News Column

UK Competition Regulator Pledges To Improve Competition In Payday Lending

June 11, 2014

Steve McGrath

LONDON (Alliance News) - The UK antitrust and markets regulator Wednesday said it thinks payday loan customers may be paying too much for their loans due to a lack of price competition, and said it will consider several measures to improve competition and increase transparency for borrowers.

The Competition and Markets Authority put out its provisional findings of a review into the payday lending market, and said the absence of price competition could be adding GBP5 to GBP10 to the average cost of a payday loan, relative to a typical loan of GBP260 taken out for just over three weeks.

"Given that customers take out around six loans a year on average, a typical customer could save between GBP30 and GBP60 per year if the market were more competitive. Some customers may be getting a worse deal still, given that the gap between the cheapest and most expensive deals for a month-long GBP100 loan is more than GBP30," the regulator said.

The investigation comes amid recent strong criticism of payday lenders by politicians and consumer groups, who say the interest rates charged by the lenders are extortionate and customers could be treated badly if they get into arrears. The companies counter that they are providing a service that banks don't currently provide, and the vast majority of clients pay little interest because they pay off the short-term loans quickly.

Payday loans are supposed to be very short-term loans that tie people over until they next get paid.

"The size of the payday lending sector, which has grown rapidly in recent years, suggests the market-wide impact of greater competition could be substantial: the CMA's indicative estimates suggest that total savings for UK customers from greater competition could be more than GBP45 million a year, relative to total revenue earned by payday lenders of around GBP1.1 billion, the regulator said in its statement.

It estimates that there were around 1.8 million payday loan customers in the UK in 2012, taking out approximately 10.2 million loans worth GBP2.8 billion. These figures represented a 35 to 50% increase on the preceding financial year.

The CMA said it will now look at ways that price competition can be increased, including establishing a price comparison website, clearer upfront disclosure of borrowing costs if a loan isn't paid back on time, and requiring greater transparency about the role played by lead generators.

'We found that 40% of new online borrowers take out their first loan with a lender via a lead generator, but the way in which these companies earn their money - by selling customer applications to the highest bidder - is often not made clear on their websites and some customers are unaware that these companies are not actually providing the loan," Simon Polito, chairman of the payday lending investigation group and CMA deputy panel chair said in a statement.

"We want customers to know who they are really dealing with, and the basis on which their applications are being matched with lenders, so that they can make informed choices," he added.

The CMA said the changes would work alongside changes being made by consumer credit regulator, the Financial Conduct Authority. The FCA in March launched a review into the way payday lenders and other high-cost short term lenders collect debts and manage borrowers in arrears. It has said it will regulate 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. That will be followed by the introduction of a price cap at the start of 2015.

'We now want to look at what measures will work most effectively in helping to tackle the issues we have identified. Given the problems with price competition, we believe that the creation of an independent price comparison website is a particularly important option - as those that exist at the moment suffer from a number of limitations and are only used by a small proportion of borrowers," Polito said.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Alliance News

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters