High Cost Credit review (paydayloans/doorstep lenders etc) - OFT consultation

[Amethyst]

OFT to review high cost consumer credit sector

78/09 02 July 2009
The OFT today launched a review into the supply of high cost credit as part of its ongoing Financial Services Strategy.
The OFT estimates that the size of the high cost credit sector is up to £35 billion annually. The sector is characterised by loans which are often for small amounts, repayable over short periods, and with high APRs. Many of the customers of products in the sector have limited access to credit and are on low incomes and represent a vulnerable consumer group.
The review will focus on:

• the level and nature of competition in the sector, including the impact of the economic downturn on competition and whether suppliers compete vigorously in a way which delivers benefits to consumers
• the business models of lenders within the sector
• the behaviour and decisions made by consumers when purchasing credit, and
• whether consumers have the appropriate level of protection and are given the information they need to make well-judged decisions.

The review will draw on information from the credit industry, consumer organisations, other parts of government and independent experts. It will also examine credit and lending practices in other countries. The OFT expects to publish interim findings by the end of 2009 and the final report in spring 2010.
The Department for Business, Innovation and Skills (BIS) has today published a Consumer White Paper, which sets out its approach to personal finance, empowering consumers through better enforcement, and modernising consumer law. The OFT has worked closely with BIS to ensure that this review complements the White Paper proposals and has therefore focused its work specifically on high cost credit, an area in which the OFT considers consumers to be vulnerable and where a review can add most value.
John Fingleton, OFT Chief Executive, said:
'Low income consumers struggle to access credit and frequently have to resort to expensive, high interest options, and this has increasingly been an issue during the economic downturn.
'These consumers are vulnerable to exploitation. This study will look at the way this sector works to examine whether they get a fair deal, and whether outcomes in the market might be improved.'
NOTES
1. Further details can be found in the credit review section of this website.
2. On 7 April the OFT started a short informal consultation on the proposed scope of this review. See press release 40/09. Download a summary of the responses (pdf 115 kb)
3. Secured and unsecured credit products will be considered as part of the review where they fall within the scope of high cost credit. Read answers to some frequently asked questions.
4. Possible outcomes of the review include informing future enforcement action by the OFT, consumer information and education programmes, and recommendations to Government for the sector.
5. The draft Financial Services Strategy was published in April this year. A final Financial Services Plan, taking account of consultation responses, will be published in July 2009. For more details read the Financial Services Strategy consultation.
6. The OFT has specific statutory duties in this sector under the Consumer Credit Act 1974 (as amended), including an obligation under section 1(2) of the Act to keep the credit sector under review. In addition, under Section 5 of the Enterprise Act 2002, it has a function of obtaining, compiling, and keeping under review information relating to the carrying out of its functions.

[Amethyst]

Re: High Cost Credit review (paydayloans/doorstep lenders etc) - OFT consultation

OFT publishes emerging evidence in credit review

140/09 8 December 2009
The OFT has today published a summary of research and emerging evidence from its high-cost credit review.
The summary includes the results of a consumer survey, initial results from behavioural economics research, a review of international policy approaches to high cost credit, and evidence on the impact of the recession on competition in the market.
The research showed that the majority of consumers understand what types of credit are 'high-cost', but a significant number - over a quarter for some products - said they were fairly or very dependent on high-cost credit in their day-to-day life. Consumers using high-cost credit said that the speed at which money could be accessed was the main reason they took out these loans.
There was limited evidence to show that those who access high-cost credit shop around for better offers or different products. Around one-third of consumers using high-cost credit would still use the product if repayments were a third higher.
The research found that information on the total repayment amount is more helpful than an APR in understanding the cost of short-term credit. The evidence showed that some consumers do not always understand APRs and may sometimes use them incorrectly when making comparisons between very different products.
The research looked at the variety of policy approaches taken in other countries to address concerns about high-cost credit. International case studies examined by the OFT and Europe Economics (a research consultancy) showed that simple interest rate caps have been circumvented by firms increasing their fees and charges, whilst caps that also limit charges can be circumvented through restructuring the transactions or cross-border lending.
The OFT is inviting comments on the research in order to test the completeness and robustness of the evidence it has gathered. It expects to issue a final report next year setting out conclusions and recommendations.
NOTES
1. Read a summary of High-cost consumer credit - emerging evidence from the review (pdf 396 kb). The full report and annexes are available on the Review of high-cost consumer credit page.
2. The review of high-cost credit was launched on 2 July 2009 (see press release 78-09).