Consumer credit regulation in action - competition review into credit cards

Posted: 5th June 2014

The transition to FCA regulation has passed in a flash; firms are now preparing for the next step, authorisation. Whilst firms continue to adjust to life under a new regulator, the FCA is flexing its muscle through the announcement of a thematic review into payday lenders’ debt collection practices and most recently, a competition review into credit cards. Whilst this month we focus on the competition review, the purpose for both is aligned to the same aim, how consumers struggling with debt are treated.

What and why?

The review, or ‘market study’ as the FCA is calling it, will explore whether competition in the credit card market is working effectively for consumers and in particular, how the industry works with those in difficult financial situations. The FCA has confirmed that it will be engaging with the industry and that there are no pre-determined terms of reference or agenda at play. The announcement by Martin Wheatley at the Credit Today Summit in London on 3 April 2014 was not as a result of any enforcement action against firms but rather information passed on to the regulator from charities and organisation such as StepChange, Citizens Advice, Debt Helpline etc. expressing concerns over consumers in vulnerable circumstances; as well as through research the regulator conducted itself into how low income consumers are interacting with these firms.

What do firms need to do to prepare?

Whatever the outcome of the review, it is important for firms to take a close look at how they are considering their customers’ best interests and indeed treating them fairly. Firms’ focus should be on the following areas;

• Business models: many credit card firms run on a model that relies on customers paying the minimum payment each month which doesn’t ‘call to action’ the idea that customers should be paying as much as they can afford. Though many firms may state that this has been their business model for years, the regulator will be looking at how they are proactively examining their methods for reaching out to customers to support them in emerging from debt.
• Customer behaviours: what work are firms doing to continually assess customers’ financial situation? This means not just looking at their financial affairs as they take their credit cards out, but of continuing to review customers’ spending patterns and how effectively they are able to make payments. Also, how comprehensive are affordability assessments? Are they appropriately detailed? And do they capture the information needed to enable a detailed oversight of a customers’ situation?
• Remedies: for customers struggling with credit card debt, suggesting or even insisting that their credit limit be reduced or that they make the minimum payment doesn’t appear to address the real issues regarding debt. Martin Wheatley stated at the summit – “There are some obvious questions and challenges here for regulators and industry: why are card issuers providing the means, in some cases, for the most indebted consumers to escalate their way into further debt?”

As customers face financial difficulty and are unable to make the required payments, firms should start asking questions of customers’ financial situations and what they can do to help, rather than immediately clamping down on them through administrative fees and debt collectors. Have they lost a job, are they ill? Showing forbearance in these situations, considering individual circumstances and suggesting actions such as a revised payment schedule to accommodate their current financial situation demonstrates a customer focused approach within firms.

The FCA will think about the customer!

Credit cards provide a welcome service, they empower consumers to purchase goods at short notice, they allow a spread of payments over a period of time, facilitate future planning; the list goes on. This business opportunity should be balanced with a responsibility to provide an appropriate service that ensures compliance with the FCA statutory objective of securing an appropriate level of consumer protection. Please do remember the customer, the FCA will!