The Competition Commission is set to examine evidence to decide whether the home credit industry distorts, restricts, or prevents competition and whether the industry exploits its customers' low level of financial literacy to sell products that charge high interest rates.
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 GBP200 to GBP300 and provides for individuals unable or unwilling to borrow via credit cards or personal loans. According to the NCC's report, average APRs are 177% but can sometimes be as high as 900%.
It is these exceptionally high rates that have attracted so much attention from MPs, the media and pressure groups. Given the current furor over Britain's ever increasing debt mountain, it is no surprise that areas such as home credit, as well as the store card market beforehand, have attracted so much regulatory scrutiny.
In reality the rates charged by home credit providers are very high, but providers argue that they are justified to cover the costs of door to door collections and the small loan amounts involved.
Home credit providers can also argue that the market is not a considerable contributor to overindebtedness. Home credit accounts for just 1.3% of unsecured consumer lending in the UK and, in contrast to other consumer credit markets, has not grown over the past couple of years.
However, although there are around 500 companies involved in the home credit market, the four leading firms account for almost 65% of the market. The task for these market leaders will be to convince the commission that their rates reflect the specific business model of the industry, and that smaller businesses are able to enter the market, providing a healthy level of competition. Ultimately, the big four providers have a lot to lose. Failure to convince the Commission could result in further rules and regulations, fines or penalties. The home credit providers have their work cut out.