Credit card market study: CAP s official response to the FCA s terms of reference - November 2014

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2 Over the last 18 years, Christians Against Poverty (CAP) has supported tens of thousands of households struggling with unmanageable debt. For many of these clients this includes credit card debts, as well as other priority and unsecured debts. As a result, CAP has observed the substantial extent of credit card debt and the impact this has on our clients financial situations. Therefore, CAP welcomes the Financial Conduct Authority (FCA) s credit card market study. CAP offers a face- to- face debt management service to over 12,000 clients a year, with 2,122 clients becoming debt free in Home visits and comprehensive support are provided through local agents in CAP s 270 Debt Centres. Debt advice, on- going support and payment dispersal is then provided from head office until the client is debt free. CAP s Creditor Liaison Unit manages over 55million of unsecured debt at any one time. This model has not only given CAP broad experience of the impacts of debt on clients lives but also the collection procedures of credit card companies. We hope that this experience will add value to the credit card market study. Unmanageable debt has significant detrimental impacts, causing both financial and non- financial distress. Financial difficulty not only restricts standards of living and forces people to sacrifice basic necessities, but also has substantial impacts on mental health, causing considerable stress and contributing to isolation. CAP s most recent survey 1 found that 70% of clients had sacrificed meals, 67% had visited their GP due to the negative effects of debt and 36% had attempted suicide. Furthermore, with 62% of CAP clients waiting over a year before seeking help with their debts, these effects can cause distress for several years. The proposed terms of reference of the study are extensive and will no doubt produce thought- provoking findings. While the scope of the study captures many important issues within the market, CAP is particularly pleased the FCA is to focus on the use of credit cards as a form of revolving credit. In CAP s experience, credit card debt can be one of the most expensive forms of credit, is easy to lose control of, and little support is offered to those with unaffordable credit card debt by the issuer. This document contains further comment on the three main areas of study. CAP would like to take this opportunity to thank the FCA for their commitment to enhance the integrity of the UK s financial system and consumer protection. We look forward to the outcome of the credit card market study and the steps that will be taken to promote consumers interests and protect the most vulnerable consumers. CAP would be happy to engage further with the FCA and would be keen to attend any relevant industry roundtables in particular. Matt Barlow UK Chief Executive 1 Please contact Rachel Gregory (rachelgregory@capuk.org) to request a copy of CAP s 2013 Client Survey. 2

3 The extent to which consumers drive effective competition through shopping around and switching CAP is pleased the FCA plans to review the information provided for comparison purposes. Credit card products have many features and the cost can vary considerably depending on how the consumer manages their account. Not only is it important that consumers can select the most appropriate product for them, it is also important that consumers understand the credit product they choose. Often 0% on balance transfers and purchases for a certain period are used as a headline feature, however there are still other fees that may apply in various circumstances, for instance initial balance transfer fees. In addition, late payment and default fees can cause debts to mount up when a consumer is struggling to pay back credit card debts, but are not prominently displayed for comparison. How firms recover costs across different customer groups and what affect this has on the market Contractual interest on credit card products typically ranges from 15-40% APR. While this is lower than for some other types of products, the open- ended nature of credit cards means the overall cost can be much higher. In view of the recent price- cap introduced by the FCA on high- cost short- term credit, as well as considering if firms generate a disproportionate amount of revenue from highly indebted consumers, CAP would encourage the FCA to similarly consider whether revolvers are charged a disproportionate amount of interest compared to the amount of credit borrowed. Unaffordable credit card debt Unaffordable credit card debt is a common occurrence amongst CAP clients. CAP is pleased that the market study will focus heavily on this area. Over- borrowing and under- repayment are certainly two of the biggest concerns in this field. However, CAP would encourage the FCA to consider the broader treatment and attitude towards those in financial difficulty and how under- repayment is also an issue for those with affordable credit card debt. Under- repayment: Contractual minimum payments encourage consumers to remain trapped in a cycle of debt. As the terms of reference document notes, many consumers choose to make the minimum repayment despite being able to afford to pay more. While progress has been made, ensuring minimum repayments are set at a level that avoids negative amortisation, CAP is pleased that there will be further exploration of this issue. CAP believes consumers fail to understand the implications of consistently making minimum repayments and would encourage the FCA to use this study to consider whether the current market encourages resolution of debts. More information should be provided to consumers about the cost of only making minimum repayments and the length of time it would take to repay the full outstanding balance. It is important that APR is displayed, but this does not clearly communicate the actual cost of a credit card product. Consumers would find it easier to understand the true costs to them, and make informed decision about how much to repay if interest charges were communicated in real terms, explaining the difference across various repayment terms. Furthermore, to encourage consumers to repay debts in a 3

4 reasonable time period, it may be necessary to introduce another repayment amount, such as a suggested repayment. This would help encourage consumers to make higher repayments, while keeping the contractual minimum payment low, which is also in the consumers interest protecting them from defaulting too easily. Note: further comment on under- repayment by those who have unaffordable credit card debt is included under the heading Attitudes to those in financial difficulty. Example 1: Client A has an outstanding balance of 2, on a credit card, which incurs interest at 24.9% APR. The minimum contractual payment on his credit card is around 83, reducing each month as the balance comes down. If client A chose to only make the minimum payment and made no further purchases, it would take 28 years and 2 months to clear the balance. In this scenario he would repay a total of 8,077. This would include 5,188 in interest, which is 179% of his original balance. Example 2: Client G has an outstanding balance of 1, on a credit card, which incurs interest at 34.99% APR. The minimum contractual payment on her credit card is around 67, reducing each month as the balance comes down. If the client G chose to only make the minimum payment and made no further purchases, it would take 25 years and 9 months to clear the balance. In this scenario he would repay a total of 6,403. This would include 4, 517 in interest, which is 242% of his original balance. Over- borrowing: Whilst the terms of reference document does recognise that consumer circumstances may change over the lifetime of a credit card product, CAP believes this contributes to more unaffordable debt than the FCA acknowledges. Fig. 1 shows the primary reasons for indebtedness of CAP clients. Although it is true that the top two primary reasons are low 4

5 income and problems with budgeting, for a significant proportion it is an unexpected life event. 45% of CAP clients reported the primary reason for their debt as relationship breakdown, unemployment or long- term illness. Therefore, to fully understand the drivers that lead a consumer to over- borrow, the extent to which circumstances do change and how issuers react to this needs to be studied. With this in mind, CAP agrees that it is right for the study to investigate other drivers of over- borrowing. Particular areas that should be reviewed are whether accessing credit card products is too easy and whether credit limits are set at an appropriate level. The ease of taking out credit on a credit card means, as mentioned in the terms of reference document, present bias is also a driver of over- borrowing. CAP would encourage the FCA to consider the wider motivations behind this and not just focus on consumer s misjudgments. As a source of rolling credit that does not need to be applied for before taking out a new issue of credit, credit cards are frequently used when consumers are in financial need and in some cases by those with volatile mental health conditions, such as bipolar or psychosis. In addition, when making a new purchase, consumers do not have to consider how they will repay this as they do with other credit products, i.e. with a repayment schedule. Therefore, the credit card industry could do more to help consumers understand the implications of taking out credit and to proactively advise consumers to access financial support before becoming further indebted. It would also be interesting to discern to what extent credit limit calculations are based on a consumer s income. In CAP s experience credit limits are often set at an inappropriately high level compared to a consumer s ability to repay in a reasonable timeframe. To enable healthier calculations, issuers would need to consider consumers expenditure as well as income, as in the application process for other credit products. Similarly, when studying the availability of multiple cards, the FCA should consider whether the amount of credit available to the consumer elsewhere, i.e. on another credit card, would mean they could become over- indebted when combined with the limit they offer. In addition, when studying the degree of consumer overconfidence in their ability to control future spending and borrowing, the FCA should consider that credit card issuers also display this characteristic. In 5

6 particular, when automatically increasing credit limits based on repayment history, not means to repay. Attitude to those in financial difficulty: Typically credit card issuers understanding of over indebtedness seems to be binary, i.e. the consumer is either in financial difficulty or not depending on whether they can afford the minimum contractual payment. However, financial difficulty is much more encompassing and, in the vast majority of cases, involves other debts and financial pressures. CAP helps consumers who are repaying debts and are in financial difficulty but their credit card debts are incurring full interest as a result of the issuer failing to see the bigger picture of a consumer s full financial circumstances. When studying how credit card issuers treat consumers with unaffordable debt situations, CAP would appeal to the FCA to focus on how credit card issuers treat not just those who are deemed to have an unaffordable credit card debt by the current industry standards, but all those in financial difficulty. To help direct the study s focus, below is a list of issues CAP experiences when managing credit card debts on clients behalf: When corresponding with credit card issuers, CAP finds that debt management plans are only available to those who cannot afford the contractual minimum payment. This means some consumers who are in financial difficulty are not eligible for a debt repayment plan and reduced interest rates. This is especially problematic for consumers who can only pay marginally more than the minimum repayment, and consequently can only reduce the outstanding balance very gradually. When a consumer is paying below the contractual minimum, interest is often reduced, but not stopped. The rate is frequently calculated to be just slightly less than the payment amount in the debt repayment plan. This significantly extends the repayment term, and in some cases the result is that the total interest paid is disproportionate to the original sum borrowed. Consumers who are placed on debt management plans with reduced interest often find full interest is reinstated once their repayments reach the contractual minimum amount. In most circumstances the consumer s circumstances have not changed, but this is a result of a reduced balance from which the minimum repayment is calculated. This practice effectively moves the goal posts and extends the repayment terms of consumers who have often spent a considerable period trying to repay their debts already. Example 3: Client T approached CAP with an outstanding balance of 1, on a credit card. He could only afford to make a repayment of 15 a month, and the credit card issuer stopped charging interest in light of this. Five months later the repayment offer increased to 60 as the client had cleared some priority debts. This new repayment amount was above the minimum contractual repayment. As a result, full contractual interest of 18.9% APR began to be applied again, despite the client having 10,361 total outstanding debt. At this rate of interest and repayments, it will take the client approximately 3 years to repay the balance. In this case, reapplying full interest extended the repayment term by approximately 7 months and the client will pay over 500 in interest. 6

7 CAP would like to see credit card issuers take more responsibility for consumers in financial difficulty, and look out for trigger points that suggest a consumer may be struggling. For instance, only paying the minimum payment for six months or the outstanding balance not reducing. At this point they could contact the consumer to offer them support to pay off the outstanding balance, for example by offering a 12 month plan that the consumer can afford and would clear the balance, or advising them of debt advice services. If a consumer accepts this support, or when a debt management company (DMC) contacts the issuer, the outstanding balance should be moved onto a plan where the contractual minimum payment is irrelevant and interest is reduced to a level that allows the consumer to repay their debt in a reasonable time period. The consumer should remain on this plan until the outstanding balance is cleared. Third party collections and purchase: CAP corresponds with many debt collection agencies (DCA) and purchasers of credit card debts on clients behalves. Passing a debt to a DCA or selling it can create confusion for the consumer, however in CAP s experience there does tend to be a good standard of communication when this happens. There is a lot of good collections practice in this industry; such as stopping interest and placing accounts on debt repayment plans for the duration of repayment. CAP would encourage the FCA to study these and promote similar practices amongst credit card issuers as part of this study. 7

8 Requests for further information This response has been compiled and written by Rachel Gregory, External Relations Analyst for Christians Against Poverty, with contributions from: Mark Anchen, Creditor Liaison Manager Chabu Chipampe, Creditor Liaison Manager Robin Hamon, Creditor Relations Analyst Daniel Kelly, Creditor Relations Analyst David Maxfield, Head of Policy and Compliance Dawn Stobart, Director of Debt Management and Creditor Relations Helen Webb, External Relations Manager Paul Walmsley, Creditor Liaison Unit Manager Please note, CAP would be happy to engage further with the FCA and would be keen to attend any relevant industry roundtables in particular. For queries and to request further information please contact: Rachel Gregory External Relations Analyst Disclaimer: Although care is taken to ensure that this information is accurate and correct at the time of writing, Christians Against Poverty cannot accept any responsibility for mistakes or omissions. Christians Against Poverty excludes to the extent lawfully permitted all liability for loss or damage arising from reliance upon this information. Copyright 2014 Christians Against Poverty. All rights reserved. This material may not be reproduced for any purpose without first obtaining written permission from Christians Against Poverty. capdebthelp.org find us on Registered Office: Jubilee Mill, North Street, Bradford, BD1 4EW Registered Charity No Charity Registered in Scotland No. SCO38776 Company Limited by Guarantee, Registered in England and Wales No CAP is authorised and regulated by the Financial Conduct Authority. Registration number Lifting people out of debt and poverty 8