Credit Card Providers Face Regulator Inquiry

April 4, 2014

Lucy_2 (Custom)
By Lucy Palmer-Richeson

4th April 2014

The Financial Conduct Authority (FCA) is to start an inquiry into the UK’s £150bn annual credit card market following concerns that credit cards are being offered to customers with serious debt, with interest rates so exorbitant that they are subsidizing wealthier customers.

The FCA’s chief executive Martin Wheatley confirmed the review would take place later this year. Mr Wheatley told a meeting of credit providers in London he feared some vulnerable consumers were being offered what were effectively “payday loans with plastic”. He explained that while 30 million people in the UK have at least one credit card, many are making only minimum repayments, which makes little impact on the overall debt.

“We know it’s not uncommon for the most at risk households to hold multiple cards and revolve multiple balances month-by-month,” he said.

The FCA, who took over regulation of firms offering consumer credit this week, said it was mostly concerned about “survivor borrowers”, that is borrowers who use credit cards or payday loans to pay their bills. According to Mr Wheatley, “the key priority here has to be those in the most vulnerable circumstances, many of whom are struggling to manage their credit card commitments, as well as other bills.

“Among the UK’s 30 million-plus cardholders, something like 3.7% make minimum payments for 12 months which is the equivalent to more than a million borrowers making 12 or more consecutive minimum payments.

“There are some obvious questions and challenges here for regulators and industry. Why are card issuers providing the means, in some cases, for the most indebted consumers to escalate their way into further debt?

“As part of this review, or market study as we call it, we will be engaging with the industry ahead of time and it’s important to say there’s no pre-determined terms of reference, outcome or agenda here.”

Mr Wheatley said there was “significant anecdotal evidence of hardship” from charities like StepChange, where 1 in 10 of people seeking financial advice had five or more credit cards, with each person having an average debt of £27,000.

“While we know the majority of people are aware of their personal duty to plan for the future – does this mean there’s no corporate responsibility for issuers to minimise long-run hardship? Maybe by limiting lines of credit to those who are already stretched. Maybe by showing greater forbearance for those in arrears,” he said.

Consumer watchdog Which? welcomed the FCA inquiry, stating there were a number of areas where greater investigation was needed, including the difficulty of comparing the interest rates of different credit cards.

According to Richard Lloyd, executive director of Which?, “Too many credit cards appear to be designed to catch customers out.

“The FCA should investigate how lenders can help put consumers in control by providing clearer information, stopping excessive penalties and encouraging people to shop around without it damaging their credit record.”