OFT consults on Financial Sector Strategy

The OFT has launched a consultation on its proposed financial services strategy which sets out its approach to the sector in response to the current economic crisis, and also announced a review of the unsecured consumer credit market.

The OFT is asking interested parties to comment on its proposal to focus on two inter-related themes:

• The prioritisation, in the short term, of promoting fairness and responsibility between the credit industry and consumers, and

• advocating choice and competition to ensure that public decisions made to deal with the current crisis do not harm competition in the long term to the detriment of consumers.

The consultation will run until 12 June 2009, and the consultation document can be downloaded here.

A review of the unsecured credit market is also being scoped out, with details available from:

www.oft.gov.uk/oft_at_work/markets/services/credit-sector/.

Comments are currently being invited concerning this until 8th May, with the full review expected to start in the summer.

Credit scoring: What is it good for?

A recent German investigation into credit scoring systems has revealed that the cost of credit has little to do with objective assessments of customer risks and calls for greater transparency to be provided.

The research report, which is currently only available in German is available from the European Coalition for Responsible Credit website: www.responsible-credit.net

Debt on our Doorstep's proposals for action, issued in late 2007, already includes the following call:

"Credit pricing must be made more transparent. In particular, the industry should publish details of the factors taken into account when determining the interest rate offered to borrowers following a loan application, and the relative weighting that they have applied to these. Where the rate offered to a borrower is higher than the advertised rate, lenders should be under an obligation to state clearly why the applicant’s credit score was not adequate to support the offer of the lower rate."

The German report appears to provide further support for this proposal.

Washington Post comes out in favour of caps on payday loans

Yesterday's editorial in the Washington Post came out in favour of a 24% interest rate cap on payday loans in the state, and neatly summarised the issues relating to caps generally. Moves are currently afoot to introduce caps in 12 U.S states and the UK consumer may be wondering why it is that US payday lenders such as Dollar Financial (trading under the Moneyshop brand in the UK) continue to operate here with no limits on interest rates and fees...

The full article follows:

Salary Sinkhole
The District would be right to impose limits on payday lending.
Wednesday, August 1, 2007; Page A16

CHANCES ARE, everyone at some point has been short of cash. Most people, though, wouldn't even consider a loan if the interest totaled nearly 400 percent a year. That those who are least able to afford such exorbitant rates are being victimized by them is reason enough for the D.C. Council to follow through on plans to crack down on payday lending.

Before adjourning for the summer, the council gave tentative approval to a measure restricting the rate of interest on payday loans. Typically located in low-income neighborhoods, payday lenders offer short-term loans (generally two weeks) of several hundred dollars. All a borrower needs is a post-dated personal check and a pay stub verifying employment.

The current rate is about $16 to borrow $100 for two weeks, or an annual percentage rate of nearly 400 percent. Under the bill sponsored by council member Mary M. Cheh (D-Ward 3), payday lenders would lose their exemption from the 24 percent interest-rate cap that applies to lending in D.C. The industry is expected to pull out all the stops to block final passage, arguing that the service is needed because people without established credit have no other options. In fact, the business is rooted in the inability of borrowers to repay their loans in full and on time. People take out new loans to pay off old ones; the nonprofit Center for Responsible Lending estimates that a typical borrower (in the District that person is a single mother with little means) ends up paying back $793 for a $325 loan.

It is instructive that Congress, appalled by stories of soldiers and their families hobbled by debt, voted last year to put in place a 36 percent cap on payday loans for military personnel. At present, some 12 states, including Maryland, have moved against payday lending. One reason the industry is so alarmed by the prospect of the D.C. regulations is that they could have a ripple effect: Virginia came close to imposing restrictions this year. No doubt capping interest rates will cause some firms to stop doing business. But the experience of states such as North Carolina has shown that there is no adverse impact on consumers and that more responsible forms of lending fill the gap.

OFT Moves on Credit Card Pricing

The OFT has today announced a new programme of work with the credit card industry and consumer bodies to make the cost of credit cards easier for consumers to understand. This decision follows a super-complaint from Which? that highlighted that consumers are choosing credit cards without understanding all the issues that affect the cost of the card.

OFT research shows that the majority of card holders do not compare cards at all. This new work will explore the issues surrounding the cost of credit for credit cards including purchases, cash advances, introductory offers and payment allocation. This work is expected to take six months, and will involve close work with the credit card industry, consumer groups, other regulators, government bodies and other key stakeholders.

John Fingleton, OFT Chief Executive, said:'Credit card pricing has become increasingly complex, with many new dimensions such as interest free periods. While these new pricing dimensions give additional choice and value to consumers, they can make it harder for consumers to make informed decisions. This work will consider how pricing information might be improved so as to enable better product comparison by consumers, without stifling valuable competition and innovation that benefits consumers.'

Debt on our Doorstep has previously drawn attention to poor levels of transparency in the advertising of sub-prime credit cards, where initial 'concessionary' rates are advertised, only to be replaced by significantly higher rates in the event of a default.