Debt Advice Foundation welcomes referral of payday lenders to the Competition Commission

National debt charity Debt Advice Foundation has welcomed the announcement by the Office of Fair Trading that the payday lending market is to be referred to the Competition Commission.

The OFT said it "continues to suspect that features of the payday lending market prevent, restrict or distort competition. It considers that these issues go deeper than can be addressed through existing laws and guidance."

Chief Executive David Rodger said: “ As we told the OFT in its consultation, we see on a daily basis the significant payday loan debts that clients have amassed simply because they were unaware of the impact of fees and high interest rates.

“Many of these clients were already in a vulnerable position and unlikely to take the time or effort involved to even begin to understand the complexities and implications of what they were taking on.

“Like many others, we were particularly shocked to discover from the OFT’s report that well over half these lenders’ profits come from the interest and fees charged after a loan repayment date has been missed. 

“This means that their business model is dependent on borrowers failing to meet the terms of their contract and being penalised. That simply cannot be right.

“We believe there should be a wide range of credit options open to all consumers, and that the terms and conditions should be open, transparent and fair.  We hope that this referral to the Competition Commission brings that closer to reality.”

Having considered responses submitted during this consultation, the OFT continues to suspect that features of the payday lending market prevent, restrict or distort competition. It considers that these issues go deeper than can be addressed through existing laws and guidance. 

The OFT set out aspects of payday lending which caused particular concern.  These included:

  • Practices that make it difficult for consumers to identify or compare the full cost of payday loans, undermining competition over price for loans.
  • Barriers to switching between lenders when loans are rolled over that prevent other lenders competing for this business.
  • Variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not.
  • A significant proportion of borrowers have poor credit histories, limited access to other forms of credit and/or a pressing need to borrow. The cost of the loan may therefore be a less significant factor for borrowers, which may weaken competition on price between lenders.

For more information on the OFT's referral, click here