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OFT refers payday loan sector to Competition Commission

The Office of Fair Trading has decided to refer the payday lending sector to the Competition Commission over concerns about “deep-rooted” problems with the way lenders compete with each other.

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The OFT announced its provisional decision to refer the market to the CC in March and carried out a public consultation.

Following the consultation, it has highlighted areas of concern about the way payday lenders compete with each other. This includes practices that make it difficult for consumers to identify or compare the full cost of payday loans, therefore undermining competition.

It is also concerned that there are barriers to switching between lenders as loans are sometimes rolled over and variable levels of compliance with the laws that govern the sector, meaning those who do not comply are putting themselves at a competitive advantage.

The OFT said it is also concerned that lenders are competing primarily on the availability and speed of loan approval, rather then price. This competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment, it says.

It also pointed to concerns about the business models of some payday lenders, which is says are predicated on making loans which are unaffordable, leading to consumers paying far more than expected through rollovers, additional interest and other charges. It says lenders derive up to 50 per cent of their revenue from these practices.

OFT chief executive Clive Maxwell says: “Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.

“The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market. In the meantime, we are using the powers available to us to crack down on payday lenders that breach the law or OFT guidance.”

The Financial Conduct Authority will take over regulation of the sector in April 2014. The regulator will have the power to cap interest rates and ban or limit the number of rollovers a lender may offer.

Which? executive director Richard Lloyd says: “Payday lending is rife with poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts. This is a market where lenders are not competing fairly with each other on price but instead use speed and ease of access to entice customers into deals they cannot afford, so it is right to get the Competition Commission to investigate.

“People under financial pressure being given high cost loans in minutes without proper affordability checks is a recipe for disaster. This referral doesn’t mean the OFT can now stand down, it needs to stay tough with lenders and continue to take early enforcement action against any company found to be lending irresponsibly.”

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  • Boris the spider 28th June 2013 at 3:41 pm

    “Lke being ravaged by a dead sheep!”

    I think you will find it was “savaged” by a dead sheep. Your comment gives it a slightly different meaning…

  • Dave 28th June 2013 at 9:43 am

    Pure politics and I am not sure given the size of the market that this warranted a referral to the Competition Commission (£2 billion market size come on!).

    All of the issues known and raised can be addressed through effective regulation (the OFT clearly failed) which I have no doubt will be dealt with under the FCA.

    Cannot see any justification for an 18 month review into this sector. What is needed is effectively regulation!

  • peter stimson 27th June 2013 at 3:17 pm

    Simon,

    There is no central DB for US payday lenders although there are some that operate on a state by state.

    If you are referring to the ‘floridia model’, whereby lenders operating in the state of Floridia have to submit data, it has a number of issues, the primary one being that lots of lenders outside of Floridia simply lend to Floridia residents thus by-passing the requirement.

    Out of state lending means that the Florida model doesn’t work well in the US as it is a federal system. However in Uk I agree there may be some merit in compulsoray data sharing given that many of the larger payday lenders are very reluctant to do so

    The other thing i would take issue with is the notion that if lenders where aware someone had defaulted they would not lend. Trust me, there are plenty that still lend in full knowledge that the borrower will struggle to pay back

  • Simon Mouncher 27th June 2013 at 1:29 pm

    Maybe we should take a look at the American model where they have one central database of all payday loans. You can only have one at any given time and if you default on one you never get another. It will come as no surprise that delinquency is very low. If processed correctly then these kind of loans have a place. I suspect however that this approach will not be taken and it will be years before the lending is policed in a responsible way.

  • Dazed & Confused 27th June 2013 at 11:01 am

    And I just bet all the pay day lenders are quaking in their boots at the prospect of having to face the competition commission!! As was once said about a certain politician…”LIke being ravaged by a dead sheep!”

  • Peter Stimson 27th June 2013 at 9:52 am

    It is commonly referred to as ‘kicking the can down the road’ or perhaps more aptly, ‘passing the buck’

    The simple fact is that a number/most of the large payday lenders have what is termed ‘default models’. This means that they lend to more or less anyone and deal with the resulting arrears in collections where they hit customers with charges and roll overs. Most of their money is made here NOT on the lending

    A large payday lender who unfortunatley has to be remain nameless, told me 3 months ago that they would welcome referral to the competition commission as it givces them another couple of years to carry on in the same manner whilst investigations commence

    The simple fact is, payday is not about rates, consumers who are desperate do not make informed rational choices and no amount of investigation is going to change this

    If you want to solve a large part of the problem, the same approach should be taken as with mortgages whereby charges and interest once a customer is in arrears can only be a direct reflection of a lenders costs e.g. you are not allowed to profiteer from customers in difficulty

    The above would kill off several large payday lenders business models overnight