The rise of payday lending has seemed unstoppable. The market has risen from an estimated £900 million in 2008/09 to a top end of £2.2 billion in 2011/12, a figure likely to be outstripped in 2012/13. Whilst the market has shown a clear and steady appetite for this type of short term loan facility the OFT has had short term lenders firmly in its sights.
With the publication of the final report in its payday lending compliance review the OFT has come down hard on payday lenders. The OFT has stated that this sector is a top priority, that enforcement action is underway, and somewhat ominously that there is more in the pipeline.
This article looks at the standards that the OFT says it expects. Although clearly directed at the payday sector, the standards expected could as easily be adapted and applied to other credit scenarios.
A central plank of the report is affordability. The Consumer Credit Act 1974 (the “Act”) provides that before making a regulated consumer credit agreement the creditor must undertake an assessment of the creditworthiness of the debtor. This assessment must be based on sufficient information obtained from the debtor where appropriate and a credit reference agency where necessary. OFT guidance makes it clear that creditors must also assess affordability, that is, each borrower’s ability to repay in a sustainable manner. The OFT, put simply, has serious concerns about whether creditors are gathering enough information to make a reliable assessment or properly checking the information they do get.
A credit reference check alone is unlikely to be sufficient to assess affordability in the OFT’s view. Equally unlikely is simply asking borrowers to self declare their income without verifying it or seeking evidence of outgoings to determine levels of disposable income. Lenders must instead draw on enough data to form a sufficiently rounded picture of affordability. This might include comparing recent bank statements and pay slips to verify income and employments data.
This is indeed concerning - and not only for payday lending. It does not take any large leap of the imagination to see that similar standards might be applied in situations such as applying for a credit card in store.
Within the payday sector affordability is particularly acute where borrowers roll-over or refinance their loan. The OFT will expect a fresh affordability assessment to be undertaken for each roll-over, and if the rollover is to proceed a clear explanation of how this will work and associated costs and risks.
The OFT claim a pattern of advertising that emphasises speed and easy access to cash. This was said to be at the expense of giving customers balanced information about the cost of lending, the risks if things go wrong and the consequences of non payment including the operation of any continuous payment authority.
However, it is debateable whether there is any requirement to provide this information in advertisements. So long as the rules of the Consumer Credit (Advertisements) Regulations 210 are followed, including plain and intelligible language and a sufficiently prominent representative example where called for, with no misleading statements or omissions, then the legal obligations of the advertiser should be met.
What is clear is that the OFT may consider to be misleading any adverts suggesting “no credit checks” and “instant cash”, particularly in light of the requirement to adequately investigate creditworthiness. The push for quicker payout contributes to irresponsible lending, to the detriment of borrowers – and it is this conduct which may put credit licences in jeopardy.
It is a requirement of the Act for an adequate explanation of certain matters to be given before the credit agreement is entered into. The OFT emphasise that all of the required information must be explained to all customers, for all loans, including repeat business. This has to be coupled with a meaningful opportunity for borrowers to ask questions. Although for online agreements a FAQ document may provide a useful starting point it is not an adequate substitute for providing borrowers with the ability to ask their own questions.
The OFT repeat their observation that affordability is key and if properly addressed many of the problems associated with debt collection could be avoided.
Debt collection practices must follow and be fully compliant with OFT guidance, in particular with its revised debt collection guidance. It will be recalled that the revised guidance paid particular attention to the use of continuous payment authorities and the occasions on which they could be used, the information the debtors must be provided with and of course clear guidance on the circumstances and manner in which they may be cancelled. Fees and charges levied on accounts in arrears must reflect actual and necessary costs - though this appears to be no more than a repetition on the bar against penalties
What comes through strongly in the report is the need for lenders to have in place adequate and appropriate policies and procedures which must be followed. Relevant staff must be trained on relevant procedures and adequately supervised.
It is clear that the “rollover culture” is not met with approval by the OFT. Forbearance is urged where financial difficulty is experienced and surely an inability to repay on time is evidence of such difficulty. The OFT’s solution would be to suspend interest and charges, or offer a repayment plan.
As mentioned above, the OFT are preparing further enforcement action. What form that will take is at the time of writing unclear. What is clear is that the OFT expects immediate steps to be taken to address the matters it sees as non compliant. The warning is stark, if the steps are not taken now then the OFT will revoke consumer credit licences. And remember that in February the OFT was given the power to immediately suspend licences where they considered there was an urgent need to protect consumers.
Consultation for referral to Competition Commission
The OFT view the problems in this market as deeper than a poor compliance culture. In its view, there are features of the market that may be distorting competition between lenders. As a result the OFT has provisionally decided that a full investigation by the Competition Commission is needed to understand how the market works and identify lasting solutions. Although it has issued a consultation to gather views on whether a Competition Commission investigation is appropriate, it is expected that an investigation will be launched in the summer. If so, then lenders will face a detailed probe of their sector and activities for up to 2 years, following which the Competition Commission has wide powers to recommend an array of remedies designed to change behaviours and practices within the sector. The consultation closes on 1 May 2013.