Out-Law News 2 min. read

Price caps in payday loans market increase need for further reforms to address competition problems, says regulator

Requiring payday lenders to abide by price caps could enhance problems with competition that already exist in the market, the UK's main competition regulator has said.

The Competition and Markets Authority (CMA) has proposed a raft of measures it said are needed to address competition issues in the payday loans market (227-page / 2.25MB PDF) that it has provisionally identified.

Issues adversely affecting competition in the market include the limited extent to which consumers demand drives price wars in the payday loan market, the challenges consumers face in identifying the best-value loan, the way intermediary 'lead generators' help point consumers towards certain lenders and the lack of consumer visibility of new entrants to the market, the CMA said.

Those problems could be exacerbated by the Financial Conduct Authority's (FCA's) planned price cap rules, the CMA said. It recommended that payday lenders should be banned from selling loans to consumers without also advertising their offers on accredited price comparison websites (PCWs).

"To encourage the development of a dynamic, high-quality price comparison sector for payday loans we have provisionally decided to prohibit payday lenders from supplying payday loans unless details of their prices and products are published on at least one accredited PCW, a link to which is included on their own website," the CMA said as it detailed proposed remedies to problems identified in its payday lending market investigation.

The CMA called on the FCA to run the PCW accreditation in accordance with certain criteria the FCA would develop. However, the regulator proposed that accredited PCWs should, as a minimum, operate in accordance with principles on customer relevance, competitive neutrality, openness and compliance.

The CMA made a number of other recommendations to the FCA in its report which it said could help address competition issues in the payday loans market. Among the measures was a recommendation to improve real-time data sharing of credit information among lenders.

A further recommendation called on the FCA to take action to improve the transparency over the relationship payday lenders have with intermediaries which gather data on potential borrowers and sell that information to the lenders. The FCA was also advised by the CMA to undertake a wider review into this 'lead generator' aspect of the payday lending market.

In June, the Financial Conduct Authority (FCA), which regulates the consumer credit market in the UK, unveiled plans to curb the fees that lenders can charge consumers looking for short-term loans.

Under the plans, payday loans companies would be prevented from charging more than 0.8% of the amount being borrowed in daily interest and fees from next year. The FCA also proposed to cap the fees that payday loans companies charge if borrowers default on repayments. The fixed default fees must not exceed £15, although companies can still charge interest on those loans.

The regulator, however, said that an overall cap should be applied on the cost of loans to consumers, meaning that borrowers would not have to pay more than double the amount they borrow in the form of interest, fees or default charges. The FCA consulted on its plans and is expected to detail its finalised regulatory changes in November.

The CMA said that the FCA's price cap measures would be likely to cause lenders to "tighten their lending criteria" and may also force some companies to exit the market as a result of falling profit margins. It also said the price cap controls would likely affect the "types and structures of loans" being sold by providers.

The regulator said that the competition problems that already exist as a result of the way the payday loans market operates could worsen if the FCA mandates price caps.

"The proposed price cap would not, by itself, address the underlying causes of the AEC (adverse effect on competition) that we have provisionally identified and, in the absence of complementary action to promote effective competition, may even exacerbate some aspects of the AEC – for example, by reducing incentives for new entry," the CMA said. "In our view, the potential risks to competition arising from the FCA’s obligation to introduce the price cap increase, rather than reduce, the need for effective remedial action."

The CMA's consultation on its proposed remedies is open until 5pm on 30 October.

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