The new UK Competition and Markets Authority (CMA) recently issued Provisional Findings in its Payday Lending Market Investigation, concluding that payday loan customers in the UK appear to be paying too much for their loans as a result of a lack of price competition. The CMA will be suggesting measures to increase competition and transparency, which will work alongside changes being made by the Financial Conduct Authority (FCA) aimed at strengthening consumer protection for such borrowers, many of whom can least afford the extra costs of such loans.
The CMA estimated that in 2012 there were some 1.8 million payday loan customers in the UK taking out loans worth £2.8 billion. Payday lenders earned total revenues of about £1.1 billion per year. Although there are an estimated 90 payday lenders in the UK, the 3 largest account for around 70% of the to the total revenue generated. In many instances, online borrowers take out their first loan via a “loan generator,” which sells customer applications to the highest bidder – and some customers are unaware these companies are not the actual lenders. Customers tend to focus on availability and speed, rather than cost.
To remedy the lack of price competition and transparency in the market, the CMA is considering the establishment of an independent price comparison website, requiring clearer disclosure of late fees and costs and requiring greater transparency about the role played by lead generators. In parallel, the FCA is considering measures to limit rollover of loans, restrictions on use of Continuous Payment Authorities to recover debt from the borrower’s bank account, requiring proper affordability checks – and introduction of a price cap in 2015.
The CMA believes that total savings for customers resulting from greater competition could be in the neighbourhood of £45 million.
Parties’ responses to these Provisional Findings are due in the autumn and the CMA expects to publish a final report at the end of 2014 or the beginning of 2015. We will be watching this space.