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Review comes as consumer anger rises over volatile fees, charges and credit limits on cards and personal loans
The Office of Fair Trading (OFT) is to launch an investigation into unsecured consumer credit, especially overdrafts, personal loans, credit cards and hire purchase.
The review into the £200bn-a-year sector comes in the wake of increasing customer anger about fees, charges and volatile credit limits. There is also incomprehension that interest rates are rising when the Bank of England base rate is at a record low.The OFT will also investigate the power and role of consumer credit reference agencies such as Experian, Callcredit and Equifax.
John Fingleton, chief executive of the OFT, said: "With our focus on credit we are addressing the area in which there is a real risk of short-term consumer harm, while also ensuring that the sector that emerges from the current crisis is competitive and behaves fairly and responsibly towards consumers.
"The financial crisis has led to significant changes in this market and the review will focus on the fair treatment of consumers."
The investigation will look at:
• Consumer behaviour and decision making – the OFT expects the review to clarify how borrowers view the market, how the increase in high-cost, short-term lending such as payday loans and logbook loans (secured on cars) has impacted the market, and how design and advertising influence customer choice.
• The degree of transparency in pricing – many consumers are confused by small print clauses which can sharply increase the cost of borrowing. There is also concern as to whether APR is a meaningful measure of credit costs: Royal Bank of Scotland recently told credit card customers that its upmarket Black Card had a 51.8% APR, but the bank said the card's charging structure "distorts the advertised APR", effectively making it meaningless.
• How risk-based pricing works – this is where interest rates are advertised as "typical" so borrowers don't know what rate they will get until they make a formal application, and could end up paying more because banks perceive them as a bad risk.
• Incentives for lenders to provide the right products for customers – this will look at whether there is enough competition to provide a variety of loans to meet consumer needs, rather than shoehorning them into unsuitable deals.
The OFT wants "interested parties" including consumer bodies, trading standards, banks, non-bank lenders and consumer bodies to comment on how these issues are affecting consumers in the post credit crunch world.
It is also inviting comment for the first time on the role of the credit reference agencies. They have been criticised for the power they wield combined with their lack of responsibility when they make mistakes. The OFT expects to publish its findings by December.
The British Bankers' Association said it was "not sure of the purpose of the review", while the Finance and Leasing Association (FLA), which represents a wide variety of loan companies including doorstep lenders and hire purchase firms, complained that the OFT review "risks confusion for consumers".
Stephen Sklaroff, director general of the FLA, said: "The OFT is right to recognise the importance of choice and competition for consumer credit customers. The industry is already taking action to deliver the best possible service to its customers.
"But the large number of current overlapping reviews risks diverting attention from helping consumers and may cause confusion. The numerous threads need to be drawn together to ensure a coherent outcome for consumers."
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