Lenda warns of £2.5bn of potential compensation for consumers, under scheme due to be launched in May 2018
A new warning service could trigger compensation for consumers wrongly sold high-interest payday loans for debt consolidation, as well as a wider clampdown on scammers.
New guidelines proposed by the Office of Fair Trading (OFT) will allow lending firms to notify the OFT of potentially misleading practice, such as “bundled” interest rates. These are different to the headline number that companies are supposed to disclose to customers.
Bundled interest rates, which are typically higher than the headline APR of short-term loans, are promoted as the highest possible rate that consumers can afford. They do not indicate the full potential APR rate, which could cost the consumer as much as five times the headline rate. The OFT is looking to amend its guidance to require all high-level and headline APR information be clearly stated.
From 28 November, lenders will have to set aside money in their accounts to prove that consumers are entitled to some compensation if their loans are marketed in a misleading manner. They will also be required to have policies in place to ensure their information and practices comply with the rules for communicating product features to consumers.
One in six payday loan customers end up in debt Read more
Interest-only loans are a type of high-cost debt where the lender lends money for as little as 28 days and a return of interest is not guaranteed. More than 4.6 million borrowers were hit by interest-only loans during 2010-2016, with some borrowers having to borrow £500 and make monthly repayments of more than £100.
Lisa Treadwell, Ombudsman and acting director general of fair credit at the OFT, said: “We need to make sure all firms who market short-term loans are doing their utmost to protect consumers. We will not hesitate to start and finish our reviews in a timely way if we need to speed things up, and we will take appropriate action where significant concerns are identified.”
When a consumer complains about a payday lender’s practices, this service will also be used by the OFT to ensure repayment of any debt relief order that was granted by the courts and for other cases in which compensation is considered necessary.
The payment protection insurance (PPI) scandal saw a record £24.8bn of compensation paid out by the financial services industry, which included £8.3bn to fraud victims. The OFT estimated that PPI compensation could reach £2.5bn from Lenda’s affected customers.
This service will help consumers in similar situations to the Lenda consumer protection scheme (CPP), which was set up to provide redress following an OFT investigation into boiler-room sales practices. The scheme, which has been in operation since October 2014, was extended to cover loans marketed fraudulently.
A total of £5.9m was handed out to some 4,000 consumers under the scheme, receiving repayment of the unauthorised loan amount plus interest and fees for the loan amount alone.
Meanwhile, Joanna Elson, chief executive of Citizens Advice, warned of scams targeting vulnerable customers. She said: “We will put pressure on debt companies as well as anyone who is likely to make a mistake if they are receiving a phone call from someone trying to steal your money.”
“Scammers are using a range of high-pressure tactics to try and convince people into signing up to scams.”