Office of Fair Trading report concludes that payday loans fill a void in the financial marketplace
The Office of Fair Trading’s (OFT) review into high cost credit, which includes payday loans, pawnbroking, home credit and rent-to-buy credit, has concluded that “the markets for high-cost credit work reasonably well” and suggests the level of complaints from consumers is low and that such products fill a gap in the market not served fully by mainstream financial suppliers.
Their findings also reveal there is evidence with some products that lenders can be sympathetic with repayment difficulties and may not penalise borrowers when payments are late or missed.
The OFT also investigated the potential impact of introducing an interest charge cap for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded that they will not address the problems identified in the high-cost credit sector, which result from both a limited choice of products and consumers' lack of ability to drive competition. The OFT is concerned that such controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness.
Gary Miller-Cheevers CEO of payday loan company Speed-e-loans.com commented "we are pleased that the OFT report finally agrees with the long-held views within the payday and short term credit industry that products such as payday loans validly fill a void in the financial marketplace".
He felt “the OFT’s decision not to cap interest rates on so-called high cost credit products means that cash-strapped consumers will continue to have a choice. A cap on interest rates would only see certain credit providers alter their product structures by charging additional ‘fees’ that a consumer would have to ultimately pay for. This way, it is easy for consumers to compare interest rates among the different providers, without it being clouded with extra fees, and choose the most appropriate solution for them”.
However, the OFT did have some concerns, in particular the relatively low level of competition between providers, and that sources of additional supply such as mainstream providers seem to be limited which means that competition on borrowing charges is not effective and prices are high.
The OFT makes some recommendations for improvements to the functioning of aspects of these markets that work less well and suggests measures to help consumers make informed decisions and increase their ability to develop a documented credit history; the promotion of best practice among suppliers with an industry-wide code of practice, and the Government working with industry groups to make information on high-cost credit loans available on price comparison sites, and ensuring that financial literacy programmes cover high-cost credit products.
Ray Watson, OFT Director of the Credit Group said:
'Our report has found that people who use high-cost credit have limited options and find it difficult to exercise what choice they have to obtain the best deal. This means that competition between suppliers is less effective than it might be. The recommendations we're making today would deliver worthwhile improvements to these markets but more radical approaches, outside the remit of the OFT, need to be examined by the Government if the fundamental and longstanding issues of lack of consumer power and limited supply are to be tackled.'
In recent times payday loans have come increasingly under the microscope. Many campaign groups have been critical of the interest charges which can be in excess of 2000% APR. The OFT's findings have disappointed some, including Mick McAteer, founder and director of the Financial Inclusion Centre who remarked: "There is no justification for a failure to impose price controls in this sector. We were hoping to see a cap on charges phased in over three years while social lenders build up their capacity to offer alternative forms of finance."
The full report can be read on the OFT website.