The Office of Fair Trading has referred the payday lending market to the Competition Commission over concerns that features of the market prevent, restrict or distort competition.
A provisional decision was made in March and a public consultation was carried out to come to the final decision. Following investigation, the Competition Commission may decide to take measures to “fix” the market.
The OFT cites the following features of the market as cause for concern.
- Practices that make it difficult for consumers to identify or compare the full cost of payday loans, undermining competition over price for loans.
- Barriers to switching between lenders when loans are rolled over that prevent other lenders competing for this business.
- Variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not.
- A significant proportion of borrowers have poor credit histories, limited access to other forms of credit and/or a pressing need to borrow. The cost of the loan may therefore be a less significant factor for borrowers, which may weaken competition on price between lenders.
There’s also concern that lenders are competing primarily on the availability and speed of loan approval rather than price, which could provide an “incentive to skimp on the affordability assessment”, and over business models that “appear predicated on making loans which are unaffordable”, with the suggestion that lenders derive up to half of their income through these practives.
OFT chief executive Clive Maxwell said:
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.