The CMA will also require 'lead generator' websites, which sell the details of potential borrowers onto lenders, to make it clearer that they neither offer loans nor match consumers with the best deal. The announcements come at the end of a 20-month investigation into payday lenders by the UK's main competition watchdog, which previously found that the lack of competition between lenders was leading to higher costs for customers.
Simon Polito, who led the CMA's investigation, said that the measures would make it easier for customers to shop around for loans and encourage lenders to compete on price, rather than factors such as how quickly they could make funds available. They would also ensure that new caps on the amount that lenders can charge for a loan, introduced at the start of the year by the Financial Conduct Authority (FCA), would not become a "benchmark price" for loans, he said.
"The payday lending market is undergoing substantial change as a result of FCA initiatives to eradicate unacceptable practices," he said. "Our actions complement the FCA's measures and are aimed at making the market more competitive and further driving down costs for borrowers."
"The FCA's price cap will reduce the overall level of prices and the scale of the price differentials but we want to ensure more competition so that the cap does not simply become the benchmark price set by lenders for payday loans. We think costs can be driven lower and want to ensure that customers are able to take advantage of price competition to further reduce the cost of their loans. Only price competition will incentivise lenders to reduce the cost borrowers pay for their loans," he said.
Payday lenders will be required to publish "clear, objective and comparable" information about the potential costs of their products on "at least one" FCA-regulated PCW, through which customers should be able to compare loans by searching relevant features such as loan amount and duration. The CMA said that it expected one or more commercial comparison sites would emerge without regulatory intervention, but that it would oblige lenders to set up their own FCA-authorised PCW if this did not happen.
Financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the introduction of a mandatory PCW listing requirement was a "novel approach in seeking to ensure clarity for customers and a competitive environment for the benefit of customers".
"Only time will tell if such a comparison website results in better deals for customers, rather than a significant reduction in the number of lenders in the market due to this increased additional cost on top of the FCA's previous steps. Those include a cap on the cost of borrowing, which would result in limiting the options available to those customers who have significant barriers to obtaining finance from other sources," he said.
"The FCA's thematic review of price comparison websites in the general insurance sector, published in July 2014, highlighted its concerns with such websites. One can only assume that these concerns will need to be addressed by such website operators to ensure the FCA supports a key tenet of the CMA's recommendations," he said.
The CMA has also asked the FCA to take action to improve the way that lenders disclose late fees and other additional charges, improve real-time data sharing between lenders and credit reference agencies and to help potential borrowers shop around without unduly affecting their credit ratings. Both online and high street lenders will also be required to provide existing customers with a summary of the cost of their borrowing, including the cost of their most recent loan and the cumulative costs of loans from that lender over the previous 12 months.
According to the CMA's final report, 40% of first-time online borrowers from payday lenders access loans through 'lead generators', which collect customer information before selling it on to lenders. However, many borrowers believed that these sites were either lenders themselves, or that they matched borrowers with the most suitable or cheapest loan on offer rather than merely selling that information to the highest bidder. The FCA will monitor these sites to ensure that they are clear about their role.
The CMA said that it would publish an order putting in place its requirements in relation to PCWs and borrowing summaries within six months. The FCA will then consult on measures to be introduced in response to the additional recommendations.
The FCA's cap on the cost of payday loans came into force on 2 January 2015. Rates are now capped at 0.8% of the amount borrowed per day, subject to an overall cap limiting interest and fees to the level of the amount originally borrowed. Default fees are limited to £15. The FCA has also introduced limits on the number of times a lender can 'roll over' a loan for repayment the following month, and restricted the use of continuous payment authorities as a means of recovering debt from a borrower's bank account.