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Published: Thursday 9th October 2014 by The News Editor
Payday lenders will be forced to provide details of their products on impartial price comparison websites so the sector’s 1.8 million customers can shop around more easily for the best deal under a proposed clampdown set out by a watchdog.
Unveiling the plans, the Competition and Markets Authority (CMA) said at the moment there is little transparency over the cost of loans and competition on price is “weak”.
It said that by ensuring there are accredited websites providing “impartial, relevant and accurate” information about payday loans, there will be a much greater incentive for lenders to offer low cost loans to win borrowers’ business.
The watchdog said payday lenders should provide details of their products on accredited websites as a condition of operating in the market.
It has previously found that a general lack of access to credit elsewhere, unclear fees and charges levied on payday loans and a shortage of ways to compare prices all combine to make it hard for customers in particular to find the cheapest deals.
The CMA has estimated that a typical payday loan customer could be up to £60 a year better off if measures were put in place to make it easier for them to shop around, and collectively, UK customers could save £45 million a year if the market were more competitive.
It said that the development of effective price comparisons would make it easier for new entrants to become established and challenge the existing big players.
The CMA’s research found that lenders which have tried to offer substantially lower rates have not been particularly successful in attracting new business because of consumers’ focus on speed and convenience over price.
It has previously found that the three largest lenders in the sector – Wonga, Dollar and CashEuroNet – accounted for around 70% of revenue from payday lending in the UK.
Dollar’s subsidiaries include The Money Shop, while CashEuroNet’s online lending products include QuickQuid and Pounds to Pocket.
The CMA also suggests that payday lenders should be required to give borrowers a summary of the charges they have paid on their most recent loan and over the previous 12 months, so they can get a clearer overview of how much they are spending with a particular lender.
It wants to see greater transparency over late fees and charges, which are not always clear to customers when they are choosing a payday loan.
It is also proposing that “lead generator” websites, which act as payday loan middlemen by selling potential borrowers’ details on to lenders, should be forced to explain “much more clearly” how they operate.
This could involve, for example, displaying messages which tell a potential customer: “We are a broker, not a lender,” and: “We sell your application details on the best terms for us rather than you,” before asking whether they still want to go ahead.
Often, consumers can mistake a lead generator for a firm which is going to lend them the money. The financial ombudsman recently highlighted complaints it is dealing with from consumers who have complained of payday loan middlemen draining money from their accounts without even providing the loan they were looking for.
Simon Polito, chairman 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.”
The CMA’s provisional recommendations will be subject to a final consultation before a final report is released around the turn of the year.
They are part of a wide-ranging crackdown on the sector after controversy erupted over the treatment of some customers.
Last week, City regulator the Financial Conduct Authority (FCA) warned the industry to take note after Britain’s biggest payday lender Wonga announced it had written off £220 million of debt belonging to 330,000 customers. The move came after the FCA found that Wonga had granted loans to some people after carrying out inadequate affordability checks.
FCA director of supervision Clive Adamson said last week: “This should put the rest of the industry on notice – they need to lend affordably and responsibly.”
The FCA has already strengthened the rules under which lenders are allowed to operate since it took over supervision of the sector in April and it plans to impose a price cap in January on the fees and interest charged by firms, to protect borrowers from escalating debts.
The tougher measures which have recently been introduced have seen payday lenders banned from rolling over a loan more than twice and they are now only allowed to make two unsuccessful attempts to claw money back out of a borrowers’ account. Payday lenders are also obliged to place “health warnings” on their advertising.
At present, such firms have only ”interim permission” to operate under the FCA’s toughened regime and they will need to pass assessments in the months ahead to get full permission to carry on.
The CMA said that on its own, a cap on lenders’ prices would not be enough to tackle the competition problems.
In the absence of any further measures to boost effective competition a cap could even make the choice for consumers worse, by putting new lenders off entering the market, the CMA said.
But alongside a price cap, the CMA said that its proposed measures could encourage lenders to drive their prices down further.
Its report said: “Without measures that are effective in addressing the underlying competition problems that affect this market, there will be little incentive for lenders to compete below the cap and the benefits to customers of effective competition will not be fully realised.”
Richard Lloyd, executive director of consumer group Which?, welcomed the proposals but said bad practices must be tackled across the credit market.
He said: “More must be done to put consumers firmly in control of their borrowing, starting with the Financial Conduct Authority looking at the whole of the credit market and cracking down on excessive fees across all forms of credit, including unauthorised overdrafts.”
Gillian Guy, chief executive of Citizens Advice, said: “Being able to compare prices and understand the full cost, including late fees, is important. But borrowers also need more choice. There is an opportunity for banks to enter into the market and provide a responsible alternative to payday loans.”
She said the CMA is right to look at the role of lead generators, adding: “We’re concerned that credit brokers are hindering people’s ability to make informed decisions about short-term loans.
“Our evidence has found that some brokers are posing as direct lenders and worse still, some payday lenders are directing people they turn down for a loan towards a credit broker. Anyone who is in financial difficulty already should be pointed towards debt advice rather than offered a loan.”
Published: Thursday 9th October 2014 by The News Editor