CMA sets out proposals to lower payday loan costs
The CMA has set out proposals to increase price competition between payday lenders and help borrowers get a better deal.
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
London WC1B 4AD
Notes for editors
- The CMA is the UK’s primary competition and consumer authority. It is an independent non-ministerial government department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. From 1 April 2014 it took over the functions of the Competition Commission (CC) and the competition and certain consumer functions of the Office of Fair Trading (OFT), as amended by the Enterprise and Regulatory Reform Act 2013.
- The members of the Payday Lending Investigation Group are: Simon Polito (Chairman of the group), Katherine Holmes, Ray King and Tim Tutton. Read more on how market investigations are conducted. The OFT referred the payday lending market to the CC on 27 June 2013.
- All the CMA’s functions in market investigations are performed by inquiry groups chosen from the CMA’s panel members. In such investigations, the appointed inquiry group are the decision makers.
- The CMA’s panel members come from a variety of backgrounds, including economics, law, accountancy and/or business. The membership of an inquiry group usually reflects a mix of expertise and experience (including industry experience).
- In its provisional findings report published in June, the Payday Lending Investigation Group found that the absence of price competition could be adding £5 to £10 to the average cost of a payday loan. To put this in context, on average a typical loan has a value of £260, and is taken out for just over 3 weeks. Given that customers take out around 6 loans a year on average, a typical customer could therefore have saved between £30 and £60 per year if the market were more competitive. Some customers could be getting a worse deal still, given the size of the gap between the cheapest and most expensive deals on the market (which the CMA’s evidence suggests can exceed more than £30 for a month-long £100 loan). Given this, and the size of the payday lending sector (which has grown rapidly in recent years), the CMA provisionally concluded that the market-wide impact of greater competition could be substantial. While the FCA’s price cap will mitigate some of the harm to customers currently arising from high prices, the CMA considers that there is scope for substantive price competition to take place within the framework of the proposed price cap, leading to further reductions in price for customers. 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.
- The CMA’s proposed package of remedies comprises the following measures:
- measures to promote the use of effective price comparison websites, in particular a requirement for lenders to publish details of their loans on an accredited price comparison website combined with a recommendation to the FCA to establish an accreditation scheme for payday loan price comparison websites
- a recommendation to the FCA to take steps to improve the disclosure of late fees and other additional charges
- a recommendation to the FCA to take steps to help customers shop around without unduly affecting their ability to access credit
- a recommendation to the FCA to take further steps to promote real-time data sharing between lenders
- a requirement for lenders to provide customers with a summary of the total cost of the customer’s most recent loan with the lender and the total charges levied by the lender over the preceding 12 months
- a recommendation to the FCA to take steps to increase transparency regarding the role of lead generators
- Following a market investigation the CMA may take action itself, by making an order or accepting undertakings from parties. The CMA may also recommend that action be taken by others such as government, regulators and public authorities. Where the CMA makes such a recommendation, it will be for the person to whom the recommendation is addressed to decide whether to take the recommended course of action.
- The FCA assumed responsibility for consumer credit regulation from 1 April 2014. In October 2013, it published its detailed proposals for regulating consumer credit, including payday lending, which formed the basis of its new conduct of business for consumer credit rules now in force. Also, following an announcement in November 2013, Parliament passed legislation which places a duty on the FCA to impose a price cap on the cost of payday loans by 2 January 2015. The FCA published its proposals for the specification of the price cap on 15 June 2014 and expects to publish final details of the price cap in November 2014.
- The final report and all other information on the investigation are now available on the payday lending case page.
- Enquiries should be directed to Rory Taylor or Siobhan Allen or by ringing 020 3738 6798 or 020 3738 6460.
- For information on the CMA see our homepage, or follow us on Twitter @CMAgovuk, Flickr and LinkedIn. For CMA case updates sign up to our daily email alerts.