Credit card probe to be launched
An investigation into whether credit cards are being sold in a way which exploits people's tendencies to take on too much debt is to be launched by the City regulator.
The Financial Conduct Authority (FCA) has outlined the proposed scope of its market study into the credit card industry which was first announced in April.
The regulator, which took over supervision of the credit card market earlier this year, wants to uncover the reasons why some consumers might be over-borrowing or under-repaying their credit card balances and how widespread the problem could be.
It plans to find out how easy it is for credit card customers to shop around and switch to the best deal for their needs, how transparent or complex the fees attached to credit cards are and how consumers' behaviour is being influenced by the market.
The regulator said: "We will look at whether credit cards are marketed and sold in a way that exploits or exacerbates consumer behavioural tendencies with respect to over-borrowing."
The move was welcomed by debt charities, which said too many people are being "trapped" into problem debt by their credit card.
Debt charity StepChange said its clients typically hold just under three credit cards each and the average card debt they have is £9,047.
UK consumers hold around 70% of all credit cards in Europe, with more than 200 different products to choose from, many offering an array of perks to woo customers, such as 0% interest on new purchases or balance transfers for a specified period of time and rewards such as cash back and air miles.
Around 30 million consumers, equating to 60% of the adult population, hold credit cards. Collectively, these account for £56.9 billion worth of outstanding debt.
As part of the probe, the FCA plans to look at whether highly indebted customers are generating a disproportionate amount of revenue from firms. It said a "key focus" will be looking at whether and why firms might provide unaffordable lending.
It will consider the possibility that consumers who may be paying more for their credit card than they had expected to may be subsidising those for whom card usage is free.
The regulator will look at firms' business strategies, as well as how a consumer uses their credit card is linked to how much money a firm makes.
The FCA highlighted some previous research published five years ago which raised concerns about the impact of firms' practices on consumers' indebtedness, including low minimum repayment amounts and firms setting unsolicited credit limits.
According to industry estimates, around two in five (39%) credit card customers are termed as "revolvers".
This means that they revolve their outstanding balance from one period to the next, often paying less than the full repayment amount on their credit card.
As a result, they will be charged interest on their borrowing, unless they are still in a 0% introductory offer period.
The FCA said a "significant" number of consumers appear to have a limited understanding of how to manage their cards in a sustainable way.
It said that some consumers will sign up to pre-filled card applications they have received in the post, as well as cards being sold as part of their bank account, with "little or no shopping around".
Of those consumers who do shop around, there is a tendency to focus on a couple of features such as 0% interest offers or the annual percentage rate (APR), which may not give a rounded view of value for money, the FCA said.
While price comparison websites have helped the situation, they they do not allow consumers to make comparisons based on the actual terms and conditions they will be offered, as these will depend on someone's individual circumstances, the FCA said.
The FCA is inviting responses to the scope of its market study between now and January 5. The investigation is expected to start early next year and could take around a year to complete.
Mike O'Connor, chief executive of StepChange, said: " Too many people are using credit as a safety net when all too often it is a trap which leads to problem debt.
"Credit card debt is one of the most common debt problems we see. Many people are struggling with multiple debts, high balances and interest rates."
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said four in 10 calls it receives involve credit card arrears.
She said: "Credit card borrowing remains a hugely significant part of the UK debt landscape and we are pleased that the FCA is looking at how this market can work better for consumers."
Richard Koch, head of policy at the UK Cards Association, the trade body for the card payments industry, said: " 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."