The £2.8billion payday loans industry is undergoing an investigation to discover what potential benefits consumers could gain if certain steps were taken to inject more competition into the market.
While the full report won’t be out until later this year, the Competition and Markets Authority (CMA), which is carrying out the probe, has just released a snapshot of the problems it’s uncovered so far — and what it proposes to do about them.
The watchdog estimates that the typical payday loan customer pays up to £60 a year over the odds because of a lack of price competition in the industry.
Part of the problem is that borrowers often focus on how quickly they can get the cash rather than the overall cost. To make it easier for people to shop around to get the best deal, the watchdog is proposing that an independent price comparison website should be set up. This would present someone looking for a short-term loan with a table of possible lenders and the overall costs involved, specifically tailored to their needs.
The CMA also suggests lenders should be forced to clearly tell a customer up front what the total cost will be if they fail to pay back their loan on time and give out periodic statements showing the long-term cost of their debt.
Other possible measures include clamping down on lead generators, and t hese are “middlemen”, who sell customer applications to the highest bidder. Some customers mistakenly believe they are actually the loan provider.
The CMA is therefore proposing that lead generators should explicitly spell out their commercial relationship with lenders.
The size of the payday loan sector has grown so rapidly in recent years that the total savings from implementing these changes could collectively save consumers more than £45 million a year.
Whatever is decided in the final report, the one thing that seems clear is that consumers’ need for short-term loans isn’t going to die down any time soon.
Simon Polito, chairman of the payday lending investigation group and CMA deputy panel chairman, said: “Short-term loans like these meet a very clear need for around 1.8million customers a year.
“This level of demand isn’t going to go away so it’s important to ensure that this market works better for consumers.”
Another possible ways to breathe new competition into industry, some debt advice charities believe, is for lenders which are more established on the high street to step in and fill the gap. For example, Gillian Guy, chief executive for Citizens Advice, suggests it’s time for banks to start offering “responsible micro loans”.
“For consumers to have real choice in the payday loans market, they need more responsible short-term credit options, not just the ability to choose between existing providers.”
However, in its provisional findings, the CMA suggested the generally negative reputation of the payday loans sector puts some financial firms off entering that market.
Further clampdowns on the sector will keep coming though. The Financial Conduct Authority (FCA), which has a remit to put consumers’ interests at the heart of what it does, will launch a consultation this summer to look at what level the overall cost of a payday loan should be capped at.
And from July 1, payday lenders will have to include risk warnings on print and television advertising. Payday firms 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 recurring payment.
The FCA took over regulation of the sector in April and it has previously said it expects around one quarter of payday firms will find its higher consumer protection standards too tough to meet, forcing them to quit.
Certainly, this “hands on” approach by the regulators already seems to be having a strong impact. According to analysis by the Financial Times last month, at least one third of the UK’s 210 payday lenders had failed to apply for permission to operate under the new regulatory regime.
HOW... MUCH MONEY ARE FIRST-TIME HOME BUYERS TYPICALLY BORROWING? According to new figures from the Council of Mortgage Lenders (CML), the typical home loan taken out by a first-time buyer reached a record high of £121,500 in April.
The affordability of a loan by people taking their first step on the property ladder also “worsened fractionally”, with this sector typically borrowing 3.42 times their gross income compared with a multiple of 3.41 in March.
The data could add to concerns that some people are stretching their borrowing for fear of missing out on their chance to get on the property ladder as house prices continue to pick up.
New figures from the Office for National Statistics (ONS) also show that first-time buyers face having to pay 10.7% more to get on the property ladder than they did a year ago, with the typical starter home now costing £199,000.
However, the CML has said that current low interest rates mean that first-time buyers’ payment burdens remain relatively low for now, with their mortgage repayments, including capital and interest, typically representing around 19.4% of their gross income.
In parallel with the typical first-time buyer loan reaching a new peak, the average income of a first-time buyer household has also jumped to the highest levels ever recorded by the CML, with the new figure standing at £37,000.