New card laws don't offer instant relief


UK credit card changesBritish credit card holders received a boost recently after the government announced that it will implement five new industry measures later this year. The move is designed to offer better protection to consumers and follows the launch of a consultation by the Department for Business, Innovation and Skills. Auriemma Consulting Group (ACG) was called in to add context to this process by providing research on the trends that characterise international credit card markets. So what were the management consulting company's findings?

Open dialogue
ACG suggested that the "unprecedented economic changes" occurring at present will make it difficult to assess the immediate impact of the move. As a result, the study recommended that the UK credit card industry is given enough time to implement and test the measures, with a view to making further improvements if required. It called for an "open dialogue" to be established between politicians, regulators and industry participants to ensure widespread understanding of the new laws.

Another key finding of the research was that imposing restrictions on lenders' ability to change their terms in a reactive fashion could compromise their attempts to manage risk. This will become particularly noticeable when credit card providers are faced with customers suffering financial hardship. However, ACG also praised the flexibility of the consumer credit market, describing it as "creative and innovative" and suggesting that it will develop new products, services and strategies to fall in line with the changing landscape.

Restricted credit
ACG also predicted that the new requirements could see the re-introduction of charge cards into the mainstream. In addition, the study found that annual fees could become more commonplace, with interest-free periods being limited and only the most successful credit card customers being offered rewards. In line with these assertions, the company noted that credit is likely to be harder to secure in the future, with interest rates almost certain to be pushed higher.

"As credit becomes more difficult to obtain, the migration of consumers to debit and prepaid will accelerate," it said. "It also seems likely that short-term lending products like payday loans will gain interest among the mainstream public."

Unintended consequences
At this stage, it is fair to say that predicting the exact effect the new regulations will have on the UK credit card industry is a futile exercise. Indeed, ACG claimed that further alterations are likely in the next one to two years, due to the "unintended consequences" of the latest move. One such change, it suggested, could be that small or medium-sized lenders are no longer able to offer store or credit cards.

However, ACG sounded a positive note by indicating that consumers should improve their "financial literacy" in the coming months. This final point cannot be overlooked amid the changing industry dynamic. Britons must remember that the old rules about adopting a responsible approach to credit card borrowing are still as important as ever.

Published: 6 April 2010