Research conducted by the FCA into the credit card market has raised some concerns that consumers are not being given adequate information before committing to a credit card deal. Tom Wilding looks at what the FCA are planning to do next to regulate the credit card market.
The FCA took over regulation of consumer credit in April 2014, the credit card market is now one of the largest areas of unsecured lending under its remit.
While carrying out work to improve their understanding of the credit card regulation market, the FCA found that it appeared to be working well for many consumers, but they also had significant concerns.
The concerns highlighted in their initial research will be looked at in depth through a study starting in April 2015 which will assess how detrimental some practices could be to consumers.
What are the FCA’s concerns?
- Competition focused on particular card features that may not represent long-term value, may not always be in the best interest of the consumer
- Repeated direct mail, pre-filled card applications and credit cards sold as part of packaged bank accounts encourage consumers to take out credit cards with limited understanding of how to manage them in a sustainable manner
- A number of consumers use credit cards heavily and quickly reach their limit, often only minimum payments are made with no consideration of how to pay back the debt
- Some issuers may profit from those who ‘over borrow’; these high risk borrowers develop into those who are at greater risk of credit default
- Incentives to provide unaffordable lending that leads to consumer detriment are a cause for concern as credit cards become an attractive lending solution to a broad range of consumers, leading to consumers without adequate knowledge getting credit cards
- Issuer advertisements and marketing appear to be focussed on features such as; 0% balance transfers, reward schemes and APR, this may not form a rounded view of value for money for consumers
- The FCA holds concerns that some consumers paying interest on balances may be paying more than they realise or expected and as such, some consumers may be owed money.
What next for the FCA?
The FCA now plan to focus their study on credit card services offered to retail consumers. This will include a variety of providers including banks, mono-line issuers and affiliated brands. From this, they are aiming to gauge if consumers are being inappropriately sold credit cards and if they may be owed money. They will also look at internal processes and if the issuers need to review them.
Key features the study will focus on:
- The extent to which consumers drive effective competition
- How firms recover their costs across different customer groups and the impact it has on the market
- Unaffordable credit card debt, in particular whether consumers are over borrowing/under repaying
- Those firms which hold incentives to provide unaffordable lending that results in consumer detriment.
The outcome of this study may lead to a number of actions:
- New rules formed, including amendments to existing rules
- Use of enforcement powers, adding requirements or changing firm permissions
- Make proposals for enhanced industry self-regulation
- Create a guidance handbook
- No further action taken.
Whichever the outcome is, this could be big news for financial institutions across the UK. Once the study has been completed we will have a better idea of the impact this may have, but it is definitely something that all of us working in the financial sector should be aware of.
For any questions regarding the up and coming credit card regulation study then don’t hesitate getting in touch, or check out our jobs section for similar roles that could prepare you for contracting opportunities in credit cards, should they come up.
– Tom Wilding