Payday lenders have been called to a government summit to discuss “widespread irresponsible lending”, as the £2bn industry braces for an inquiry by the competition watchdog.
Payday loan companies, financial regulators and debt charities will attend the meeting with the government’s consumer minister, Jo Swinson, on Monday, to discuss whether more regulation is needed to protect borrowers.
News of the summit came before an announcement by the Office of Fair Trading (OFT) on Thursday about whether it will refer the industry to the Competition Commission.
The OFT is expected to opt for a referral, after it found serious problems in the market for high-cost, short-term loans in a report this year, including irresponsible lending and breaches of the law that had caused “misery and hardship for many borrowers”. It gave 50 leading payday lenders 12 weeks to reform their practices or facing losing their credit licences.
Monday’s summit is expected to discuss the role of the Financial Conduct Authority (FCA) when it takes over regulation of the sector from the OFT in April 2014.
Although the head of the FCA, Martin Wheatley, has promised a crackdown on “abusive” practices by lenders, consumer campaigners have called for new laws, including cost caps, to be introduced.
Figures from the debt charity StepChange show that between 2011 and 2012 the average payday-loan debt of its London-based clients rose by £563 to £1,859.
The executive director of the consumer group Which?, Richard Lloyd, said the government was right to highlight problems in the industry.
“Many households are increasingly reliant on payday loans to pay for essentials or clear existing debts,” he said. “The Financial Conduct Authority takes over regulation of consumer credit next year, providing a unique opportunity to clean up this market. Now is the ideal time to assess whether the FCA has the powers it needs.”
Last month the Commons public accounts committee said the OFT had been “ineffective and timid in the extreme” in regulating payday lenders.
Swinson told the BBC website: “We must make sure the FCA rules are robust and strong and what is needed to stamp out the rogue and irresponsible behaviour of some parts of the industry.”
She added: “Far too many times, consumers have been lured into taking out products that are not right for them, that are not the right financial product.”
Among those who have confirmed they will attend the summit are representatives of the OFT, Which? and the Consumer Finance Association (CFA), the main trade organisation for the industry.
Payday lenders have been widely criticised for offering high-cost, short-term loans to customers who cannot always afford the repayments. According to Citizens Advice, in 87% of cases it looked at borrowers had not been asked to provide evidence that they could cover the loan.
Interest rates over 5,000% APR are not uncommon, with the largest lender, Wonga, now quoting a rate of 5,853%. Although lenders argue that annual percentage rates do not tell the whole story, debt charities say that borrowing costs quickly spiral upwards if a loan repayment is missed or borrowing is rolled over.
StepChange’s external affairs director, Delroy Corinaldi, who plans to attend the meeting, said the industry was “beset by a variety of problems which require prompt action from regulators, politicians and the industry itself”.
Stella Creasy, the Labour MP who has been a vocal campaigner against the payday loans industry, welcomed the summit but said Swinson must use the meeting to force change. She added: “I hope they don’t use this as a cosy chat to keep calm and carry on, but an opportunity to hold these legal loan sharks to account for their broken promises to change their ways and stop exploiting the financial difficulties of millions of Britons.
“With the cost of living still rising and bad practices widespread, the time for hesitation or self-regulation is over. We must deal with the root cause of the problem by capping the total cost of credit and so limiting the amount any person can owe on a loan.”
Creasy said the FCA had the power to cap prices but required more data from the lenders to do this. “The test of whether ministers are serious about helping British consumers must be if they will use this summit to demand the industry share the data needed with the FCA now so that they can set and introduce such a cap without delay.”
Russell Hamblin-Boone, head of the CFA, said: “We look forward to the opportunity to engage in open and honest dialogue with the government, regulators, consumer groups and debt charities.”
