The UK Card Association has submitted proposals to the government for the forthcoming regulation of the card industry. These proposals aim to protect competition in the market and ensure that issuers can lend reasonably. While the proposals should lead to more transparency in the market, the introduction of fees and ever higher APRs becomes inevitable.
The beginning of 2010 has heralded huge changes in the dynamics of the UK credit card industry. Firstly, in last year's white paper, the government for the first time clarified its intention to tackle the way in which card repayment policies lead to what are seen as excessively high interest rates. In response, the UK Card Association (UKCA) undertook extensive independent research into the issue, the results of which were submitted in January. Secondly, the economic downturn has led to consumers using credit cards less, with credit card debt continuing to decrease.
Among the UKCA's proposals is a change in the allocation of payment practices. Specifically, all payments above the minimum payment would be allocated to the most expensive debt first, while the minimum payment would be allocated at the issuer's discretion. According to Datamonitor's Financial Services Consumer Insight survey conducted in June 2009, 33.7% of cards were paid above the minimum threshold but below the full amount, which means a significant number of consumers will benefit from this (in comparison, 49.3% of cards were paid in full).
Another proposal looks to ban unsolicited credit limit increases for those customers who are facing financial difficulties. Any individual offered a credit limit increase will be offered a new 30-day notice period and simple means of 'opting-out'. According to the UKCA, 8% of customers were offered a credit limit increase in 2009. Enhanced transparency will encourage consumers to be reasonable when it comes to borrowing and take more control over their finances, especially in the downturn.
One of the most interesting proposals concerns minimum payments, whereby card companies will contact any customer who repeatedly only makes the minimum repayment on their card to make clear that this is the most expensive way of paying off a debt. Datamonitor's research revealed that in June 2009 14.1% of consumers paid cards with the minimum payment only, compared to an estimated 3.1% who paid the minimum for 12 consecutive months (as reported by UKCA). Certainly, these consumers are potentially more profitable but pose risk to issuers.
After years of getting access to cheap credit and being chased by players, consumers no longer fit issuers' risk profiles. As a result, many issuers took appropriate re-pricing action in 2009. In fact, according to UKCA, between January and October 2009 10.6 million accounts were re-priced, around 40% of which were actually re-priced downwards. To this end, the industry pledged to produce a consumer leaflet to explain the reason behind the 'risk-based re-pricing' practice.
Reasonable lending practices are an important part of a correctly functioning market. In the wake of the downturn, the industry has come to realize it is equally important that customers have the right amount of available credit and pay the correct price on their borrowings. While these changes if implemented will tackle the current issues of lack of transparency and awareness among consumers, the new regulations will likely lead to the introduction of annual fees, higher interest rates, or both, as issuers will seek to recoup lost revenue. That said, greater transparency should lead to greater consumer confidence and thus increased spending (provided the economy will support consumer spending and borrowing). Ultimately, however, more can be done to tackle consumer borrowing behavior where the risk of defaulting is high.