THE National Consumer Council (NCC) has called for taxpayers to subsidise loans to high-risk groups turned down by mainstream lenders.
The consumer group made the plea as it filed a complaint with the Office of Fair Trading (OFT) against doorstep lenders after uncovering evidence that some borrowers were being charged interest rates of up to 900 per cent. An investigation by the group found that the door-to-door industry was preying on millions of low- income and vulnerable people who had nowhere else to turn for credit. The OFT will now start a 90-day inquiry into the trade, estimated at £2 billion.
The NCC, which has also complained about questionable sales practices, is seeking reform of a state-sponsored scheme, the Social Fund Budgeting Loan, which makes loans to low-income borrowers on benefits.
Provident Financial, which last year became the first doorstep lender to join the FTSE 100, said yesterday that it would welcome an expansion in state-funded credit. Robin Ashton, chief executive, said: “I don’t think it (the Social Fund) would be a threat to our business. It is the features of our product that make it popular with borrowers. We provide convenient, flexible and affordable access to credit.”
Edward Ripley, a managing analyst at Datamonitor, the market research group, said that the prospect of harsher regulation or the wider availability of state-funded credit did not pose a terminal threat to the doorstep lending industry.
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“Unless there is severe regulatory change, we expect doorstep lending to continue, as it is an established industry which has been around for over 100 years,” he said.
“However, we are forecasting the market to decline over the next five years, with the key players in the industry looking at other forms of lending, via bank accounts rather than the doorstep, such as unsecured personal loans and credit cards.”
Provident Financial shares were down 3.1 per cent at 621.5p. Cattles, which is the second largest player in the market, saw its shares fall 1.52 per cent to 325p and it issued a statement playing down the importance of doorstep lending to the group. Cattles said that home credit accounted for less than 15 per cent of its loan book and was declining as the group moved into larger loans repaid by direct debit.
The NCC cautioned against an outright ban on home credit, on the grounds that it would result in a growth of unlicensed lending, and the group recognised that doorstep loans provided a “valuable source of credit” for people unable to get loans on the high street.
Ed Mayo, chief executive of the council, said: “Our report concludes that boosting financial capability among lowincome groups must go hand-in-hand with measures to reduce the negative impacts of home credit and making more affordable and appropriate credit choices available.
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“It is now up to the Office of Fair Trading to decide what action to take in response to this home credit super-complaint.”
If the OFT finds a case for a complaint it could result in a full-blown Competition Commission investigation of the industry in the autumn. Provident said that scrutiny of the industry would help to dispel “myths and misunderstandings” about the industry.
Mr Ashton said: “Our shareholders recognise that we provide a valuable source of credit for people on low incomes and this is why we are a highly successful credit business.”
Malcolm Bruce, the Liberal Democrat Trade and Industry spokesman, said: “The OFT’s first priority should be the consumer. A heavy-handed approach that stamps out doorstep credit could succeed in driving thousands of people into the arms of loan sharks.”
THE OFT INVESTIGATION
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THE Office of Fair Trading is to investigate problematic areas of the doorstep lending market identified by a National Consumer Council investigation.
The consumer group found that borrowers are not switching home credit providers to find a better deal but stay with lenders, accepting step-up and rollover loans, which can result in interest charges of up to 900 per cent.
The NCC also found that low levels of financial literacy meant borrowers did not appreciate the high cost of the credit offered. Most borrowers simply turned to the leading four players, which control more than 70 per cent of the home credit industry.
The consumer group blamed barriers to entry in the market for stifling competition and allowing lenders to charge a typical annual percentage rate (APR) of 177 per cent.
The sales tactics employed by agents were also questioned. The NCC believes some take advantage of the “captive” environment of a borrower’s home.
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OFT officials will examine these allegations under new super-complaint powers. From the Enterprise Act, a super-complaint is a fast-track mechanism enabling consumer groups to make a complaint about a market that may be “significantly harming consumers’ interests”.
The OFT must publish a response within 90 days and can recommend an investigation by the Competition Commission.