Following the launch of the FCA market study into the credit card sector in November 2014, the final findings have been published this week.
After an interim report published November 2015, the FCA carried out further analysis to improve its understanding of consumers' debt position. That analysis has refined, rather than fundamentally altered, the views expressed in the interim report.
The FCA has two particular concerns about credit card debt:
The FCA states that consumers in default are unprofitable and that firms do actively contact them. However, firms have fewer incentives to address consumers with persistent levels of debt or who repeatedly make minimum payments; firms do not routinely intervene to address this behaviour.
The FCA has said that this raises questions about how firms assess creditworthiness for new borrowers and has, in some instances, raised this with individual firms.
Competition is seen to be working fairly well for consumers, with firms offering a range of products to meet consumers' preferences, for example, introductory promotional offers and rewards.
There is, however, some concern that consumers are giving insufficient weight to certain product features. For example, only 20% of consumers looking for a balance transfer card considered both the introductory offer and the balance transfer fee. In addition, higher risk consumers have a more limited choice of products and providers.
The FCA recognises price comparison websites (PCWs) play an important role in the market. But there are concerns about the limitations of their effectiveness in terms of the ranking criteria used and the clarity around how they are funded. Also there are concerns regarding the extent to which PCWs compare the whole market.
The package of proposed remedies was first published in the FCA's interim report.
The aim of the remedies is to enable consumers to shop around more effectively, to encourage better control of spending and, where appropriate, to repay faster. Firms are also to be incentivised to address persistent and problematic debt.
They will be delivered through a mix of FCA rules (subject to cost-benefit analysis and consultation), industry voluntary agreements, work done by third parties and through supervisory work.
The advantage of this is that other market participants (other credit card providers and PCWs) are better able to offer a product which suits a particular consumer's needs.
In light of the work being done in this area - as a result of the government's MiData initiative for personal current accounts and the development of Application Programming Interfaces - the FCA has decided that it will not be proposing any additional measures.
The FCA will explore issues relating to PCWs in its work for the UK Regulators Network and will also feed into the Competition and Markets Authority's (CMA) market investigation into PCWs.
The FCA is keen for all consumers to be able to get an indication of their eligibility for specific products and the price they are likely to be offered if they apply, plus other terms where these may vary. Instead of proposing any changes now, the FCA will consider the outcome of the cross-sector work currently underway by the British Bankers’ Association (BBA), the Finance and Leasing Association (FLA) and the UK Cards Association (UKCA).
The FCA has agreed with the UKCA that consumers will be sent a notification by text or email two or three weeks before the expiry of a promotional period, or one month for consumers contacted by letter only. This is to ensure awareness and to encourage consumers to consider shopping around.
The UKCA has also committed to sending a digital communication to consumers who cross a threshold between 80% and 95% of their credit limit. This serves not only as a prompt but also as a reminder of the charges they may face.
This remedy, perhaps more than any other, has led to a split between industry and consumer groups. The FCA will consult on a proposed rule later in 2016 on this. One of the options being considered is the need for a consumer to opt in to any increase.
This would involve consumers being given more information in their monthly statements about:
The FCA also suggested a wider range of pre-set repayment options, beyond, for example, the minimum repayment. However, it recognises the need for behavioural trialling first, to make sure there are no unintended consequences.
The UKCA has also committed to allowing consumers, except those in arrears, to request a 'later than' payment date, for example, that payment should come later than 25th of each month to ensure it comes out after pay day.
Before considering a possible small increase in the minimum repayment rate, the FCA wants to see how effective the information encouraging consumers to take account of how much they are borrowing proves to be.
The FCA intends to consult later in 2016 on rules that go further than the current requirement to monitor a consumer's repayment record for signs of payment difficulties. Credit card firms may need to monitor drawdown behaviour, credit reference agency data and data from other credit products held with them. Rules will also be considered to establish a set of escalating interventions when a consumer has been persistently indebted for a period, for example, a more structured repayment plan.
This is far from being the end of the FCA's work in this sector as few definitive positions have been reached on the remedies to date.
However, arguably many firms - either of their own initiative or via their association with the UKCA - will already be ahead of the curve on a number of the proposals, lessening the ultimate impact of this market study on them.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.