FCA investigates: Is credit card market fair for all consumers?

By Marianne Curphey

Now that the Financial Conduct Authority (FCA) has taken over credit card regulation from the Financial Services Authority (FSA), it is taking a much more consumer-focused approach than the FSA did. In particular, the FCA wants to establish whether banks treat customers struggling to repay debt fairly, by making allowances for missed payments or offering repayment support.

To do that, the FCA will investigate credit card market competition to see if it's working effectively for consumers -- in particular, those in difficult financial situations. According to the FCA, of the 30 million UK credit card holders, more than a million make minimum payments each month.fca-review

Experts say the effects of the review could include:

  • Clearer pricing, so card deals are easier to compare
  • More fair treatment for struggling customers
  • Reduced credit limits for new and existing customers
  • Limits on how many cards one person can have

Consumer groups hope that the review will prompt card providers to give customers more time to pay and a more flexible repayment scheme.

Paul Crayston, media officer with National Debtline, says the terms and conditions of consumer credit products in general (including credit cards) could be "significantly improved", so consumers are aware of the ins and outs of products and pricing in advance.

He says National Debtline would like to see interest and charges frozen if a borrower is making a clear attempt at establishing a sustainable repayment solution.

"We'd like to see a greater commitment to early intervention where a borrower's behaviour indicates they might be in financial difficulty. People in this situation should be effectively directed to sources of free and impartial help."

The national charity Debt Advice Foundation says in an analysis of 400 of its clients who had debt, almost all of them who had more than one credit or store card.

"We want to see a wide ranging investigation into the business practices of credit card providers, particularly the appropriateness of unilateral credit extension facilities," says David Rodger, chief executive of Debt Advice Foundation.

Potential downsides for consumers
"If there were to be a step change in the number of cards people were able to have, then that would affect some people," says James Jones, of the credit information agency Experian. "Not the majority, but those who regularly have a lot of different cards."

He also explains how credit ratings might be affected if card providers were to cut credit limits for existing customers. When lenders asses your credit, they will look at the percentage of available credit you are using, called the credit utilisation ratio. That ratio makes up 30% of your score.

"For example, if you have a £20,000 credit limit and you regularly spend around £5,000 of that per month, you are using 25% of your available limit. If [your limit] is cut to £10,000, but you continue to spend the same amount, that will now be 50% of your available limit," Jones says.

National Debtline's Crayston says that the reason borrowers value credit cards is for their flexibility. He worries that lower credit limits -- which may help prevent bad debts from building -- will also restrict that flexibility.

In addition, he acknowledges that some people use multiple credit cards simply to borrow more, which can lead to debt problems, but says some use different cards for different benefits. For example, someone may have one card for rewards, another for travel and another for everyday use. "The regulator has to be careful not to punish this kind of proactive and astute financial management," he says.

Variety and innovation in the credit card market are also a concern. "Pricing needs to be clear and easily understood, but the problem with always striving for easily comparable products is that this can stifle innovation," he says. That is, if all cards are compared just on price, everything else has to be the same, and that can prevent effective markets for consumers.

The argument for the credit card market's existing procedure

The UK Cards Association, a trade body for the card payments industry, says the industry has already made recent changes on credit limits and repayment schedules for those in difficulty.

Crayston says repayment plans fall under the category of card regulation, which is now the FCA's job. He also says providers are responsible for knowing applicants' other financial commitments, and suggests a robust affordability check to prevent lending to those building up debt across a number of credit products.

"Credit card lenders and borrowers have a clear responsibility to only lend or borrow money where there is a clear and affordable plan for repayment, and the regulator is there to make sure this is happening," he says.

Richard Koch, head of policy at the UK Cards Association, said in a statement that credit card providers were taking steps to lend responsibly.

"The evidence shows that consumers are seeing the benefits as they become more savvy in getting the best out of their cards, demonstrated by credit card debt falling while spending has risen," he said.

See related: FCA takes over consumer credit regulation, Are you a candidate for Debtors Anonymous?

Published: 14 May 2014