The move comes after it uncovered evidence of widespread irresponsible lending and failure to comply with the standards required of them.
The OFT has also today announced that, subject to consultation, it proposes to refer the payday lending market to the Competition Commission after it found evidence of deep-rooted problems in how lenders compete with each other.
Lenders were found to compete by emphasising the speed and easy access to loans rather than the price and also to be relying too heavily on rolling over or refinancing loans - this speed meant they often failed to carry out proper affordability assessments and thus allowing many people to be granted loans they cannot afford to repay.
The action was announced in the final report on the OFT's compliance review of the £2 billion payday lending sector, which found evidence of problems throughout the lifecycle of payday loans, from advertising to debt collection, and across the sector, including by leading lenders that are members of established trade associations.
Particular areas of non-compliance included:
- 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 OFT has stated that it believes that these fundamental problems with the operation of the payday market 'go beyond non-compliance with the law and regulations' and that 'a full investigation by the Competition Commission is needed to identify and, if appropriate, impose lasting solutions to make this market serve its customers better'.
The FCA authority will regulate consumer credit from April 2014 and it will be able to use the analysis and conclusions of the Competition Commission in developing its rules and applying its powers. The FCA will have significant powers and resources beyond those available to the OFT, including powers to cap interest rates and to impose a ban or a limit on the number of rollovers lenders may offer.
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.
"Irresponsible lending is not confined to a few rogue payday lenders - it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed. Payday lending is a top enforcement priority for the OFT."
