Download Home credit remedies evaluation

Understanding past market
investigation remedies
Home credit
February 2013
Abstract
The Competition Commission (CC) is committed to a rolling programme of research into past
remedies with the aim of ensuring that learning points are captured and fed into the development of remedies policy and practice. This report sets out an evaluation of the remedies on
the home credit market investigation. It is the second time we have examined the impact of
the CC’s remedies put in place as a result of a market investigation under the Enterprise Act
2002 (the Act). In 2011, we examined the remedies on the store cards market investigation.
The paper finds that the remedy package has addressed some of the features identified by
the CC in the home credit market and significantly reduced the detriment caused by those
features. In particular:
• the data-sharing remedy, where used effectively by lenders, has reduced information
asymmetries between lenders, which has helped reduce incumbency advantages;
• those customers that have used the LendersCompared website have benefited from
reduced search costs and being more aware of price differences between lenders; and
• the changes to early settlement rebates have led to a transfer from lenders to customers
of around £35 million a year, approximately half of the detriment the CC identified in
2006. There is no evidence of this change having led to increases in the headline cost of
credit.
However, the paper finds that the remedy requiring on-demand statements appears to have
delivered relatively little benefit for home credit customers.
The paper concludes that there have been few, if any, unintended consequences from the
CC’s remedies and also that profit per customer of the largest provider (Provident) has fallen
since 2006. Some of the remedies have also been followed in other areas of high-cost credit.
However, the CC’s remedies have not necessarily removed all the features the CC identified
in 2006. In particular, headline prices on lenders’ principal products do not appear to have
changed much since 2005, leaving continued scope for improved price competition in the
home credit market. This suggests that although the remedies have achieved many of their
initial aims they have not had quite as much impact on competition as the CC would have
liked, in part due to the unfavourable economic circumstances which have limited the impact
of the data-sharing remedy in increasing the constraint from mainstream lenders on home
credit providers.
Looking forward, the paper concludes that maximizing the impact of the website remedy in
particular will be important. This remedy remains well supported by stakeholders and can be
used to continue to heighten customers’ awareness of price differences between lenders
and of the availability of other forms of lending, such as credit unions. As and when
economic conditions improve, the paper suggests that the data-sharing remedy should have
a greater effect than it has had hitherto.
Acknowledgements
The CC would like to thank all those who participated in this study. In particular, the CC
would like to thank the representatives of various companies and organizations who agreed
to be interviewed and the Office of Fair Trading (OFT) market remedies team.
1
Contents
Page
Introduction ........................................................................................................................... 2
Background........................................................................................................................... 2
The reference ..................................................................................................................... 2
The home credit market ...................................................................................................... 3
The CC’s findings ............................................................................................................... 5
Our approach to this evaluation .......................................................................................... 10
Changes affecting the home credit market since the CC’s final report in 2006 .................... 10
Changes in the market for home credit ............................................................................. 11
Other types of non-standard credit.................................................................................... 15
Regulatory developments ................................................................................................. 18
Assessment of the effect of the CC’s remedies ................................................................... 21
Implementation and impact of each measure in the remedy package ............................... 22
Overall impact of the remedy package .............................................................................. 39
Conclusions ........................................................................................................................ 45
Introduction
1.
In December 2004, the OFT referred to the CC for investigation and report under
section 131 of the Act the supply of home credit in the UK (the reference). ‘Home
credit’ was defined as the provision of credit, typically small-sum cash loans, the
repayments for which are collected in instalments (often weekly or fortnightly) by
collectors who call for that purpose at the customer’s home.
2.
The CC’s final report entitled Home credit market investigation (the CC’s final report)
was published in November 2006. 1 The CC’s remedy package to address the competition problems identified was implemented through an enforcement order made in
September 2007 and was subsequently varied in February 2011 as a result of the
introduction of the European Union Consumer Credit Directive (CCD). 2
3.
In this paper we assess the impact of the CC’s interventions in the home credit
market. The paper is structured as follows:
(a) background, including the reference, the home credit market and the CC’s
findings, setting out why the CC adopted the remedy package that it did;
(b) our approach to this evaluation;
(c) changes affecting the home credit market since the CC’s final report in 2006;
(d) assessment of the effect of the CC’s remedies; and
(e) conclusions.
Background
The reference
4.
1
2
In December 2004, the OFT referred the home credit market to the CC following
receipt in June 2004 of a super-complaint from the National Consumer Council
www.competition-commission.org.uk/our-work/directory-of-all-inquiries/home-credit/final-report-and-appendices-glossary.
Directive 2008/48/EC. See paragraph 88.
2
(NCC). However, the home credit industry had been the subject of considerable public
scrutiny for some time prior to the reference. Some of this public scrutiny had arisen
because of broader social and/or public policy issues beyond competition—for
example, financial inclusion and irresponsible lending. The CC’s terms of reference
required it to consider the competition aspects of the home credit market. The CC was
neither remitted to nor equipped to examine the place of home credit within social or
public policy. 3
The home credit market
5.
Home credit (sometimes known as doorstep lending) is the provision of low value,
unsecured cash loans which are repaid in fixed instalments usually over a period of
around a year or less to an agent that visits the borrower’s home often at the same
time each week.
6.
The CC’s final report set out that in 2005 some 430 home credit lenders lent about
£1.3 billion to around 2.3 million customers and collected around £1.8 billion in
repayments. 4
7.
The CC found that some 70 per cent of loans were for less than £500; and around
90 per cent were for less than £1,000. The mean value of a loan issued in 2004 and
2005 was around £325 and £335 respectively and the mean repayment term was 43
weeks. 5
8.
The CC estimated that at least three-quarters of home credit lenders were sole
traders or partnerships. However, most lending was accounted for by companies
which engaged agents to help carry out assessment of customers’ creditworthiness,
lending decisions and collection of repayments. 6 There were 22 lenders whom the
CC classified as large or medium, of which six were classified as large lenders. 7
These six large lenders (which became five during the course of the investigation)
accounted for around 90 per cent of the market:
(a) Provident Financial plc (Provident) was by far the largest lender, accounting for
over 60 per cent of the market. 8 Provident operated from approximately 240
branches with around 11,000 self-employed agents and almost 1.5 million
customers. Provident’s home credit business was carried on by two whollyowned subsidiaries: Provident Personal Credit Limited (PPC), which had around
180 branches, and Greenwood Personal Credit Limited (GPC), which had around
60 branches. 9
(b) Cattles plc (Cattles) was the second largest lender with around a 15 per cent
market share. 10 Cattles traded under the Shopacheck brand, operating from 110
branches with over 2,000 self-employed agents and over 340,000 customers. 11
Cattles bought the loan book of around 80,000 customers from Park Group plc
3
CC’s final report, paragraphs 1.7–1.9.
CC’s final report, paragraphs 2.57 & 2.92.
5
CC’s final report, paragraphs 2.2 & 2.3.
6
CC’s final report, paragraph 2.5.
7
CC’s final report, paragraph 2.57. Large lenders were classified as those with more than 100 agents; medium-sized lenders
those with 10–99 agents (see Appendix 2.4 of the CC’s final report).
8
CC’s final report, paragraph 2.98.
9
CC’s final report, paragraphs 2.59.
10
CC’s final report, paragraph 2.98.
11
CC’s final report, paragraphs 2.64.
4
3
(Park) in August 2006 following Park’s decision to exit the business. 12 Up to that
point Park had been one of the six large lenders.
(c) The three other large lenders between them accounted for 10 to 15 per cent of
the market: 13
(i)
London Scottish Bank plc (LSB), which had acquired the debt and goodwill
of Morse’s Ltd in 2004. LSB operated from approximately 80 branches
(following some closures in 2005) and in 2004 had approximately 110,000
customers. 14
(ii) S&U plc (S&U), which also traded under the names of two acquired
businesses—S D Taylor Ltd and Wilson Tupholme Ltd. S&U operated from
24 branches with over 450 agents and approximately 70,000 customers. 15
(iii) Mutual Clothing & Supply Ltd (Mutual), which operated from around 16
branches with approximately 260 employed agents and over 50,000
customers. 16
9.
Home credit lenders find new customers by a combination of word of mouth recommendation, direct marketing and canvassing using vouchers or goods on credit. 17
Home credit is governed by consumer credit law, which is primarily concerned with
the protection of the individual who is granted credit. The main relevant legislation at
the time of the CC’s final report was the Consumer Credit Act 1974 and the
Consumer Credit Act 2006, which had received Royal Assent in March 2006 and was
being brought into force. 18
10.
The CC’s survey of home credit customers found that they were more likely than the
population as a whole to be female, to be under 35, to have young families, to fall
into in socio-economic groups D and E, to live in a low-income household and to live
in housing rented from the local council or housing association. 19
11.
In the course of a weekly visit, the agent collects the weekly repayment and updates
his/her records and the customer’s payment book/card which provides a record of
payments made and sums outstanding on the loan. Agents may also gather information on customers’ circumstances which might influence demand for credit or
creditworthiness. 20 Agent remuneration is generally based on commission (of around
7 to 10 per cent) on the amount collected each week. 21
12
In its Annual Report and Accounts 2006, Parks Group plc said that:
Our strategic review of the group’s business concluded that the HCC [home credit] market is faced with
increasing regulation and adverse political activity which we have determined is having a detrimental impact
on the business. The Competition Commission investigation into the HCC market has imposed significant
pressure on management and has had an adverse impact on recent performance. Having reviewed current
market conditions and performance issues within the business it is clear that the group would not be able to
generate a return for shareholders in the medium term. The decision to withdraw from the HCC market will
remove a cash drain from the group and release funds to develop other parts of the business.
13
CC’s final report, paragraph 2.98.
14
CC’s final report, paragraphs 2.69–2.73.
15
CC’s final report, paragraph 2.74.
16
CC’s final report, paragraph 2.84.
17
CC’s final report, paragraph 2.14.
18
CC’s final report, paragraph 2.35. Other relevant legislation included the Consumer Credit (Advertisements) Regulations
2004, the Consumer Credit (Disclosure of Information) Regulations 2004 and the Consumer Credit (Early Settlement)
Regulations 2004.
19
CC’s final report, paragraph 2.107.
20
CC’s final report, paragraphs 2.19 & 2.20.
21
CC’s final report, paragraph 2.7.
4
12.
When the last repayments on a loan have been made, the agent generally takes the
payment book/card into the branch office for checking and returns it to the customer.
Where the customer settles the loan early (for whatever reason) a rebate may be
payable. Some customers settle new loans early by renewing them (ie repaying the
outstanding balance on one loan with some of a new one, taken out at least in part
for that purpose). 22
13.
Home credit lenders, unlike providers of many other credit products, impose no
default charges or additional interest for customers who miss payments. In the CC’s
final report, it found that one-third of customers believed that they had missed at least
one payment in the last two months. The CC found that the larger established home
credit companies incurred annual bad debt charges in their accounts of between 5
and 13 per cent of average receivables. 23
14.
The CC found that the prices of home credit loans were high by comparison with the
prices of many other credit products (though, given the differences in product
offerings, that did not necessarily imply that a home credit loan represented worse
value for money). 24 The CC found that annual percentage rates (APRs) 25 generally
exceeded 100 per cent, and for loans of around six months often exceeded 300 per
cent. However, the CC considered the total cost of credit (TCC) 26 to be a better price
measure for home credit loans than the APR, especially for loans of less than a year.
TCCs varied from around £30 per £100 borrowed for the shortest loans to over £100
per £100 borrowed for some of the longest. 27
The CC’s findings
The adverse effect on competition and detrimental effects
15.
The CC concluded that there were features in the market that prevented, restricted or
distorted competition and that there was an adverse effect on competition (AEC)
within the meaning of the Act.
16.
The CC’s final report identified three broad features (and seven ‘sub-features’): 28
(a) Weak price competition due to:
(i)
the insensitivity of customers to measures of price other than the level of
weekly repayment. This issue was exacerbated by difficulties of comparing
products; and
(ii) the failure of lenders to compete in any significant way using price as a
competitive weapon. This included a failure to compete on rebates.
This weak price competition meant that incumbency advantages were not
overcome and prices remained high to the detriment of customers.
22
CC’s final report, paragraph 2.28.
CC’s final report, paragraphs 2.21–2.25.
24
CC’s final report, paragraph 6.
25
The APR is a standard measure of a loan’s interest rate (incorporating some defined non-interest payments made by the
borrower) which allows a customer to compare, before taking out a loan, the costs of different types of loan with different terms.
26
The TCC indicates how much more than the amount borrowed is to be paid back to the lender. It is usually expressed as a
TCC per £100 borrowed.
27
CC’s final report, paragraphs 6 & 3.15.
28
CC’s final report, paragraphs 8.6–8.9.
23
5
(b) Information shortfalls which collectively contributed substantially to incumbency
advantage by inhibiting lenders which did not currently have a relationship with
customers from competing for their business:
(i)
the inability of customers to convey information (on which lenders could
confidently rely) about their creditworthiness to lenders with whom they did
not currently have a relationship; and
(ii) the asymmetry of information about customers’ creditworthiness between
lenders which had a relationship with the customer and lenders which did
not.
(c) Features which preserved these incumbency advantages:
(i)
the lack of data sharing;
(ii) the inability of agents not already known to a customer to convey their
reliability to that customer; and
(iii) the regulatory prohibition on door-to-door canvassing of cash loans.
17.
The CC found that Provident was the greatest beneficiary of these incumbency
advantages simply by virtue of its size and its share of customer relationships.
However, the CC did not find that Provident’s share of the market for home credit
was a feature of the market which prevented, restricted or distorted competition. 29
18.
The CC’s final report estimated detrimental effects in terms of: 30
(a) the price of an average loan was approximately £20 higher than could have been
expected in a market in which competition ensured prices reflected only the costs
of provision (equating to £7 per £100 of loans issued); and
(b) profits in excess of the cost of capital of at least £75 million a year had been
earned over the period 2000 to 2005.
The CC’s remedy package
19.
The CC’s remedy package comprised four remedies: (a) data sharing; (b) price
information; (c) statements; and (d) changes to early settlement rebates (ESRs).
(a) Data sharing
20.
Home credit lenders with over 60 agents or £2 million in annual turnover from home
credit loans were required to share data on the payment records of their customers
(subject to those customers’ consent) with at least two of the three credit reference
agencies (CRAs) mentioned in the Principles of Reciprocity (POR) agreement
(2006). 31 Data sharing would be based on a single protocol approved by the CC. 32
29
CC’s final report, paragraph 8.10.
CC’s final report, paragraphs 7.33–7.42.
31
The POR are produced by the Steering Committee on Reciprocity (SCOR). They are a set of guidelines governing the
sharing of personal credit performance and related data via the closed user groups of the CRAs. The three CRAs contained in
the 2006 POR agreement were Experian, Equifax and Callcredit. The intention of the POR is to ensure that all companies
which use and/or subscribe shared data undertake to abide by the POR on the basis that ‘subscribers receive the same credit
performance level data that they contribute, and should contribute all such data available’. See
www.scoronline.co.uk/principles/ for further information and the latest version of the POR. The POR now also cover another
CRA—CoreLogic Teletrack.
30
6
21.
This remedy was designed to reduce the information advantages enjoyed by
incumbent lenders over other actual or potential lenders and to make it easier for
customers to demonstrate their creditworthiness to new lenders. 33
(b) Price information
22.
All home credit lenders were required to:
(a) Provide specified information on the price (TCC per £100 advanced and typical
APR) and other terms (eg the term in weeks) of all their loans 34 to an independent price comparison website, LendersCompared.org, the costs of which were to
be met by the largest lenders. 35 Any lender was allowed to contribute information
regarding any loans that the lender would normally be paid in cash, in instalments
irrespective of whether it was home collected or not. 36 It was anticipated that it
would take six to nine months from the date of the order for LendersCompared.org
to be operational (although the ‘go live’ date would be later to allow time for
information to be collated and made ready for publication). 37
(b) Put a reference to LendersCompared.org on (i) any advertisement that was
required by the Consumer Credit (Advertisements) Regulations 2004 to include
the typical APR; and (ii) all payment books, statements, flyers and direct mail.
(c) Provide pricing information about their home credit products on request, either
orally or in writing, to the customer within one week of a request. 38
23.
This remedy was designed to increase customers’ awareness of differences in prices
charged by home credit lenders, reduce search costs and increase incentives for
lenders to compete on price. The CC said that it would not be necessary for most
home credit customers to use the website for this remedy to be effective because an
increase in price sensitivity among even a relatively small group of customers might
be expected to prompt a reaction from lenders. 39
(c) Statements
24.
The CC recommended to the Department for Trade and Industry (DTI) (now the
Department for Business, Innovation and Skills (BIS)) that information included on
home credit loan annual statements should include, among other things, TCC for the
loan, alternative wording on ESRs, reference to LendersCompared.org and details of
how to request additional statements. 40
25.
The CC also itself required all home credit lenders to provide, upon request, one free
statement per quarter or one per loan (whichever allowed for more requests). These
statements were to be provided within one week of the request being made. 41
32
CC’s final report, paragraphs 9.36–9.40.
CC’s final report, paragraphs 9.11–9.12.
34
There was an exception where fewer than 100 loans of the same type had been made in the previous 12 months.
35
The largest lenders for these purposes were defined as any home credit lender with over £10 million in home-credit-related
turnover or more than 200 agents. (See CC’s final report, paragraph 9.73.)
36
The CC found that adding data from non-home-collected cash products would be useful and relevant for customers and
would increase the effectiveness of the remedy in encouraging competition for home credit customers’ business. See the CC’s
final report, paragraph 9.64.
37
CC’s final report, paragraph 9.77.
38
CC’s final report, paragraphs 9.68–9.77.
39
CC’s final report, paragraph 9.43.
40
CC’s final report, paragraph 9.99.
41
CC’s final report, paragraph 9.100.
33
7
Information on the ability to request statements on demand was to be provided in all
home credit lenders’ payment books and direct mail to customers. 42
26.
It was intended that statements would be used as a conduit for information, as a
record of information and as a credit certificate when considering switching. The
remedy was aimed at addressing the informational asymmetries between incumbent
lenders and other lenders and increasing the price awareness of customers. 43
(d) Changes to early settlement rebates
27.
At the time of the CC’s final report, home credit customers that discharged their loan
early for any reason were entitled to a rebate calculated in accordance with the
Consumer Credit (Early Settlement) Regulations 2004. Under this legislation, the
lender was entitled to defer the settlement date for the purposes of calculation. The
deferment period allowed was up to 28 days on a loan that was less than a year and
eight weeks on a loan that was over a year. 44
28.
Under the CC’s remedy package, all home credit lenders were required to give an
ESR at least as generous as one based on the actuarial formula set out in the
Consumer Credit (Early Settlement) Regulations 2004. In calculating the minimum
rebate, home credit lenders were not allowed to defer the settlement date for more
than 13 days, or to use actual repayments rather than contractual repayments 45 as
the basis for the calculation. 46
29.
This remedy was aimed at addressing the customer detriment (specifically the low
level of rebates being given to customers, which the CC said were not ‘fair’ in terms
of what the lender would receive if rebates reflected cost savings). It was thought that
this remedy would also increase price transparency and that it might lessen incumbency advantages because more generous rebates would reduce switching costs. 47
Remedies rejected by the CC
30.
The CC also considered but rejected a price cap remedy on the grounds that it
would:
(a) contribute to a reduction in access to credit for riskier customers (and a possible
increase in financial exclusion);
(b) act as a price ceiling, thereby limiting price competition;
(c) be difficult to implement, particularly in the absence of any existing regulatory
structure to administer the price cap; and
(d) be prone to circumvention by lenders (for example, by charging for missed
payments). 48
42
CC’s final report, paragraph 9.102.
CC’s final report, paragraph 9.81.
44
CC’s final report, paragraphs 2.52–2.56.
45
Using actual repayments when calculating rebates for loans with high APRs was found to reduce substantially the rebate if a
small number of repayments had been missed. The CC found that this approach was not consistent with the accepted feature
of home credit that occasional missed repayments are common and did not have a charge associated with them. (CC’s final
report, paragraph 9.124.)
46
CC’s final report, paragraph 9.128.
47
CC’s final report, paragraphs 9.105–9.107.
48
CC’s final report, paragraph 9.139.
43
8
The CC’s expectation of the effect of its remedy package
31.
In considering the likely effect of the remedy package in its final report, the CC said
that it could not predict exactly how the remedies would work because markets
evolve in unpredictable ways. The CC said that it could not be wholly confident that
the remedy package would remedy all aspects of the features or eliminate all the
customer detriment identified but it concluded that the remedy package was the most
comprehensive solution which was both practicable and reasonable. 49
Implementation of remedies
32.
In February 2007, the DTI responded to the CC’s recommendations and stated that it
would implement the recommendations in full. 50
33.
The CC’s recommendations to the DTI were implemented by the coming into force
on 1 October 2008 of The Consumer Credit (Information Requirements and Duration
of Licences and Charges) (Amendment) Regulations 2008 51 (the 2008 Regulations).
The 2008 Regulations required that statements must include the TCC under the
agreement, prescribed wording about the right to request additional statements (one
per quarter or one per loan), 52 and a statement regarding the existence of the price
comparison website.
34.
On 13 September 2007, the CC implemented the other aspects of the remedy package by way of an enforcement order. The date of commencement of the Home Credit
Market Investigation Order 2007 (the Order) was 4 October 2007.
Variation of the Order
35.
The Order was varied on 24 February 2011 53 to take into account a change of circumstances brought about by the coming into force of the European Union’s CCD
(see paragraph 88), and its transposition into UK law via a group of six Consumer
Credit Act 1974 Regulations (CCRs).
36.
Changes were made to the Order primarily to ensure that any display of interest rate
or cost of credit information on LendersCompared is accompanied by a representative example, 54 as required by the CCD. Other minor changes were made to
remove duplication with the CCD and to update references made to the Consumer
Credit (Advertisements) Regulations 2004 to the Consumer Credit (Advertisements)
Regulations 2010.
49
CC’s final report, paragraph 9.153.
Following further discussions between DTI officials and the CC, the CC’s recommendation regarding alternative wording on
ESRs was not carried forward in order to keep the number of changes for home credit lenders to a minimum.
51
SI 2008, No.1751. This amended The Consumer Credit (Information Requirements and Duration of Licences and Charges)
Regulations 2007 (SI 2009, No.1167).
52
The prescribed wording was: ‘You are entitled to request one free statement per quarter or one per loan (whichever allows for
more requests). We are required to provide you with a statement free of charge within seven days of receiving your request’.
53
http://webarchive.nationalarchives.gov.uk/20111108202701/http://competition-commission.org.uk/inquiries/ref2010/
Home%20Credit%20Review%20of%20Order/pdf/110224_home_credit_market_investigation_order_2007_variation_order_201
1.pdf.
54
The representative example must comprise ‘standard information’ and must be accompanied by the words ‘representative
example’. It must be representative of agreements to which the representative APR applies and which are expected to result
from the advertisement. The representative example must be more prominent than any other cost information and any APR
trigger. The ‘standard information’ is specified in regulation 5(1) of The Consumer Credit (Advertisements) Regulations 2010, SI
2010/1970.
50
9
Our approach to this evaluation
37.
Our research methodology is based on the approach we have used previously in
evaluating past merger remedies and the store card market investigation remedies. 55
We undertook initial background research by reviewing the CC’s final report and the
inquiry files. We interviewed those involved in the design and implementation of the
remedies. The questions for each interviewee were tailored to reflect their role in
relation to the remedy. Broadly, interviewees were asked questions about the choice
and implementation of the remedy, what had happened since the remedies had been
put in place, whether the remedy had been working as expected, and if not, why not.
38.
We spoke to 14 different parties between February and April 2012:
(a) the five large lenders: Provident, S&U, Mutual, Morses Club and Shopacheck;
(b) two medium-sized lenders;
(c) one CRA;
(d) two industry bodies: the Consumer Credit Association and the Association of
British Credit Unions Limited (ABCUL);
(e) two independent researchers; and
(f) three other parties, including the Citizen’s Advice Bureau (CAB), and
representatives involved in the implementation and running of LendersCompared.
39.
In addition, we sought to undertake some more quantitative analysis, examining data
from the LendersCompared website, some market-level data and some firm-specific
data. Our ability to gather comprehensive data is limited by a lack of information
gathering powers for these evaluations.
40.
In the remainder of this paper:
(a) we first set out the changes affecting the home credit market since the CC’s final
report in 2006 (see paragraphs 41 to 88);
(b) we then review evidence on the effect of the CC’s remedies (see paragraphs 89
to 176(d)); and
(c) we finish with some conclusions (see paragraphs 178 to 180).
Changes affecting the home credit market since the CC’s final report in 2006
41.
Our research identified a number of changes in the home credit market and wider
credit markets since the CC’s final report in 2006. We explore these changes in this
section. We cover:
(a) changes in the market for home credit;
(b) the introduction of or development of other types of non-standard credit; and
55
These reports are available on the CC’s website: www.competition-commission.org.uk/governance/specialist-groups/
remedies-standing-group.
10
(c) regulatory developments.
Changes in the market for home credit
42.
The size of the home credit market has remained relatively static since 2006. It is a
mature market, particularly in comparison to other types of non-standard lending,
particularly payday lending (see paragraphs 67 to 71). 56 In 2010, home credit was
used by 2.4 million individuals, 90 per cent of whom are low-income users (ie in the
lowest 50 per cent of household incomes). 57 This compares with 2.3 million
individuals in 2005 (see paragraph 6). Datamonitor estimated that outstanding
balances have grown from £1.08 billion in 2005 to £1.3 billion in 2009, a compound
annual nominal growth rate of 5 per cent. 58
43.
The home credit market has been affected significantly by the recession in the UK
economy since 2008. The effects of the economic downturn on the home credit
market are ambiguous because it has created both opportunities and threats for
home credit lenders:
(a) On the demand side, unemployment has increased from between 1.64 and 1.72
million in the period from November 2006 to July 2008 to above 2.43 million in
the period since June 2009 59 (in addition to increases in underemployment 60) and
inflation has remained at over 3 per cent (RPI) (despite a significant fall in 2009).
This combination of unemployment and inflation is likely to have had a number of
effects on home credit customers. On the one hand, it is likely to have led to a
squeeze on discretionary expenditure, which potentially reduces demand for
credit. On the other hand, it is likely to have affected those individuals most likely
to want home credit, potentially leading to difficulties in paying bills or more
difficulty in getting mainstream credit, both of which potentially increase the
demand for home credit; and
(b) On the supply side, the global financial crisis has led banks to withdraw funding
to consumer finance companies (or offering funding on worse terms). This has a
cascade effect in the credit industry. First, mainstream credit lenders have
reduced appetite to lend, leading these companies to turn away from those most
risky standard credit customers (see paragraph 65), causing some of these
customers to turn to high-cost credit. Second, the cost of capital for home credit
lenders has increased (by at least 2 per cent according to the CCA). Many
lenders that we interviewed cited difficulties in borrowing from banks and paying
higher interest rates and arrangement fees. As a result, many home credit
lenders have tightened their own lending criteria. One CRA noted that this had
affected consumers’ ability to obtain credit and that there had been an increase in
the turndown rate in the high-cost credit sector.
44.
In an effort to mitigate any potential fall in demand, home credit lenders have sought
to innovate and develop new products. These innovations have included:
(a) Pre-paid payment cards—this was a logical extension of home credit. The
advanced funds are loaded on to a payment card rather than being provided in
56
Non-standard credit is credit for those customers that are systematically refused credit from mainstream lenders. It includes
the market for home credit.
57
Ellison, Whyley et al, p7.
58
Datamonitor, UK Non-standard Lending 2010, pp4&5.
59
Source: ONS. Unemployment stood at 2.49 million in September to November 2012. The claimant count has risen from
0.95 million in November 2006 to 1.57 million in November 2012.
60
Workers only being able to find part-time rather than full-time employment.
11
the form of cash. The main advantages are greater security and the ability to be
used online. 61
(b) Short-term ‘budget loans’—Provident told us that in response to changing
customer demand towards shorter terms, it had introduced a new loan product
with a 14-week duration (see Table 5). S&U has similarly introduced a shorterterm loan product. 62
(c) Online lending—many home credit lenders have started to provide online
facilities. This approach to market has to work in conjunction with the agency
model that they adopt, so it is not an ‘instant’ loan decision, but it does allow
borrowers to make contact with the lender online and for the agent then to visit
the borrower and agree a loan product.
Impact of changes in the market since 2006 on large lenders
45.
We have assessed how each of the five large lenders has fared since 2006.
Provident
46.
Table 1 shows how Provident’s business has changed since 2005.
TABLE 1 Provident’s performance 2005–2011
Agent numbers
% growth
Customer numbers
% growth
Profit before tax £m
% growth
Profit per customer per
year (£)
% growth
Loan book (year end
net receivables) (£m)
% growth
CAGR
2005–2011
%
2005
2006
2007
2008
2009
2010
2011
11,500
11,500
0.0
1,567,000
5
122.0
–6
11,600
0.9
1,650,000
5
123.5
1
11,500
–0.9
1,753,000
6.2
126.1
2.1
11,600
0.9
1,842,000
5.1
121.2
–3.9
11,400
–1.7
1,861,000
1.0
127.3
5.0
10,500
–7.9
1,825,000
–1.9
127.5
0.2
–1.5
87.37
77.86
–11
74.85
–4
71.93
–3.9
65.80
–8.5
68.40
4.0
69.86
2.1
–3.7
648.9
695.6
7.2
749
7.7
852.1
13.8
866
1.6
867.2
0.1
876.7
1.1
5.1
1,488,000
130.0
3.5
–0.3
Source: Provident.
47.
Provident now operates out of a network of 260 branches with 10,500 agents, in
contrast to 240 branches with 11,500 agents in 2005. The rationalization in the
number of agents occurred in 2011. Between 2006 and 2009, Provident’s customer
base has grown in each year by around 5 per cent a year as the market expanded.
Its loan book has also expanded significantly during this period. However, its
customer base fell by 2 per cent in 2011 (although its loan book size continued to
increase slightly to a level of £877 million, in comparison with £649 million in 2005).
48.
Provident told us that the fall in the size of its customer base since 2010 was as a
result of Provident tightening its credit standards to try to reduce bad debts and
maintain profitability. Provident told us that it rejected credit to an additional 80,000
people in 2011 that it would have accepted in 2010.
61
62
Datamonitor, UK Non-standard Lending 2010, p25.
See S&U annual report, 2010, p3.
12
49.
Provident told us that its profitability had fallen since 2005 due to a combination of
inflationary pressures and the effect of the CC’s remedies. In 2005, profit per customer was £87.37 a year and this had decreased to £69.86 in 2011.
Cattles
50.
Shopacheck told us that the Cattles plc business had been in decline post-2006.
Between 2006 and 2009, Cattles plc had focused its investment on Welcome
Financial Services Limited (Welcome), which provided secured and unsecured loans
collected through the bank. The Shopacheck brand—which provided home credit—
had seen customer numbers fall from 370,000 in 2004 and 340,000 in 2005 to
227,000 in 2009. Although it had become loss-making, Shopacheck was still the
second largest home credit lender in the market.
51.
In 2009, Cattles discovered a very significant shortfall in its impairment provisions
(primarily in relation to its subsidiary, Welcome) which led to Cattles being in breach
of its borrowing covenants. 63 In response to this Welcome closed to new business in
December 2009. Shopacheck, which had a loan loss charge of around £40 million in
2009, continued to trade as normal. 64
52.
The discovery of the impairment shortfall led to the dismissal of a number of Cattles
executive directors and the resignation of the Chairman and Chief Executive. 65 The
FSA subsequently fined and banned two former directors of Cattles and its subsidiary
Welcome for publishing misleading information to investors about the credit quality of
Welcome’s loan book and acting without integrity in discharging their responsibilities.
The FSA also publicly censured Cattles and Welcome for publishing misleading
information. 66
53.
In March 2011, following a Scheme of Arrangement approved by shareholders and
creditors, the shares of Cattles plc were acquired by a special purpose company,
Bovess Ltd, and Cattles plc was delisted on 7 March 2011 and the company was
registered as a private limited company, Cattles Limited. 67 The Scheme of
Arrangement places a number of restrictions on Cattles Limited. However, these
restrictions do not prevent Shopacheck from taking on new business and
Shopacheck has continued to lend throughout this period of restructuring.
54.
In year ended 31 December 2010, Shopacheck reported a return to profitability and
has increased its customer numbers back up to 234,000 (still significantly below the
340,000 in 2005). Shopacheck now has nearly 1,800 self-employed agents, 68
compared with over 2,000 in 2005. Gross receivables have remained consistent at
around £114 million and the loan loss charge has reduced from £38.6 million in 2009
to £36.8 million in 2010 due to a tightening of credit-granting criteria.
63
In its later investigation into the matter, which concluded on 28 March 2012, the Financial Services Authority (FSA) said that
Cattles’ 2007 annual report contained highly misleading arrears, impairment and profit figures. The annual report had stated
that only £0.9 billion of Welcome’s approximately £3 billion loan book was in arrears, when if accounting standards had been
properly applied the correct figure would have been around £1.5 billion.
www.fsa.gov.uk/library/communication/pr/2012/034.shtml.
64
Cattles plc, Annual Report and Financial Statements 2009, pp1–3.
65
Cattles plc, Annual Report and Financial Statements 2009, p1.
66
www.fsa.gov.uk/library/communication/pr/2012/034.shtml.
67
www.cattles.co.uk/about-us/company-history.
68
See Shopacheck website.
13
London Scottish Bank
55.
LSB went into administration in December 2008 as a result of capital adequacy difficulties. Morses Club was an operating division within LSB and at the time of LSB’s
administration Morses Club had book debt of around £33 million.
56.
On 16 January 2009, Morses Club Limited was incorporated and it acquired the trade
and assets of the Morses Club division of LSB with effect from 1 March 2009.
R Capital, a private investment company bought Morses Club Limited on 3 April 2009
from the administrators, Ernst and Young. Morses Club traded under the administrator for four months prior to purchase. Since the initial investment by R Capital,
the debt to buy the business has been paid back. R Capital remains as a majority
shareholder in Morses Club.
57.
Morses Club told us that it was now in a much healthier state than in 2009. In the
period 2009 to 2012, total cash collected has increased from £33–£34 million to
£37 million and EBITDA has improved from £2.3 million to over £3 million. Morses
Club now has offices in 34 locations compared with 80 branches in 2005. Morses
Club told us that organic growth was difficult because the economic climate had
affected the rate at which customers took out loans. Morses Club has recently
acquired the book debt assets of NFL Direct Ltd, a Leeds-based family business.
S&U
58.
S&U continues to provide home credit trading as S&U and SD Taylor. In addition, it
has since 2008 also traded as Loansathome4U.
59.
S&U has expanded since 2005, now operating with 520 agents from 33 branches, in
comparison with 449 agents from 24 branches in 2005. S&U told us that its customer
numbers had increased by about 3 per cent a year since 2007.
60.
S&U’s home credit revenues have increased from £30.0 million in year ending
31 January 2006 to £34.1 million in year ending 31 January 2012. Profits in S&U’s
home credit business are lower than in 2006 and 2007, but have increased since
2009. Its annualized percentage impairment to revenue had increased slightly to
nearly 25 per cent in 2009, but has now reduced back to around 20 per cent. 69
Mutual
61.
Mutual now employs 238 agents at 15 different branches. 70 The number of agents is
slightly less than in 2005. Mutual remains focused on the East Midlands area. During
the economic recession, Mutual has focused on improving its lending criteria and
managing cash within its existing loan facilities. Mutual’s total value of gross lending
has reduced from £44.2 million in 2006 to £40.6 million in 2010 (but had reduced to
as low as £38.4 million in 2009). A recovery in profits in the most recent financial
years have been attributed to lower levels of bad debt charges but Mutual noted that
its profit levels were well below the levels prior to the start of the CC’s investigation. 71
69
See S&U presentation: The Credit you Deserve: Full year results to 31 January 2012.
www.mutual.uk.com/aboutus.asp.
71
See Mutual’s annual reports up to year end 31 December 2010.
70
14
Changes in the home credit market across all lenders
62.
We have not been able to collect confidential market-wide data to calculate market
shares because we do not have appropriate information-gathering powers for these
evaluations. However, we were able to collect information from the large lenders. To
supplement our analysis of each large lender, we have used existing publicly
available information. Table 2 sets out estimates of market shares based on number
of customers.
TABLE 2 Market shares based on number of customers, 2005 and 2012
per cent
2005
2012
Provident
Shopacheck
Morses Club
S&U
Mutual
Others
62
17
7
3
2
10
75
10
3
4
2
8
Total (m)
2,300
2,400
Source: For 2005: the CC’s final report, Table 2.4; for 2012: CC analysis.
Note: Figures may not sum to 100 due to rounding.
63.
The estimated market shares in Table 2 tend to reflect the experiences of each of the
large lenders we have described in paragraphs 46 to 61. In particular, Provident
seems to have increased its share of customers since 2006, S&U has gained share
whilst Shopacheck and Morses Club have both lost share.
64.
Provident said that there had been no major exits from the market and that there
remained around 400 to 500 home credit lenders. However, other lenders noted that
some small lenders (in particular sole traders) had exited due to increased regulation
and difficulties in raising funds. Our analysis of LendersCompared website data
found around 480 home credit providers listed on the website (see paragraph 139).
This compares with an estimated 430 lenders in 2005 (see paragraph 6). This
suggests that there has been a slight increase in the total number of lenders in the
market.
Other types of non-standard credit
65.
Datamonitor estimated that gross advances in the ‘non-standard’ credit market had
fallen from £12.4 billion in 2005 to around £4.9 billion in 2009, with a customer base
increasing from 6.2 million to 6.9 million over the same period. 72 Provident told us
that unsecured loan providers such as Citifinancial, HFC Beneficial, Welcome
Finance and Black Horse Finance had all exited the market, often due to their business models not being robust to the economic crisis and the lack of securitization or
wholesale funding available. Some of the decline in non-standard lending by
mainstream providers has been replaced by growth in other forms of specialist nonstandard credit lending—payday loans, pawnbroking and credit unions (see Figure 1
below).
72
Datamonitor report UK Non-standard Lending 2010. Datamonitor defined ‘non-standard’ as the unemployed, those with
County Court Judgments, those without bank accounts, those self-employed for less than three years and those in mortgage
arrears.
15
FIGURE 1
Gross advances in non-standard and payday lending, 2005 to 2009
14,000
Non-standard lending
Payday lending
12,000
Gross advances (£ million)
10,000
8,000
6,000
4,000
2,000
0
2005
2006
2007
2008
2009
Source: CC analysis.
66.
We consider each of payday loans, pawnbroking and credit unions in turn.
Payday loans and online lending
67.
Payday loans are short-term cash advances. Borrowers present either a post-dated
cheque or provide the lender access to their current account. The loan amount is
redeemed after 30 days or on the borrower’s payday. Payday loans are therefore
generally taken out to smooth out fluctuations in income and expenditure as well as
to pay for time-limited special offers and promotions from retailers and service
providers. Loans are made either at a payday lending outlet or online.
68.
Payday lending has some similarities to home credit:
(a) loans are relatively small in size—the typical loan size for first time applicants is
£200 to £300; 73 and
(b) APRs and TCCs are high compared with other forms of borrowing—the cost of
payday loans are typically £25 interest for every £100 borrowed online and £17
per £100 borrowed for store-based borrowing (leading to APRs of over 1,000 or
2,000 per cent). 74
73
74
OFT Review of high-cost credit, Interim research report, December 2009, paragraph 2.35.
Ellison, Whyley et al, p9. OFT Review of high-cost credit, Interim research report, December 2009, p23.
16
69.
However, it also has some significant differences. First, payday loans tend to be
given on shorter timescales and are a more automated product (many loans are
granted online) with less tolerance for missed payments (in contrast to home credit
which focuses on the relationship between the agent and the borrower). Second,
most interviewees were of the view that borrowers of payday loans are typically
different to those taking out home credit loans. For example, 42 per cent of home
credit users are on benefits compared with only 3 per cent of payday users (Policis
2011 report). These differences are reflected in the limited extent of overlap between
the two products—Provident customer research showed that the proportion of its
customers that also have payday loans is around 5 per cent.
70.
The payday loan market has grown rapidly since 2005. In 2005, the estimated
number of payday loan customers was 250,000. 75 By 2011, Policis estimated 76 that
payday lending was used by 1.3 million individuals, 70 per cent of whom were lowincome users. 77 Key Note estimated that the total value of the UK payday loans
market had grown from £735 million in 2007 to £2.34 billion in 2011. 78
71.
Leading payday loan providers include DFC Global (with trading names including
The Money Shop, Cash A Cheque and Payday UK), Wonga, Wage Day Advance,
Enova (with brands QuickQuid and Pounds to Pocket) and Payday Express. To
illustrate the speed of growth of this sector, Wonga, which operates a fully automated
lending process, launched in 2007 and was reported to have approved 2.5 million
loans in 2011. 79
Pawnbroking
72.
Traditional pawnbrokers (such as H&T Group and Albermarle & Bond) have grown in
the recession but with an annual loan book of around £900 million in 2009 the market
remains significantly smaller than home credit and has been overtaken by payday
loans. 80 More modern versions of pawnbroking such as sale and buy-back 81 used by
Cash Converters International Ltd (Cash Converters) has grown significantly since
2006. For example, Cash Converters was operating 157 stores in the UK on either a
direct or franchise basis in 2010, up 21 from 2009. 82 Many pawnbrokers have also
expanded into offering payday loans. Provident customer research found that the
proportion of its customers that also use Cash Converters type stores has doubled to
around 8 per cent in the last few years.
Credit unions
73.
Credit unions are mutually-owned financial organizations which offer saving and
credit products to their shareholder members. Many credit unions in the UK are run
by volunteers. Credit unions are regulated by the FSA and are legally obliged to
define a group of people who share a ‘common bond’ from which they can recruit
their membership; common bonds are generally based on employment or residence.
75
CC’s final report, Table 4.1.
Credit and low-income consumers: A demand-side perspective on the issues for consumer protection, 2011, Anna Ellison,
Clare Whyley, Rob Forster and Paul A. Jones (Ellison, Whyley et al).
77
Ellison, Whyley et al, p7.
78
Consumer Credit and Debt—Market Assessment 2012, Key Note, November 2012, p102.
79
Personal Loans, UK, Mintel, January 2013, p50.
80
OFT Review of high-cost credit, Interim research report, December 2009, paragraph 2.29.
81
Sale and buy-back allows for cash advances against sale of goods, with the borrower able to buy back the goods at a preagreed (higher) price within a given period, typically four weeks.
82
Ellison, Whyley et al, p24.
76
17
74.
The CC found that loans from credit unions were used in parallel with home credit,
rather than as a competitive constraint. 83 Key differences to home credit are in the
size of the loan and the cost of the loan—the typical credit union loan size is £1,500
to £7,200 (although in 2005, nearly 50 per cent of loans issued were for less than
£500) 84; and the interest rate that credit unions may charge is capped at 2 per cent
per month (APR 26.8 per cent) and in practice many charge no more than 1 per cent
a month (APR 12.7 per cent). In addition, social lending by credit unions was used by
just 2 per cent of low-income households. 85 Provident customer research found that
only 3 per cent of its customers also have a credit union loan.
75.
Credit unions have grown since 2005. In June 2005, there were 492,000 members of
credit unions; 86 by 2012, there were over 850,000 adult members. A key reason for
this growth was successive Governments’ support for the modernization and
expansion of credit unions through the Growth Fund. Between August 2006 and
March 2011, the Government provided a Growth Fund to increase the availability of
affordable personal loans via third sector (not-for-profit) lenders such as credit unions
and community development finance institutions. 87 Between July 2006 and March
2011 over 400,000 loans were made from the Growth Fund. 88 The coverage of credit
unions and their presence on the high street has also increased considerably during
this time.
76.
In June 2012, the Government announced that it would make a further investment of
up to £38 million over the next three years in credit unions. This investment, which is
in addition to the £13 million invested in 2011/12, is conditional upon the credit union
industry meeting a number of agreed milestones for collaboration, modernization and
expansion. The aim is to support the sector to provide financial services for up to one
million more consumers on lower incomes, and to do so in a way that enables credit
unions to modernize, expand and become financially sustainable. In addition, the
Government plans to consult on raising the cap on the interest rate that credit unions
are permitted to charge on loans. 89
Regulatory developments
77.
Since 2006 there have been three significant further reviews—the OFT’s high-cost
credit review and its review of payday lending practices, and BIS’s Consumer Credit
and Personal Insolvency Review—as well as relevant new legislation and
regulation—the Consumer Credit Act 2006, the OFT’s Guidance on Irresponsible
Lending and its enhanced power to suspend credit licences and the EU CCD.
The OFT’s high-cost credit review
78.
Between July 2009 and June 2010, the OFT conducted a review of the high-cost
credit market. The scope of the market study covered home credit, short-term small
sum lending such as payday loans, pawnbroking and rent-to-buy retail credit. The
OFT’s final report was published in June 2010. 90
83
CC’s final report, paragraph 4.55.
CC’s final report, paragraph 4.27.
85
Ellison, Whyley et al, p7.
86
CC’s final report, paragraph 4.24.
87
www.dwp.gov.uk/other-specialists/credit-union-expansion/.
88
www.dwp.gov.uk/other-specialists/the-growth-fund/statistics/.
89
www.dwp.gov.uk/other-specialists/credit-union-expansion/.
90
Review of high-cost credit: Final report, June 2010.
www.oft.gov.uk/shared_oft/reports/consumer_credit/High-cost-credit-review/OFT1232.pdf.
84
18
79.
As a result of the market study, the OFT made recommendations to the Government
covering four overarching themes: 91
(a) Helping consumers make informed decisions on high-cost credit by (i) extending
financial literacy programmes to cover high-cost credit; (ii) working with industry
groups to provide information on high-cost credit loans through price comparison
websites; and (iii) exploring whether a ‘wealth warning’ could be added to advertisements.
(b) Increasing the ability for consumers to build up a documented credit history when
using high-cost credit through the provision of data to CRAs.
(c) Enhancing the understanding of developments in the high-cost credit sector
through collection of essential data on high-cost credit (eg volume, value and
pricing of credit, levels of repeat business and default levels).
(d) Promoting best practice among suppliers of high-cost credit through a code of
practice.
80.
The OFT’s recommendations had significant overlap with the CC’s remedies in the
home credit market—in particular the remedies on price information and data
sharing.
81.
Like the CC, the OFT also concluded that introducing price controls would not be an
appropriate solution to the particular concerns it had identified. This was because it
might lead to reduced profit levels and hence more restrictive lending criteria. The
OFT said that this would create reduced access to high-cost credit for consumers
with few practical alternatives. 92
The OFT’s review of payday lending
82.
In February 2012 the OFT launched a review of the payday lending sector to
investigate compliance with the Consumer Credit Act 2006, which came into force in
2008, 93 and the OFT’s Guidance on Irresponsible Lending, 94 which was first
published in March 2010 and subsequently revised in August 2010 and February
2011. The guidance requires that lenders should clearly set out the financial
implication of extending or rolling over loans. Other aspects include explanations of
credit agreements, affordability assessments, pre- and post-contractual issues,
default and arrears handling and regulatory compliance.
83.
The OFT published its findings in November 2012, which set out concerns about the
adequacy of checks made by some lenders on whether loans will be affordable for
consumers; the proportion of loans that are not repaid on time; the frequency with
which some lenders roll over or refinance loans; the lack of forbearance shown by
some lenders when borrowers get into financial difficulty; and debt collection
practices. 95 At the same time it announced that it was opening formal investigations
into several payday lenders over aggressive debt collection practices. 96
91
ibid, pp6–8.
ibid, p9.
93
The Consumer Credit Act 2006 amended the Consumer Credit Act 1974. The CC was aware of the changes during the
course of its investigation and considered their impact in its final report. See paragraphs 2.40 & 2.49 of the CC’s final report.
94
www.oft.gov.uk/about-the-oft/legal-powers/legal/cca/irresponsible.
95
www.oft.gov.uk/shared_oft/business_leaflets/consumer_credit/OFT1466.pdf.
96
www.oft.gov.uk/news-and-updates/press/2012/110-12.
92
19
BIS’s Consumer Credit and Personal Insolvency Review
84.
BIS launched its own Consumer Credit and Personal Insolvency Review in October
2010. Part of BIS’s review covered high-cost credit.
85.
BIS’s response to its call for evidence was published in November 2011. 97 Despite
ruling out an interest rate cap on credit cards, the government response noted that:
‘What became clear however during the Review was that the real concerns on
interest rates centred on the high cost credit market. The Government has therefore
commissioned research to gather robust evidence on the impact of introducing a cap
on the total cost of credit that can be charged in that market.’98
86.
BIS’s call for evidence also covered a number of areas in relation to the OFT’s
recommendations following its high-cost credit market study. Measures to be
introduced include working with the main trade associations representing payday
lenders to introduce enhanced consumer protections in their existing codes of
practice. Building on the data-sharing remedies in home credit, the government
response also stated that ‘the Government has decided to discuss with key
stakeholders how to ensure that any increase in data sharing would be to the benefit
of consumers’ and that ‘the Government wants to explore whether more high cost
credit providers could provide information to credit reference agency databases’.
87.
In its call for evidence, BIS asked about the effectiveness of the CC’s remedies and
whether more needed to be done. It received 78 responses from outside central and
local government, of which 48 were from individuals. 99 In its summary of responses
BIS noted that:
(a) respondents expressed doubts that the CC’s remedies had had much impact in
terms of helping consumers to get a better deal from providers of home credit
loans. In particular, it was asserted that Provident had consolidated its position;
(b) some respondents tended to link their concerns with the need for an interest rate
cap on forms of high-cost credit, including home credit loans, while others
referred to the need for more far-reaching social policy measures aimed at
increasing access to affordable credit for disadvantaged consumers. This would
involve continuing investment in social lenders, such as credit unions and
Community Development Finance Institutions, expanding consumer financial
education as well as the continuation of the Growth Fund; and
(c) the economic situation had changed quite significantly since the remedies were
implemented and that any consideration of their effectiveness would need to bear
this in mind, given the large contraction of the supply of credit in the UK. The
consensus of those respondents who opposed additional action was that competition was holding up well given the difficult economic circumstances; the
supply of credit had been maintained; and while some costs to the consumer had
increased, this was due to increases in the costs of lenders obtaining funds from
the finance markets and that returns and profitability were down as a result.
97
www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/11-1341-consumer-credit-and-insolvency-response-on-credit.pdf.
This work is being done by Bristol University's Personal Finance Research Centre and a final report is expected to be
published shortly.
www.bristol.ac.uk/geography/research/pfrc/current/.
99
www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/11-1063-consumer-credit-and-personal-insolvency-responses.pdf.
98
20
Other changes to legislation and regulation
88.
The home credit market has been affected by other legislative and regulatory
changes since 2006. Those changes not already mentioned above have included:
(a) The Financial Services Act 2012, which was given Royal Assent on 19 December
2012. 100 The legislation will give the newly created Financial Conduct Authority
(FCA) the power to cap interest rates, stop excessive charges and limit the
duration of a loan agreement.
(b) The OFT’s power to suspend credit licences, 101 which came into effect on
19 February 2013. In February 2013, the OFT published guidance on how and
when it can use this new power, which allows it to suspend consumer credit
licences with immediate effect or from a date it specifies, in certain circumstances
(for example, where a business has engaged in violence, fraud or dishonesty, or
is targeting vulnerable consumers with harmful practices).
(c) The EU’s CCD 2008, 102 which established a set of common rules for consumer
credit providers on the form, content and manner of provision of pre-contractual,
contractual and ongoing information on consumer credit agreements. As noted in
paragraphs 35 and 36, the Order was amended to take into account the changes
brought about by the CCD.
Assessment of the effect of the CC’s remedies
89.
In considering the effect of the CC’s remedy package, we have considered whether
and how it has addressed the AEC and the detrimental effects arising from it, as
identified in the CC’s final report. We are not conducting a fresh market investigation
to assess the extent of any competition issues that may or may not now be present in
the home credit market. The scope of our evaluation exercise is significantly
narrower than this:
(a) first, we have assessed whether each measure in the remedy package has been
successfully implemented and whether it has achieved its aims (see paragraphs
92 to 168); and
(b) second, we have assessed the overall impact of the remedy package as a whole
by considering the effect of the remedy package on the industry and on outcomes
such as price (see paragraphs 169 to 176(d)).
90.
The second part of this assessment is inevitably more challenging than the first
because of the significant difficulties in disentangling the effects of the remedy
package from wider economic effects since the CC’s final report (see paragraph 43)
and our lack of information-gathering powers. We have therefore not sought to
quantify the overall effect of the remedies package.
91.
We also note that the remedy package was only designed to address competition
issues. Although there is a wider social, economic and financial context in which the
home credit market exists (eg weaknesses in financial capability of consumers,
limitations on access to credit and financial exclusion, low incomes, social policy),
this was not part of the CC’s remit and is therefore not part of our assessment.
100
www.legislation.gov.uk/ukpga/2012/21/pdfs/ukpga_20120021_en.pdf.
www.oft.gov.uk/news-and-updates/press/2013/17-13.
102
Directive 2008/48/EC: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2008:133:0066:0092:EN:PDF.
101
21
Implementation and impact of each measure in the remedy package
Data sharing
92.
The data-sharing remedy was required to be implemented within six months of the
commencement of the Order, ie by April 2008. Interviewees reported few issues with
implementation and the OFT was not made aware of any material implementation
concerns (nor have subsequent monitoring issues arisen).
93.
As noted in paragraph 21, the aim of this remedy was to reduce the information
advantages enjoyed by incumbent lenders over other actual or potential lenders and
to make it easier for customers to demonstrate their creditworthiness to new lenders.
We have therefore considered (a) how the data is used by lenders and (b) what
effect this has had on the home credit market. We also consider any potential costs
of the remedy and ways in which the remedy might have been implemented differently with the benefit of hindsight. We finish with an assessment of the effect of the
remedy.
94.
We note that the CC’s intended effect of this remedy was twofold: first, that the data
would be used by home credit lenders to stimulate competition within home credit;
and second, that it would be used by other forms of credit providers so that they
could offer credit to home credit customers (in particular those with good payment
records), thus increasing the competitive constraint on home credit lenders. 103 We
have already identified in paragraph 43 that the global financial crisis and credit
crunch have had a significant effect in reducing the appetite of mainstream lenders to
lend. As a result, one important effect of this remedy has not materialized. We have
therefore focused throughout on how the data has been used by home credit
providers and the effect it has had on home credit providers (and not on other
lenders).
How used by lenders
95.
The majority of lenders commented that the remedy had helped in lenders’
assessment of the creditworthiness of customers.
(a) Provident said that it was now registering more than 2 million loans a year with
the CRAs. It said that it used the data to manage existing customers’ loans every
month by looking at the other forms of credit they had. As the cost of retrieving
this data is a few pence per customer the extra predictive power it adds over and
above the agent visit is worth having. Provident said that it had also tried using
the information to assess new customers but had found that the costs of this (£1
per search) outweighed the benefits in terms of reducing bad debt. 104
(b) S&U said that it used a CRA’s data to check credit ratings of new customers and
of those customers who wished to increase their borrowing.
(c) Shopacheck said that it had not traditionally used CRA data but that it now had
the systems developed to inform its lending on new and existing customers.
Shopacheck expected it would help improve lending decisions.
103
CC’s final report, paragraph 9.12.
Provident said that this was because it rejected around 80 per cent of applications for credit and would therefore need to pay
for on average five bureau searches for each loan made.
104
22
96.
However, not all lenders were enthusiastic about using CRAs’ data. One large lender
said that it did not take data from CRAs because it was a costly exercise and its
customers tended to overlap most with smaller lenders who were not required to give
data to the CRAs. Three lenders said that past payment records were not necessarily
a good predictor of future payment behaviour and that the agency relationship was
as important.
Effects on the home credit market
97.
There were mixed views on the impact of this remedy on the market.
(a) Several lenders said that the remedy was having an effect on the market. Mutual
said that the remedy made it easier for customers to demonstrate creditworthiness. S&U commented that the remedy had been successful in increasing transparency and that it had led to more customers checking their own credit records
(however, this amounted to only four credit record inquiries per month from a
customer base of around 100,000). Provident said that it was difficult to track
through the ultimate specific effect of the remedy; however, it had achieved the
aim of reducing information asymmetries. Provident also noted that other types of
non-standard lenders may also be benefiting from the remedy as they have
increased their penetration into Provident’s customer base.
(b) Other interviewees (independent researchers and one large and one mediumsized lender) considered that this remedy had had little effect. One interviewee
said that the retreat of some home credit lenders to ‘high end customers’ to
reduce their credit risk (see paragraph 43(b)) had meant that this remedy had
had less effect than it might otherwise have done.
98.
We asked interviewees what impact this remedy had had on switching.
(a) Three large lenders considered that the remedy had had little effect on switching
because the relationship with the agent was the key to winning business, not
proving creditworthiness. The CAB told us that it had not seen any evidence that
consumer switching was becoming more prevalent and there were a large
number of borrowers that had been with the same lender for a long time.
(b) The CCA considered that the remedy had made it much easier for customers to
switch among home credit lenders. Shopacheck said that any trend was difficult
to observe because many customers used dual lenders and may slowly move
their borrowing requirements from one lender to another. However, it added that
by enabling home credit providers to lend more to creditworthy customers earlier,
the remedy should help encourage switching.
99.
105
Although not an objective of this measure, the CC had noted in its final report that
lenders may benefit from reductions in bad debt if they made use of the data
available. 105 Two lenders made such a link between this remedy and being better
able to control bad debts. However, S&U said that it was the relationship between the
agent and the borrower that was the key to keeping bad debts low and not access to
a customer’s past payment history.
CC’s final report, paragraph 9.15.
23
Costs of the remedy
100.
Provident said that the main compulsory cost of this remedy was the administrative
cost of capturing, quality controlling and submitting the data and the optional cost of
requesting the data which came down to individual company’s cost-benefit analysis.
Provident told us that the cost of setting up the mechanism had been in line with the
CC’s original estimates, although it could not comment on the impact it had had on
smaller lenders. Provident understood that the CCA had provided assistance to
smaller home credit providers and that new systems allowed even small lenders to
easily access bureau data.
101.
One medium-sized lender commented that the implementation of the remedy had
created some administrative burden for it because it did not previously supply data to
the CRAs. However, like other interviewees, it said that once established the process
of supplying data to CRAs was automated and efficient. We note that the datasharing remedy only applied to the largest lenders and this helped with the
implementation of the remedies because it would have been unworkable had all
lenders been required to submit data to CRAs.
102.
The remedy required data to be supplied to only two CRAs. Of those large lenders
we interviewed, we were told that some share their data with all three CRAs and
some only send data to two out of the three CRAs. We asked lenders and CRAs
whether this had led to any distortions.
(a) Four large lenders and the CCA said that they did not consider that the remedy
had created any distortions as a result of only requiring data to be shared with
two out of three CRAs. In some cases the reason given was because lenders
send data to all three CRAs in any event. However, one large lender noted that it
would be preferable to have all the credit reference data in one place so that the
four UK CRAs (Call Credit, Experian, Equifax and Teletrack) competed on price,
service and value added to clients rather than on what data they had on their
system.
(b) Three interviewees (one large and one medium-sized lender and a CRA)
commented that some distortions had been created. One large lender said that
the remedy had favoured Experian because most lenders that only gave data to
two CRAs used Experian as one of those CRAs. One CRA said that the remedy
had distorted competition in the credit reference market—this CRA had only a
small proportion of home credit lenders supplying data to it and because of the
principles of reciprocity that meant data was supplied from a lender to a CRA and
back to a lender, this CRA consequently had a limited number of home credit
clients. As there were incentives for lenders to go with the CRAs with the largest
portfolio relevant to them, it meant that this CRA had found it difficult to attract
home credit lenders to supply data to it. This CRA said that there had been
limited switching of home credit lenders between CRAs since 2007. However, the
CCA commented that there was a lot of competition among CRAs.
Possible areas for improvement
103.
106
As part of its high-cost credit review, the OFT recommended greater provision of data
to CRAs and explicitly referred to the CC’s home credit remedy. 106 We asked
interviewees about possible areas to which the remedy could be extended. Two
Review of high-cost credit: Final report, June 2010, paragraph 4.29.
24
aspects were raised: (a) sharing credit unions’ data and (b) sharing data of other
lenders (eg payday lenders).
104.
With regard to credit unions’ data, one consumer group had said to BIS during its call
for evidence that it would be sensible to explore whether more could be done to
enable the credit data of customers of social lenders such as credit unions to be
exported to CRAs so that other lenders could access it. It said that this would
increase the scope for consumers to achieve the best possible deal when they
wanted to access credit. ABCUL noted that more credit unions had been using CRAs
since 2007.
105.
However, we found very little appetite among lenders for having greater access to
credit unions’ data. For example, Mutual said that credit unions were in a different
market and that access to such data would be interesting but not necessary. One
large lender said that extending the remedy to credit unions would be unlikely to have
much effect as they did not appear to be interested in lending to home credit
customers who were higher risk than their typical customer base. However, it added
that it would provide a much more level playing field for home credit providers if all
lending of any type were submitted to all CRAs allowing all lenders to assess the full
credit record of all consumers.
106.
There was some appetite among some lenders for seeing payday lenders’ data. One
CRA said that payday lenders’ needs were different to those of home credit lenders
because they needed real-time access to data in order to give quick access to credit.
However, this CRA was of the view that data from payday lenders might still be of
interest to home credit lenders, and vice versa.
Our assessment of the impact of this remedy
107.
The data-sharing remedy was implemented effectively and appears to have been
used to good effect by some home credit lenders but less so by others. For those
lenders that have chosen use the data, the remedy has achieved its aim of reducing
information advantages enjoyed by incumbent lenders. We heard how some lenders
have used the data in informing lending decisions.
108.
However, some lenders continue to consider the knowledge of agents as more
insightful than past lending records in predicting future payment behaviour. We note
that prepayment data is likely to be more useful for those lenders that use online
lending because more data allows better decisions to be made and the online
process does not benefit from the insight of agents.
109.
The main disappointment regarding this measure is that its impact on mainstream
lenders constraining home credit providers has been limited by the economic
downturn. However, as and when economic conditions improve and lending criteria
change again, we would expect to see mainstream lenders using the data to try to
compete for ‘high-end’ home credit customers.
110.
As we have been unable to quantify the impact of the remedy on switching (either
between home credit lenders or from home credit lenders to other forms of credit) 107
we are unable to form a firm view on the effect this remedy has had on the
customers. However, there is some evidence that this remedy has helped some
107
Home credit lending is over short fixed terms and customers choose to use different lenders at different times of the year
and for different purposes and use different lenders to varying degrees in parallel which makes it very difficult to define and/or
measure any switching behaviour. The CC found it difficult to assess switching in its final report even with information-gathering
powers.
25
lenders better manage bad debts (which would lead to lower costs of borrowing if
passed onto customers). This is supported by evidence of falls in bad debts, partly
caused by an increased focus on more stringent lending criteria and partly due to
better credit record data being available.
111.
The CC weighed up the costs and benefits of this remedy in its final report. The CC
found that the incremental cost of supplying data to an additional CRA was minimal
so it is perhaps surprising that some lenders have chosen only to supply to two
CRAs. 108 Whilst it is possible that the requirement to supply to only two CRAs may
have acted to the advantage of the leading CRA, the alternative approach of
requiring data to have been given to all CRAs would have been more onerous than
necessary (because the remedy was seen to be effective with data provided to just
two CRAs) and could itself have distorted competition because lenders would have
lost bargaining power with the CRAs (because they would have had to provide data
to all CRAs).
112.
We welcome the widening of data sharing to other forms of credit in line with the
OFT’s recommendations. Whilst this would have been beyond the scope of the CC’s
investigation it seems a natural extension of the remedy. Whilst all the data may not
be of interest to each type of lender, the more data that is shared, the less
informational incumbency advantages are likely to exist across all forms of credit.
Price information (LendersCompared.org)
113.
We have examined first the implementation of the LendersCompared website and
then the impact of the website in meeting the CC’s aims.
Implementation
114.
The process for implementation of the website was laid down in the Order. Following
the Order, the CC published a timetable for its implementation. 109 The CC had
expected it to take six to nine months from the date of the Order for the website to be
operational, with information being provided by lenders within one month of the
website being operational and a ‘go live’ date later to allow time for the information to
be collated and made ready for publication. 110
115.
Having made the Order, the main duty of the CC was to accredit a website operator.
The successful candidate for running LendersCompared.org needed to be both
accredited by the CC and to enter into a contract with the five large lenders, which
were to fund the website.
116.
The CC appointed a procurement specialist (Hedra 111) to manage the appointment of
the website operator. An invitation to tender was issued to potential operators in
October 2007. The procurement specialist reported to the CC in mid-November 2007
on the outcome of the tender process with a recommendation on whether or not to
accredit the bidders. Following this process, four bidders were shortlisted to act as
website operator and all four bidders were approved by the CC as suitable operators.
108
CC’s final report, paragraphs 9.28 & 9.29.
http://webarchive.nationalarchives.gov.uk/20111108202701/http://competition-commission.org.uk/inquiries/current/
homecredit/administrative_timetable_for_the_implementation_of_the_order.pdf.
110
CC’s final report, paragraph 9.77.
111
Hedra was subsequently acquired by Mouchel Group plc.
109
26
117.
The five large lenders and other stakeholders (including CCA, ABCUL and NCC) met
in December 2007 to consider the proposals and identified TechnoPhobia as the
preferred bidder. The CC accredited TechnoPhobia as website operator on
1 February 2008. 112
118.
To ensure that the process of sending data to the website operator could be
progressed smoothly, the CC published a Notice of readiness to receive information
for publication on website on 29 April 2008, 7.5 months after the Order was made. 113
This was on schedule with the timescales set out in paragraph 114 above.
119.
LendersCompared (www.lenderscompared.org.uk/) went live in August 2008, 21
months after the final report and 11 months after the Order was made.
120.
We asked interviewees about their views on the implementation of the website.
Provident said that the engagement of the procurement specialist to assist with the
process of vendor selection and site design had been very important in helping to
implement the remedy in a timely fashion.
121.
In contrast, Mutual expressed concern that the process of setting up the website and
the ongoing management of the site had been too bureaucratic and expensive but
that the website had brought a number of benefits in terms of transparency and
increased applications via the Internet. The CCA said that the logistics of dealing with
the contract for operating the website had been difficult and expensive and that with
hindsight it would have been a good idea to set up under the umbrella of a price
comparison website such as moneysupermarket.com but that the success of such
sites was not foreseen at the time the remedy was put in place.
122.
In terms of operation of the website, one interviewee referred to a number of teething
problems to begin with in relation to the accuracy of data provided by lenders which
led to an error-checking process being established. The same interviewee also noted
the difficulties that were encountered in designing the website so as to maximize its
usability and the relevance of the data presented while also complying with the
Consumer Credit (Advertisements) Regulations 2004, particularly in terms of
including an APR when the most relevant measure of cost for home credit was seen
by all parties to be the TCC.
123.
One issue also raised during our interviews was in the governance of the website. As
the contract with the website operator was between TechnoPhobia and the lenders
and not the Governance Board, contractual discussions do not involve the
Governance Board. Although the Governance Board operates in a collegiate manner
such that any problems can be usually overcome, this interviewee considered the
situation to be unsatisfactory. The funding of the website by the lenders also created
some misperceptions as to whether the site was actually independent.
• Our assessment of implementation
124.
The implementation of the website was a new experience for the CC. It proceeded on
time and, although there were some inevitable difficulties during implementation (for
example, initial data problems and design issues), none of these were significant
enough to delay implementation or materially increase the costs of implementation.
As the website was to be funded by lenders and was intended to be a non-
112
http://webarchive.nationalarchives.gov.uk/20111108202701/http://competition-commission.org.uk/inquiries/current/
homecredit/notice_of_approval.pdf.
http://webarchive.nationalarchives.gov.uk/20111108202701/http://competition-commission.org.uk/inquiries/current/
homecredit/notice_of_readiness.pdf.
113
27
commercial website, this ruled out the possibility of using a third party commercial
price comparison site.
125.
The governance of the website has created a few subsequent challenges but thanks
to the efforts of all concerned and goodwill towards the remedy none of these have
been insurmountable. Overall, the implementation of the website was a success with
good buy-in from lenders and other stakeholders.
Impact of the website
126.
As noted in paragraph 23, the aim of the website was to increase customers’
awareness of prices, reduce search costs and increase incentives for lenders to
compete on price.
127.
In this section we consider (a) usage of LendersCompared.org, (b) possible areas for
improvement, and (c) our assessment of the impact of the website remedy.
• Usage
128.
Technophobia provided us with monthly website usage data from the launch of
LendersCompared.org in July 2008 to December 2012. We have excluded the first
six months of this data from our analysis due to some data missing for some
measures and because the effect of launching the website caused considerable
variations in data to begin with.
129.
Figure 2 below shows visits, new visits and unique visitors to LendersCompared.org
in the period from the start of 2009 to the end of 2012. ‘Unique visitors’ are the
number of users visiting the website; 114 ‘visits’ are the number of times visitors have
been to the website; 115 ‘new visits’ are the number of visits by people that have never
been to the website before.
114
This measure is based on a unique identifier, usually an IP address, so in effect it is a computer not a person visiting the
site.
115
If a user is inactive on a website for 30 minutes or more, any future activity will be attributed to a new session and will be
recorded as an additional visit.
28
FIGURE 2
Visits, new visits and unique visitors to LendersCompared, 2009 to 2012
16,000
Visits
New visits
Unique visitors
14,000
Number of visits/visitors per month
12,000
10,000
8,000
6,000
4,000
2,000
Ja
n
09
M
ar
09
M
ay
09
Ju
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9
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p
09
No
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9
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n
10
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ar
10
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ay
10
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11
M
ar
11
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ay
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n
12
M
ar
12
M
ay
12
Ju
l1
2
Se
p
12
No
v1
2
0
Source: CC analysis.
130.
Figure 2 shows that there were between 3,500 and 4,000 visitors per month (circa
42,000 to 50,000 a year) in 2011 and 2012. This amounts to around 2 per cent of
home credit customers. However, since the launch of the website there have been
over 300,000 new visits (over 10 per cent of home credit users). This is lower than,
for example, the Money Advice Service’s online ‘Health check’ 116 which received
521,668 visits in the year to March 2012, although that service covers a wider range
of credit products and hence has a much wider user base. 117 Whilst the CC had no
firm expectation of visitor numbers, it was clear that an increase in price sensitivity
among even a relatively small group of customers might be expected to prompt a
reaction from lenders. 118
131.
We note that three-quarters of the visits to the website in any one month are ‘new
visits’. In addition, since August 2008, 41 per cent of traffic is referred from lenders’
websites, 24 per cent from search engines and 35 per cent direct traffic. This suggests that a significant proportion of borrowers are finding their way to the website as
a result of the links that we have required on lenders’ websites. We also note a
steady volume of repeat visits (circa 1,200 visits per month in 2012) (see paragraph
138 for a discussion).
116
The Health check uses behavioural insights to encourage people to take financial action.
The Money Advice Service’s Annual Review 2011/12, p10.
118
CC’s final report, paragraph 9.43.
117
29
132.
One concern is the declining number of visits over time, which has fallen from
monthly averages of over 10,000 per month in 2009 to around 4,500 per month in
2012. The pattern of visits and visitors over time can be split into three broad phases:
(a) Website launch to the end of 2009—significant interest in the website following its
launch followed by a decline to a steady state. This sort of initial drop-off in user
numbers might be expected following the launch of the website as many lenders
will have looked at the website in the first few months to check that their products
were correctly listed.
(b) 2010—steady state (around 7,000 visits per month and 6,000 unique visitors per
month).
(c) 2011 and 2012—website redesign to take account of EU CCD requirements and
decline in visits and unique visitors. The website redesign appears to have
coincided with (or potentially caused) a further fall in the number of visits and
unique visitors. Nearly half of interviewees (particularly lenders) commented that
the enforced redesign had made the website more complex than necessary. We
return in paragraphs 140 to 146 to steps that could be taken so as to increase
usage again. However, the number of visits and unique visitors per month has
stabilized in 2012.
133.
Another concern raised during the course of the CC’s investigation and subsequently
to BIS in response to its call for evidence was that the remedy would not be effective
because insufficient home credit customers have access to the Internet or are
comfortable with using the Internet. 119 However, consistent with the CC’s view in its
final report, 120 our research has found this concern to be unfounded and this is not a
reason for any decline in usage. Many lenders reported that a significant number of
their customers use the Internet:
(a) Provident customer research shows that the percentage of its customers with
Internet access has increased to 72 per cent in June 2012 from 34 per cent in
2005. Provident also said that based on a June 2012 survey 46 per cent of its
customers had made a purchase online in the last year. It commented that
customers were now far more willing and able to shop around online.
(b) S&U told us that 50 per cent of its customers now had access to the Internet.
(c) The CCA said that Internet access did not appear to be an issue for consumers
as access was now quite widespread and this had increased substantially since
the remedies were implemented. It noted, among other evidence, a study by
Shopacheck which had found that around two-thirds of its customers regularly
used the Internet.
(d) One large lender told BIS that applications to its own website before
LendersCompared were approximately 50 to 75 per month and had grown to 500
applications per month.
(e) Large lenders told us that they now took a significant number of online applications albeit the online process was only used as an initial screen because the
agent had to visit the prospective borrower before a lending decision was made.
119
One large lender had noted that the OFT’s high-cost credit review had found that only 7 per cent of home credit users used
the Internet as source of information. Review of high-cost credit: Final report, June 2010, p28.
120
CC’s final report, paragraph 9.47.
30
134.
Taking the figures provided by Provident and S&U (which show that around 50 to
70 per cent of home credit users had access to the Internet) suggest that based on
the figures in paragraph 130 around 4 per cent of home credit customers that are
capable of accessing the Internet are using LendersCompared each year.
135.
We have also examined what visitors are doing when visiting the website.
136.
Figure 3 below shows that there has been a steady decline in the number of unique
searches 121 conducted, falling from around 17,000 per month in 2009 to just over
5,000 per month in 2012. The average number of unique searches per visit (see
Figure 4) has fallen from 1.5 in 2009 to 1.2 in 2012. There appears to be a step
change at the start of 2011, around the time of the website redesign, but the number
of unique searches per visit seems to have risen since the start of 2012.
FIGURE 3
Number of unique searches on LendersCompared, 2009 to 2012
25,000
Number of unique searches per month
20,000
15,000
10,000
5,000
0
09 r 09 09 l 09 09 09 10 r 10 10 l 10 09 10 11 r 11 y 11 l 11 11 11 12 r 12 12 l 12 12 12
n
a
a
a Ju ep ov Jan
ay Ju ep ov Jan Ma
ay Ju ep ov Jan Ma
ay Ju ep ov
Ja M
N
S
M
N
N
S
S
N
S
M
M
M
M
Source: CC analysis.
121
Total unique search is the total number of times the site search was used. This excludes multiple searches on the same
keyword during the same visit.
31
FIGURE 4
Number of unique searches per visit to LendersCompared, 2009 to 2012
1.60
Number of unique searches per visit
1.50
1.40
1.30
1.20
1.10
11
l1
1
Se
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11
No
v1
1
Ja
n
12
M
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12
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12
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11
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0
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10
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09
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9
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09
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09
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Ja
09
1.00
Source: CC analysis.
137.
The ‘bounce rate’ (the percentage of people entering the site and leaving immediately) has also increased from 13 per cent in 2009 to 23 per cent in 2012.
138.
However, Figure 5 shows that average time spent on the website (in minutes and
seconds) has remained relatively steady at around 5 minutes. 122 The peak in early
2011 is likely to be due to the website being updated to take into account new EU
legislation. This suggests that one possibility is that one set of users of the website
are the lenders themselves. Four lenders said that they used the website to compare
their prices with those of local competitors. For example, Provident said that it
regularly used the website to check that its prices were competitive and its product
designs were meeting customer needs. This is consistent with the evidence on visits
above where the number of new visits has remained consistently at around 75 per
cent of total visits, suggesting that there is a group of visitors that regularly check the
website in a given month (we would not necessarily expect consumers to visit the
website regularly, only when they need new credit).
122
Since July 2008, 41 per cent of visits have been for a duration of longer than 3 minutes; 66 per cent for longer than 1 minute.
32
FIGURE 5
Average time spent on LendersCompared per visit, 2009 to 2012
07:01
06:34
Time in minutes and seconds
06:07
05:40
05:14
04:47
04:20
03:53
03:26
09
l0
9
Se
p
09
No
v0
9
Ja
n
10
M
ar
10
M
ay
10
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0
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09
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11
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11
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11
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ar
12
M
ay
12
Ju
l1
2
Se
p
12
No
v1
2
Ju
09
ay
M
ar
M
Ja
n
09
03:00
Source: CC analysis.
139.
We have looked at how many lenders are providing data to the website. We found
that there has been an increasing number of providers (from 500 in 2009 to 560 in
2012) providing an increasing number of products (from 1200 in 2009 to nearly 1500
in 2012). By 2012, over 80 of around 600 credit unions (around 15 per cent) were
listed on the site. We discuss the number of credit unions on the website in further
detail in paragraph 142 below.
Possible areas for improvements
140.
We asked all interviewees about ways in which the operation of the website could be
improved either to increase usage or to make it easier to use. We note that any
possible improvements to the website are for the governance board and are not
something which the CC has any jurisdiction over. Suggestions can be categorized
under four headings: (a) more effective promotion of the website; (b) more credit
unions listed on the website; (c) allowing users to click through; and (d) improving the
content of the website. We consider each in turn.
• Promotion
141.
Several interviewees said that the website could be promoted more effectively. The
website has a small marketing budget of circa £20,000 a year (which has recently
been built up to a £40,000 budget). This is a welcome development as it shows
commitment to maximizing the value of the website. It also demonstrates that
consumer groups engaged in running the website recognize its value and are
33
encouraging such promotion. It will be important to monitor the value of this
additional marketing activity.
• Credit unions
142.
A number of interviewees wanted to see more credit unions listed on the website.
However, there seems to have been a reluctance on the part of some credit unions to
become involved with the site. A number of reasons were put forward for this
reluctance:
(a) credit unions tend to have limited resources and do not want additional work and
cost from listing with the website;
(b) some credit unions’ loans are not ‘cash collected loans’ in line with the definition
in the Order, which limits their ability to list;
(c) some credit unions consider that they have enough demand for their services
already and that their members are already aware of their services;
(d) credit unions tend to have different types of borrowers to home credit lenders
(see paragraph 74) and do not want to deal with the same types of customers as
they are seen as higher risk. In this context, three lenders said that as credit
unions provided different products to home credit lenders, it was potentially
confusing for them to be listed on the site unless the site made clear what the
differences were between the relevant products. 123
143.
As noted in the CC’s final report, 124 the CC considered that adding data from nonhome-collected products would be useful and relevant for customers. In particular, it
would help generate greater buy-in from consumer bodies and those interested in
promoting greater choice for existing home credit customers. Subsequent revisions
to the LendersCompared website mean that there is now a hyperlink to
findyourcreditunion.co.uk.
• Click-through
144.
Some interviewees considered that the website could be better linked to lenders’
websites, over and above the additional requirement to provide a link to the website.
There were two angles on this: (a) click-through from LendersCompared to lenders’
websites, and (b) click-through from lenders’ websites to LendersCompared:
(a) Click-through from LendersCompared: Independent researchers were concerned
that because users could not click through from LendersCompared to the lenders’
websites, the website lacked some legitimacy. However, they noted that there
was no evidence that introducing click-through would necessarily improve the
effectiveness of the website. S&U said that it was important the website
continued to be a price comparison tool not a marketing tool and it was generally
against direct links on the website. In contrast, it said that credit unions should be
given the opportunity for direct links from the website in order to encourage them
to take part.
123
124
The same argument was made to the CC during the market investigation (see the CC’s final report, paragraph 9.63).
CC’s final report, paragraph 9.64.
34
(b) Click-through from lenders’ websites: One large lender suggested that traffic
through the site could be improved by lenders’ websites automatically linking to
LendersCompared when customers were searching for loans.
145.
We note that neither of these click-through approaches is ruled out by the Order.
With regard to click-through from LendersCompared, the only constraint we are
aware of is that the advertising regulations could be interpreted as potentially
affecting the status of the website, which would lead to additional regulations needing
to be complied with. 125 With regard to click-through from lenders’ websites, this
seems like a good idea. A similar effect should, however, be achieved by ensuring
that disclosures of the existence of LendersCompared.org are sufficiently prominent
when customers are conducting searches on lenders’ websites, which is a
requirement of the Order.
• Content
146.
The content of the website has been enhanced over time (for example, links to the
Money Advice Service and FAQs have recently been added). A few further suggestions were made in terms of improving the content of the website. For example,
the CAB suggested there should be more debt advice to consumers and ABCUL
suggested providing more generic information on credit unions (a link to
findyourcreditunion.co.uk has now been added to the website).
• Our assessment of the impact of the website
147.
We have considered the effect of the website against its three objectives: increasing
price awareness, reducing search costs and increasing price competition.
148.
On the demand side, those customers that use the website have undoubtedly
benefited from reduced search costs and increased transparency of prices. Nearly all
lenders commented that the website had worked well for the purposes of comparing
prices and providing an independent source of information. However, some
interviewees with consumer interests noted that the website might have had limited
effect on switching given the importance of the agency relationship. As noted in
paragraph 110, we have been unable to ascertain whether the website has led to an
increase in switching.
149.
We would like to see greater usage of the site and to reverse the fall in visitors since
the launch. Whilst potential customers seem to be finding their way to the site from
lenders’ websites, there is potentially more that could be done to make use of the
site. This includes more promotion, greater inclusion of credit unions’ products, use
of click-through and improving content. In particular, the website needs to continue to
communicate the message that cheaper loans are available (and having credit
unions’ products on the site are an important part of achieving this message). We
note that some of the suggested improvements for the website may be constrained
by other regulations and that this does limit to some extent what the website is capable of achieving. This is a challenge for the governance board in the coming years.
150.
On the supply side, the website has clearly had a positive effect and has helped to
achieve its aim of increasing focus on the price of loans. We have already noted in
paragraph 138 how some lenders use the site to compare prices. This is supported
by the evidence on site usage, with a number of returning visitors, some of whom will
125
If this interpretation were to be applied, the LendersCompared website would become a credit broker and the site would
have to carry an overall representative APR, which could significantly reduce the effectiveness of the website.
35
include lenders themselves. In particular, the CCA told us that the website had been
very useful as a marketing tool for local competitors who were able to use the
comparative pricing data by postcode area to ensure that they were more
competitively priced than rivals such as Provident. We were told that this had led to
an increase in competition at the local level. Whilst it is not possible to quantify this
effect, the behaviour of lenders suggests it is significant.
151.
The other key benefit of the remedy, perhaps not envisaged by the CC, is that the
governance arrangements have facilitated the CAB, ABCUL and CCA getting
together to discuss issues of transparency effectively. The website is a good example
of how involvement of wider stakeholders can lead to the realization of a consumerfocused project.
Statements
152.
The CC’s remedies affecting statements comprised (a) a recommendation regarding
further information on annual statements regarding the TCC for the loan and reference to LendersCompared.org; and (b) the requirement to offer additional statements
upon request.
153.
The first part of this remedy (the recommendation in (a)) was complementary to the
CC’s other remedies. We have already discussed its implementation in paragraphs
32 and 33. In this section, we focus on the effectiveness of the requirement to offer
additional statements upon request and what additional benefit this brought to the
remedies package.
154.
As set out in paragraph 26, it was intended that statements would be used as a
conduit for information, as a record of information and as a credit certificate when
considering switching. The remedy was aimed at addressing the informational
asymmetries between incumbent lenders and other lenders and increasing the price
awareness of customers.
155.
Lenders told us that the option to request additional statements has not been widely
used. Table 3 summarizes the evidence from the lenders we spoke to and indicates
that the option is taken up during a year by less than 2 per cent of the customer
base:
TABLE 3 Impact of statements remedy
Provident
Shopacheck
Morses Club
S&U
Mutual
A mediumsized lender
Requests per year
Customer
base
% customer
base
35,000
2,000
‘Occasional’
1,250
‘Almost no requests’
12
1,800,000
230,000
N/A
100,000
N/A
10,000
1.9
0.9
<2
1.3
N/A
0.1
Source: CC analysis.
156.
We were told by two large lenders that they had not seen any systematic evidence
that additional statements had been used as a credit certificate when switching as
the CC had envisaged in its report. Provident also said that it was difficult to track the
direct and separate impact of the combination of ad hoc and annual-statementrelated changes on the behaviour of customers. It said that as a result of the
remedies, statements and communications now carried information about higher
36
ESRs, TCCs and the LendersCompared website. We were told that the take-up of
statements on request had been low because:
(a) payment books/cards were updated regularly by agents and provided similar
information to that which would appear on an on-demand statement;
(b) annual statements were sufficient for customers given that many loans were for a
one- or two-year period; and
(c) the requirements of the CCD had enhanced pre-and post-contractual information
available to consumers, albeit we note not in the same way as this remedy
required information to be disclosed.
157.
Despite this, the CAB told us that it still received ongoing complaints from consumers
regarding a lack of documentation or a lack of understanding of outstanding
balances.
158.
Shopacheck was of the view that this part of the remedies package only added costs
for lenders with little benefit for consumers. However, no interviewees considered this
cost to be particularly significant.
Our assessment of the impact of this remedy
159.
The on-demand statement part of this remedy does not appear to have been a
particularly important part of the remedy package. Customers do not appear to be
using statements in the way the CC expected or to a great extent. While this may
suggest limited effectiveness, in part this might be because other parts of the remedy
package have proved effective (eg the data-sharing remedy has meant that lenders
have access to better information so customers do not need to prove their creditworthiness) or because lenders have improved the frequency with which they update
payment books/cards to reduce the costs of having to send out on-demand statements.
160.
Overall, although this part of the remedy package was relatively low cost, it appears
to have delivered relatively little benefit for home credit customers.
Early settlement rebates
161.
In assessing the effect of the changes to ESRs, we asked lenders about the financial
effect of the remedy and to what extent the remedy had resulted in increased rebate
payments to customers. This was because the remedy was specifically aimed at
addressing the customer detriment (it was also expected to increase price transparency and to lessen incumbency advantages to a limited degree).
162.
Lenders’ comments and estimates on the extent of the effect of the changes to ESRs
are set out in Table 4.
37
TABLE 4 Impact of change to ESRs
Annual cost
increase from
remedy
Provident
£30,000,000
Shopacheck
£600,000 to
£1,100,000
Morses Club
An increase in
ESRs (up to
£750,000)
S&U
£500,000
Mutual
Minimal
A mediumsized lender
£250,000
CCA
N/A
Other comments
Provident said that this total was calculated after allowing for the increase in payments
expected as a result of lending more to customers compared with 2007 (a few million
pounds). It was also calculated after allowing for the small increase in the ESRs paid out as a
result of refinancing (a few million pounds). It was likely that some additional and earlier
customer demand for refinancing had been encouraged by the higher ESRs but it was very
difficult to identify this separately from general trends in customer preferences. The vast
majority of the large increase in early settlement payments to customers therefore had come
as a direct result of the remedy.
Compared with £15 million income
Annual report 2009 referred to a cost of £250,000 in the first full year
Does not provide rollover loans so increase in ESRs has not affected its business
Cost taken out of £3 million annual turnover
The CCA told us that its members said they were making significantly more rebate payments
than historically such that customers were getting a better deal. The CCA did not have
access to data to quantify this but estimated that the increase was greater than 15 per cent.
Source: CC analysis.
163.
The CC estimated the cost of this remedy to providers (which would directly translate
into benefits for consumers) as £10–15 million a year for the whole industry. 126
Table 4 shows that across the lenders that we spoke to the annual customer benefit
of this remedy is over £32 million. Provident suggested that based on its understanding of its market share of around 60 per cent, it would expect the industry-wide
effect of this remedy to be around £50 million. However, evidence from the other
major lenders suggests that they have not been affected in proportionately the same
way as Provident. Our interviews covered around 90 per cent of the market, so
adding the effect of this remedy on lenders we did not talk to is likely to lead to
around a £35 million annual customer benefit of this remedy.
164.
Although not something that the CC expected, we asked interviewees whether the
change to ESRs had encouraged customers to pay off loans earlier in order to switch
lenders. Large and medium-sized lenders told us that this was unlikely and that
customers that were benefiting most from this remedy were instead ‘re-financers’—
those settling early and taking out a new loan with the same lender. Provident said
that causation between refinancing and the increase in ESRs ran both ways—in
other words, some refinancing was happening anyway and leading to increased
ESRs but some customers may also be refinancing and/ or refinancing earlier
encouraged by higher ESRs.
165.
Provident said that the percentage of loans being refinanced had not changed
significantly since 2006. This assessment is to some extent supported by analysis by
Policis, which found that 27 per cent of home credit users take out a new loan before
their previous loan is finished, 52 per cent of which are halfway through the term or
earlier. Half of home credit users taking out new loans then rolled the previous loan
126
CC’s final report, paragraph 9.113.
38
into the new loan, implying that around 13 per cent of home credit loans are
refinanced. 127
166.
A couple of medium-sized lenders noted that the remedy might have had some
unanticipated consequences on the home credit lending model:
(a) One noted that the remedy could create some cashflow issues for lenders with
respect to a small group of customers who, for example, did not make payments
until they were 75 per cent through the loan term (without being penalized),
settled early and then received a full rebate.
(b) Another said that in pure accounting terms the changes to ESRs had put
pressure on the theoretical business model pressing it towards that of a perpetual
overdraft on which only interest was ever serviced. It said that in practice
customers would not tolerate such an arrangement and it could not work.
Our assessment of the impact of this remedy
167.
The change to ESRs has created a significant transfer from lenders to consumers. If
the benefit is around £35 million, this would account for approximately half of the
customer detriment identified by the CC (see paragraph 18). In this respect, this
aspect of the remedy package has clearly achieved its aim. As this remedy built on
existing legislation, the additional compliance and adjustment cost associated with
the remedy was very small, creating a significant net benefit to customers.
168.
Although not expected to be a significant effect of the remedy, it is not clear that
incumbency advantages have been reduced as similar numbers of borrowers still
appear to be refinancing their loans with the same lender.
Overall impact of the remedy package
169.
This final part of the evaluation aims to assess the overall impact of the remedy
package by considering the effect of the remedy package on the industry and on
outcomes such as price. Bearing in mind the difficulties described in paragraphs 90
and 91, in this section we set out:
(a) a summary of interviewees’ assessment of the overall effectiveness of the
remedy package; and
(b) an analysis of changes in the TCC.
Interviewees’ views
170.
There were mixed views on the overall effect of the CC’s remedy package. Several
interviewees noted that the economic situation had limited the impact of the CC’s
remedies and/or made it difficult to ascertain the effect the remedies have had. The
main benefits of the remedy package identified by interviewees were:
(a) more transparent prices;
(b) reduced search costs;
127
Ellison, Whyley et al, p70.
39
(c) reduced information asymmetries; and
(d) transfer of funds from lenders to consumers via changes to ESRs.
171.
Representatives from consumer bodies and independent researchers were of the
view that the CC’s remedies had not had a significant effect:
(a) The CAB said that whilst prices had not increased there remained a need to
resolve social issues. In particular, it said that there was some evidence of recent
deterioration in business practices (for example, agents being paid commission
even when the loan went bad, increased use of ‘roll-over’/renewal loans and poor
documentation being provided to customers) but that the level of complaints in
home credit had remained stable in contrast to an explosion of complaints in
payday lending and other high-cost credit.
(b) Independent researchers said that there had been a limited range of remedies
available to the CC because of the risk of driving lenders out of the market, but
they felt that lack of information was not an issue. On the other hand, price
controls would have damaged the industry.
172.
One medium-sized lender expressed concern that, although the remedy package
had been fair, some new regulations deterred smaller lenders and increased barriers
to entry.
Analysis of changes in total cost of credit
173.
The 2006 report found that the TCC was ‘a more appropriate basis [than the APR] for
comparing the value for money of different loans’ and that small differences to the
period of the loan could have a dramatic effect on the APR such that it was a poor
measure of the price of a home credit loan. Using data from LendersCompared, we
have therefore examined changes in TCC since the launch of the website.
174.
Figure 6 shows that average TCC per £100 has fallen fairly steadily since 2008.
40
FIGURE 6
Average TCC of products listed on LendersCompared, 2009 to 2012
44.00
43.00
42.00
41.00
TCC (£)
40.00
39.00
38.00
37.00
36.00
35.00
34.00
09 09 09 09 09 09 l 09 09 09 t 09 09 09 10 10 r 10 r 10 10 10 l 10 10 10 t 10 10 10 11 11 r 11 r 11 y 11 11
y n u
y n u
v
c n b a p
c n b a p
v
n
g p c
g p c
n b ar pr
Ja Fe M A Ma Ju J Au Se O No De Ja Fe M A Ma Ju J Au Se O No De Ja Fe M A Ma Ju
Source: CC analysis.
175.
However, the pattern in Figure 6 is likely to disguise a change over time in the mix of
products (eg different terms and different providers). We have therefore examined in
Figures 7 and 8 and Table 5 average TCCs for each of the five large lenders and for
their main products.
41
Ja
n
F e 09
b
M 09
ar
Ap 09
r
M 09
ay
Ju 09
n
Ju 09
l
Au 09
g
Se 09
p
O 09
ct
No 09
v
De 09
c
Ja 09
n
F e 10
b
M 10
ar
Ap 10
r
M 10
ay
Ju 10
n
Ju 10
l
Au 10
g
Se 10
p
O 09
ct
No 10
v
De 10
c
Ja 10
n
Fe 11
b
M 11
ar
Ap 11
r
M 11
ay
Ju 11
n
11
TCC (£)
FIGURE 7
Average TCC of products listed on LendersCompared, 2009 to 2011: Provident
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
GPC average TCC
PPC average TCC
0.00
Source: CC analysis.
42
FIGURE 8
Average TCC of products listed on LendersCompared, 2009 to 2011:
other larger lenders
90.00
80.00
70.00
TCC (£)
60.00
50.00
40.00
30.00
20.00
10.00
Shopacheck average TCC
Loansathome4U average TCC
Morses Club average TCC
Mutual average TCC
Ja
n
F e 09
b
M 09
ar
Ap 09
r
M 09
ay
Ju 09
n
Ju 09
l
Au 09
g
Se 09
p
O 09
ct
No 09
v
De 09
c
Ja 09
n
F e 10
b
M 10
ar
Ap 10
r
M 10
ay
Ju 10
n
Ju 10
l
Au 10
g
Se 10
p
O 09
ct
No 10
v
De 10
c
Ja 10
n
Fe 11
b
M 11
ar
Ap 11
r
M 11
ay
Ju 11
n
11
0.00
Source: CC analysis.
43
TABLE 5 Changes in TCC and APR for main products of large lenders, 2005–2012
2005
2012
Lender
Term
(weeks)
TCC
(£)
APR
(%)
Term
(weeks)
TCC
(£)
APR
(%)
Change in
TCC, 2005–
2012
PPC
PPC
PPC
PPC*
PPC*
PPC*
GPC
GPC
GPC
Morses Club
Morses Club
Morses Club
Mutual
Mutual
Mutual
Mutual
Shopacheck
Shopacheck
Shopacheck
S&U
S&U
S&U
S&U
S&U
N/A
23
31
55
55
55
N/A
N/A
32
N/A
34
50
26
51
102
156
30
52
N/A
N/A
32
41
50
70
N/A
47.2
55
65
65
65
N/A
N/A
60
N/A
59.78
62.48
30
40.25
55.04
70
59
76.8
N/A
N/A
60
64
66.7
75
N/A
497.4
365.1
177.0
177.0
177.0
N/A
N/A
399.7
N/A
353.8
194.7
188.0
104.9
59.2
47.5
440.3
246.5
N/A
N/A
399
281
213
148
14
23
31
50
52
57
14
23
33
33
34
50
26
51
102
156
32
50
78
23
32
41
52
70
40
49.5
55
75
82
71
40
49.5
65
65
70
75
30
40
55
70
60
75
95
53.3
60
64
73.3
75
1068.5
545.2
365.1
254
272.2
189.2
1068.5
545.2
433.4
433.5
469.8
254.45
188.0
104.0
61.5
47.5
399.7
254.5
171.9
632
399.7
281
230
148
N/A
+5%
Unchanged
+15%
+26%
+9%
N/A
N/A
+8%
N/A
+17%
+20%
Unchanged
Unchanged
Unchanged
Unchanged
+2%
–2%
N/A
N/A
Unchanged
Unchanged
+10%
Unchanged
Source: CC analysis of LendersCompared data and lenders’ websites for 2009–2012 data and the CC’s final report, Table 3.1
for 2005 data.
*In 2005, PPC only had one product of around one-year duration that it offered at the same price to both new and existing
customers. PPC now offers two different products of this approximate term—one is available to existing customers (the 50week loan) and is priced to reflect their lower risk and cost to serve; the other (the 52-week loan) is available to new (or
existing) customers and is priced to reflect their higher risk level and higher cost to serve. PPC has also continued to offer a 57week product (which evolved from the 55-week product in 2005) to existing customers. The table therefore shows the price
change from the 55-week product in 2005 to each of these three products in 2012.
N/A = Not applicable because the product was not available in 2005.
176.
Examining Figures 7 and 8 and Table 5 and the underlying data show that:
(a) For Provident, PPC’s average TCC has fallen slightly since 2009 whereas GPC’s
average TCC has increased slightly. For some products (eg GPC’s 32/33 week
product and PPC’s 23-week product) the TCC has increased by 5 to 8 per cent
between 2005 and 2012. PPC’s 55-week loan, one of its main products, has
increased in price fairly significantly (by 26 per cent for new customers and by 9
or 15 per cent for existing customers). However, as noted in paragraph 49,
Provident’s profit per customer fell from £87.37 in 2005 to £69.86 in 2011.
(b) Mutual’s and S&U’s TCCs have remained unchanged since 2005 across their
products. S&U introduced a new, lower-priced shorter-term product in 2010,
which led to the slight decline in its average TCC.
(c) Morses Club increased the TCC on its principal products by 17 to 20 per cent
between 2005 and 2012. However, the prices of its three main products have
remained unchanged since May 2009. Other cheaper and more expensive
products have been introduced and withdrawn over the period 2009 to 2010 and
this has affected the average TCC of Morses Club in Figure 8.
(d) Shopacheck’s 32-week and 50-week products have changed little in price since
2005 (and remain unchanged since 2009). A new longer-term 78-week product
44
was introduced in 2010, leading to an increase in average TCC (albeit this
product had a lower APR than Shopacheck’s other two products).
(e) There is evidence of new products being brought to market (eg PPC’s and GPC’s
new short-term 14-week loans and Shopacheck’s longer-term 78-week loan).
177.
It is difficult to interpret the increase in TCC on some products because we have not
examined whether there have been cost increases for lenders that have caused
these increases, We have not, for example, examined the cost composition of loans,
the cost of collection or the cost of borrowing over this period of time, some of which
may have driven up the cost of lending over this period. However, in general TCCs
have tended not to increase significantly for many large lenders’ products despite a
climate in which the cost of capital is likely to have increased for home credit
providers and the constraint from mainstream lenders has not been as strong as it
might otherwise have been. Overall, the lack of price movement on many products
suggests that there remains scope for improvement in price competition between
providers.
Conclusions
178.
Our evaluation has shown that the CC’s remedy package was implemented
effectively and promptly and has addressed some of the features identified in the
CC’s final report and significantly reduced the detriment caused by those features. In
particular:
(a) the data-sharing remedy, where used effectively by lenders, has reduced information asymmetries between lenders, which has helped reduce incumbency
advantages;
(b) those customers that have used the LendersCompared website have benefited
from reduced search costs and being more aware of price differences between
lenders; and
(c) the changes to ESRs have led to a transfer from lenders to customers of around
£35 million, approximately half of the detriment the CC identified in 2006. There is
no evidence of this change having led to increases in the headline cost of credit.
179.
The extension of some of these remedies to other forms of high-cost credit, as
recommended by the OFT in its review, may have similarly beneficial effects.
180.
However, we have found that the remedy requiring on-demand statements appears
to have delivered relatively little benefit for home credit customers.
181.
We found that there have been few, if any, unintended consequences from the CC’s
remedies and profit per customer of the largest provider (Provident) has fallen since
2006. However, the CC’s remedies have not necessarily removed all the features the
CC identified in 2006. In particular, headline prices on lenders’ principal products do
not appear to have changed much since 2005, leaving continued scope for improved
price competition in the home credit market. This suggests that although the
remedies have achieved many of their initial aims they have not had quite as much
impact on competition as the CC would have liked, in part due to the uniquely
unfavourable economic circumstances which have limited the impact of the datasharing remedy in increasing the constraint from mainstream lenders on home credit
providers.
45
182.
Looking forward, our evaluation emphasizes the importance of maximizing the impact
of the website remedy in particular. This remedy remains well supported by stakeholders and can be used to continue to heighten customers’ awareness of price
differences between lenders and of the availability of other forms of lending, such as
credit unions. As and when economic conditions improve, we would also expect the
data-sharing remedy to have a greater effect than it has had hitherto.
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