The UK’s competition watchdog has proposed a series of reforms designed to increase price competition between payday lenders in the wake of the Wonga scandal.
The Competition and Markets Authority wants to stimulate a “high quality price comparison sector” for payday loans by requiring all payday lenders to provide details of their products on accredited price comparison websites.
“This will help stimulate greater price competition in a market where many borrowers currently do not shop around – partly because of the difficulties in accessing clear and comparable information on the cost of borrowing,” the CMA says.
“The development of an effective price comparison sector would make it easier for new entrants to become established and challenge existing suppliers by offering better deals for borrowers.”
The CMA is also recommending that lead generators who sell potential borrowers’ details to lenders are required to explain their role more clearly to customers.
“The CMA has found that many borrowers believe that lead generators are themselves actually lenders rather than simply intermediaries,” the regulator says.
“Even where this is understood, there is very little transparency about the basis on which lead generators pass borrowers’ details on to lenders, so that customers are generally unaware that, rather than matching borrowers with the most suitable or cheapest loan on offer, lead generators instead sell borrowers’ details to lenders based on the fees lenders offer to them.”
In addition, the CMA has proposed measures to “help competition work effectively” in the payday loans markets. These include:
- greater transparency on late fees and charges;
- measures to help borrowers shop around without damaging their credit record;
- further development of real-time data sharing systems, which the CMA says 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.
Simon Polito, who chaired the CMA’s Payday Lending Investigation Group, says: “This is a proportionate set of remedies, which could be introduced quickly to make the payday lending market work much more effectively. We expect to work closely with the FCA to finalise these measures which will complement its work in protecting customers and which together will provide a better deal in future for borrowers.
“Whilst the FCA’s price cap and its other regulatory actions to clean up the market will protect customers from some of the worst excesses, greater competition will drive prices down further and is the only way to ensure that customers are offered the best possible deals.”