Payday loans companies have 12 weeks to clean up their acts

Payday loans companies could be put out of business if they fail to moderate their business practices. The lenders, offering short-term loans at exorbitant rates of interest, have been given 12 weeks to change their business methods or face closure by the Office of Fair Trading.

Fifty companies, of which Wonga.com is the highest-profile, but that also includes PaydayUK, QuickQuid and Payday Express, have been warned that they need to clean up their act. The companies' flouting of financial regulations and guidelines have led to them being labelled "legal loan sharks". Their activities, and interest rates, would be illegal in many countries.

The OFT’s chief executive Clive Maxwell, 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." He dismissed the idea that most of the companies were reputable. "Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector," he said. "If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed."

The rise of payday loans is directly linked to the banking crisis. With banks and building societies making it increasingly difficult for poorer people to obtain loans at sensible levels of interest, the new companies have moved in to cater to hundreds of thousands of people desperately in need of cash.

The StepChange debt charity believes that payday loans can involve borrowers in an escalating debt trap. The charity’s director Delroy Corinaldi called the OFT report, a "stark wake-up call to the payday loan industry."

Wonga has been the most visible company with TV ads, sponsorship of ITV primetime shows and football clubs, and has already been censured by the OFT forr its "aggressive and misleading" debt collection practices. It forged links with the Government by paying thousands to obtain lobbying access to senior Conservatives at the 2012 party conference. David Cameron’s adviser Jonathan Luff even quit Downing Street to work as a lobbyist for Wonga.

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