Comparison order for payday lenders

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Published: Tuesday 24th February 2015 by The News Editor

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Online payday lenders will be ordered to publish details of their products on at least one price comparison website under plans by the competition watchdog to make it easier for borrowers to shop around.

The Competition and Markets Authority (CMA) has made the finding following a 20-month investigation into the payday lending market, which found that a lack of price competition between lenders has led to higher costs for borrowers.

It found that most borrowers do not shop around, partly because of the difficulties in accessing clear and comparable information on the cost of borrowing and a lack of awareness of late fees and additional charges.

The CMA has estimated that the UK’s 1.8 million payday loan customers could typically be up to £60 a year better off if it was easier for them to shop around.

The watchdog, which has been talking to price comparison websites about the issue, said it believes that at least one website, and possibly more, will emerge which people can use to compare the cost of a payday loan.

If this does not happen, lenders will be obliged to set up a price comparison website which is authorised by regulator the Financial Conduct Authority (FCA).

The comparison websites which carry such information should provide consumers with clear, objective information on all potential loan costs – in particular the total amount which a consumer would end up paying -and enable people to easily make searches bases on features of the loan such as the amount it is for and how long they need it to last for, the CMA said.

Payday lenders operating online and on the high street will also be ordered to provide existing customers with a summary of the cost of their borrowing.

The summary will tell borrowers what the total cost of their most recent loan was, as well as showing how the cost of borrowing with that lender built up over the previous 12 months and how late repayments affected their borrowing charges.

The move comes amid a huge clampdown which has been taking place across the industry. The FCA has already strengthened the rules under which payday lenders are allowed to operate and has placed limits on the amounts lenders are allowed to charge as well as the number of times that they can roll a loan over.

The CMA’s report said that while comparison websites uSwitch and MoneySuperMarket had told it they are not planning to launch a payday loans comparison table, other websites had expressed an interest in doing so, either now or in the future, subject to the right conditions being in place.

Gocompare indicated to the CMA that, given the right regulatory framework and consumer protection in place, it would consider launching a payday loans comparison service on its website.

Comparethemarket.com said that, subject to a number of factors, it would consider, at some point in the future, launching a price comparison service which included payday loan products and Confused.com said it may consider payday loans in its medium to long-term plans, the report said.

The FCA also told the CMA that it had had approaches from websites which were interested in operating an authorised payday loan price comparison website.

An average of 880,000 households a month took out a payday loan last year, according to research from consumer group Which?

Which? executive director Richard Lloyd said: “The payday lending market has been rife with poor practice but today’s proposals, alongside the Financial Conduct Authority’s price cap and tougher supervision, are a step in the right direction to make lenders start to compete on price and treat customers fairly.

“We now want to see the regulators turning their attention to unfair practices and excessive fees in the wider credit market, including unauthorised overdrafts.”

The payday lending industry has been beset by scandal in recent years. A previous investigation by the now defunct Office of Fair Trading (OFT) found that some firms appeared to be basing their business models around people who could not pay their loans back in time, meaning the cost of their debts ballooned.

Welcoming the CMA’s report, Russell Hamblin-Boone, chief executive of short-term loan trade body the Consumer Finance Association (CFA), which represents the Money Shop, Quick Quid, Payday UK, Peachy and Sunny among others, said: “Today’s short-term lending industry is very different to the one that the CMA observed at the start of its investigation in 2013…

“We need to draw a line under the past and recognise the value of short-term lending in a competitive consumer credit market.”

The CMA’s previous research has found that there were at least 90 payday lenders offering loans to UK customers as of October 2013.

But it said that in reality, the market has been “much more concentrated” than this figure might suggest, with the three largest lenders – CashEuroNet, Dollar and Wonga – accounting for around 70% of total revenue generated from payday lending in the UK in the 2012 financial year.

Around four in 10 payday loan customers have used more than one lender, but the use of multiple lenders often happens when customers are unable to borrow more from their existing lender, perhaps because there is already a loan outstanding or there has been a repayment problem, the CMA said.

It said that many payday loan borrowers are put off shopping around for the best deal because often they are uncertain about which firm will grant them a loan. This uncertainty can push the consumer towards sticking with their existing lender rather than looking for the best-value loan for their needs.

The CMA also said that lead generator websites, which generally sell the details of someone looking for a loan on to the highest-bidding lender, need to spell out their role more clearly to consumers.

Four in 10 (40%) people taking out a loan online for the first time go through a lead generator, but in many cases borrowers wrongly believe that the lead generator is the lender, rather than the middleman that they really are, the CMA said.

Its consumer research also found that some people mistakenly assume that a lead generator’s role is to act like a comparison website in that it will find the best-value loan provider for the consumer’s needs.

The CMA found that lead generators may also create an incentive for lenders to hike their prices to customers, as lenders offering cheaper loans would find it harder to bid high prices in lead auctions.

It has recommended that lead generators should be required to state that application details are referred to the lender that offers the lead generator the best commercial deal – rather than to the lender that offers the most suitable loan for the customer’s needs.

The FCA will consult this summer on the CMA’s recommendations.

Simon Polito, chairman of the CMA, said: “We expect that millions of customers will continue to rely on payday loans.

“Most customers take out several loans a year and the total cost of paying too much for payday loans can build up over time.”

Chancellor George Osborne said: “We welcome the CMA’s final report from its investigation into the payday lending market today. The report makes a number of important recommendations to increase competition and drive down prices of payday products to benefit customers.”

But Martin Lewis, founder and editor of consumer help website MoneySavingExpert.com, described the report as “a rather flaccid response by the CMA”.

He said: “While setting up an online price comparison won’t cause harm and may help a few people on the periphery, the payday loan market has never been about price.

“People get these loans due to a mix of easy technology and desperation. If price really made such a difference, no-one would be getting any of them in the first place.”

Published: Tuesday 24th February 2015 by The News Editor

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