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 who are generally on low incomes and have few if any realistic alternative sources of credit.
Although there are around 500 companies involved in the home credit market, the five leading firms account for the lion's share of the market and Provident Financial, the UK's largest home credit provider, accounts for over half of a market, estimated to be worth in excess of GBP2 billion in 2004.
Commenting on the findings, the Competition Commission's (CC) acting chairman Peter Freeman said "the home credit industry seems to us to provide a service which meets its customers' requirements. Various factors, however, appear to point towards a lack of effective competition which may mean that home credit customers pay more than they should."
Understandably, much of the media and regulatory scrutiny has focused on these high prices, which, according to National Consumer Council, can be as much as 900% APR. In reality, the rates charged by home credit providers are very high, but providers have argued that they are justified to cover the costs of door to door collections, the small loan amounts involved and the significant bad debt risks associated with the home credit customer base.
However, a worrying sign for the industry is that the CC seems unimpressed by these arguments, stating that returns being earned by the leading home credit providers appear to have been in excess of their cost of capital over an extended period of time, which suggests a lack of effective competition in the market. They have also found little evidence of price competition among providers and little evidence that prices have changed over time in response to industry or economic shocks.
However, the CC did not stop there. In addition to charging high prices, the CC believes that a lack of effective competition has stifled product innovation and severely limited the number of customers that shop around for better deals or switch from one provider to another.
The CC's report has been eagerly awaited by the home credit industry because it sets out the CC's initial thoughts on whether or not any practices in the market are having adverse effects on competition and, therefore, gives an indication to the potential outcome of the inquiry.
The home credit market was referred to CC in December 2004, following an earlier super-complaint filed by the National Consumer Council to the FSA, which argued that a lack of adequate competition in the home collected credit market and a number of questionable sales practices are having a serious "adverse impact on an already vulnerable group of consumers." After highlighting its initial thoughts, the CC will now collect responses from the industry and other interested parties before publishing its provisional findings in the New Year.
The industry will clearly focus on the positive findings of the CC's report, such as the admission that customer satisfaction levels are very high and that home credit is a good fit for the specific needs of the market's customer base. However, while the CC has as yet reached no decisions on any of the issues raised in the report, it looks like the industry now faces an uphill battle to avoid some form of remedial action. This could take the form of imposing price controls, recommending legislative changes, imposing fees or penalties or ordering companies to refrain from anti-competitive practices.