Consultation response: FCA Credit Card Market Study Interim Report

Response by the Money Advice Trust Date: January 2016

Contents Page 2

Contents

Page 3

Introduction / About the Money Advice Trust

Page 4

Introductory comment

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Comments on potential remedies

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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.

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Introductory comment We welcome the opportunity to comment on the FCA credit card market study interim report. The FCA has conducted an extremely comprehensive review of the market. It is very helpful for us to be given the chance to see the FCA’s emerging thinking and draft proposals for remedies in this area. We are broadly supportive of the proposals the FCA have made for remedies in relation to the areas of potential consumer detriment addressed in the study. We are particularly keen to see measures put in place to help with unaffordable credit card debts. We welcome the emphasis the FCA has placed on examining whether some consumers are over-borrowing or under-repaying on their balances, and whether firms have incentives to provide unaffordable lending that may result in consumer detriment. We also welcome the recognition of early forbearance and early intervention where people are at risk of falling into debt, and the importance of referral to sources of free, independent debt advice. We would particularly like to see more work done in the area of multiple credit card use, and particularly how multiple cards affect the cycle of debt. We do not see that the potential remedies have addressed these issues in any depth. We appreciate that there is further work being done throughout the FCA which will also affect the credit card sector, in relation to pre-arrears, responsible lending, HCSTC and price comparison websites and so on. So we recognise that these remedies are not the final answer. We look forward to working further with the FCA and trade bodies to develop the thinking in regard to suitable remedies further. We have set out our comments on each proposed remedy below.

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Comments on FCA potential remedies Shopping around and switching Allow consumers to open access to their credit card usage data to other market participants We agree with the FCA that there is potential for third party intermediaries to help with the complexity of the credit card market by helping consumers to identify the most suitable product for them in a transparent way. We can see there is a potential in the Midata project to enhance the consumer experience of shopping around for the best price if the credit card provider or price comparison site could provide a bespoke quotation for that customer that would be based upon their pattern of spending and how they repay their card. However, as the FCA says in the paper, this is under trial in the personal current account sector and there needs to be more research into the outcomes of this trial and whether the tools can be adapted for the credit card sector. It is also important to evaluate whether accessing transaction history data is beneficial to consumers or has the potential to cause harm. Clearer standards for price comparison websites (PCWs) It is of concern that the FCA has concluded that consumers do not always manage to choose the best credit card for their circumstances. This may well be for the reasons set out in the paper such as the difficulties consumers face in effectively comparing the cards available or not taking all the relevant product features into account when making their decision. We welcome any remedy that the FCA can put in place to ensure there are compulsory standards for price comparison websites. Any potential remedy needs to take into account the conclusions of the consultation into HCSTC price comparison websites. We are responding to this consultation. We have argued that there should be one independent price comparison website for HCSTC hosted by an independent body such as the Money Advice Service. We also believe there should be a clear display on sites of a strong health warning about the risks of borrowing which includes clear signposting to sources of free, independent debt advice. This can be translated across to the credit card market. We have also supported proposals to prohibit companies to use a “featured product” filter which could easily confuse consumers, if they even notice that such a filter on results has been deployed. In our view, adverts where the PCW has any commercial relationship with the company should not be allowed either in the search filter, or in banners on the website. We are very concerned by the FCA’s findings that there is a lack of transparency in price comparison websites in relation to how they are funded and whether they compare the whole of the market. It is particularly difficult for consumers if they have to use various comparison sites in order to come up with a suitable product for them. This makes the process complex and time-consuming for consumers.

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It is vital the FCA remedy for this sector, creates a robust set of standards for price comparison websites which covers the issues identified in the annex of the report. We have reproduced these below. “The presentation of headline rate offers or general prices, such as APR, may not aid the comparison process because it does not account for the fact that a consumer may not be eligible for that rate/offer; Ranking criteria may not be sufficiently personalised to allow consumers to find products that best suit their needs or may be based on assumptions that do not reflect their credit card usage behaviour; Sometimes cards from providers with whom the PCW does not have a direct relationship are ‘hidden’ or difficult to find in search results; Some savings claims are unclear or inaccurate; Several firms offer exclusive deals to PCWs so consumers need to “multi-home” (i.e. look at more than one PCW) to ensure they receive the best deals; Meaningful comparisons are more difficult for some types of credit cards, such as in subprime and rewards segment.” Providing timely information to remind consumers to repay their credit card debt or shop around before promotional offers expire We support these proposals in relation to a range of situations where consumers may benefit from a prompt including when people are in debt. We support the proposals for firms to be required to give consumers proactive warnings through a range of media to remind them that their promotional offer is due to expire. These warnings should include both the current interest rate and any new rate that will apply once the introductory period expires. Prompts to make payment appear to have a beneficial effect, and we would of course support further research into how effective such measures are in practice. Promoting and facilitating the use of quotation searches As we have said in our response to the FCA’s proposals on HCSTC it does not seem fair to us that a consumer’s credit rating can be damaged by the very act of searching for credit. We value the advent of quotation searches as a way that a consumer may obtain an indication of whether they are eligible for credit and the price of the credit likely to be offered, without a consequent effect on a credit file. We would value the FCA taking further action in this area and to consider turning the current guidance on quotation searches into a set of rules. There is also merit in considering the development of guidance on when the FCA would expect quotation searches to be offered and what the search would be expected to cover. The one risk we can identify is that where someone really needs debt advice instead of more credit, and is repeatedly turned down, the activity on their credit file can act as an earlywarning sign that they are in trouble. However, unless this is used by lenders and creditors as an early warning sign and opportunity to refer their customer to free debt advice as part of an early intervention strategy, then presumably the consumer will just keep searching until they find sources of ever-more unsuitable credit that are willing to lend to them to stave off the inevitable.

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Affordability and problem debt We welcome the proposed steps that the FCA is considering to help reduce over-borrowing and encourage early payment. We hope that the measures will meet the aim of reducing the amount of interest and charges that consumers pay because of the way they use their credit cards; and encourage earlier intervention by firms to help consumers with potentially problematic debt. We are not convinced that these remedies will go far enough and think there should be further consideration given to increasing the minimum payment threshold. It is very important to provide clear information to borrowers using plain, simple English and simple terms that everyone can understand without any use of mathematical calculations or APR and interest rates that people find hard to follow. This can be provided in a variety of mediums but it important that the message is clear and straightforward and highlights the crucial points. Disclosures to encourage faster repayment: We think it would be very helpful if firms were required to disclose in each monthly statement how long it will take to repay the current balance at the current rate. It would also be of use in battling consumer inertia to display how much would be saved by repaying more than the minimum amount, perhaps in payment increments. It may also be beneficial to show how much you would need to pay each month to clear the debt in a set period. We would recommend a requirement to show more than one time scale as a year could require such large monthly payments that would be unaffordable for many people. This could be a discouraging message to convey and the incentive effect could be lost. There will need to be considerable amounts of research to make sure that these messages are conveyed in a consistent style using prescribed wording. This should use simple and clear terms that everyone can understand and not involve any complicated mathematical terms or the use of APRs. Provide a wider range of pre-set repayment options We agree that firms should offer different pre-set payment options for regular automated payments. This should be helpful in counteracting the “anchoring effect” identified in the paper where people opt for making the minimum payment. There should also be a requirement on lenders to allow everyone the option to set a fixed monthly payment amount that differs from these pre-set repayment options, as long as it is set at an amount that is more than the minimum payment. However, we agree that the required minimum repayment level is low and that there should be consideration given to increasing the required minimum repayment level across the board. If this is to be attempted, this should be done extremely carefully and if it is agreed, then the FCA should consider increasing the rules for minimum payments in small yearly incremental steps. This would help deal with the issues where existing borrowers would suddenly be required to pay back an unaffordable amount. We appreciate that this is a difficult option to consider as it does have the disadvantage of reducing repayment flexibility.

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However, increasing the minimum payments would significantly reduce the time that it will take people to pay back their debts. Perhaps some consideration could be given to whether existing borrowers in financial difficulties could be excluded from such provisions, and their balances repaid using different rules. Alternatively a higher minimum payment could be put in place for new borrowers only. Perhaps this decision could be deferred to take into account evidence of whether the proposed remedies on flexible payments work as intended. Providing timely information to remind consumers to consider how much they are borrowing Again, we support any measures that will increase awareness amongst consumers. If it is found that proactive warnings using a variety of different media approaches are an effective remedy, then it is worth putting these in place. If it is found that warnings at certain trigger points, such as when particular amounts of a credit limit has been used up, could be helpful, we would support this. However, that particular warning is not an idea we have seen in practice so we cannot comment on how effective it is or what behaviour it is trying to promote. Giving consumers more control during the lifetime of the credit card on variations, such as an opt-in for credit limit increases We would usually support proposals to give consumers more control over their finances, and these proposals may be helpful particularly as we have argued before that consumers should have the ability to opt into an increase in their credit limits. It is also important to ensure that consumers can choose a monthly payment date to coincide with the time their regular income arrives in their account. Currently some providers are inflexible about this and this can cause financial difficulties such as overdraft fees and charges escalating as a result. Earlier forbearance We welcome the emphasis on earlier forbearance and early intervention. It is important to use innovative technology to help provide solutions in this area. The FCA concludes: “We find that consumers with high levels of credit utilisation or systematic minimum payment behaviour are profitable, suggesting that firms have little incentive to screen these consumers out or to intervene when they identify such behaviour.” This is a worrying conclusion as there is an implication that lenders are not currently incentivised to put into place structural changes to products that are not suitable for consumers who can end up paying their cards back over many years. There is also less pressure on lenders to take action to identify people who are struggling to pay but who have not yet fallen behind or defaulted, perhaps where they are making systematic minimum payments or have a persistent debt. We welcome the proposals on early forbearance and the use of early-intervention techniques. We agree that firms should identify and help people in debt sooner, before payments are missed and interest and charges start to accrue. We have worked with UkCards before on early intervention projects such CardCosts and developing pre-arrears

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letters to help spot the signs that someone is struggling. We would also highlight the research we carried out with The Personal Finance Research Centre and Barclays into the value of early intervention. 1 This provides some practical ideas as to how to put together an effective early intervention project. A stepped approach to intervention at different stages seems a good way forward. This could range from reminders, through to signposting to debt advice and on to potentially restructuring the repayment arrangements. Could the signposting to free sources of debt advice become required on lenders at key points in the customer journey? This would enable lenders to reach their customers at points where they are most likely to be receptive to messaging. We would urge the FCA to work further with the Money Advice Service in the area of early intervention work. It is likely that a way forward would be the piloting of different approaches to see what works best. We are intrigued to see the detail of proposals for firms to offer lower cost alternative credit as a matter of course to people in problem debt with their cards after a standard period. Such customers might be in a specific group that have paid minimum payments for a substantial period, have a debt that is reducing very slowly and have paid enough interest to pay the original balance back many times over. We have discussed this with industry previously and it is interesting to see what form the alternative credit would take, and whether this would be interest-bearing. Some of the problems with consolidation or “restructured” managed loan products have been a perceived failure to offer these types of loan within the context of a holistic approach to dealing with a debt problem. Consolidating credit owed to one company without taking into account other debts or affordability is not a strategy that is likely to succeed. If someone is in debt and making reduced offers to payment to creditors then we would expect interest and charges to be frozen by FCA compliant lenders. Perhaps this is a “middle way” for someone with one or two accounts only, who want to manage their way out of their borrowing? However, it is difficult to see how the FCA will be in a position to require lenders to offer such managed products. Furthermore, there will be a separate group of customers who may be heading for trouble with their credit, and it is difficult to decide at what stage this group would be offered alternative products, rather than be referred to free, independent holistic debt advice. There is a further issue as to how such managed loan products would affect credit ratings and be flagged by credit reference agencies. Should such a product prevent someone from taking out further credit elsewhere? We would like to see an imaginative approach adopted by lenders to address these ideas.

1

http://www.infohub.moneyadvicetrust.org/content_files/files/understanding_financial_difficulty.pdf

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Further suggestions We have not been able to identify references to the following areas which we would have expected the market study to investigate. There are no remedies that relate to these issues in particular. Multiple cards and card use when in debt 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? We hope to see further analysis on these particular areas to ensure that any remedies fully take into account these scenarios which particularly affect people who are reaching a crisis point with their debts and who are trying to avoid tipping over the edge. We would suggest there has not been sufficient research into these areas. How are credit card companies sharing data in these circumstances? What affordability checks are suitable where someone has or is applying for multiple cards? Is it the role of the regulator to say how many cards are “too many” for people to hold? What is the customer journey in using their multiple cards where they end up in financial difficulties? Is there evidence that people “max-out” multiple cards to pay bills and other debts and how do they do this in practice? Until we can understand the process and techniques used to reach this stage, it is difficult to come to a firm conclusion about what to do. There may be mechanisms using behavioural economics, technology and referrals to sources of debt advice that can be put in place to help people at risk of this behaviour. Sub-prime lending The paper indicates that there is evidence of a systemic higher return to lenders who offer high-risk credit products. This is of concern and we believe that that FCA should look further at this area of the market. The FCA needs to ascertain whether a small amount of firms are taking advantage of a captive section of the consumer market that can only access subprime credit. Although it is helpful that the FCA’s comprehensive research has shown that there are not systematic cross-subsidy incentives across the market as a whole, we would suggest that the sub-prime market is still an issue particularly in relation to both higher profitability for firms and high rates charged to consumers. We note that there is a suggestion that a cap on the total cost of credit cards is not an approach the FCA is “minded to pursue” at this stage. We are pleased to see that the FCA has not ruled out further work “if we find that we cannot develop a package of measures that rebalances the incentives for firms.” We would suggest that it is sensible to leave the door open to revisiting this issue, particularly if further work is carried out in the sub-prime credit card market.

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Forbearance and arrears We understood from the original terms of reference for the market study that there was an intention 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.” However, we do not find much information in the interim report about how firms treat people in arrears in practice. These are the areas we identified in our comments on the terms of reference that do not appear to have been covered in the study. 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? 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? Whilst we are not suggesting that the credit card sector is particularly prone to bad practice in these areas, we would expect to see this area as part of the investigation. In particular, if consumers are constrained by their financial situation to take out further lending, perhaps with a sub-prime rate, then this would have a competition angle rather than a purely supervision issue for an individual firm. Furthermore, if consumers use credit cards to deal with other debts and bills this will also affect early intervention strategies and forbearance.

For more information on our response, please contact: Meg van Rooyen, Policy Manager [email protected] 0121 410 6260

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The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: 020 7489 7796 Fax: 020 7489 7704 Email: [email protected] www.moneyadvicetrust.org

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