LONDON (Reuters) - Britain’s consumer watchdog must get tough on unscrupulous short-term lenders that target low earners with loans they cannot afford to repay, a British parliamentary committee said on Friday.
Britain’s Public Accounts Committee (PAC) said bad practices by some of these firms were costing already hard-pressed borrowers at least 450 million pounds a year.
So-called payday lenders, which offer loans that are repaid when borrowers get their wages, have grown rapidly in Britain as banks cut back on short-term credit after the 2008 financial crisis. But they have been criticised for charging sky-high interest rates and for shoddy treatment of customers.
The committee’s call for a crackdown on some of the firms follows its review of how effectively Britain’s consumer lending industry, worth 176 billion pounds a year, is regulated.
Committee Chairwoman Margaret Hodge said some lenders used predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which, when rolled over with extra interest, spiral rapidly out of control.
She said the regulator, the Office of Fair Trading, had been ineffective and timid in its handling of the sector. The OFT had never fined any of the 72,000 firms in the market and very rarely revoked a company’s license, Hodge said.
In response, the OFT said it had taken “strong, targeted action to tackle the areas of greatest risk to consumers”. The OFT said its powers were limited and that it was only able to impose fines in very limited circumstances.
In March, the OFT gave Britain’s biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses after finding evidence of irresponsible lending. The watchdog said on Friday it had since closed down three of the lenders and opened formal investigations into three others.
Industry body the Consumer Finance Association (CFA) said the larger lenders had already been working closely with the regulator and the government to improve standards and address many of the issues highlighted by the PAC.
“We have established an independent body to monitor and enforce our standards and support any efforts to drive out rogue lenders and the worst offenders,” CFA Chief Executive Russell Hamblin-Boone said.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage interest rate is listed on Wonga.com as 4,214 percent.
The firm has said it makes stringent checks on borrowers and turns down two thirds of applications. It has called for tighter control and regulation to stamp out the worst practices within the industry.
The parliamentary committee said annual percentage interest rates were misleading to borrowers and should be replaced by a legally required statement of the total amount borrowers must repay. It also recommended the OFT increase license fees it charges lenders to provide more money for regulating them.
The OFT will cease to exist in 2014, handing over regulation of the sector to the newly-created Financial Conduct Authority (FCA). The committee recommended that the FCA acquire better intelligence so it can improve protection of consumers and apply tougher sanctions to punish wrongdoing.
“Consumers can have greater confidence that the new FCA will intervene early and decisively in their interests, thanks to its more focused remit, objectives and powers,” said Sajid Javid, Economic Secretary to the Treasury.
The Citizens Advice Bureau, a charity that helps people with legal and financial issues, on Tuesday accused payday lenders of bullying borrowers into extending loans and harassing those heavily in debt.
Additional reporting by Kylie MacLellan; editing by Jane Merriman and Tom Pfeiffer