OFT pulls short of recommending price capping on the high-cost borrowing sector
In its final report on the high cost borrowing sector, the Office of Fair Trading (OFT) has announced that it will not be recommending price controls on the short term loan sector. This market includes payday loans, pawnbroking, home credit and rent-to-buy credit and is estimated to be worth around £7.5 billion.
These products are typically used by people on low incomes who cannot obtain credit from high street banks because of a poor or no credit history, and the sum and term of repayment applied for is often too small for a mainstream lender to consider.
The OFT report states that although these forms of borrowing can be expensive they actually serve a purpose by helping those that need to raise short term finance and who would otherwise not qualify for a loan from a normal source.
However the review found that many consumers were unaware of the options available to them, that advice was limited and that some focused on the easy availability of this form of credit and the affordability of the repayments rather than considering the total cost compared to other products.
The review was also concerned that competition on price is mostly absent in some high-cost credit markets, with some of the suppliers appearing to be earning high profits.
The report recommends that measures be taken to help consumers make informed decisions. These to include the promotion of best practice among suppliers with an industry-wide code of practice, a high-cost credit loans price comparison site and ‘wealth warnings’ on loan adverts.
The OFT warned that imposing formal price controls would not only be complex and difficult but might be against the interests of potential borrowers.
It said that some lenders might restrict their lending or stop it altogether or might find other ways to make money from their loans by imposing or increasing late payment fees.
The report’s findings are for the government to consider and if they still think the industry requires price controls then it is open to them to introduce any measures they think necessary.
