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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 27, 2012

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Consumer rights groups are investigating short-term loan violations in the United Kingdom and implementing new regulations for payday lenders.

The Office of Fair Trading (OFT) has opened formal investigations into several payday lenders over hostile debt collection practices. The OFT wrote to all 240 payday lenders highlighting the agency’s concerns over the short-term loan industry.

David Fisher, Director of Consumer Credit at the OFT, said the actions of payday lenders are so serious that further investigations are needed.

“It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action,” Fisher said in an OFT release.

The OFT reports show that a large percentage of short-term loans are not repaid in a timely manner.

“Our revised guidance makes it absolutely clear to lenders what we expect from them when using continuous payment authority to recover debts and that we will not accept its misuse,” Fisher said.

In addition to the OFT’s work, the Citizens Advice Scotland (CAS) has launched a coinciding campaign to assist with the new voluntary restrictions for payday lenders. The marketing campaign is due to an increase in complaints and formal investigations. CAS said it reviews 50 new cases daily involving short-term lending. CAS warned lenders they will be watched “like a hawk” to ensure that all voluntary codes are followed.

The CAS has implemented two ways to reduce short-term loan issues. First, they will distribute the new codes to educate any loan customers about their rights. Secondly, they will send a message to payday companies that their activities will be monitored.

Under the new regulations, loan companies will have to provide clear information about how the short-term loans work and an example of the price for each £100 (about $160) borrowed, including fees and charges. In addition to preventing unwarranted lending, the new regulations will criticize lenders who pressure borrowers into a new loan by rolling an existing one over. The CAS will force the companies to freeze interest and charges if a customer faces financial difficulty and making repayments plans. If the new plans are not followed by payday lenders, legal action will be taken.

Margaret Lynch, chief executive of CAS, said they welcome the new code of conduct.

“The way payday and short-term lenders currently operate is very poorly regulated, and as a result we see huge numbers of people getting into un-manageable debt,” Lynch said in a press release.

The numbers are increasing at an unsound rate, with an overall 20 percent rise in the number of cases involving unsecured personal loan debts.

“We see very clearly what the problems are with payday loans, and the misery that they can cause to people,” she said. “However, any voluntary code is only going to work if people actually stick to it. So that’s why today we are launching a campaign to help make this charter a success.”

The Consumer Finance Association (CFA), a trade association which represents the interests of short-term loan businesses, is preparing for the new regulations. The list of CFA members who accepted the new code includes: The Money Shop, Cheque Centre, Payday UK, Quick Quid, Cash Converters, Express Finance, and Cash Generator.

Russell Hamblin Boone, Chief Executive of the CFA, said in a company release that the organization fully supports the OFT’s review of the payday lending sector.

“Our biggest advocates are our customers themselves. So as well as highlighting areas of poor practice, the final report must acknowledge the high levels of satisfaction and the value our customers place on short-term credit products,” Boone said.

Boone said the CFA is “committed to continual improvement” and will continue working with the government to find improvements for customer protection.

The OFT will publish a full report next year and will decide if increased actions are needed to tackle the issues surrounding short-term loans.