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City watchdog ramps up pressure on banks with credit card clampdown

The City watchdog has ramped up the pressure on banks and credit card firms with a crackdown on card debts that could result in interest being scrapped for struggling borrowers.

Business Matters
By Business Matters
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The Financial Conduct Authority (FCA) has unveiled a host of proposals that would force firms to help consumers labouring under long-term credit card debts, including cancelling interest or other charges for customers who are unable to clear their balances through a repayment plan.

It comes amid mounting concern about the rise of so-called “persistent” card debts, with the regulator estimating that there are approximately 3.3m people who pay more in interest and charges than they repay of their borrowing over 18 months, the Telegraph reports.

“Because these customers remain profitable, firms have few incentives to intervene,” said Andrew Bailey, the chief executive of the FCA. “We want to change this situation so that firms and customers will deal with outstanding debt more quickly, and avoid persistent debt in the first place.”

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Analysts said the watchdog’s plans threatened banks including Barclays, the UK’s leading credit card business with a 26pc market share through its Barclaycard division, as well as Lloyds Banking Group, which is seeking to boost its share to 25pc by acquiring MBNA from Bank of America for £1.9bn. Lloyds struck the deal in December but is waiting for the competition regulator’s approval.

Smaller firm Provident Financial, the doorstep lender that has pushed into credit cards through its Vanquis division, could also be vulnerable to the FCA’s measures because it targets sub-prime borrowers.

“Obviously any caps on interest rate charges would also cap the profits that the banks are making off their credit card businesses,” said Cenkos analyst Sandy Chen.

Under the regulator’s plans, which have now been put out for consultation, firms will be forced to prompt customers to make faster repayments if they have been been in “persistent debt” for 18 months. If customers remain debt-burdened after a further 18 months, companies must give them extra help, such as suggesting repayment plans.

In the worst cases, firms should aid consumers who cannot make faster repayments by reducing, waiving, or cancelling interest or charges, the FCA has proposed.

The watchdog also wants companies to suspend cards for the most troubled borrowers or for customers that are able to make faster repayment but refuse, or who do not respond when a firm offers them help.

Banks have been hit by  record low interest rates and so have focused on credit cards to help boost profits in recent years. In the battle to lure customers, some lenders offer teaser rates of zero which jump sharply once the introductory period expires, fueling broader concerns about the recent double-digit increase in consumer credit.

Peter Richardson, an analyst at Berenberg, said the FCA clampdown “adds to this growing disquiet that the regulators seem to be having at the moment around some of the growth in consumer lending”. Last week, the Bank of England said it would review firms’ consumer credit lending practices following a worrying leap in household debts.

The UK Cards Association (UKCA), which counts all the big banks and card providers as members, said it welcomed the FCA’s proposals and would “explore” them “in more detail”.

Richard Koch, head of policy at UKCA, said: “We are not complacent and the industry remains committed to helping the minority of cardholders who do not use a credit card in a way which is in their best interest.”

The FCA noted that currently a credit card user with £3,000 in debts and an annual percentage rate of charge (APR) of 19pc would take nearly 20 years to pay-off their borrowings, if they repay as much in interest and charges as in principal.

Mike O’Connor, the head of StepChange Debt Charity, said that while the regulator’s plan to tackle the problem of debt burden was welcome, the measures “don’t go far enough”.

He said: “We are concerned that these proposals will not fix the central issue that credit cards, which are supposed to be a short-term form of borrowing, often become long-term and expensive debt.”

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