CMA final report on payday lending investigation: impact on lenders and brokers (lead generators)Print publication
On 25 February 2015, the Competition & Markets Authority (the CMA) published its final report of its investigation into the payday lending market. A summary of key points from the report can be viewed here.
This note sets out the key impact for lenders and lead generators and advises on what they need to do to ensure compliance.
The CMA’s final report recognises the need for payday loans. It also recognises that there are structural and behavioural barriers for any new entrants and that these barriers – particularly the need to use lead generators and associated cost – inhibit the prospects of greater price competition. Further the report recognises a sharp decline in the payday market with the exit of a number of suppliers over the last year or 18 months.
The report finds that consumers’ need for credit urgently, coupled with their credit status, means that many will prioritise the prospects of securing credit above the price charged. This means they are likely to return to a lender or lenders which has lent to them before rather than take the risk of being refused by a lender offering a cheaper price. Even where consumers are willing to shop around the different features of products make comparison difficult and current price comparison websites are not always independent or reliable.
With very limited price competition, barriers to new entry and the lack of price sensitivity on the part of borrowers, the market does not work well for consumers.
The CMA seeks to address the problems it has identified by a mixture of Orders and recommendations to the Financial Conduct Authority (FCA). These cover the lack of transparency over the role of Lead Generators, the need for reliable price comparison information for consumers, the provision of better data on the true cost of borrowing and the use of better data by Lenders.
Impact on Lenders
Of most immediate importance to Lenders are the CMA’s decision to require online lenders to publish details of their products on at least one FCA authorised price comparison website and the CMA’s requirement that lenders should provide borrowers with details of the costs paid by the borrower for their most recent loan and over the previous 12 months.
The CMA report states the following:
Price Comparison Websites (PCWs)
We have …decided to revise the Order that we had proposed so that online lenders will be prohibited from supplying payday loans to customers in the UK unless details of their payday loan products are published on at least one payday loan PCW which is operated by an FCA-authorised person following the FCA’s implementation of additional standards. Where an online lender can demonstrate that it has been unreasonably excluded from all authorised payday loan PCWs, this prohibition will not apply.
Summary of cost of borrowing
We have … decided to issue an Order requiring payday lenders to provide their borrowers with details of the charges that the borrower has paid on both the most recent loan and also over the last 12 months and the web address of one or more authorised payday loan PCWs or a portal listing all authorised payday loan PCWs. This would be available from when a loan has been repaid. Lenders should take all reasonable steps to bring the summary to borrowers’ attention. To demonstrate this, before an existing borrower commences a further loan application process with a lender, the lender should request that a borrower confirms that they are aware that they have had the opportunity to access the summary issued following the conclusion of the borrower’s most recent loan with that lender. At the point of this confirmation, a link should be available for the borrower to access the summary, or, for high street lenders, borrowers should be reminded of the availability of the summary.
What Lenders need to do to meet these requirements
The requirements will come into effect once the CMA makes its proposed Orders. Even when the Orders are made, there will be no immediate action required on the PCW point as the FCA is first required to put forward additional standards for PCW operators. Once the FCA has done so and there are PCW’s available on-line, lenders will need to ensure that their products are published with at least one such site.
In advance of publication lenders should check to ensure that all the information they publish is legally compliant including the stated APR.
Lenders need to ensure that their record keeping and systems are capable of producing the information required both for the last loan and the preceding 12 month period. They will also need to build into their systems the requirement to bring the summary to the attention of the borrower when a loan is repaid.
Differentiating new from existing or returning customers will also be essential.
Impact on Lead Generators
The report contains recommendations for actions to improve transparency in respect of the status and role of lead generators. The report states:
(a) many borrowers that use a lead generator’s website to find a loan are unaware of the fact that they are using a lead generator and believe they applied directly to a lender; and (b) there is a lack of transparency in how lead generators describe the service they provide and the commercial relationship that the lead generator has with lenders on their websites. Applicants are typically referred to the lender that offers the lead generator the best commercial deal rather than to the lender that offers the most suitable loan for the customer’s needs.
We have therefore decided to recommend that the FCA take the steps necessary to address both dimensions of this lack of transparency.
We also recommend that the FCA continues to prioritise its review of the operation of this sector.
We recommend that lead generators should be required to state that application details are referred to the lender that offers the lead generator the best commercial deal rather than to the lender that offers the most suitable loan for the customer’s needs.
Action on these matters rests with the FCA but it seems highly likely that full status disclosure rules which address the points that concern the CMA will be introduced.
Lead generators need to await what the FCA requires but should stand ready to amend their websites, any advertising material and any consumer facing communications so that they fully disclose what role they play, how they are paid and on what basis they refer applicants to lenders.