Citizens Advice survey says firms are still failing to treat customers fairly
Payday lenders have broken a series of promises to reform their industry, including pledges to check that their loans are affordable and to freeze charges when people struggle to repay, according to new research that raises fresh concerns about how they operate.
A survey conducted by Citizens Advice also found that most lenders are failing to remind clients that their loans, which can carry equivalent annual interest rates in excess of 5,000%, are not a long-term fix. Nor do they check whether the borrower can pay back the money.
The findings are likely to be studied closely by MPs and debt counselling organisations who are increasingly concerned about the industry's tactics – which have come into sharp focus during the economic downturn.
Six months on from the launch of an industry charter to deflect criticism of how it operates, evidence to be released on Tuesday by Citizens Advice found lenders had broken 12 of 14 of their industry pledges to treat customers fairly.
A loan tracker service, set up by Citizens Advice examining about 2,000 loans taken out with 113 lenders, found that 87% of lenders did not ask the borrower to provide documents to show they could afford the loan, while 58% failed to explain that the loan should not be used for long-term borrowing.
Of those who had repayment problems with payday loans, seven out of 10 said they had been put under pressure to extend the loan, while 84% said they had not been offered a freeze on interest rates and charges when they said they were struggling to repay. In 95% of cases the lender had not checked to see if the borrower could pay back the loan if it were extended.
"It is a damning indictment of an irresponsible and careless industry that payday lenders have not been serious about their commitment to treat customers fairly," said Gillian Guy, chief executive of Citizens Advice.
In the last four years Citizens Advice bureaux have seen a 10-fold increase in payday loans, sparking concerns that more people are relying on the operators to help them get by.
Citizens Advice gave the typical example of an 18-year-old unemployed person who had received a payday loan of £50 to pay their mobile phone bill, despite telling the lender they lived on just £208 a month. After repaying the loan, they took out another and kept receiving texts and emails offering more. After three months they had racked up loans of £500 coupled with interest charges of £300.
"Borrowers who hoped for a bit of cash to tide them over are now harrowed by debt and find themselves in a vicious cycle of payday loans, without any sign of a way out," Guy said. "It's hugely disappointing that the industry has held its hands up and admitted it could do more – but has completely failed to do so. We want payday lenders to start sticking to their promises and stop ruining people's lives with irresponsible lending."
Citizens Advice, which is calling on the industry to stand by its commitment to treat customers fairly and stop sending them into a spiral of debt, has called on high-street banks to offer personal micro-loans as a responsible alternative.
The Office of Fair Trading is investigating the payday loan industry and has given 50 lenders a 12-week deadline, which expires on Tuesday, to improve. Of those under review, 48 have confirmed that they will provide the OFT with proof that they are fully compliant with their charter, while two of the lenders have surrendered their licences.
"I am very disappointed to see these worrying findings from Citizens Advice," said the consumer minister, Jo Swinson. "Consumers, and particularly those who are most vulnerable and struggling financially, should expect lenders to treat them in a way which matches up to the commitments made in industry codes. This is clearly not happening and more needs to be done to address the problems we are seeing. Tough enforcement and compliance by the Office of Fair Trading (OFT) now, combined with a move to a new regulatory regime under the new Financial Conduct Authority (FCA) in 2014, will tackle the real concerns in this market."
In February, Citizens Advice reported four payday lenders to the OFT and called for them to be immediately banned from trading. Last August it provided evidence to the OFT's investigation that saw lender MCO Capital Limited stop trading.
The OFT has opened formal investigations into the practices of three lenders and, in addition, three others have also had their licences revoked since its review of the sector began in March.
"Irresponsible payday lenders are on notice – if you don't clean up your act, the consequences will be severe," Swinson said.
