FCA interim report on credit card industry

Posted by Erika Bone in Personal Finance on 16 November 2015 - Erika is a Credit Analyst at checkmyfile

On the 3rd of November the Financial Conduct Authority (FCA) published their interim report on the Credit Card market, with the overall conclusion that competition is working pretty well for the majority of consumers. They did, however, furnish that conclusion with the caveat that problematic debt for consumers just above default level is becoming increasingly prevalent.

Christopher Woodward of the FCA reiterated this declaration when commenting on the report’s findings, stating, “Our study suggests that the market is working well 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”.

Statistics contained within the report highlight the significance of the credit card market with approximately 60% of UK adults owning one or more cards and the UK’s total debt in outstanding balances exceeding £61bn. 6.9% of all cardholders, which loosely equates to 2m people, are either in arrears or have already defaulted on their account. Another 2m have importunate levels of debt that many are struggling to pay.

The report’s findings affirm that competition in certain areas of the market is thriving, with a plethora of cards to cover the majority of customers’ specialist requirements and with new deals and offers added the market habitually. Consumers regularly “shop around” for the best deal and card providers allow flexibility to facilitate this practice.

The area that is causing the FCA concern, and where lenders are not clamouring to offer the consumer the best deal, surrounds the issue of minimum payments. Accounts which customarily make only the minimum payment are highly profitable to the card provider and as a result there is very little incentive for companies to help customers pay their debt quicker. When payments are missed there is a high level of forbearance shown by the lenders, not to specifically help the customer who may be experiencing financial difficulties, but because defaulted accounts are highly unprofitable.

Along with their observations, the FCA has provided a number of suggested improvements and remedies, including consumers obtaining greater access to their transaction history, advancing the role of comparison websites and necessitating companies to notify consumers when the promotional period has elapsed.

To reduce burdensome debt the FCA has advocated allowing customers more control over their credit limits. They would also like to see measures introduced to encourage borrowers to pay off their debt quicker and for lenders to identify and help those who are struggling to make their required payments.

The report has been welcomed by both sides of the industry with Richard Koch of the UK Cards Association confirming that, “We look forward to working with The FCA to identify ways in which we can build on our considerable track record of providing support to those who did find themselves in difficulty, often due to an unexpected life event”.

Mike O’Connor of StepChange debt charity, although slightly less effusive and without the self-promotion agreed with the sentiment by observing that, “the FCA, the credit card industry and consumer groups need to work together so people in difficulty can get the help they need. As providers begin to lend more freely, we must avoid returning to the high levels of unsustainable credit we saw in the run-up to the recession”.

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