These proposals have been developed in light of the Financial Conduct Authority’s (FCA) price cap proposals announced this July and will help ensure that the cap, which is intended to protect consumers from excessive charges, does not simply become a going rate charged by all lenders. They follow the Competition and Markets Authority’s (CMA) provisional findings into the market which were published in June (see note on research ( PDF. 118KB. 2 pages ) ) by the group of independent CMA panel members investigating this market.
Key to the proposals announced today are measures to encourage the development of a high quality price comparison sector for payday loans. As a condition of participation in the market, payday lenders would be required to provide details of their products on accredited price comparison websites that will allow people to make quick and accurate comparisons between loans.
This will help stimulate greater price competition in a market where many borrowers currently do not shop around – partly because of the difficulties in accessing clear and comparable information on the cost of borrowing. The development of an effective price comparison sector would make it easier for new entrants to become established and challenge existing suppliers by offering better deals for borrowers.
The CMA is recommending that lead generators (websites which sell potential borrowers’ details to lenders) are required to explain their role and how they operate much more clearly to customers. The CMA has found that many borrowers believe that lead generators are themselves actually lenders rather than simply intermediaries. Even where this is understood, there is very little transparency about the basis on which lead generators pass borrowers’ details on to lenders, so that customers are generally unaware that, rather than matching borrowers with the most suitable or cheapest loan on offer, lead generators instead sell borrowers’ details to lenders based on the fees lenders offer to them.
The CMA is also proposing a number of other measures designed to help competition work effectively in this market. These measures involve:
- greater transparency on late fees and charges – which are not always clear to customers when choosing payday loans
- measures to help borrowers shop around without damaging their credit record
- further development of real-time data sharing systems, which will help new entrants better assess credit risks
- a requirement for lenders to provide borrowers with a summary of the charges they have paid on their most recent loan and over the previous 12 months, so that they can get a clearer picture of how much they are spending with an individual lender
In developing these measures – some of which are illustrated here ( PDF. 367KB. 2 pages ) – the CMA has carried out further customer research to inform the design of its remedy package and has consulted extensively with consumer groups and debt charities, lenders, intermediaries, trade associations and a range of other market participants, as well as with the FCA. The CMA now expects to work closely with the FCA, the regulator of the sector which has brought in its own measures to strengthen consumer protection for borrowers and is currently consulting on
the introduction of a price cap. The CMA will now consult on its proposed measures before publishing its final report at the turn of the year.
Simon Polito, Chair of the Payday Lending Investigation Group said:
Greater price competition will make a real difference to the 1.8 million payday customers in the UK. At the moment there is little transparency on the cost of loans and partly as a result, borrowers don’t generally shop around and competition on price is weak.
By ensuring that there are accredited websites providing impartial, relevant and accurate information about payday loans, we can make it easier for customers to make comparisons and there will be a much greater incentive for lenders to offer lower cost loans and to win borrowers’ business.
Lower prices from greater competition would be particularly welcome in this market. If you need to take out a payday loan because money is tight, you certainly don’t want to pay more than is necessary. Given that most customers take out several loans in a year, the total cost of paying too much for payday loans can build up over time. Customers will also benefit from the greater clarity we want to see on late payment fees, which can be difficult to predict and which many customers don’t anticipate.
As for lead generators, we want customers to know who they are really dealing with, and the basis on which their applications are being referred to lenders, so that they can make informed choices.
This is a proportionate set of remedies, which could be introduced quickly to make the payday lending market work much more effectively. We expect to work closely with the FCA to finalise these measures which will complement its work in protecting customers and which together will provide a better deal in future for borrowers. Whilst the FCA’s price cap and its other regulatory actions to clean up the market will protect customers from some of the worst excesses, greater competition will drive prices down further and is the only way to ensure that customers are offered the best possible deals.
The CMA is also consulting on an addendum to its provisional findings setting out further analysis and evidence about lead generators collected after a change to the terms of reference in July 2014.
Moves by the FCA (see notes for editors) to strengthen consumer protection mean closer regulation of lenders over issues such as limiting rollovers, restrictions on the use of Continuous Payment Authorities to recover debt from a borrower’s bank account, carrying out proper affordability checks and sensitive treatment of debt problems. The FCA has also set out its proposals for a price cap which it is required by legislation to introduce by 2 January 2015.
The CMA’s provisional decision on remedies, the addendum to provisional findings, customer research and all other information relating to the investigation can be found on the payday lending case page. The CMA is now inviting comments in writing on the provisional decision on remedies by 5pm on Thursday 30 October 2014 either by emailing email@example.com or writing to:
Payday Lending Investigation
Competition and Markets Authority
Category: Payday loans