Price controls on short-term loans are not needed, OFT concludes

The Office of Fair Trading yesterday shied away from recommending a cap on the extortionate interest rates and other charges imposed on borrowers on low incomes by some doorstep and payday loan companies.

The watchdog began its review into the £7.5bn high-cost credit sector last July in response to claims that many poorer families had few options when seeking credit and were charged excessive interest on loans. Some payday loan companies charge annual percentage rates of up to 2,000 per cent.

In addition to payday loan and doorstep lenders, the OFT examined pawnbrokers and suppliers of rent-to-buy credit. It concluded that "in a number of respects, these markets work reasonably well" in serving borrowers who were not catered for by mainstream suppliers. Although such borrowing was expensive, it met a need for people who could not otherwise borrow any money.

Ray Watson, the director of the OFT's credit group, said: "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."

On the case for price controls on the high-cost credit market, the OFT said such measures would not address the problems, which stemmed from limited supply and consumers' lack of ability to drive competition. The watchdog said it feared such controls might further reduce choice. The OFT also cited potential problems with price controls, such as suppliers trying to recover lost income by introducing or ramping up charges for late payments.

The OFT identified several areas of concern in the wider market. It found that consumers were often unaware of options open to them and the advice available was limited. Many consumers worried only whether they could get credit quickly and afford the repayments, rather than comparing the total cost of their loan to other products.

The OFT noted there had been "few significant entrants" into the high-cost credit market and competition on price was "mostly absent". Concerns about high-cost loans intensified during the recession as large numbers of borrowers were denied credit by high street banks and building societies. As a result, some credit firms' profits boomed during the downturn. While the main thrust of the OFT review was the charges levied by doorstep and payday lenders, pawnbrokers, such as H&T and Albemarle & Bond also increased their profits during the credit crisis.

The OFT suggested several ways the Government could improve the operation of the high-cost credit sector but conceded that these could only make a "limited difference" given the financial problems facing some consumers. It recommended the provision of more consumer advice and the promotion of best practice among lenders, including an industry-wide code of practice, It also urged the Government to work with the industry to make data about high-cost credit loans available on price comparison websites.

Mr Watson said: "The recommendations 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 long-standing issues of lack of consumer power and limited supply are to be tackled."