63/10    15 June 2010

The OFT has today published the final report of its review of the £7.5 billion high-cost credit sector.

The sector comprises the pawnbroking, payday loan, home credit and rent-to-buy credit markets. Products supplied in these markets are typically used by people on low incomes who cannot access mainstream credit and who borrow small sums for short periods.

The report found that, in a number of respects, these markets work reasonably well in that they serve borrowers not catered for by mainstream suppliers, complaint levels are low, and there is evidence that for some products, lenders do not levy charges on customers who miss payments or make payments late. The report also makes some recommendations for improvements to the functioning of aspects of these markets that work less well.

However, to the extent that problems arise from more deep-seated issues, such as weaknesses in the financial capability of consumers, the OFT recognises that the sorts of recommendations it is making can make only a limited difference. More radical approaches which are beyond the OFT's remit 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.

The OFT has also considered the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded that they will not address the problems identified in the high-cost credit sector, which stem from both limited supply options and consumers' lack of ability to drive competition. The OFT is concerned that such controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness. These problems include the potential for suppliers to recover income lost through price controls by introducing or increasing charges for late payment and default.

Specifically, the review found that:

• many consumers are unaware of the options open to them and advice is limited
• consumers tend to focus on how quickly and easily they can access credit and the affordability of the repayments rather than the total cost compared to other products, and
• there have been few significant entrants to these markets recently, competition on price is mostly absent in some high-cost credit markets, and some of the incumbent suppliers appear to be earning high profits.

The report makes a number of recommendations for improvements to the way in which these markets operate, while recognising that these will have only a limited impact in the current context. They include:

• measures to help consumers make informed decisions and increase their ability to develop a documented credit history
• the promotion of best practice among suppliers with an industry-wide code of practice, and
• the Government working with industry groups to make information on high-cost credit loans available on price comparison sites, and ensuring that financial literacy programmes cover high-cost credit products.

The recommendations included in this report are also intended to assist the Government in considering its approach to the challenging high-cost credit sector. The report makes it clear that these findings and recommendations do not have wider applicability than the high-cost credit sector the OFT examined in this review.

Ray Watson, OFT Director of the Credit Group said:

'Our report has found that people who use high-cost credit have limited options and find it difficult to exercise what choice they have to obtain the best deal. This means that competition between suppliers is less effective than it might be. The recommendations we're making today would deliver worthwhile improvements to these markets but more radical approaches, outside the remit of the OFT, need to be examined by the Government if the fundamental and longstanding issues of lack of consumer power and limited supply are to be tackled.'

The high-cost credit review (pdf 451kb) has been submitted to the Minister for Consumer Affairs at the Department for Business, Innovation and Skills.

NOTES

1. The OFT launched its review in July 2009, in response to 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 had potentially limited suppliers' willingness to lend money.
   
2. 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. Publication of this report was delayed following the announcement of the General Election in April 2010.
   
3. The interim research report of the review was published on 8 December 2009 and is available on the project page.