Government should set up price comparison site for credit services, says OFT

The OFT has conducted a study of the high cost credit market, in which borrowers with low incomes or poor credit histories use pawnbrokers or payday loan companies to borrow money at far higher rates of interest than those offered by banks, building societies and credit unions.

The OFT said that a price-comparison website should be available so that users of the high cost credit companies can see which services are the most expensive and can compare costs to cheaper mainstream lenders. If volunteers will not start such a site the Government should provide it, the OFT said.

"We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites," said the OFT's report into the sector. "If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area."

The OFT investigated the sector because of fears that people who had no other source of credit were being exploited. It found that problems were not as bad as some had feared.

"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," said an OFT statement.

The regulator said, though, that many of the problems it did find were not ones that it had the power to solve. "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," it said.

Competition in the market is low and that results in companies making significant profits, the report found.

"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," said the OFT statement.

The OFT decided against direct controls over pricing, though. "The OFT is concerned that such controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness," its statement said. "These problems include the potential for suppliers to recover income lost through price controls by introducing or increasing charges for late payment and default."

The OFT did recommend that the companies operating in high cost credit markets engage in some self-regulation.

"We recommend that the relevant trade associations for home credit suppliers, payday lenders and pawnbrokers establish a code or codes of practice covering best practice policy in a number of areas," said the report. "Such a code could include: complaints processes and advice to customers; policies on rolling over of loans; rules of thumb on typical limits for amounts to lend to consumers; guidance on avoiding misleading consumers through advertisements; and steps to ensure that consumers are aware of the ultimate owners of brand names."

"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," said Ray Watson, the director of the OFT's Credit Group. "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," said Watson.