On 24 February 2015, the Competition and Markets Authority (CMA) published its final report on its market investigation into the supply of payday lending in the UK. It has set out a package of remedies intended to address concerns over a lack of effective price competition in the market.
In June 2013, the Office of Fair Trading (OFT) made a market investigation reference to the Competition Commission in relation to the supply of payday lending in the UK. The OFT identified several features of the market that it suspected were preventing, restricting or distorting competition.
The CMA (and its predecessor the Competition Commission) subsequently carried out a 20-month investigation into the payday lending market. The CMA published its provisional findings in June 2014 and then consulted on its proposed remedies the following October.
The CMA’s findings
In its final report, the CMA concluded that a combination of structural and conduct features limit the extent to which customer demand is responsive to the price of payday loans, and so reduce the pressure for lenders to compete to attract customers by lowering prices. These features include the context in which customers take out payday loans, the difficulties customers face in identifying the best-value loan on offer given their borrowing requirements, and customer insensitivity to charges incurred if the loan is not repaid in full on time. While noting evidence of non-price competition, the CMA took the view that lenders in a well-functioning market would also be expected to compete on prices to a greater degree than it had observed.
The CMA also identified structural market features that weaken the competitive constraint that might otherwise be imposed on prices by the prospect of new entry or expansion by smaller lenders. For example, the CMA identified various disadvantages faced by new entrants in raising customer awareness of their product due to both (i) difficulties in raising customer awareness, and (ii) difficulties in assessing credit risk accurately. Further, the CMA considers that the negative reputation of the payday lending sector (due to the history of non-compliance and irresponsible lending) deters potential new entrants.
The CMA considers that these adverse effects on competition are likely to have resulted in customers paying higher prices for payday loans and in reduced innovation in pricing structures among payday lenders. In particular, lower-risk customers, borrowers repaying their loans late, borrowers paying up-front fees and borrowers using "traditional" 30-day payday lending products to borrow for relatively short periods are likely to have overpaid by a particularly significant amount (which the CMA estimates to be on average around £5 to £10 per £100 per month).
While the CMA notes that the FCA's price cap on the cost of pay day loans (which came into force on 2 January 2015) will mitigate some of the harm to consumers that has arisen from the high prices, the CMA considers that there remains significant scope for price competition between payday lenders to further improve customer outcomes. The CMA has concluded that the scale of the customer detriment caused by the adverse effects on competition would be likely to continue to be material, despite the reduction in prices brought around by the cap.
The CMA has set out a package of measures designed to tackle the problems identified in its final report:
- new measures to promote the use of effective price comparison websites (PCW);
a recommendation to the FCA to take steps to improve the disclosure of late fees and other additional charges;
- a recommendation to the FCA to work with lenders and other market participants to help customers shop around without unduly affecting their ability to access credit;
- a recommendation to the FCA to take further steps to promote real-time data sharing (RTDS) between lenders;
- a requirement for lenders to provide existing customers with a summary of the cost of borrowing; and
- a recommendation to the FCA to take steps to increase transparency around the role of lead generators.
To implement these remedies, the CMA will publish an order within six months putting in place its requirements in relation to PCWs and borrowing summaries. The FCA will consult in the summer of 2015 on the measures to be introduced in response to the CMA’s recommendations. The CMA has said it will work closely with the FCA to implement the recommendations.
The wider payday lending landscape
In conducting its investigation, the CMA has stated that it has been aware of wide-ranging concerns expressed about the payday lending sector, including in relation to factors such as the cost of borrowing, irresponsible lending, misleading adverts and customer repayment terms. A number of these concerns relate to issues beyond the question of competition in the provision of payday loans.
The investigation has also taken place against the background of substantial changes to the regulation of the sector by the FCA. In addition to the recently-introduced price cap, the FCA has made new rules to address two issues which had been the subject of much public concern: (i) the number of times that a loan might be "rolled over", and (ii) the extensive use by lenders of continuous payment authorities to recover debt from a borrower's bank account. The CMA has stated that it sought to take into account the impact on competition of regulatory changes and other market developments in both its conclusions on the effects on competition and in relation to remedies.