Property search figures show OFT's "pro-active" approach to payday lending, expert says

Figures obtained by Pinsent Masons, the law firm behind Out-Law.com, show that the Office of Fair Trading (OFT) used its powers under the Consumer Credit Act to search 68 business premises between January and May 2012. The OFT only used the same powers once during the whole of 2011, according to Pinsent Masons financial services expert Ian Roberts.

However, Roberts added that the "vast majority" of companies in the sector were operating "legitimate businesses that meet the OFT's requirements", and would be happy to cooperate with the regulator.

"The OFT has openly said it is targeting payday firms as part of an on-going review," he said. "Although there may be a few rotten apples who may give the OFT a genuine cause for concern, I would like to think that the vast majority of businesses in this sector operate in a transparent manner and try to comply with all the detailed legal requirements and guidance. We have certainly seen a number of new clients coming into this industry and wanting our advice to help ensure that they are fully compliant."

Under the Consumer Credit Act, the OFT or Trading Standards officers can gain access to premises to observe how a business is run and inspect its documents. This may include monitoring and recording telephone calls, online applications and lending decisions. The OFT carries out visits as part of its role in ensuring that payday lenders are complying with the legislation and are "fit" to hold a licence, Roberts said that going into a business and searching through its files was "one of the most intrusive forms of action the OFT is able to take".

Companies providing consumer credit, including payday lenders, are regulated by the OFT under its Irresponsible Lending Guidance (80-page / 785KB PDF). In February, the OFT began an "extensive" review of compliance with the guidance by payday lenders, which are companies that offer high interest, unsecured loans intended to be repaid when borrowers receive their next regular income payment. This followed an initial review of the websites of a number of companies operating in the sector.

The OFT said that it would conduct on-site inspections of 50 major payday lenders, as well as surveys of industry and consumer organisations, as part of this review. Among its concerns were companies that gave loans without first adequately checking that the borrower could afford to repay them, companies failing to explain features and risks of the loans to borrowers adequately, inadequate or misleading advertising and the practice of 'rolling over' loans so that the charges became unaffordable.

Roberts said that the increased activity by the OFT mirrored its review of the commercial debt management sector in 2010. The OFT employed tactics such as 'mystery shopping' exercises, a website sweep and on-site visits by Trading Standards officers during its review, which according to the regulator resulted in 43 companies surrendering their licences and enforcement action being taken against a further 13 businesses.

Although he welcomed the review, Roberts said that properly regulated short-term lenders had a "vital role" to play in the consumer credit market.

"The OFT has a key role to play as a consumer champion, and it is important that it ensures all participants comply with the law," Roberts said. "Licensed payday and other short term lenders play a vital role in the market by providing funds to borrowers who would otherwise be unable to borrow funds from legitimate sources."

In July, the Government said that the OFT would be given the power to immediately suspend the licenses of rogue lenders. Under its existing powers, decisions are open to appeal and firms can continue trading until a final decision is taken. The regulator will consult on how it would use the new power later this year, with a view to publishing guidance on the issue in early 2013.