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Payday lenders referred to Competition Commission

Payday lenders referred to Competition Commission

Category: Loans

Updated: 27/06/2013
First Published: 27/06/2013

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Payday loan companies are to be investigated by the Competition Commission following concerns that they are competing on a speed and availability basis, rather than pricing.

The Office of Fair Trading (OFT) confirmed it had referred the payday loan industry to the commission stating that it had "reasonable grounds" to do so based on results of its review earlier this year, which uncovered "deep-rooted problems" in the way lenders operate.

The Competition Commission will look into suggestions from the OFT that firms are competing with one another based on the speed at which a loan approval can be made, which has led to suggestions that such practices involve skipping affordability checks leaving the customer at risk of falling behind with payments.

The commission will investigate four key areas of concern:

  • Lenders who make it difficult for customers to assess or compare the full cost of payday loans. This is thought to undermine competition over price for loans.
  • Preventing other lenders from competing for business by creating barriers for customers who wish to switch between lenders.
  • The risk of firms who invest time and effort by being compliant being left at a competitive disadvantage compared with lenders that do not.
  • Concerns that a large number of payday loan customers 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.

The Commission's investigation will also provide the Financial Conduct Authority (FCA) with fundamental evidence on which to base new rules when it acquires the regulation of the payday loan market with effect from April 2014.

Clive Maxwell, chief executive of the OFT, 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.

"The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market.

'In the meantime, we are using the powers available to us to crack down on payday lenders that breach the law or OFT guidance," he added.

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