Review of the Regulation of Credit and Store Cards
27/10/2009
BIS has today published a Consultation on its Review of the Regulation of Credit and Store Cards.
Proposals set out in the Consultation will look at five key aspects of how credit and store cards currently work which BIS has identified could be giving rise to problems for consumers.
A review of credit and store card regulation was originally committed to this July in the Government’s Consumer White Paper, “A Better Deal for Consumers”.
Alongside fairness, transparency, better consumer decision making and debt reduction, this Review’s aims are said to include continuing availability of card borrowing and to make sure revolving credit remains an “innovative and viable” sector. It calls for evidence about multiple card usage, the profitability of lending and the impact of the downturn here, as well as about the consumer experience.
BIS says “We must of course properly assess the risks that certain interventions could inadvertently increase the cost of credit and make it less readily available to consumers, but we will not hesitate to take action where there is evidence of consumers being exploited or disadvantaged.”
The government claims that it “has taken account of developments in financial markets over the last decades and particularly during this last year”. It appears to have been very heavily influenced by changes in the US from the introduction of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act.
The measures set out in today's Consultation cover five key facets of credit and store card lending:
Allocation of payments – where the most expensive debt is paid off last. BIS is concerned that, despite existing disclosure requirements around payment allocation, consumers don’t understand how repayments are structured, possibly due to lack of consistency in how the information is shown. There are specific concerns around cash advances. BIS appears to recognise why cash withdrawals need to be priced higher, but believes there may be a case for intervening on how payments are allocated. The CARD Act has now made it law in the US that payments above the minimum must be allocated to the most expensive debt first. 5 options are presented ranging from ‘do nothing’ to the CARD model.
Minimum payments – BIS says 30% more consumers make only minimum payments on cards now than in 2002. The discussion includes the ‘anchoring’ effect of presenting a low minimum payment figure which consumers then use as a psychological base point when deciding how much to repay. The Government wants to make sure consumers not only fully understand the significance of just making minimum repayments, but are also encouraged to repay more. Options considered here include possibly setting a recommended minimum repayment level, or increasing the lowest level that minimum repayments can be set at.
Unsolicited limit increases – Although lenders increase limits based on prudent conduct of the account, BIS is concerned at the growth in personal debt it associates with unsolicited limit rises. The OI Taskforce found automatic increases had associations with financial difficulties. BIS believes that the requirements already outlined in the OFT’s draft Irresponsible Lending Guidance may not go far enough to address this area. Interestingly, one reason it feels that current practice is unsatisfactory is that it believes lenders cannot react sufficiently quickly to address sudden changes in borrower circumstances. Indeed, there is no intention of preventing lenders being able to reduce limits, although they will need to bear in mind conditions prescribed by rules on unfair terms and new provisions of the Consumer Credit Directive when doing so. As well as a simple blanket ban on unsolicited increases, the options include ‘opt in’ to increases, or limiting size and/or frequency of increases.
Re-pricing existing debt – If it is to take place, risk-based re-pricing should be transparent, proportionate and justifiable. If it is felt that the self regulation currently in place is not working action may be taken. The US CARD Act heavily restricts the re-pricing of existing debt - BIS is considering similar measures. Alternatively, work could be done to prescribe which risk factors lenders may fairly use as a basis to change an individual’s rate.
Simplicity and Transparency – The way cards work is considered to be complex and opaque, preventing consumers from making good decisions about their use. While recognising a simplified form to explain products will be introduced through the Consumer Credit Directive, BIS also thinks there may be a case for requiring lenders to provide an annual summary sheet to existing borrowers. This could help existing borrowers to compare product features and decide whether to consider switching. A benchmarking or labelling system to help compare products, similar to food labelling, may also be considered here. The Treasury’s recent Reforming Financial Market’s consultation proposed this idea for FSA regulated products.
The consultation will remain open until 19 January 2010. BIS is interested in receiving evidence from lenders, to ensure only reasoned changes with positive economic effects go forward. A Government response is promised by 20 April 2010. Legislation would not go ahead in the current Parliamentary session.
As the foreword to the consultation says: “Given the scale of credit and store card lending in the UK, this review could ultimately have far reaching consequences for levels of consumer credit in the economy.” These implications could be weighted by shifts in credit usage since the credit crisis set in. BIS believes consumers may now be using credit card borrowing more, due to difficulty accessing other kinds of borrowing from lenders constrained by capital and funding who have acted to tighten acceptance criteria.
Callcredit believes that the ability that lenders now have to access daily alerts on borrowers shows how quickly and flexibly they can react now to reduce limits if circumstances call for it. Consumers who have conducted their accounts prudently should be provided with the ability to make use of credit to structure their financial affairs however they choose. Requiring them to effectively periodically re-apply is an unnecessary use of their time and the lender’s resources. We currently live in times of low inflation, but should that situation change, many consumers could want their limits increasing on a fairly regular basis. Not allowing this could result in it being more cost-effective to offer a higher limit at the outset – unlike the “low and grow” model, hardly a recipe for responsible lending.
Lenders now have a better ability to correctly assess the ability of consumers to repay their commitments than has ever been the case before. The draft Irresponsible Lending Guidance and the Mortgage Market Review will ensure those who make best use of available tools to automate compliance where possible will have a significant advantage for the future. Preventing the majority of people, who borrow responsibly, from benefiting from ease of access to credit might not be the best result for them - and could prevent them from making the strategic, bigger ticket purchases that can help the economy recover.
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