* Bad practices costing borrowers 450 mln stg/year
* Chairwoman Hodge says firms target the vulnerable
* Hodge says regulator has been “ineffective and timid”
* OFT says it has taken strong action to protect consumers
* OFT says 3 payday lenders closed down since March
By Matt Scuffham
LONDON, May 31 (Reuters) - Britain’s consumer watchdog must get tough on unscrupulous short-term lenders that target the financially vulnerable and lend them money they can’t afford to repay, a British parliamentary committee said on Friday.
Britain’s Public Accounts Committee (PAC) said bad practices by some of these firms were costing already hard-pressed borrowers at least 450 million pounds ($677 million) a year.
So-called payday lenders, which offer loans that are repaid when borrowers get their wages, have grown rapidly in Britain as banks cut back on short-term credit after the 2008 financial crisis. But they have been criticised for charging sky-high interest rates and for shoddy treatment of customers.
The committee’s call for a crack-down on some of these firms follows its review of how effectively Britain’s 176 billion pound ($265 billion) a year consumer lending industry is regulated.
Committee Chairwoman Margaret Hodge said some lenders used predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which, when rolled over with extra interest, rapidly became out of control debts.
She said the regulator, the Office of Fair Trading, had been ineffective and timid in its handling of the sector. The OFT had never given a fine to any of the 72,000 firms in the market and very rarely revoked a company’s license, Hodge said.
The OFT said in response it had taken “strong, targeted action to tackle the areas of greatest risk to consumers.” The OFT said its powers were limited and that it was only able to impose fines in very limited circumstances.
In March, the OFT gave Britain’s biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses after finding evidence of irresponsible lending. The watchdog said on Friday it had since closed down three payday lenders and opened formal investigations into three others.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage interest rate is listed on Wonga.com as 4,214 percent.
The firm has said it makes stringent checks on borrowers and turns down two-thirds of applications. It has called for tighter control and regulation to stamp out the worst practices within the industry.
The parliamentary committee said that annual percentage interest rates were misleading to borrowers and should be replaced by a legally required statement of the total amount that borrowers must repay. It also recommended that the OFT increased the license fees it charges lenders to provide more money for regulating them.
The OFT will cease to exist in 2014 and will hand over regulation of the sector to the newly-created Financial Conduct Authority (FCA). The committee recommended that the FCA has better intelligence so it can improve protection of consumers and should apply tougher sanctions when it identifies wrongdoing.
The Citizens Advice Bureau, a charity that helps people with legal and financial issues, on Tuesday accused payday lenders of bullying borrowers into extending loans and harassing those heavily in debt.