The Financial Conduct Authority (FCA) is fresh from probing the headline-grabbing Payday Loan industry. It is now focusing on a new target – credit cards. Research has been released from the organisation. It discovered that it is a sector of the financial market that not all customers are happy with.
The FCA Remit
This is a big undertaking for the FCA, the credit card market a huge source of consumer credit. In the UK alone there are 30 million credit card owners. They hold a combined £56.9bn of outstanding debt. That is 60% of the adult population.
Debt Charity StepChange has commented that its clients carry an average credit card debt of £9047. Thry possess on average three cards each.
The FCA interest in cards is not that surprising, considering the UK’s dependency on this form of credit. UK consumers hold 70% of all credit cards in Europe, a staggering statistic. The choice of products is vast, most if not all accompanied with attractive sign-up award. These include such deals as 0% interest on purchases or balance transfers.
FCA Intentions
The FCA has commented on their intention to understand what drives people to take out the cards they choose. And also to establish how firms change and develop their service. Above all, they will be looking to ensure customers get a fair deal. They will look at all issuers of credit cards, be it bank or stand-alone business.
There are areas the FCA are sure to look out. Firstly, whether consumers can easily shop around to find the best deal. Secondly, that terms and conditions for these products are clear and fair. This is so that borrowers are not tricked into deals that aren’t suitable for them. They will also examine how credit card providers recover costs across different cardholder group. They will seek to ascertain whether certain groups are disadvantaged.
The final issue, and an important one, is whether people are borrowing too much. Also they will examine whether people are repaying too little. Doing so brings with it the prospect of crippling interest payments. The key to the issue that the FCA will look at is whether cards are sold with the consumer’s best interests at heart.
Credit Cards
Virtually all of us have had credit cards at one time or another. Many of us do right now. A convenient source of funds, many will know how easy it is to build up debts on them. Anyone with a semi-decent credit rating will not struggle to acquire multiple cards. The cards allow anyone to purchase items with money they don’t have. It’s a clearly attractive product.
I know the perils of credit cards all too well. Having originally bought the odd purchase on my first ever card, I soon gradually built up more and more debt. This was to accommodate for a fairly low income. Endless movement of money from card to card, from offer to offer has ensued since. Only now have I begun to rid myself of the credit card lifestyle. It’s easy to get sucked in. The StepChange charity has commented that credit card debt is one of the most common problems they deal with. It’s not surprising, as it is in our psyche to pay for items with cards, be it a bank or credit card.
FCA & Credit Cards
As the FCA itself commented when announcing the study earlier in 2014:
- Credit cards provide a free service for many, but the market may not be working well for certain groups of customers. For example, over-borrowing on credit cards may be a significant problem for some consumers.
- Consumers may not choose or use cards in a way that best meets their needs.
- Consumers paying interest on balances may be paying more than they realise or expected.
- Some consumers tend to use up credit limits quickly, repeatedly making minimum payments and not considering how they will repay their credit card debt.
- A proportion of consumers may be using credit cards unsustainably and taking on too much debt.
Industry Comments
The industry itself is confident that it will not suffer from any investigations of its practices.
Richard Koch, head of policy at the UK Cards Association, said: “Credit cards are an important part of the daily lives of consumers, so it is understandable that the regulator is keen to explore how such an important sector is working. The industry has a long-standing commitment to responsible lending and transparency and over the last five years has introduced many changes including on credit limits and re-pricing of debt, improved transparency, and forbearance for those who find themselves missing repayments. “Our work with debt advice charities shows that changes in people’s circumstances, such as illness, unemployment or separation, can mean that financial commitments which were previously manageable suddenly become harder. That is why there are measures in place for providing extra support for people in such situations. We will study the FCA’s observations carefully and welcome the opportunity to work with them.”
Still, there’s no immediate cause for concern for credit-card operators. The review is not expected to be completed until 2016.
Investigations
Part of the FCA’s investigation into the payday loan industry focused on whether companies were targeting those that weren’t in a position to make repayments. They thus earned disproportionate amounts from them. Expect a similar scope to the FCA’s credit-card investigation. The worry here is that the business model exists in a way that is not fair. It utilises those who pay most in interest and charges on their card. And they pay for those who utilise the free lending offers and make full and timely repayments.
Industry figures suggest that 40% of customers are what’s known as “revolvers”. They carry balances forward from one period to another, without making full repayments. Thus many of these will be paying extra charges on their card(s). The FCA has reported that worryingly a significant number of card holders cannot manage their cards in a sensible and sustainable manner. Many do not shop around for the most suitable deal, whilst many others focus on the introductory offers rather than the all-round package.
Minimum Payments
The news comes as research by the Debt Advisory Centre (DAC) recently showed that 19% of card holders made just the minimum payment on their card in October, whilst 5% made no payment at all, which will naturally attract penalty fees. With big spending inevitable over the Christmas period, those figures may well get worse in the coming months.
Their research suggested that it is young card-holders that struggle most with payments, 26% of 18-24 year olds managing to make just the minimum payment in October, whilst 13% admitted making no payment at all. A non-payment fee usually costs £12, but there is the added penalty of the non-payment showing up on the person’s credit history. At least 49% did pay off the full amount of those surveyed, with 19% paying an amount somewhere between the minimum and the full repayment amount.
Conclusion
It’s far too early to speculate on what the FCA will action regarding the credit-card industry. Like any financial sector, scrutiny should not be feared by the industry nor by consumers, and hopefully the outcome will be a clear, transparent market that suits both sides.
