The Independent newspaper has conducted an investigation into the activities of various payday loan companies, discovering that almost two thirds of those approached have no valid consumer credit licence and are therefore trading illegally.
Under the Consumer Credit Act 1974, businesses that lend money need to have a 'Category A' consumer credit business licence.
Company licences are available from the Office of Fair Trading, the body that regulates the industry, investigates unfair practices and has the power to revoke licences if its rules on responsible lending are broken.
Payday loans are short-term, high interest loans that can be taken out to cover expenses until your monthly salary is paid. The loans require no security, other than employment status, but are often charged at 4000%+ interest and come with hefty financial penalties if repaid late.
The popularity of 'fast cash' solutions, such as payday loans and pawnbrokers, has mushroomed during the credit crisis, as families struggle to afford a rising cost of living at a time when salary rises are not keeping up with inflation. Companies are entering the burgeoning sector quickly, flouting the rules to make money from those struggling to make ends meet.
A recent Which? investigation revealed that nearly half of those who use payday loans cannot afford to repay them.
"Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by," said Richard Lloyd, Which? executive director.
2012 OFT investigation
In February it was announced that the Office of Fair Trading would conduct an investigation into the activities of so called 'high-interest' lenders, after it was revealed that companies were lending without actively enquiring into whether the borrower could afford to repay the money.
David Fisher is the OFT's Director of Consumer Credit.
'We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending. This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms' licences to operate where necessary."
The OFT last investigated the sector in 2010, when 43 companies surrendered their lending licences and a further 13 were forcibly shut down. The OFT has previously ruled out capping the interest companies can charge, citing their usefulness in providing short-term credit as a reason for them to continue to trade.
The OFT would prefer a tighter set of standards for companies in the industry, which will include a commitment to treating customers fairly when they are in financial difficulty and agreeing not to target those who cannot afford to repay the money.
The Independent investigation revealed that many of the firms offering loans online were not in fact lenders themselves, but foreign companies using a façade of legitimacy to generate sales leads, which are then sold on to local UK lending companies.
The newspaper found that of the top six sites on Google.co.uk just one was a legitimate lender with a consumer credit licence from the OFT. The remainder either did not give licence details (as required by law) or used false details.
The investigation has uncovered a loophole in the efficacy of enforcement of UK consumer credit laws, because online businesses can disappear and reappear under a different guise very rapidly.
Payday loan firms that are flouting the law (The Independent)