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Increasing Consumer Choice
While the OFT's final report on high cost credit found price controls unnecessary, the industry regulator is keen to increase competition within the sector.
The industry breathed a sigh of relief when the OFT took a step back from imposing price controls on the high cost credit sector. However, they did call for a code of practice to be introduced and to help promote greater consumer choice.
The final report of the £7.5bn sector (which includes pawnbroking, payday loan, home credit and rent-to-buy credit markets) highlighted practical problems with introducing price controls and the OFT said it would not address problems that stem from supply options and consumers' lack of ability to drive competition.
They believe that controls could actually even stunt supply even further and force suppliers to ramp up late payment and default charges as a result.
Fiona Hoyle, head of consumer finance at the Finance & Leasing Association explained their view: "We agree with the OFT that price controls would not be appropriate because they would have adverse unintended consequences for consumers, including for the cost and availability of credit.
"We hope that the government will take careful note of these arguments against price capping when it considers the credit and store card markets."
The OFT's report actually showed the high cost credit market works well, with low complaint levels and – on occasion – some charges are not imposed for late or missed payments.
However, Ray Watson, director of the OFT's credit group, added: "Our report has found that people who use high-cost credit have limited options and find it difficult to exercise what choice they have to obtain the best deal. This means that competition between suppliers is less effective than it might be.
"The recommendations we're making would deliver worthwhile improvements to these markets but more radical approaches, outside the remit of the OFT, need to be examined by the government if the fundamental and longstanding issues of lack of consumer power and limited supply are to be tackled."
Likewise, the OFT has found many consumers are unaware of their options and that advice is limited. The report went on to say how consumers focus on how quickly and easily they can access credit, as well as how affordable the repayments are – not the total cost when compared to other products.
In fact, the report states competition on price is mostly absent in some sectors, with incumbent suppliers earning high profiles.
Tim Moss, head of loans and debt at moneysupermarket.com praised the refreshingly balanced approach of the OFT: "It is easy to get a trapped in a middle class mindset and overlook the millions of people who are excluded from mainstream bank or card company shouldn't be able to borrow."
Moss also highlighted the important role played by payday loans. Moneysupermarket.com has seen a spike in customers looking for payday loans on its websites – up 26% in May compared to January. He added: "The reality is that for a loan of a day or two, payday loans can be cheaper than an unauthorised overdraft from a major bank."
The report also included findings of its assessments of credit unions.
Mark Lyonette, chief executive of ABCUL, said: "We agree with the OFT''s analysis that credit unions' ability to compete with high cost lenders is limited by their scale, which prevents them from enjoying economies of scale."
In addition, new legislation introduced this year will allow the unions to expand on partnerships with housing providers and employers, while other laws will allow more social housing tenants and employees to benefit from membership with the credit unions.
Lyonette added: "Support for the sector to collaborate and work together behind the scenes would be an extremely cost-effective way to make access to affordable credit and safe savings available to millions more people.
"Millions of pounds could be kept in low income communities instead of leaking out to high cost credit providers such as doorstep lenders and rent to buy stores."
Along with an industry code of practice, the OFT has called for measures to help consumers make informed decisions and increase their ability to develop a documented credit history.
The OFT has also strongly suggested that industry groups and the government need to work together to make information on high-cost loans available on rice comparison sites and working to ensure financial literacy programmes cover high-cost credit products.
Original article courtesy of Credit Today.
