The widely vilified UK pay day lending industry is about to face it’s toughest test yet. If something as uncool as regulation could ever be dialled up to eleven, the overseers are certainly giving it their all. The scrutiny firms are facing is quite unlike anything they’ve experienced before, with a quarter of firms expected to leave the market as a result.

Some commentators will take satisfaction, if not delight.  There has been no shortage of prior antagonists: journalists, consumer affairs organisations, MPs, even the Archbishop of Canterbury queued up to take shots (even if some backfired).

A few brave souls have spoken out in defence of the sector, recognising the value of transparency offered in a wider financial sector that appears to con people by design, pointing out the middle-class hypocrisy within a generation addicted to credit, or expressing their concern that an outright ban could force the desperate into the arms of even less savoury characters (as acknowledged by the Archbishop of Canterbury as part of an embarrassing climb down).

While there has been much wailing and gnashing of teeth, it could be argued that few commentators possessed either sufficient insight into the inner workings of the industry or the motivation to take a fresh look.  That is until now.

This is the last month under which pay day lenders in the UK fall under the remit of the Office of Fair Trading (OFT).  Charged with responsibility for the issuance (and revocation) of Consumer Credit Licences under the Consumer Credit Act, the OFT hands over it’s regulatory powers to the Financial Conduct Authority (FCA) on 1st April 2014.

Following a period of consultation, the FCA have set out its initial policy for regulating the sector, tightening the rules on some key issues of concern, such as credit extensions and collection practices.  The FCA has now also announced it will review in detail how firms treat customers when they fall into arrears from day one.  Thanks to government intervention, the FCA has also been tasked with setting a cap on interest rates.

About time, some might say. The OFT has been heavily criticised for not excising its (admittedly more limited) powers to interrogate and regulate the sector with more zeal.  Whatever its shortcomings, the OFT did have one brilliant final card to play: it referred the pay day loans industry to the Competition Commission citing various concerns.

The grounds for this referral may prove to be weak, and the Competition Commission may find few reasons for remedial action (its has a statutory deadline of June 2015 to compete its work, but has signalled its intent to conclude late this year).  Regardless, the Competition Commission has used its legal powers to lift the lid on the industry, and is just beginning to share its preliminary findings in the public domain.

The working papers published over the last few weeks make pretty interesting reading, and are awash with statistics (although some of the juicier detail has been redacted).   Some numbers confirm what others have already claimed: the market is highly concentrated, primarily served by just three players: Wonga at between 40-50% market share, with two US firms, Dollar Financial and Cash America, claiming the next two spots (both operate under a variety of brands including The Money Shop and Quick Quid).

One set of statistics shared by the Competition Commission at this early stage is the degree of repeat borrowing with the same lender, and the impact on customer outcomes.  (Further analysis into borrowing across multiple lenders will be completed using credit reference agency data.) The figures are sobering: 30% of customers take a new loan within 30 days of their first, while over 20% take out 5 or more loans over the course of a year.  As customers repeatedly borrow one loan after another, the high APR (which most pay day lenders argue is misrepresentative for a single short term loan) begins to look more appropriate.

Regulators ultimately care about customer detriment, and at this early stage the Competition Commission may have already unearthed grounds for concern.  A simple analysis that compares the repayment profile of last loans to that of their predecessors shows that 64% of customers never repay their last loan. This suggests that firms may continue to lend to customers until they find themselves in difficulties and are unable to repay.  Firms absorb the loss of the last loan, but this may still be a profitable outcome when compared to the revenues earned from the prior loans lent to the customer.  The customer however defaults, and will likely end up in a substantially worse financial state as a result.

The Competition Commission is yet to pass any judgement: it is currently setting out some initial facts and methodologies for evaluation without drawing any conclusions, good or bad.  More advanced analysis will undoubtedly follow. Even if the Competition Commission takes no action, it will have exposed the industry to even greater scrutiny, and given the FCA amongst others some hard facts to work from.