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Payday loans ‘lack competition’

Payday lenders could be forced to spell out the overall cost of defaulting on a loan more clearly up front and an independent price comparison website could be set up to help people shop around after a watchdog found an “absence of price competition”.

The Competition and Markets Authority (CMA) suggested the possible remedies after finding that a payday customer could typically save around £30 to £60 per year if the market were more competitive.

The CMA’s estimates suggest that collectively, UK payday loan customers would be £45 million a year better off if there were better competition across the market.

Simon Polito, chairman of the payday lending investigation group and CMA deputy panel chairman, said: ” If you need to take out a payday loan because money is tight, you certainly shouldn’t have to pay more than is necessary.

“While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least.

“This can particularly apply to late payment fees, which can be difficult to predict and which many customers don’t anticipate.”

He said the provisional findings suggest that payday lending customers tend to focus more on the availability and speed of a loan over the cost, and even for people who do try to shop around there is a “lack of transparency on additional fees and charges” as well as a shortage of ways to compare prices.

The CMA found that the gap between the cost of borrowing £100 for a month when comparing the cheapest and most expensive deals on the market is more than £30.
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A lack of price competition could be adding between £5 and £10 on to the average size of a payday loan, which is £260, borrowed over three weeks.

Given that customers take out around six payday loans a year on average, a typical customer could save between £30 and £60 a year if more competition were injected into the market.

Mr Polito said: ” There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs.”

The CMA is inviting feedback on its provisional findings, which come amid a wide-scale clampdown on the sector, with a view to publishing a full report towards the end of the year.

Other measures it is proposing to fix the market include forcing lenders to give periodic statements to borrowers showing the long-term cost of their loan, changes to make it easier for customers to search for credit without affecting their credit score, and requiring lenders to provide “real time” information to credit reference agencies so it is easier to spot if someone might be getting into trouble by taking out multiple loans in a short space of time.

The CMA is also proposing that lead generators, which act as middlemen and earn money by selling customer applications to the highest bidder, should be required to make it clear to consumers that they are not providing the loan.

It found that 40% of new online borrowers take out their first payday loan through a lead generator, but the generator’s role is often not made clear on websites and customers are sometimes unaware who they are dealing with.

Mr Polito said: ” Given the problems with price competition, we believe that the creation of an independent price comparison website is a particularly important option – as those that exist at the moment suffer from a number of limitations and are only used by a small proportion of borrowers.”

The CMA said the three largest payday lenders in the sector – Wonga, Dollar and CashEuroNet – account for around 70% of revenue generated from payday lending in the UK.

Dollar’s subsidiaries include The Money Shop, while CashEuroNet’s online lending products include QuickQuid and Pounds to Pocket.

The proposed measures will work alongside an overhaul of the £2.8 billion market being undertaken by City regulator the Financial Conduct Authority (FCA).

A consultation is set to be launched by the FCA this summer which will consider the level at which the overall cost of a payday loan should be capped.

The FCA took over regulation of the sector in April and since then, payday lenders have been required to provide financial “health warnings” on emails, online and in texts and to signpost people to free debt help.

From July 1, payday firms will have to include risk warnings on other forms of advertising, such as print and television. They will also be banned from rolling over a loan more than twice and they will only be able to make two unsuccessful attempts to claw money back out of a borrower’s account by using a type of recurring payment called a continuous payment authority (CPA).

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