It’s probably a good idea. It’ll help people compare and make competition more intense – if the site can avoid the pitfalls the FCA have already pointed out – but will it drive out supply in the high cost credit market and leave borrowers with poor credit ratings reliant on shady characters whose deals are entirely unregulated and, sometimes, illegal?
There have been changes to the payday loan industry in an attempt to protect borrowers against high interest charges and falling into the void of no return, unable to repay their debts.
However, in our infographic Payday Loans: Totally evil, right?, if a borrower stays in control, they are a quick and easy form of available credit. Nevertheless, budgeting and making ends meet will always be a better solution.
Wonga woes and wiping debts
Of all the payday lenders, Wonga appears to be the industry whipping boy and has much of the media attention.
It has been a week since Wonga entered into a voluntary requirement agreement and have a new set of affordability criteria, after the FCA felt that Wonga was taking inadequate steps to ensure their customers could afford the loans.
This has led to £220m of debt being written off for 330,000 customers who wouldn’t have been given a loan under the new affordability rules and are 30 days or more in arrears. A further 45,000 customers who are up to 29 days in arrears and who also wouldn’t have been given a loan under the new affordability rules, will not have to pay interest or charges and will have the option of paying off the debt over an extended four month period.
It was good to see the lender acting quickly to put things right, albeit they had the regulator breathing down their neck.
Price competition between payday lenders
The CMA propose to encourage the development of a high quality price comparison sector for payday loans.
These proposals have developed since the FCA announced the price caps in July of this year. Intended to protect consumers from excessive charges, the CMA proposal for comparison competition will stop the price caps becoming a standard rate amongst all payday lenders.
This would mean we may be seeing payday lenders on accredited price comparison websites, allowing customers to make a quick and accurate comparison between loans and the providers.
The CMA is also proposing measures to help competition work effectively in the payday loan market. These involve:
- Greater transparency on late fees and charges;
- Helping borrowers shop around without damaging their credit record;
- Further development of real-time data sharing systems, which will help new entrants better assess credit risks;
- A requirement for lenders to provide borrowers with a summary of the charges they have paid on their most recent loan and over the previous 12 months, so that they can get a clearer picture of how much they are spending with an individual lender.
Simon Polito, Chair of the Payday Lending Investigation Group said:
Greater price competition will make a real difference to the 1.8 million payday loan customers in the UK. At the moment there is little transparency on the cost of loans and partly as a result, borrowers don’t generally shop around and competition on price is weak.
He also said:
Lower prices from greater competition would be particularly welcome in this market. If you need to take out a payday loan because money is tight, you certainly don’t want to pay more than is necessary. Given that most customers take out several loans in a year, the total cost of paying too much for payday loans can build up over time. Customers will also benefit from the greater clarity we want to see on late payment fees, which can be difficult to predict and which many customers don’t anticipate.
The CMA proposals also extend to lead generators, meaning customers will know who they are dealing with, so they are able to make informed choices.
Will the illegal loan shark rise again?
Many debt experts, especially those that deal with the most vulnerable consumers, will tell you that the illegal loan shark has never gone away, but the presence of payday lenders, which some have characterised as legal loan sharks, gave the “don’t pay and we break your children’s legs” merchants less chance to thrive.
The FCA say they are aware that driving lots of high cost credit providers out of the market will lead to unfulfilled demand. There is a risk that regulatory behaviour could lead to greater consumer hardship.
For the moment, we’ll have to trust that the regulators are watching carefully for bad outcomes. After all, they are only doing to the payday lenders what most consumer advocates want to see done – and which, in the large part, the payday lenders have brought on themselves.
