1. What is high-cost credit?
There is no formal and accepted definition of the term high-cost credit. Our research has covered a number of different products, and we have concluded that there is no single economic market for high-cost credit.
High cost credit products are typically small loans borrowed over short periods - while the cost expressed as a total charge (in pounds) may seem reasonable, the annual percentage rate (APR) is often high because of the short time over which the loan is taken and the high charge relative to the loan value.
We have found that markets for high-cost credit include the following products:
2. Are lenders of high cost credit the same as loan sharks?
No. High cost credit lenders are legitimate businesses with consumer credit licences issued by the OFT. The term loan shark is used to refer to illegal money lenders who carry on the business of consumer credit without a consumer credit licence. Loans from loan sharks are not legally enforceable, therefore some loan sharks employ violence and intimidation to enforce outstanding debts.
Loan sharks can be reported to the Trading Standards Illegal Money Lending Team by calling 0300 555 2222.
3. What is the OFT's role in relation to consumer credit?
The OFT is responsible for regulating the consumer credit industry in accordance with the powers granted under Consumer Credit Act (CCA) 1974 (the Act), as amended. The functions of the OFT under the Act are:
A Consumer Credit Public Register is maintained by the OFT. The register records traders who hold licences and any actions taken against them, and also details traders who have applied for a licence.
Since 6 April 2008, the OFT has adopted a more targeted, risk based, approach to consumer credit licensing, focusing resources on the areas of highest risk to consumers. As part of this approach, applicants for a licence to carry out any activities that the OFT deems to be high risk have to provide evidence of their credit competence. To verify the evidence of their competence, they may also be subject to an on-site visit by officers from their Local Authority Trading Standards Service or the OFT.
4. What prompted this review and when was it launched?
This review was launched on 2 July 2009 with the aim of establishing whether the high-cost credit sector is working well for consumers. It was launched because of concerns that many low income consumers may suffer from a lack of options when seeking credit, that the price they pay for the credit available to them is too high, and that the recession has potentially limited suppliers' willingness to lend money.
5. Who did the OFT consult with during its review?
The review team met with and received information, research and submissions from a wide variety of stakeholders in this sector which have added significantly to the body of evidence on which the conclusions of this report are based. Amongst the wide range of stakeholders consulted were:
6. How does the review fit with other Government initiatives in this area?
The review was designed to complement rather than overlap with other OFT and Government initiatives in this area. These included the OFT's work on personal current accounts and overdrafts and its recent work on developing guidance on irresponsible lending. In addition, we are aware of wider work in this area, including the recently published outcome of the BIS credit and store card review, the follow-up to the BIS consultation on Post Office Banking and the Department for Work and Pension's proposals for reform of the Social Fund.
Our analysis, conclusions and recommendations have taken account of these initiatives.
7. How does the final report differ from the interim report?
The final report is the result of a nine month review of the operation of the market for high-cost credit. This review has involved the collection and analysis of a large amount of data obtained from a wide range of sources. On 8 December 2009, some of the evidence was published in an interim research report, which enabled us to test the completeness and robustness of our emerging evidence and research.
The additional primary research covered in the final report includes:
The final report contains our analysis and identifies key issues and findings drawn from all the evidence obtained by the review team and submitted to us by stakeholders. It also provides our conclusions and recommendations for changes to this sector.
8. Does the report take account of the manifesto commitments of the political parties published in the lead up to the May 2010 general election?
This review was completed in advance of the recent general election, and has not been updated to take account of the policies and intentions of the new Government, or the manifesto commitments of the parties announced in advance of the election. Publication of this report was delayed following the announcement of the general election in April 2010.
9. When was the final report written?
The final report was due to be published in April 2010. Due to the timing of the announcement of the general election, the publication of the final report was delayed until after the election.
10. What is the size of the market?
Our research and internal analysis suggests that the value of loans made in 2008 by specialist high-cost credit providers is around £7.5 billion.
11. Have you estimated the level of consumer detriment in the market?
Yes, we have estimated the scale of potential consumer detriment from high prices in the high-cost credit sector.
We found from our theoretical analysis that it might have been possible for consumers to save up to around £150 million in 2008 by choosing the best deal for each high-cost credit product.
To ascertain the potential benefits from more price competition, we then introduced the notion of a fictional new product that undercut existing providers. Using our data on loans for 2008, we estimated that a five per cent lower price increased our estimate of achievable savings to up to around £190 million.
It should be noted that this analysis represents at best a partial analysis of the theoretical detriment that might be seen in the sector. Further details can be found in Chapter 3 of the report.
12. Who is a typical high-cost credit consumer?
The consumers of high-cost credit are difficult to characterise, as they include a variety of different demographic groups which vary by product, and each product has a variety of different types of user.
In many cases, consumers of high-cost credit have lower than average incomes. There are some instances of lower levels of final educational achievement and lower social classes among consumers of home credit, with many home credit consumers noting that they would find it difficult to find a small amount of money without increased borrowing.
There is more variation between customers of payday lending, and little overlap between them and customers of home credit. A typical customer for pawnbroking was described by researchers in 2003 as a woman in her twenties or thirties, with children, and in low paid work or unemployed and receiving benefits.
13. Is the sector working well for consumers?
We have found that, in a number of respects, these markets work reasonably well. We make some recommendations for improvements to the functioning of these markets. However, to the extent that problems in these markets arise from more deep-seated issues, such as weaknesses in the financial capability of consumers, we believe that the sorts of recommendations made by the OFT will only make a limited difference.
More radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist. Addressing such issues is beyond the scope of this review and outside the OFT's remit.
14. What is the OFT doing about the problems identified?
While we note that there are some deep-seated concerns in these markets, we believe that there are some incremental improvements that could be made in these markets within the current economic, financial and social context. We therefore make recommendations within four overarching themes:
15. Why is the OFT not in favour of price caps?
The OFT has considered the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded that they would not be an appropriate solution to the particular problems found in these high-cost credit markets.
16. What happens after the final report is published?
The Government's response to our report will be coordinated by the Department for Business, Innovation and Skills (BIS).
17. I have a complaint against a lender - who should I contact?
If a consumer has a complaint against a lender, and cannot resolve the matter with the lender directly, there are a number of sources of help and advice. These include the Financial Ombudsman Service, local Citizens Advice Bureaux and Consumer Direct.
Consumer Direct, which is a government-funded telephone and online service funded by the OFT and delivered in partnership with Local Authority Trading Standards Services, can be contacted on 08454 04 05 06 or online at www.consumerdirect.gov.uk/contact.
If the consumer has pursued the complaint with the lender but is dissatisfied with the outcome, they can also approach the Financial Ombudsman Service via one of the channels below:
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