News Column

As the payday lending market is labelled uncompetitive, has criticism gone too far?

June 12, 2014

YES Philip Booth Regulation is being proposed to deal with an apparent lack of competition in the payday loan market. It is rare for regulation to create competition. Experience in energy markets suggests that attempts to do so have actually raised costs for consumers. This move is part of a two-pronged attack on payday loans, and there is a danger that over-regulation will raise barriers to entry, and force vulnerable borrowers to seek semi-legal forms of credit. Indeed, many of those demanding regulation wish to see payday lending eradicated, thus putting people at the mercy of loan sharks. The government has also given power to the financial regulator to cap the total cost of credit. International evidence suggests that capping the cost of credit leads lenders to migrate towards the cap. This reduces price competition. It seems that the right hand of government does not know what the left hand is doing.

Philip Booth is professor of insurance and risk management at Cass Business School.

NO Simon Polito Clearly there's been a lot of criticism of the sector and, as we have found, there's room for improvement in terms of price competition and information for borrowers. But our job is to take a balanced and objective look at the evidence, and then see what changes are needed. It's not a question of condemning or praising a whole sector, with diverse providers, products and practices. Making practical improvements is how we can best benefit customers. Well-informed customers, aware of all the potential costs of borrowing and able to search through a price comparison website, will get a better deal. And if the work that we and the Financial Conduct Authority is doing helps improve the sector's reputation, this could encourage new entrants, increasing competition. There will continue to be demand for shortterm loans, so the most important thing is to make the market work better. Simon Polito is chair of the Competition and Market Authority's (CMA) payday loan investigation, and a CMA deputy panel chair.

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Source: City A.M. (UK)

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