NEWS...
OFT Review of High Cost Credit
The OFT has published the final report on the review of the £7.5 billion high-cost credit sector.
From pawnbroking to payday loans, home credit to rent-to-buy credit markets, the products on offer in this market are often used by people on low incomes, those who can't access mainstream credit and those who need to borrow small sums for short periods only.
The OFT's report found, in a number of ways, the markets work well. They serve borrowers not catered for by more mainstream suppliers, complaint levels are very low and – in some cases lenders do not levy charges on users who miss or are late with their payments. Areas that were identified as needing attention were also highlighted.
However, the OFT realised that more deep-seated issues – including the financial capability of consumers – mean that the OFT can only make a limited difference to the wider social, economic and financial situation. Unless more radical approaches were undertaken.
The OFT also considered the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded they will not address the problems identified in the high-cost credit sector, which stem from both limited supply options and consumers' lack of ability to drive competition. In essence, the OFT is concerned that such controls may reduce supply and considers there to be practical problems with their implementation and effectiveness.
The identified problems include the potential for suppliers to recover income lost through price controls by introducing or increasing charges for late payment and default. Specifically, the review found that:
- many consumers are unaware of the options open to them and advice is limited
- consumers tend to focus on how quickly/easily they can access credit and the affordability of the repayments, rather than the total cost compared to other products
- there have been few significant entrants to these markets recently, competition on price is mostly absent in some high-cost credit markets, while some incumbent supplies appear to be earning high profits
The OFT's report makes a number of recommendations for improvements to the way in which these markets operate – although it acknowledges these will only have a limited impact in the current environment. The recommendations include:
- measures to help consumers make informed decisions and increase their ability to develop a credit history
- the promotion of best practice among suppliers with an industry-wide code of practice
- the Government working with industry groups to make information on high-cost credit loans available on price comparison sites, and ensuring that financial literacy programmes cover high-cost credit products
The recommendations are intended to assist the Government in considering its approach to the challenging high-cost credit sector. The report states clearly these findings and recommendations do not have wider applicability than the high-cost credit sector the OFT which has been examined in their review.
Ray Watson, OFT Director of the 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 today 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".
Original article courtesy of DBSG and OFT.
