Lloyds must help TSB, Office of Fair Trading says

Lloyds Banking Group now required to bolster TSB's profitability by £50m a year in its first four years while giving it another £40m

Lloyds Banking Group has been ordered to help the 631-strong TSB branch network become more profitable under a series of measures set out by the Office of Fair Trading to make the offshoot a stronger high street competitor.

The move will be seen as clearing the way for government to kickstart the sale of its stake in 39%-taxpayer owned Lloyds Banking Group, which was first signalled by chancellor George Osborne in his Mansion House speech in June.

But the OFT's verdict is a frustration for Lloyds which just two days ago launched TSB as a new brand with much fanfare. It will now be required to bolster TSB's profitability by £50m a year in its first four years while giving it another £40m. But Lloyds will be relieved that is not being forced to include more branches in the spun-off TSB, which is likely to be floated on the stock market next year.

The announcement by the OFT follows an analysis commissioned by Osborne in June of whether the sale of the TSB branches as well as the 315 outlets by Royal Bank of Scotland – ordered by Brussels as a condition of the 2008 taxpayer bailouts – will be enough to increase competition on the high street.

The OFT concludes that the RBS sell-off, codenamed Rainbow, does not need alteration. A separate analysis of splitting RBS into a good and bad bank, also commissioned by Osborne, is ongoing. Business secretary Vince Cable said: "We must not forget the potential implications of a 'good bank/bad bank' split of RBS".

The competition body acknowledges that asking Lloyds to put more branches in to the TSB network could risk "incurring further delay and additional sunk costs" but wants steps to be taken to ensure that the TSB offshoot attains a 4.6% share of the current account market. As currently constructed, the OFT estimates TSB's current account market share is between 4% and 4.5%.

The announcement by the OFT came as a top Bank of England official attempted to justify his claim that bad lending by the Britannia building society was the cause of the £1.5bn capital hole in the Co-operative Bank, which merged with the mutual lender in 2008.

Andrew Bailey, deputy governor of the Bank of England, wrote to the Treasury select committee to set out the cause of nearly £1bn of losses on loans at the Co-op.

Bailey provided the analysis of the Co-op's losses following evidence given to the committee last week by Neville Richardson, the former head of Britannia which merged with Co-op in 2008. Richardson, who ran the combined entity until 2011, told MPs that he had left the organisation with "no issues" and insisted that Britannia's loan book was well managed and in line with other lenders.

In a letter obtained by the BBC, Bailey tells the committee's chairman Andrew Tyrie that some 75% of the £970m of bad loan losses at the Co-op between the beginning of January 2012 and the middle of 2013 were in the bank's non-core book, which in turn is made up of between 85% and 90% of former Britannia loans in 2013 and around 75% in 2012. Of the £970m, £288m were from the core lending book and £682m from the non-core book.

Article Source : http://www.guardian.co.uk

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Payday loans market faces competition inquiry

Office of Fair Trading suspects payday lenders of preventing, restricting or distorting competition
The Office of Fair Trading has referred the payday loans market to the Competition Commission, saying there are deep-rooted problems with the way competition works and that lenders are too focused on offering quick loans.

The regulator said variable levels of compliance with credit laws and guidance meant firms that invest time and effort to comply were at a competitive disadvantage.

The referral follows a year-long review of the sector which exposed widespread evidence of irresponsible lending and breaches of the law, which the OFT said were causing "misery and hardship for many borrowers".

Although lenders say their high-cost loans are designed to be taken out over short periods and that annual interest rates of often more than 4,000% are not a fair indication of the cost, the regulator found companies were making up to 50% of their money from customers who extended or rolled over loans or incurred late payment charges.

Announcing the referral, the OFT highlighted several features of the £2bn market, which it said might be preventing, restricting or distorting competition:

• borrowers using payday loans have "poor credit histories, limited access to other forms of credit and/or a pressing need to borrow", which could be weakening competition on price

• lenders are using practices which make it difficult for consumers to identify and compare costs

• there are barriers to switching when loans are rolled over.

It also expressed concern about the focus on quick loans, which it said compromised affordability checks and meant competition was on the basis of speed rather than price. Too many people were being granted loans they could not afford to repay, and there was no incentive for lenders to cut interest rates.

The OFT's chief executive, Clive Maxwell, said: "Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.

"The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market."

In March, lenders were given 12 weeks to reform and notify the OFT of the changes they had made. The final deadline is the end of July, and the regulator said it was still waiting for 30 of the 50 lenders to respond.

In the runup to Thursday's announcement, three lenders had opted to leave the market, but that figure has since increased to five. Two have left the credit market; the other three have left the sector.

The OFT said payday lending would remain a top enforcement priority until it handed regulation of the sector to the Financial Conduct Authority (FCA) in April 2014.

It said by referring the market now, the commission would be able to provide the FCA with a sound evidential basis on which to develop its rules and apply its new powers after it took over responsibility.

The Consumer Finance Association (CFA), the trade body for some of the largest players in the industry, including The Money Shop, Cash Converters and QuickQuid, said it would have liked the referral to have been deferred.

Its chief executive, Russell Hamblin-Boone, said: "The CFA and its members have always supported well-designed, well-implemented regulation in order to protect consumers and drive up standards. However, no other sector has faced such intense scrutiny in such a short space of time.

"We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect before the industry faced further judgement. We urge the Competition Commission to take this into consideration during its inquiry."

Debt charities and consumer groups welcomed the announcement but urged the OFT to continue to scrutinise the market.

The executive director of Which?, Richard Lloyd, said: "People under financial pressure being given high cost loans in minutes without proper affordability checks is a recipe for disaster. This referral doesn't mean the OFT can now stand down, it needs to stay tough with lenders and continue to take early enforcement action against any company found to be lending irresponsibly."

On Monday the government will hold a summit on the industry between lenders, consumer groups and industry watchdogs to explore whether further regulator of the sector is necessary. A growing number of organisations have taken a stand against the industry, blocking adverts and even access to lenders' websites.

The Competition Commission has previously stepped in to shake up the home credit market. In 2006 it told doorstep lenders, who like payday lenders offer small, short-term loans, that they had to make charges more transparent and share data to make it easier for consumers to shop around and drive down prices.

Article Source : http://www.guardian.co.uk

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