When people take out loans they typically do so to spend and with the UK economy in its current state, many would argue that this is a good thing. The ‘payday loan’ industry took advantage of the weak economy and the squeezed households in the UK and for the past few years, we have seen constant adverts that will appeal to many households. But, is the industry as competitive as the adverts would have us believe?
An inquiry into this industry has been on-going for some time, and it has now been referred to the Competition Commission, due to ‘deep-rooted problems with the way competition works’. For some, a payday loan is a short term form of finance, but for others it has become a way of living that has led to a debt spiral. Frank McKillop, policy manager at Abcul said:
There is a clear demand for instant credit and across the country we are increasingly seeing members who have debts with multiple payday lenders and a record of rolling over debts, or going to one payday lender to clear the debt to another.
One problem identified by the OFT is that customers have found it difficult to compare costs and this has led, in some cases, to customers paying back significantly more than they originally thought. Customers being unable to repay loans will ring warning bells for many people, with no-one wanting a return to the height of the credit crunch.
The OFT has criticized payday loan companies for competing not on costs, but on the speed of approval and using certain unapproved tactics as part of their advertising. The selling point of such companies is that you can have the money in a very short time period. However, the criticism is that this leads to loans being given to those who are unable to afford them. Key credit checks are not being done and with late night texts being sent to often financially vulnerable people, it is no wonder that complaints have been received. In a statement, the OFT said:
The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers.
[the business models of companies were] predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges.
While payday loans are legal and there are many companies offering them, it is what they are competing over, which seems to be in question. The industry itself has begun to change its practices, providing more information to customers, only allowing loans to be rolled over three times and the potential to freeze repayments if the customer gets into financial difficulty. If more stringent checks are completed and hence timing does not become the only grounds for competition, then the problems above may become less significant. With the ongoing OFT inquiry into the practices of the payday loan industry and the continuing demand for such financing, it is likely that we will see much more of both the good and the bad that it has to offer. The following articles consider the investigation.
Webcasts
Balls warns against payday loans ‘blank cheque’ BBC News (27/6/13)
Payday lender investigation could be delayed by bureaucracy Telegraph, Steve Hawkes (27/6/13)
Payday lenders to face ‘tougher restrictions’ on advertising BBC News, Simon Gompertz (1/7/13)
Payday lending rates BBC News, Julio Martino and Stella Creasy (2/7/13)
Articles
Regulator to investigate payday loan industry Financial Times, Elaine Moore and Robert Cookson (27/6/13)
Q&A: Payday loans BBC News (31/5/13)
Payday loans: reining in an industry that is a law unto itself Guardian (27/6/13)
Payday loans industry to face competition inquiry BBC News (27/6/13)
Payday loans firms face competition inquiry Sky News (27/6/13)
Payday loans market faces competition inquiry Guardian, Hilary Osborne (27/6/13)
OFT refers payday loans to Competition Commission Scotsman, Jane Bradley (27/6/13)
Five reasons why we all need to worry about payday lenders Telegraph, Emma Simon (27/6/13)
OFT documents
Payday lending compliance review Office of Fair Trading (27/6/13)
Questions
- Into which market structure would you place the payday loans industry? Make sure you justify your answer.
- What is the role of the (a) the OFT and (b) the Competition Commission? Do these authorities overlap?
- What part does advertising play in this industry?
- To what extent is the payday loan industry a possible cause of another credit crunch?
- Why has the OFT referred this industry to the Competition Commission?
- To what extent are payday loans an essential part of an economy?
When crude oil prices go up, the prices of petrol and diesel go up pretty well straight away and by the full amount, or more, of the crude price rise. When crude prices go down, however, road fuel prices are often slow to fall; and when they do, the fall is less than the full fall in crude prices.
Click on charts below for a larger version. Click here for a PowerPoint of the left-hand chart.
In response to complaints of motorists and haulage companies, the Office of Fair Trading has announced that it will investigate the link between crude prices and prices at the pump. It will report in January 2013.
The review will consider questions of competition and market power. In particular, it will look at the power of the oil companies in determining the wholesale price of road fuel.
It will also examine the retail fuel sector and whether supermarkets are driving out independent retailers. The claim of many independent petrol stations is that supermarkets are selling below cost as a lost leader to encourage people to shop in their stores. They also claim that supermarkets use their buying power to obtain fuel more cheaply.
What is more, most of the petrol stations that are not part of supermarkets are owned by the oil companies. Again, independents claim that oil companies supply fuel more cheaply to their own stations than to independents.
As a result of what many independents see as unfair competition, many are driven out of business. Today there some 9000 petrol stations in the UK; 20 years ago there were twice as many.
The following articles look at the remit of the OFT investigation and at the competition issues in the road fuel market.
Articles
Formal inquiry tries to ease motorist pain at the pumps ITV News, Laura Kuenssberg (5/9/12)
OFT to scrutinise retail petrol market Financial Times, Caroline Binham (5/9/12)
OFT launches probe into pump prices Channel 4 News (5/9/12)
Petrol and diesel prices: Office of Fair Trading launches competition inquiry Guardian, Terry Macalister (5/9/12)
Petrol and diesel price review is launched by OFT BBC News (5/9/12)
Are supermarkets to blame for the devastation of independent petrol retailers by deliberately selling at a loss? This is Money, Tom Mcghie and Neil Craven (8/9/12)
OFT petrol pricing probe welcomed The Grocer, Beth Phillips (7/9/12)
Private businesses welcome OFT’s fuel price investigation Talking Retail (6/9/12)
10 charges that make consumers scratch their heads BBC News Magazine, Lucy Townsend (6/9/12)
Data
Crude Oil Price Index Index Mundi
Daily Brent Crude Spot Price, 1987 to present day US Energy Information Administration
Current UK Petrol Pump Prices What Pric£?
Fuel Prices WhatGas.com
Questions
- Describe the structure of the road fuel market, from oil production through to the retailing of petrol and diesel.
- What is meant by the terms ‘monosony’ and ‘oligopsony’? Which companies in the road fuel market have significant monopsony/oligopsony power?
- What determines the price elasticity of demand for road fuel in (a) the short run; (b) the long run? What implications does this have for the value of the short-run and long-run price elasticities?
- Where is the abuse of market power likely to occour in the road fuel market?
- To what extent is it in the consumers’ interests for supermarkets to sell road fuel below average cost?
- Examine the data for pump prices and crude oil prices and establish whether there is any truth in the claim that pump prices adjust rapidly to a rise in crude prices and slowly to a fall in crude prices.
As part of its drive to reduce the number of ‘quangos’ (quasi-autonomous, non-governmental organisations), the government has decided to merger the two main competition authorities: the Competition Commission and the Office of Fair Trading. The aim is to streamline the investigation of mergers, restrictive practices and the abuse of monopoly power, thereby saving costs and reducing the time taken before a decision is made. At present an initial OFT investigation can take many months before a reference is then made to the Competition Commission, which then starts the process of investigation from the beginning again.
Business leaders have welcomed the announcement, seeing the merger as a means of simplifying and speeding up investigations. But will the proposal be more effective in preventing the abuse of market power and encouraging competition? The following articles look at some of the issues.
OFT merger to shake up competition regime in UK Belfast Telegraph (15/10/10)
Competition lawyers gear up for merger of OFT and Competition Commission Legal Week, Friederike Heine (14/10/10)
Labour’s antitrust system dismantled Financial Times, Michael Peel (13/10/10)
Watchdog merger that merits review Financial Times (14/10/10)
Merged competition agency divides opinion Financial Times, Michael Peel (14/10/10)
Office of Fair Trading and Competition Commission to merge Guardian, Julia Kollewe (14/10/10)
Concerns at merger of OFT and Competition Commission Telegraph, Alistair Osborne (15/10/10)
Questions
- What are the current roles and responsibilities of the OFT and the Competition Commission?
- What types of market abuse are the two agencies designed to reduce or prevent? What instruments do they have at their disposal for enforcing their findings?
- What are the arguments in favour of the merger of the two agencies?
- What are the dangers of the merger?
- How will consumer protection be provided under the new regime?
In 2003, the Office of Fair Trading launched an investigation into possible collusion between tobacco manufacturers and retailers to fix prices. The investigation sought to establish whether the firms had breached the Chapter I prohibition of the Competition Act 1998. Chapter I is concerned with Restrictive Practices.
The allegation was that two tobacco manufacturers, Imperial Tobacco and Gallaher, had colluded with 11 retailers to fix the retail prices and thereby reduce competition. The details of the allegations are given in a 2008 press release.
As a result of its investigations, the OFT has decided to impose fines of £225m. “The OFT has concluded that each manufacturer had a series of individual arrangements with each retailer whereby the retail price of a tobacco brand was linked to that of a competing manufacturer’s brand. These arrangements restricted the ability of these retailers to determine their selling prices independently and breached the Competition Act 1998.” As the Times Online article states:
The OFT said that the companies were guilty of “price-linking” or “price matching”. It said that Imps and Gallaher had come to an arrangement with each retailer that if one or other manufacturer increased or decreased prices the retailer would alter the price of the competitor brand in line, up or down accordingly – a practice known in competition law circles as “vertical price collusion”.
Articles
‘Unlawful’ tobacco pricing leads to £225m fine by OFT BBC News (16/4/10)
OFT levies £225m fine for cigarette price fixing Guardian, Richard Wray (17/4/10)
Tobacco giants face £225m fine for price-fixing Independent, Alistair Dawber
(17/4/10)
OFT case will send smoke signals Financial Times, Michael Peel, Elizabeth Rigby and Pan Kwan Yuk (16/4/10)
Imperial and Morrison set to appeal OFT fine Financial Times, Michael Peel, Pan Kwan Yuk and Elizabeth Rigby (16/4/10)
OFT faces challenge to £225m price-fixing ruling Times Online, Robert Lea (17/4/10)
OFT gets tough on tobacco as price-fixing net is cast wider Independent, Nick Clark (26/4/08)
OFT Press Release
OFT imposes £225m fine against certain tobacco manufacturers and retailers over retail pricing practices OFT Press Release (16/4/10)
Questions
- What are the allegations against the tobacco manufacturers and retailers?
- Why has the OFT judged that such behaviour is in breach of the 1988 Competition Act, and hence against the public interest?
- What are the arguments put by the tobacco companies and retailers in their defence?
- Is giving companies an amnesty if they alert the OFT an example of a prisoners’ dilemma game? What credible threats or promises may the companies have in such a situation?
When people take out loans they typically do so to spend and with the UK economy in its current state, many would argue that this is a good thing. The ‘payday loan’ industry took advantage of the weak economy and the squeezed households in the UK and for the past few years, we have seen constant adverts that will appeal to many households. But, is the industry as competitive as the adverts would have us believe?
The OFT has criticized payday loan companies for competing not on costs, but on the speed of approval and using certain unapproved tactics as part of their advertising. The selling point of such companies is that you can have the money in a very short time period. However, the criticism is that this leads to loans being given to those who are unable to afford them. Key credit checks are not being done and with late night texts being sent to often financially vulnerable people, it is no wonder that complaints have been received. In a statement, the OFT said: