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The CMA makes suggestions to reduce the cost of payday loans.
Designed in the wake of the Financial Conduct Authority (FCA) maximum limit pricing proposal made in July of this year, these suggestions will help to prevent the maximum limit designed to guarantee consumer protection against excessively high fees from becoming an interest payable by all lenders. It follows the preliminary observations of the Competition and Markets Authority (CMA) into the relevant markets issued in June (see Research Notice ( PDF, 118KB, 2 pages) ) by the group of CMA' independents examining this area.
Today's announcements focus on actions to promote the emergence of a high value, comparable pricing system for payday lending. In order to participate in the free cash flow markets, payday lenders would be obliged to publish product information on accelerated rate matching sites, enabling individuals to make fast and precise credit matches.
It will help to encourage greater pricing pressure in a situation where many borrower do not currently buy, not least because of the difficulty in obtaining clear and similar information on the costs of taking out a loan. Developing an efficient comparative pricing system would make it simpler for newcomers to establish themselves and challenging current providers by providing better offers to borrower.
CMA recommends that the use of leads should be made compulsory for those who generate leads (websites that provide information on prospective lenders ) to make their roles and functions much clearer to them. CMA has found that many borrower believe that lead generating agents themselves are actually lenders and not just brokers. Although this is understandable, there is very little visibility into the way in which leads generate the borrower's data is passed on to lenders, so clients generally do not know that leads generate the borrower's data is not matched with the most appropriate or cheapest loan offered, but are selling it to lenders according to the charges offered by lenders.
CMA also proposes a number of other actions to contribute to the effective functioning of effective competitive conditions in this area. The CMA has developed these actions - some of which are presented here (PDF, 367KB, 2 pages) - through further client research to provide information on the nature of its remedies portfolio, and has held in-depth consultations with consumers and voluntary organisations, lenders, brokers, retailers and a number of other players in the markets, as well as with the FCA.
Now the CMA is expecting close cooperation with the FCA, the sector's regulatory authority, which has initiated its own actions to enhance customer protections for credit users and is currently discussing the implementation of a maximum limit on prices. Said Simon Polito, chairman of the Payday Lending Investigation Group: Increased pricing will make a genuine distinction for the 1.8 million payday consumers in the UK.
There is little visibility at the present time about the costs of credit and in part as a consequence of the fact that creditors do not generally rummage around and pricing pressure is weaker. We can make it simpler for clients to make settlements by making sure there are accessible sites that provide unbiased, pertinent and precise information about payday mortgages, and there will be a much greater incentive for lenders to provide cheaper mortgages and attract borrowers' businesses.
Reduced pricing through more competitive conditions would be particularly welcome in this area. When you need to take out a payday loan because your budget is short, you certainly don't want to spend more than you need to. Considering that most clients take out multiple mortgages in one year, the overall costs of payment can become too much for payday mortgages built up over the years.
Clients will also enjoy the greater transparency we want for charges for delayed payments, which are unpredictable and not expected by many clients. Concerning our leads generator, we want our clients to know who they are really facing and on what bases their requests will be forwarded to the lenders so that they can make sound decisions.
It is a proportional proportion of corrective actions that could be quickly implemented to make the functioning of the payday credit markets much more effective. It is our expectation that we will work in close cooperation with the FCA to complete these actions, which will supplement its work to protect clients and offer better services to the borrower in the longer term.
While the FCA's maximum retail pricing limit and its other measures to regulate the markets will help consumers avoid some of the most serious exaggerations, increased competitive pressure will further lower retail pricing and is the only way to make sure that consumers get the best possible deal. CMA is also discussing a supplement to its preliminary observations containing further analyses and insights on leads found after a mandate amendment in July 2014.
The FCA (see editor's notes) to enhance consumers' rights means tighter regulations for lenders on matters such as the limitation of prolongations, limitations on the use of permanent payment authorities to collect debts from a borrower's accounts, the implementation of adequate controls on affordable prices and the sensitivity of dealing with debts.
FCA has also presented its suggestions for a maximum limit on prices, which it is obliged by law to implement by 2 January 2015. CMA' s preliminary ruling on corrective actions, the supplement to the preliminary finding, client research and any other information related to the inquiry can be found on the Payday Granting of Credit page.
CMA is the main UK anti-trust and anti-trust agency. As of 1 April 2014, it took over the duties of the CC and the Office of Fair Trading (OFT), as modified by the 2013 Act on Enterprise and Regulatory Reform, as regards certain aspects of fair trading. Members of the Payday Lending Investigation Group are:
Learn more about how to conduct research. OFT transferred the payday credit markets to CC on 27 June 2013. The CMA' s role in conducting research is fully shared by research groups selected from CMA panels. The Payday Living Investigation Group's preliminary investigation released in June found that the lack of pricing pressure could add 5 to 10 to the mean costs of a payday loan.
In order to relate this, a standard loan has an averaging value of 260 pounds and is taken out for just over 3 week. Therefore, since clients borrow on averaging around 6 per year, a generic client could have been saving between GBP 30 and GBP 60 per year if the overall markets were more competitive.
A few buyers might still get a poorer deal, given the magnitude of the distance between the cheapest and most costly deals available on the merchant ( which the CMA's proofs suggest can top more than £30 for a month-long £100 loan). In view of this and the scale of the payday credit industry (which has been growing at a rapid pace in recent years), the CMA came to the preliminary conclusion that the market-wide effects of increased competitiveness could be significant.
Whilst the FCA's maximum limit will alleviate part of the damage to consumers currently caused by high retail tariffs, the FCA believes that substantial pricing corrosion can take place within the suggested maximum limit, resulting in further decreases for consumers. In the absence of efficient action to address the fundamental competitive concerns affecting this particular geographic area, there will be little incentives for lenders to remain below the ceiling and the full benefit of efficient customer conditions will not be attained.
The CMA may take its own initiative following a recent analysis of the markets by placing an order or taking commitments from interested third party. From 1 April 2014, the FCA has taken over full control of household loan regulations. The Commission in October 2013 issued its meticulous regulatory proposal on retail loans, which included payday loans, which provided the foundation for its new commercial policy for the current regulations on retail loans.
Following an earlier notice in November 2013, Parliament also adopted legal provisions requiring the FCA to set a maximum limit on the costs of payday lending by 2 January 2015. FCA issued its proposal for setting the maximum limit on 15 June 2014 and expected to issue definitive pricing limit detail in November 2014.
Finally, the closing and all other information on the survey is now available on the payday case page.