24th February 2015
Payday lenders will be required to publish details of their products on at least one price comparison website, the Competition and Markets Authority (CMA) has said.
Separately, Wonga revealed today that it would be cutting nearly a third of its workforce and closing two international offices as it can no longer sustain its high cost base.
The CMA has recommended to the Financial Conduct Authority (FCA) that authorised comparison websites should provide customers with clear, objective and comparable information on all potential payday loan costs, in particular the total amount payable. Borrowers should be able to compare different loans by factors like loan amount and duration.
The CMA believes that one or more commercial comparison websites will emerge and be authorised by the FCA, but if this does not happen, lenders will be obliged to set up an FCA authorised comparison site.
The CMA has also made recommendations to the FCA to take steps to improve the disclosure of late fees and other additional charges; help customers to shop around without unduly affecting their ability to access credit; improve real-time data sharing between lenders and credit reference agencies; ensure that lead generators – websites which sell potential borrowers’ details to lenders and through which 40% of first-time online borrowers access their loans – explain how they operate much more clearly to customers; and finally, online and high street payday lenders will be ordered by the CMA to provide existing customers with a summary of their cost of borrowing. The summary will tell borrowers what the total cost of their most recent loan was, as well as the cumulative cost of their borrowing with that lender over the previous 12 months and how late repayment affected their cost of borrowing.
The measures are designed to tackle problems identified in the final report, where the CMA found that a lack of price competition between lenders has led to higher costs for borrowers. Most borrowers do not shop around – partly because of the difficulties in accessing clear and comparable information on the cost of borrowing and a lack of awareness of late fees and additional charges. Without the pressure to drive down costs, lenders have tended to price their loans at similar levels whilst competing on other factors such as speed – often the initial priority for borrowers.
The CMA also found that many borrowers believe that lead generators are themselves lenders, rather than simply intermediaries. Even where they understand this, most customers are unaware that, rather than matching borrowers with the most suitable or cheapest loan on offer, lead generators sell borrowers’ details to lenders based on how much lenders are prepared to pay for the details, generally selling them to the highest bidder. As a result the CMA does not consider that lead generators have been effective in promoting price competition between lenders even though they have helped to promote the entry into the market of additional lenders.
The CMA’s remedies follow the FCA’s introduction of a price cap for the sector which came into force on 2 January 2015, which is in addition to a number of other FCA measures to increase customer protection that theFCA has introduced over the past year.
Simon Polito, chair of the CMA’s payday lending investigation group, said: “The payday lending market is undergoing substantial change as a result of FCA initiatives to eradicate unacceptable practices. Our actions complement the FCA’s measures and are aimed at making the market more competitive and further driving down costs for borrowers.
“We expect that millions of customers will continue to rely on payday loans. Most customers take out several loans a year and the total cost of paying too much for payday loans can build up over time. During our investigation, we found that there was often a substantial difference in this market between the most expensive and cheapest deals.”
He added: “The FCA’s price cap will reduce the overall level of prices and the scale of the price differentials but we want to ensure more competition so that the cap does not simply become the benchmark price set by lenders for payday loans. We think costs can be driven lower and want to ensure that customers are able to take advantage of price competition to further reduce the cost of their loans. Only price competition will incentivise lenders to reduce the cost borrowers pay for their loans.”
Which? executive director, Richard Lloyd, said: “The payday lending market has been rife with poor practice but today’s proposals, alongside the Financial Conduct Authority’s price cap and tougher supervision, are a step in the right direction to make lenders start to compete on price and treat customers fairly.
“We now want to see the regulators turning their attention to unfair practices and excessive fees in the wider credit market, including unauthorised overdrafts.”
Mike O’Connor, chief executive of StepChange debt charity, said: “The payday lending industry has had its wings clipped. CMA action combined with the work of the Financial Conduct Authority (FCA) means that a number areas of consumer detriment and failures of the previous regulatory regime are now being addressed.
“There are, however, outstanding issues that now need attention. Current rules do not adequately address the issue of unsolicited marketing calls. It is very wrong that people seeking a loan have their information sold on to the highest bidder. The resulting barrage of nuisance calls and texts offering high-risk credit products can lead to serious harm for financially vulnerable people. We need a ban on the unsolicited marketing of high-cost credit products such as payday loans.”
Wonga has said it expects to cut 325 jobs as it seeks to satisfy new regulations.
Wonga says 325 posts are set to go in teams that support the UK businesss in London, Dublin, Cape Town and Tel Aviv. The Dublin and Tel Aviv offices will close.
Police recently ruled out a criminal investigation into the company’s use of fake legal letters to chase debts from over 45,000 customers.