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OFT report: The high cost of credit

28 July 2010

In June 2010, the Office of Fair Trading (OFT) published the final report on its High-Cost Credit Review.

The purpose of the review has been to establish whether high-cost credit markets are working well and focuses on four areas:

Following its assessment of the markets (which include home credit, payday loans, pawnbroking and rent-to-buy retail credit), the OFT considers there are some relatively deep-seated causes of concern within the market, and addressing such issues is beyond the scope of the OFT’s review.

Addressing these issues, such as weaknesses in the financial capability of consumers, would require greater, more radical government intervention to secure a step change in financial capability of the section of the population that tends to use high cost credit products. 

However, within the context of the review, the OFT has found that in some respects, the markets for high-cost credit work reasonably well. The suppliers in these markets have met the demands for easier access to their products and they fill the gap in the market not served fully by mainstream financial suppliers.

There is also evidence with some products that lenders showed forbearance with repayment difficulties and do not penalise borrowers when payments are late or missed. In addition, without the existence of legitimate players in these markets, there would be significant groups of people who, unable to obtain credit from mainstream financial suppliers, would be denied access to licensed credit in the United Kingdom and would be forced into borrowing from those with less than scrupulous business practices. 

Notwithstanding these findings, the OFT did have some concerns regarding the competitiveness of these markets. Consumers seem to lack the ability to drive competition between providers, given their low level of financial capability, and sources of additional suppliers, such as mainstream financial providers, seem to be limited. In those circumstances, competition price is not effective and prices are high.

However, given the deep-seated nature of the problems identified by the OFT, it recognises that the recommendations it makes are likely to bring only marginal, rather than fundamental, improvements.

The recommendations put forward by the OFT are:

Helping consumers make informed decisions on high cost credit

The OFT recommends that enhanced information be made available to customers, for example through the Moneymadeclear website, and that the Government should also consider the case for introducing legislation to create a single website allowing consumers to compare the features of high-cost credit alongside credit unions and other lenders in the local area. However, it is not clear how effective such disclosure via the internet will be, given that, as the OFT points out, only 7% of users of home credit use the internet as a source of information, which indicates that consumers in this sector do not typically spend much time or effort looking for different suppliers or products.

Increasing the ability for consumers to build up a documented credit history when using high cost credit

The OFT recommends that the Government works with credit reference agencies, pay day lenders and rent-to-buy suppliers whereby such lenders/suppliers would supply suitable information to the credit reference agencies about payment and performance of their customers so that those with good payment records may be in a position to access more mainstream lenders in the future. 

Improving terms for monitoring the high cost credit sector

The OFT recommends that it collects additional information about the high-cost credit sector, such as volume, value and pricing of credit. 

Promoting best practice among suppliers of high cost credit

The OFT recommends that the relevant trade associations for home credit suppliers, pay day lenders and pawnbrokers establish a code or codes of practice covering best practice policy in a number of areas. 

Given the limited competition in the high-cost credit markets, the OFT also considered the suitability of imposing price controls for pawn broking, pay day loans, home credit and rent-to-by credit as a solution to the concerns for these markets. However, the OFT has made it clear that introducing price controls would not be appropriate, as their imposition would be complex, expensive and difficult to administer.

The OFT points out that the imposition of price controls in high cost credit markets creates a risk for high cost suppliers that they would generate lower profit levels which could lead to restrictions in the type and risk of consumers they are willing to supply. This could further limit the ability of consumers in these markets to obtain credit. In addition, the mechanisms used in the differing markets of high cost lending have different costs bases, which are based on the product characteristics and target consumers. It would be very difficult to impose price controls in such circumstances, as detailed investigations of the pricing and profits of suppliers would be needed at a product-by-product level.

The Government’s response to the OFT’s report will be co-ordinated by the Department for Business, Innovation and Skills.

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