Consultation response: FCA Credit card market study terms of reference

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1 Consultation response: FCA Credit card market study terms of Response by the Money Advice Trust Date: December 2014

2 Contents Page 2 Page 3 Page 4 Page 5 Contents Introduction / About the Money Advice Trust Comments on the terms of Suggested areas of focus 2

3 Introduction About the Money Advice Trust The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money wisely. The Trust s main activities are giving advice, supporting advisers and improving the UK s money and debt environment. We help approximately 1 million people per annum through our direct advice services and by supporting advisers through training, tools and information. We give advice to around 200,000 people every year through National Debtline and around 40,000 businesses through Business Debtline. We support advisers by providing training through Wiseradviser, innovation and infrastructure grants. We use the intelligence and insight gained from these activities to improve the UK s money and debt environment by contributing to policy developments and public debate around these issues. Public disclosure Please note that we consent to public disclosure of this response. 3

4 Comments on the terms of From our reading of the credit card market study terms of, the study has a wide and comprehensive remit. We welcome the focus on unaffordable credit card debt as one of the three areas the FCA intends to explore over the course of the market study. Unaffordable credit card debt, in particular whether some consumers are over-borrowing /under-repaying on their balances, and whether firms have incentives to provide unaffordable lending that results in consumer detriment. Paying for goods and services using a credit card can help people deal with unexpected expenditure, pay flexibly and offers extra protection under Section 75 rules when there are problems with goods and services. The free debt advice sector has worked extensively over the years with industry to look at how the credit card sector could help to offer the best possible outcomes for their customers, particularly when people fall into debt. We have been particularly involved with UK Cards and their work on letters to frequent minimum payers, designed to warn people of the costs of making minimum payments and to signpost debt advice. We also helped with the development of CardCosts 1, an online tool to help consumers to better understand the cost of using their credit card. We were particularly pleased to see the changes put in place following the BIS consultation in 2009 and the Consumer Credit Directive. These changes were in relation to changes to unsolicited increases in credit limits, the issuing of credit card cheques, the use of summary boxes, changing the level of minimum repayment amounts and how payments are allocated to the most expensive debt first. We welcome the emphasis in the study on considering the extent to which the existing rules and guidance fully address these issues and whether there are any further work in relation to these areas that need to be remedied. We particularly welcome the stated intention in the terms of to look at how bad debt is treated by firms, both their accounting policy for the provisioning of bad debt and how they treat those who fall into arrears. Money Advice Trust runs National Debtline and Business Debtline. Approximately 44% of callers to National Debtline have credit card debts when they ring for advice. Although this is substantially reduced from the heights of 2008 when 68% of callers to National Debtline had credit card debts, this is still a substantial issue for many of our clients. We also know from Business Debtline, that some of our business clients use their personal credit cards to cover business expenses and debts. Our forthcoming report on business debt will show that we are continuing to see evidence that people are using personal credit to pay for business costs as a result of the lack of access (either real or perceived) to business credit

5 Suggested areas of focus We would suggest that the following areas of focus for the market study in relation to credit cards and debt. Are sufficient lending checks in place that mean people do not borrow amounts they cannot afford to pay? Is there sufficient control over credit card limit increases? Should consumers have to opt in rather than opt out? Are lenders behaving responsibly when recovering credit card debt? An examination of the current practices in relation to the level of default charges to ensure that charges are not a penalty on borrowers and only reflect lenders actual costs. An examination of the suggestion that firms are charging people who pay minimum payments more for their borrowing than is necessary, to cover the cost of new lending at introductory rates. A close look at whether customers in debt are generating a disproportionate amount of revenue for firms. The effects of multiple credit card use on people who are at risk of financial difficulties or who are already in financial difficulties. Is there evidence that people are using credit cards as part of a cycle of debt and using one card to pay another card or other type of loan? Is there evidence that people are keeping up with their household bills by using credit cards to pay rent and mortgage payments and other essentials? To what extent are people paying minimum payments over many years either because they are not aware of the effects of doing so on the amount they will pay back, or because they are unable to pay more? If this is the case, then what alternatives should the industry be offering to help people in this situation? Can lenders do more in developing early intervention strategies for customers at risk of financial difficulties, and dealing with vulnerable customers? Could the signposting to free sources of debt advice become required on lenders at key points in the customer journey? Is there a consistent approach to breathing space, holding action, the freezing of interest and charges and acceptance of common financial statement compliant offers of payment? 5

6 We would suggest that companies do not always take a consistent cross-industry approach to the freezing of interest and charges or only do so for a temporary period and add these back on to accounts once circumstances improve. We would also like to see interest and charges being frozen even where a consumer can cover the minimum payment on one card, but is making pro-rata offers across a range of creditors in a multiple debt situation. Are debt collection practices unduly harsh? Are companies treating customers fairly when dealing with debt, and in particular when debts are passed for collection to debt collection agencies and sold to debt purchase companies? Should accounts be passed on when customers are identified as vulnerable or are in an agreed payment arrangement with interest and charges frozen? When debts are passed on, is the appropriate history of the debt being passed on as required, including offers of payment, correspondence and financial statements? What evidence is there in relation to self-employed use of personal credit cards for business expenditure? Finally, when assessing the market, the impact of any changes on the availability of credit and the potential to financially exclude sectors of the population should be fully considered. We hope the list of areas we have highlighted is of help in progressing the market study. We would stress that our list is not intended to indicate that we believe there are problems in all these areas, just that they should be explored as part of the evidence gathering exercise. We look forward to working with the FCA alongside other consumer bodies to help inform the market study in relation to the experiences of people in debt. For more information on our response, please contact: Meg van Rooyen, Policy Manager meg.vanrooyen@moneyadvicetrust.org

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