The £2.8bn payday loan industy will be forced to sign up to an officially-recognised price comparison site, under new rules proposed by the Competitions and Markets Authority this morning.
The aim will be to stimulate competition and stop all lenders simply charging the rate set by the price cap proposed by the Financial Conduct Authority which is due to come into effect in January.
Accredited price comparison sites would also help consumers to shop around for better deals by seeing at-a-glance how much different short-term lenders charge.
Meanwhile lead generators – online loan brokers identified as a particular problem – will face tighter restrictions under the proposals.
They will be required to explain their role and how they operate much more clearly to customers. The CMA said many borrowers had no idea that lead generators sell their details to lenders based on the fees lenders offer to them., rather than fining them the best rate.
Simon Polito, chair of the Payday Lending Investigation Group said: “Greater price competition will make a real difference to the 1.8 million payday customers in the UK. At the moment there is little transparency on the cost of loans and partly as a result, borrowers don’t generally shop around and competition on price is weak.
“By ensuring that there are accredited websites providing impartial, relevant and accurate information about payday loans, we can make it easier for customers to make comparisons and there will be a much greater incentive for lenders to offer lower cost loans and to win borrowers’ business.” In June h CMA calculated that borrowers were paying up to £60 a year too much because of a lack of competition in the payday loan market.
Last week, Britain’s biggest payday lender Wonga was forced to write of the loans of 330,000 people after the Financial Conduct Authority accused it or irresponsible lending. The City Watchdog gave warning to other payday lenders that further action would follow if more were caught lending money to people without checking properly whether they could afford to borrow.
The CMA is also proposing a number of other measures including greater transparency on late fees and charges – which are not always clear to customers when choosing payday loans.
It has also called for measures to help borrowers shop around without damaging their credit record and further development of real-time data sharing systems, which will help new entrants better assess credit risks.
Lenders will also have to give borrowers a summary of the charges they have paid on their most recent loan and over the previous 12 months, so that they have a clearer picture of how much they are spending with an individual lender.
Mr Polito said the proposals “could be introduced quickly to make the payday lending market work much more effectively”. The CMA has given the high-cost credit sector until the end of he month to respond to the proposals.