The Office of Fair Trading has decided to refer the payday lending sector to the Competition Commission over concerns about “deep-rooted” problems with the way lenders compete with each other.
The OFT announced its provisional decision to refer the market to the CC in March and carried out a public consultation.
Following the consultation, it has highlighted areas of concern about the way payday lenders compete with each other. This includes practices that make it difficult for consumers to identify or compare the full cost of payday loans, therefore undermining competition.
It is also concerned that there are barriers to switching between lenders as loans are sometimes rolled over and variable levels of compliance with the laws that govern the sector, meaning those who do not comply are putting themselves at a competitive advantage.
The OFT said it is also concerned that lenders are competing primarily on the availability and speed of loan approval, rather then price. This competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment, it says.
It also pointed to concerns about the business models of some payday lenders, which is says are predicated on making loans which are unaffordable, leading to consumers paying far more than expected through rollovers, additional interest and other charges. It says lenders derive up to 50 per cent of their revenue from these practices.
OFT chief executive Clive Maxwell says: “Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.
“The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market. In the meantime, we are using the powers available to us to crack down on payday lenders that breach the law or OFT guidance.”
The Financial Conduct Authority will take over regulation of the sector in April 2014. The regulator will have the power to cap interest rates and ban or limit the number of rollovers a lender may offer.