Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
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Author: Internal Compliance Director
Price Comparison Websites and the Payday Lending Market Investigation Order 2015.
As the person in charge of compliance at BFWG Grants I often find myself getting into the nuts and bolts of new regulations and regulatory changes. This is in part because I have, what many may say, a sad fascination with such legislation, but in the main it is because I need to make sure that our company is fully compliant with the regulations designed to protect our customers.
A recent piece of regulation (made in August 2015) came along as a result of the investigation where, in Mid-2013, the Office of Fair Trading (former regulator of consumer credit companies) referred the Payday Loans market as a whole to the Competition Commission as it felt that it was in breach of many competition rules.
The Competition & Markets Authority (CMA) (who took over from the Competition Commission) laid down 2 key rule in August 2015 that are designed to both promote competition and provide more information to borrowers, in what has become a very price insensitive market. Today I am going to focus on what I feel is the most significant of these rules in terms of enhancing competition, that being Price Comparison Websites (PCW).
Firstly, for those who have totally managed to avoid those little Meerkat’s bouncing over the TV screen, or that annoying man with the big moustache bellowing out his operatic prowess, I will spend a few lines explaining what a PCW is.
In short, they are websites that allow companies to list on their products alongside similar products so consumers can make an easy comparison, both of key features and of course price. This can be anything from insurances to credit cards to energy suppliers. For some products, such as credit cards, this will be a generic list, whereas with more complex products, such as motor insurance, you may need to fill in your personal details and then the list will be populated with quotations specific to you. Whatever way they work, in the main they will list products from cheapest to dearest, unless the user wants to filter by another item such as those with protected no claims discount.
The problem with Payday Loans, as identified by the OFT, was that there is a lack of price competition. Many borrowers will not focus so much on getting the cheapest loan as just getting any loan. This is particularly true for those with bad credit as they will be happy to just get a loan, regardless of cost. This has meant that a majority of lenders have been able to cluster their pricing around certain levels and there has been no real need to undercut each other in order to attract more business. Even with the latest Financial Conduct Authority (FCA) cost capping regulations this has just moved the cluster from circa £1 per day to circa 80p per day.
So what happens in other markets? Well let’s take the travel industry, for example cheap flights. We all know EasyJet and Ryan Air operate in this market, as do a few other ‘low cost carriers’. Many customers will compare these prices, and if both carriers operate to a similar destination at the time the passenger wants to travel, they will often choose the cheapest one. The airlines will continually be looking to undercut the other and thus the price is forced down. The same is true with travel agencies, Thomas Cook and Thomson will both be trying to offer cheaper holiday deals than the other to attract business and this makes for better deals for the consumers.
Now take this one step further and introduce a website such as travelsupermarket.com. This lists all available flight on one place so the user does not even have to visit the individual airlines sites. They can type in a destination, departure point and time/date and a whole list of prices appears in an instant. So why not have PCW in the payday market?
Well, in actual fact there are. The problem is that firstly some lenders elect not to be listed on these, and secondly, for those that do, many of these sites do not rank on the cost of the loan. Many (not all) of the current payday PCW’s continue to use the revenue method to decide the listing order. Let’s assume I have 10 lenders wanting to list on my site. One is prepared to pay £3.00 per click (customer following the link from the PCW to the lenders site). If another lender wants to be at the top (and therefore get more customers) they may offer £3.50 per click. This has nothing to do with the interest rates they are charging customers, but how deep their marketing pockets are. Lender 1 wants to get back on top so pays £4.00 per click and so on.
So in fact such a method of PCW is great for the owners of this site as they can see their profits rise with increased competition, however for the lender there is no incentive to cut interest rates, and for the borrower they still do not benefit from competition acting as it does elsewhere and forcing prices down.
In the new regulations regarding price comparison websites, which will not come in to force until after the FCA have finalised their own regulations on how these must operate, every payday lender must list on at least 1 PCW, and furthermore must include a link to that PCW from their own website. This will encourage borrowers to use these PCW to compare loans. But that is only the first part as, under the current rules we have already demonstrated that many of these sites do not promote price completion.
So the next step is to reform the way that PCW owners arrange their listings. While, as at Feb 2016, the FCA have not finalised exactly how this will work, to comply with the CMA Order, this MUST list in order of the cost of the loan. This means that those at the top will cost the borrower less, and those at the bottom will be the most expensive. So under these rules, if a lender wants to get to the top of the list, and therefore attract more customers, they must reduce the cost of their loan. So now, instead of the fight for the top benefiting the PCW owner, it should now, at last, benefit the consumer.