The Financial Conduct Authority (FCA) recently announced it was undertaking a credit card market study. Why so?
The first UK credit card, Barclaycard, was issued in 1966, with Access following in 1972. They remained the two main providers until the mid-1980s when building societies were permitted to compete with retail banks and, among other things, issue credit cards. In recent years, a range of new providers (such as Capital One, Egg, Smile and MBNA) has entered the market and the use of credit cards has boomed in the UK:
- There are now over 200 different cards available from over 30 issuers
- 30 million consumers hold one or more (usually more) cards
- The UK Cards Association estimates that more than 70% of EU credit cards are held by UK consumers
- The end of 2013 saw £57 billion still outstanding on UK credit cards, about 60% of which was incurring interest.
In April 2014, the FCA assumed responsibility for regulation of consumer credit. The credit card market is now one of the largest areas of unsecured lending under its remit. Its initial study of the market showed that credit cards work well for many people, particularly those (called ‘transactors’ by the FCA) who use cards primarily as a payment mechanism and pay off balances in full at the end of each month (thus avoiding interest charges).
A major attraction for transactors is the well-known ‘section 75 protection’, referring to the relevant provision of the Consumer Credit Act. This makes a credit card issuer jointly and severally liable for any breach of contract or misrepresentation by the retailer or trader where the transaction is between £100 and £30,000. In practice, this allows customers to claim money back from their credit card company where, for example, a business goes under before it is able to deliver paid-for goods or services.
In contrast to transactors, there are what the FCA calls ‘revolvers’ – people who revolve their outstanding balance from one period to the next, often paying less than the full repayment amount (and, as a result, being charged interest). The use of credit cards as a form of revolving credit is where most of the FCA’s initial concerns lie. The market study will, therefore, focus on three main areas:
- The extent to which consumers drive effective competition through shopping around and switching
- How firms recover their costs across different customer groups and what impact this has on the market
- 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.
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