Credit cards - a balance transfer in the FCA's view of the market?

Posted: 15th June 2016

As part of the FCA’s Credit Card interim market study, the regulator noted that there are about 30 million card holders in the UK with an estimated £61 billion of outstanding balances. This represents one of the largest areas of unsecured lending in the UK.

Given this level of debt, and with credit openly available, it is important that firms are designing products in a way that helps consumers manage their use of credit.

As well as this, the changes made to the short-term, high-cost lending sector mean it remains likely that the credit card market will see such consumers turn to cards as a source of finance.

Recent front page press related to credit cards has again thrust the market into the spotlight. The FCA business plan (2016/2017) also shows a change in tone from the interim report and states that the FCA “are currently considering a number of interventions” in the market. These are likely to be brought more into focus with the imminent release of the Credit Card Market Study.

Our dialogue with the industry suggests that, with the extent of interventions as yet unknown, firms feel some trepidation over the work they should be committing to. This is understandable, however in examining the key consumer risks in the sector more closely, it’s possible for firms to pre-empt some of the regulatory change coming in this area.

The Risks in this Sector    

Designing credit card products

Given the cap on interchange fees, plus other commercial pressures, your firm’s approach to product design and balancing any commercial pressures against the standard of customer outcomes will be a key factor in mitigating risk. Some points for firms to assure themselves on include:

• Ensuring that products being designed do not unintentionally exploit borrowers’ behaviours, biases and limited knowledge
• Whether they take a pro-active stance where consumers do not have a repayment plan in place (for example when the balance transfer period ends). Engaging in early discussions with consumers in this situation will help you to circumvent poor outcomes
• That charging structures and fees are appropriate for your target market. Can your firm articulate their thinking on this?
• Whether customers will lose any promotional 0% deals ahead of expiry, and what the key reasons are for this. Do you take individual circumstances into account or are you rigid in the application of your T&Cs? This could be the key to providing good outcomes for your vulnerable customers

Credit Card Sales

As well as designing products responsibly, firms should seek to have a clear, consistent and sustainable strategy towards credit card sales.

As a firm, are you overly reliant on ‘revolver’ consumers (who do not repay their balance in full every month) and/or consumers who may be perceived as higher risk? How your firm’s sales strategy ties into its wider risk appetite and what management information the board is receiving in this regard can serve to make the risk inherent in your sales strategies clear within the business.

Ensuring you are able to articulate which channels you have used to distribute products and why will assist your firm if it experiences regulatory scrutiny. Do you perform outcomes testing to assess appropriateness of products, processes and distribution channels? If your target market is established and clear within the business, you can select the distribution channels that will best engage those target consumers.

Finally, is your approach to marketing balanced? Communications will of course need to be “clear, fair and not misleading” as a minimum. How can you gain assurance that card agreements have been read and understood by the consumer? Importantly, evidencing your considerations in this area is paramount to satisfying any regulatory attention.

Credit card servicing

It is estimated that over 1 million consumers may have made the minimum repayment for at least twelve consecutive months on their credit cards. One of the striking statistics from the interim report is that “8.9% of credit cards active in January 2015 (5.1 million accounts) will – on current repayment patterns and assuming no further borrowing – take more than 10 years to pay off their balance”. What approach does your firm take to credit card servicing?

• Continuously testing outcomes and offering support for consumers in genuine difficulty can improve advocacy and prove your customer-centric approach to credit card servicing
• Being able to articulate the reasons behind your segmentation of your customer base (and how you engage and make recommendations for those segments) can help evidence responsible lending
• How does your firm decide whether to modify a consumer’s credit limit? The reason needs to be justifiable in order to satisfy the regulator. Has the customer been engaged, or was the extension of their limit simply applied? The latter can present a real regulatory risk
• Are your firm’s charging structures fair? The wider industry has had a spotlight shone on it, therefore being able to articulate your firm’s penalty charging structures and the basis for these will help satisfy the regulator in case of scrutiny
• Are your firm’s charges broken down for consumers in a transparent manner? Outcomes testing should take into account the transparency of products and processes as a possible contributor to detriment

Where does this leave firms?

The FCA’s final report is due imminently, and firms who are able to demonstrate that they are starting to address some of the potential concerns listed above will be in a good position following full publication.

Customer outcomes testing and ‘mock’ s166 reviews can ensure that you are not only seeking what’s best for customers in regards to their outcomes, but are also thinking about regulatory obligations and articulating your approach to the regulator. Thinking about some of the regulatory issues above while you perform this work will help you focus your activity, allowing you to perform it in a commercially efficient way.

Consider whether your firm can utilise this opportunity to assess current practices and benchmark itself ahead of the FCA’s Credit Card Market Study, as it will be those who have not familiarised themselves with this most recent FCA view of the market that may find themselves unable to rebuff any scrutiny, and, by association, fail to deliver good outcomes for areas of their customer base.

Huntswood are holding a CRO forum on Credit Cards, and if you would like to be a part of this, please contact Sean Kulan, Client Partner for Consumer Credit.