The CMA found that a combination of structural and conduct features limit the extent to which customers respond to the price of payday loans, and so reduce the pressure on lenders to reduce prices in order to compete to attract customers.

These features include:

While noting evidence of non-price competition, the CMA took the view that lenders in a well-functioning market would also be expected to compete on prices to a greater degree than it had observed.

Lack of price competition. The CMA identified structural market features that weaken the competitive constraint that might otherwise be imposed on prices by the prospect of new entry or expansion by smaller lenders. For example, it found various disadvantages faced by new entrants in raising customer awareness of their product due to difficulties both in raising customer awareness, and in assessing credit risk accurately.

The CMA also found that the negative reputation of the payday lending sector (due to the history of non-compliance and irresponsible lending) deters potential new entrants.

The CMA considers that these adverse effects on competition are likely to have resulted in customers paying higher prices for payday loans and in reduced innovation in pricing structures among payday lenders.

Price cap. While the CMA noted that the Financial Conduct Authority's (FCA) price cap on the cost of payday loans (which came into force on 2 January 2015) will mitigate some of the harm to consumers that has arisen from the high prices, the CMA considers that there remains significant scope for price competition between payday lenders to further improve customer outcomes. The CMA has concluded that the scale of the customer detriment caused by the adverse effects on competition would be likely to continue to be material, despite the reduction in prices brought about by the cap.

Consistent with the general theme of improving transparency in markets, the remedies package sets out a series of measures designed to tackle the problems identified in the CMA's report. These include new measures to promote the use of effective price comparison websites (PCWs) and a requirement for lenders to provide existing customers with a summary of the cost of borrowing. To implement these remedies, the CMA will publish an order within six months of the publication of the report putting in place its requirements in relation to PCWs and borrowing summaries.

Several of the other measures are in the form of recommendations of actions that the FCA should take, including:

The FCA will consult in the summer of 2015 on these measures.

The CMA recognises in its report that the price cap imposed on payday loans will not address the ability of consumers to shop around for better priced products. It may actually have the effect of reducing the numbers of lenders in this market and, by that measure, reducing competition. The remedies that the CMA has sought to impose are intended to incentivise consumers to compare different products on the basis of price and thereby to encourage lenders to lower their prices further.

The report and remedies do raise the important question of how competition authorities expect markets to function, otherwise known as "what does good look like?". In financial services markets, the relationship between cost and price is a difficult one. The payday loans market is an extreme example of this. It is one where the market has reacted to a demand for short-term loans that consumers are not able to obtain from their banks or other traditional unsecured loan providers.

As well as having confidence that the remedies are going to lead to better consumer outcomes, competition authorities need to be equally confident that the remedies they impose do not have the unintended consequences of reducing consumer choice and stifling innovation.

In that sense, competition authorities should have more confidence when considering remedies directed at facilitating supply, encouraging innovation and reducing barriers to market entry. In the case of payday lending, those include making recommendations to the FCA to work with lenders and other market participants to help customers shop around without unduly affecting their ability to access credit and taking further steps to promote real-time data sharing between lenders.

The CMA estimates that all of its recommendations will be fully implemented within the next two years. However, it may well be that the payday lending market, at least as it is known now, may not exist in two years, again highlighting one of the problems with the market investigation regime.