MP crackdown on payday loans
Several payday loan providers, including Toothfairy Finance and Wonga.com, are under fire from MPs who are calling for much-needed regulation in this unscrupulous industry.
MPs and pressure groups are questioning whether these loan providers, which offer short-term cash advances at astronomical interest rates, meet proper legal standards.
The Office of Fair Trading has been sent a letter by Scottish MSP Margo MacDonald demanding clarity on the law, according to the Financial Mail today. She has asked whether the firms are covered by laws that allow borrowers a 14-day cooling-off period during which they can cancel their loan.
"My concern, on behalf of my constituents, particularly those of modest means, is that the companies may be operating on the very borderline of legality," the letter says.
MacDonald also highlights a Scottish law that requires a witness to be present for the signing of certain contracts. If such a rule were to be applied to the payday loan market it could render all such loan contracts in Scotland null and void, she says.
It is reported that MacDonald's team is now researching more websites which it thinks may be breaking the rules ahead of further talks with the OFT.
Flouting advertising laws
Meanwhile, the newspaper reports that Stella Creasy, Labour MP for Walthamstow, East London, is due to meet OFT chairman Philip Collins this week to discuss the payday loan companies.
Creasy believes that an advertising campaign by Wonga may have broken the rules. Wonga sponsored a free Tube service last New Year's Eve on the London Underground, but posters failed to mention the APR of the loans – currently 4,214%– a legal requirement for consumer credit firms.
Despite apparently breaking that rule, no action was taken against the firm, says Creasy. She told the House of Commons last week that the Government had "dragged its heels" on payday loan firms. The Department for Business, Innovation and Skills has commissioned a report on the market, which is expected to take a year to complete.
Creasy claims it should take no more than a few months and argues that time is running out to rein in a booming sector. She is calling for a cap on the extraordinary interest rate charges to be made before Christmas, when she expects more people will become ensnared in payday loan debt. "People are not borrowing this money to buy fancy cars or new TVs," she says.
"They are borrowing to cover their rising cost of living. I don't want to get rid of these companies, but I do want to regulate them. What is clear is that Consumer Minister Ed Davey doesn't want to talk about this and wants it to go away. But this is about consumer protection. It's just common sense."