Regulatory clampdown on UK home credit sector edges nearer

28th April 2006
By IB Staff Writer

Outlining its provisional findings, the UK's Competition Commission (CC) has stated that there is a lack of competition in the home credit market, which has resulted in customers being substantially overcharged. To rectify the situation, the CC has outlined a raft of possible remedies to increase competition and reduce prices; remedies that could cost some in the industry dear.

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Home credit consists of small loans, which are collected door to door in weekly or fortnightly installments by commissioned agents. The average advance is usually in the region of GBP300 and provides for individuals who are generally on low incomes and have few if any realistic alternative sources of credit.

The industry has received a considerable amount scrutiny in recent times, much of which has focused on these high prices charged by home credit providers, which according to National Consumer Council can be as much as 900% APR.

According to the CC, customers have been overcharged to the tune of GBP100 million per year over the past five years, which implies that a home credit customer pays over GBP25 too much for an average loan, or GBP9 per GBP100 borrowed.

Commenting on its findings, Peter Freeman, chairman of the CC said: "Price competition between the existing lenders is weak, partly because customers seem insensitive to prices, given the greater value they place on factors such as the convenience of the loan and the difficulty in comparing prices between companies."

To force prices downwards, the CC has proposed a raft of possible remedies. These include obliging lenders to share information on their customers' repayment records with credit reference agencies, obliging lenders to provide better information on prices and offer comparable products to help increase price sensitivity and requiring lenders to provide statements which will provide clear information on the cost of loans and enable them to demonstrate creditworthiness to other lenders.

However, the CC has also added a more ominous note to its findings, stating that should these remedies not prove immediately effective, it will consider imposing price caps, which would directly address high prices resulting from lack of competition. This is something the industry will be clearly very keen to avoid.

The CC's publication of its provisional findings will not make pleasant reading for the industry, particularly for the top six firms that account for 90% of the market and even more so for Provident Financial, which accounts for over half of the market and which derives 70% of its pre-tax profits from the UK home credit market.

It is understandable, therefore, that the industry will wish to query these findings. Indeed, Provident Financial has already hit back, stating that "we strongly disagree with the CC's methodology and conclusions regarding profitability, which forms the cornerstone of its provisional findings. Customers are not being over-charged for their home credit loans nor is the home credit sector making excessive profits."

While there is still a window of opportunity open to the industry to provide feedback and continue discussions with the CC before it publishes its final report in July, it now appears that there is little chance of changing the CC's view.
'End Intelliext

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