The warning comes after the OFT completed its compliance review of the payday lending market which it has now referred to the competition commission.
The OFT said there were problems in the way companies in the market are competing, they said there are,
“deep-rooted problems in how lenders compete with each other”
The regulator has gave 50 payday lenders 12 weeks to change the way they do business or they could lose their licences and be put out of business.
The OFT said the areas they were focusing on most were;
- lenders failing to conduct adequate assessments of affordability before lending or before rolling over loans
- failing to explain adequately how payments will be collected
- using aggressive debt collection practices
- not treating borrowers in financial difficulty with forbearance.
The report said that payday lenders are offering a high interest rate service to people who have little or no other means of getting credit.
It is irresponsible say the Office of Fair Trading to give out high interest rate loans to people who can not afford to repay them in the time granted.
Clive Maxwell, OFT Chief Executive, said:
“We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or re-financed deals where unexpected costs can rapidly mount up.
“We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers.”
Payday lenders claim their service is transparent and that clients are fully aware of what they are applying for and the repayments, however Stuart Carmichael, Director at debt charity Debt Support Trust said:
“The review conducted by the OFT has unveiled the true nature of short term lending. People need to be wary of payday lenders who simply want to lend money because it can result in a disastrous financial situation. The failure of the majority of short term lenders to negotiate with clients and accept token payments needs to change.”