FCA finds credit card market 'working well' but wants extra protection for minimum repayment borrowers
Consumer champions the FCA have been looking into the (fairly sizeable) UK credit card market to make sure it still provides a sterling service to consumers, and last November it detailed exactly what it was going to do. The regulator has now published interim findings, and even come up with some helpful suggestions on how the market could be improved further.
The interim findings of the FCA’s credit card market study have, perhaps surprisingly, found that the industry is working 'reasonably well' for most consumers. However, the FCA still have concerns over the approximately two million people who are in arrears or have defaulted on their card payments and the 1.6 million who are repeatedly making just the minimum repayment each month- but they have actually come up with suggestions on how to help them, too.
The report’s interim findings, in line with its stated aims, came up with the following main issues:
Firms compete strongly for custom on some features, offer a range of products to meet consumers’ needs and there have been new entrants in the market in recent years- the FCA had been worried that barriers to entry may allow established providers to run roughshod over consumers.
Consumers shop around, switch and value the flexibility offered by credit cards, although the interim report does offer additional ways in which comparability on comparison sites could be improved.
Firms were not targeting particular groups of consumers to cross-subsidise other groups- the worry was that vulnerable (and therefore lucrative) customers were targeted in order to subsidise the less profitable borrowing habits of others
However, the interim report does focus on the fact that while consumers in default are unprofitable, meaning firms are active in contacting these consumers, those with persistent levels of debt or who make minimum payments are profitable for the provider, and firms do not routinely intervene to address this behaviour. The FCA wants more done on this, and on preventing ‘over-borrowing’, which often leads to defaulting behaviour.
Their specific recommendations on these points were, in relation to under-repayment, that firms could disclose in each monthly statement (i) how long it will take the consumer to repay the current balance and/or (ii) the saving in total cost from repaying more than the minimum and/or (iii) the repayment amount needed to pay off the balance within, say, one year. The idea is that being presented with the cold hard facts of your minimum repayment plan will spur you into action.
The FCA also suggest that card providers could offer different pre-set payment options for regular automated payments, for example, reflecting target time to repay. This would help consumers in choosing what is the right amount to pay and counteract the potential ‘anchoring’ effect of making the minimum repayment- i.e. that it’s a safe and easy amount to pay and that you don’t need to think about it any more than that. In fact, in some cases the FCA would rather see the term ‘minimum amount’ disappear altogether, by removing the minimum amount from the range of pre-set payment options but with a default setting to ensure that at least the minimum is repaid. This seems a better alternative than simply increasing the minimum repayment across the board, i.e. forcing consumers to pay a much higher amount than the rules currently require, which has been suggested to the FCA from some quarters.
To try and counteract over-borrowing, theFCA would like to see card companies providing timely information to remind consumers to consider how much they are borrowing as some consumers discovered they had spent more on their credit cards than they expected to when they took out their credit card.
Some credit card firms already provide proactive warnings to consumers using through text alerts, mobile applications, and/or email to remind them how much credit they have used at certain trigger points, e.g. half their credit limit and the FCA will look at these to see how effective they are before considering making them mandatory.
Another bugbear for many is the automatic and eternal inflation of credit limits. While firms currently have to let consumers opt-out of credit limit increases, the FCA is looking at whether forcing increases to be an opt-in Giving consumers more control during the lifetime of the credit card on variations, such as an opt-in would help prevent over-borrowing where the affordability of the monthly repayments may then trigger defaults or missed payments.
Christopher Woolard, director of strategy and competition at the FCA, said: 'This is a really important market in the UK. Around 60% of adults have at least one credit card, and there is an estimated £61bn in outstanding balances.
'Our study suggests that the market is working reasonably well for most consumers, with a range of cards on offer. However, for a significant minority who are in persistent levels of debt, the market could potentially work better.'