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Detailed proposals for the FCA regime for consumer credit
(CP13/10)
Response on behalf of The UK Cards Association
December 2013
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Contact Details
Name:
Organisation:
Address:
Telephone:
Email:
Jacqui Tribe
The UK Cards Association Limited
2 Thomas More Square, London, E1W 1YN
0203 217 8348
[email protected]
1.
Introduction
The UK Cards Association is the leading trade association for the cards industry in the
UK. The Association is the industry body of financial institutions who act as card
issuers and/or acquirers in the UK card payments market. It is responsible for
formulating and implementing policy on non-competitive aspects of card payments.
Members of The UK Cards Association account for the vast majority of debit and credit
cards issued in the UK, issuing in excess of 56 million credit cards and 88 million debit
cards, and cover the whole of the payment card acquiring market.
The Association promotes co-operation between industry participants in order to
progress non-competitive matters of mutual interest and seeks to inform and engage
with stakeholders to advance the industry for the ultimate benefit of its members’
consumer and retail customers. As an Association we are committed to delivering a
card industry that is focused on improved outcomes for the customer.
We welcome the opportunity to respond to the consultation: Detailed proposals for the
FCA regime for consumer credit and would welcome further dialogue with the FCA to
explore the points that we have raised. For completeness, our response should be
read in conjunction with individual submissions of our members and other trade
associations in the credit sector.
We have structured our response in four parts: first, an executive summary of our key
points, then our general observations about the transfer and implementation of the
consumer credit regime to the FCA, then the consultation document (CP13/10) itself
and the questions it poses; and finally we consider the draft sourcebook (CONC) and
our members’ observations.
2.
Executive Summary
Although there are many a number of important points which we highlight within our
paper, the following are those which we feel create the most risk of causing significant
problems to lenders if not addressed by the FCA. The scale of the changes being
made has inevitably created a very significant challenge for all providers in the credit
market but we feel that unless these points are addressed, the situation could have
such a dramatic impact on providers that it would be impossible for them to avoid
creating a very poor experience for customers in their attempts to comply with the rules.
The FCA’s focus should be on doing all it can to help the industry make a smooth
transition to the new regime which minimises the impact on customers and we do not
feel the current approach will achieve that objective.
1.
The FCA’s position on transition is wholly inadequate. All lenders will have to
undertake a detailed gap assessment against the new rules which may reveal
that changes need to be made. Given the differences in content and nature of
the rules compared to the previous regime, it is unrealistic to think that no or
minimal changes will be required.
Six months is not long enough to allow large organisations to make changes to
systems, policies, processes and documentation. The FCA should allow at least
a 12 month period for firms to make the necessary changes, in recognition of
the difficulties presented by finalising rules in March which come into effect on 1
April, which is not an optimal strategy.
2.
The definition of high-cost, short-term credit (and the accompanying
requirements) is too broad and could unintentionally capture credit products
which are not payday loans. We don’t believe this is the FCA’s intention. This
becomes even more important given the recently announced proposals to cap
interest and charges for payday lenders – there is a significant risk of
unintended consequences if those requirements are applied to other products.
3.
The draft CONC section on creditworthiness and affordability is not clear as to
whether it creates a new standard of compliance for lenders, and whether
lenders will mandatorily have to conduct and verify income and expenditure
checks for customers as part of their application processes for all credit, no
matter the credit limit/loan amount. If it does, this will have a significant impact
on lenders’ current systems, processes and policies and it is highly unlikely that
any such changes could be achieved within six months.
4.
In terms of the approach to regulation post 1 April, we would ask the FCA not to
repeat the approach taken by the FSA in relation to the PSR Approach
Document whereby changes were made regularly and retrospectively applied.
This puts payment service providers in a very difficult position without obvious
evidence-based corresponding benefit to customers.
5.
The industry has a number of concerns about the clarity and intention of the
guidance regarding the use of quotation searches and the practicality of
implementation within the prescribed timeframes. We would therefore welcome
the opportunity to work with the FCA and other trade bodies to consider how
best to achieve a practical and proportionate approach to meet the outcomes
envisaged by the FCA within a practical timeframe.
3.
General Observations
It would be helpful for industry to understand the mapping that the FCA has undertaken
to understand any gaps or areas of enhancement within the CONC and, more
generally, a consolidated position of what current requirements are staying and what
falls away. Perhaps the FCA could share their analysis with industry to assist in
members own review of the changes required. It has been impossible for individual
firms to undertake a very detailed comparative analysis in the time available.
3.1
Implementation Timelines and Transition
Lack of reasonable grace period
We note that firms holding OFT consumer credit licences will be able to continue
carrying on regulated consumer credit activities (that they are licensed for) from 1 April
2014 until April 2016, subject to them notifying the FCA within the required time period
that they require ‘interim permission’. However, we understand that the ‘grace period’,
during which firms will effectively be able to continue operating under the existing
regime requirements (a combination of CCA requirements and OFT guidance)
demonstrating adherence to these requirements/standards, is limited to just 6 months.
If the Policy Statement in response to the consultation paper and final rules for the new
regime under the FCA are not available until February/March 2014, and there are
significant amends, this will provide very little time prior to implementation for industry to
undertake the necessary development, systems changes, collateral amendments,
training, etc. to ensure a smooth and effective transition to the new regime.
In a number of areas, for example, affordability, requirements around adequate
explanations, income verification, the provisions are such that what is required of
lenders within the current timescales is at the boundaries of what can feasibly be
achieved. Six months is barely adequate to deliver systems changes, collateral and
staff training.
By way of further evidence, for many of our members, documentation is produced out
of bespoke systems (many of which have, by necessity, been bolted on) and which
therefore operate outside of members’ core systems. Scoping discretionary updates
and collateral changes into hard-coded systems needs to be scheduled in alongside
other key changes.
We therefore request that lenders be given a more reasonable 12 months grace period.
New regime and approach of carrying across OFT Guidance into CONC will require
lenders to undertake detailed gap assessments
The FCA is of the view that few substantive changes will have to be made by firms
because the conduct provisions in CONC are simply based on existing legal
requirements in the CCA and OFT guidance – which firms should already be complying
with. However, we do not agree with the FCA’s assumption that there are few
substantive changes that lenders will have to make few changes.
In addition, where guidance is being carried across as a rule, this significantly changes
the general regulatory landscape. It means that, in practice, many lenders will still need
to review their existing policies, processes and documentation to identify any gaps,
which may in turn require major systems changes, collateral updates and additional
staff training.
For example, lenders may have designed specific processes and systems around
guidance which is not being carried across to CONC at all, and therefore will need to
consider how to demonstrate compliance with the new rules and guidance which have
been carried across into CONC.
The overall approach of carrying across some guidance into rules, retaining some
guidance and including it in CONC as “guidance”, removing existing guidance
altogether, and placing this in a handbook that will sit alongside the remaining parts of
the Consumer Credit Act is very complicated and will take a significant amount of time
for lenders to review and embed. If lenders do not undertake detailed assessments,
there is a risk that there will be unnecessary and disproportionate compliance costs for
business, which is also likely to translate into complexity for consumers – because they
will not be clear about what their rights are, nor their lenders’ obligations to them.
We make additional comments about carrying across guidance into rules in paragraph
2.3 below.
Status disclosure for Authorised Payment Institutions
We would also request clarification on how the status disclosure rules will apply to
authorised payment institutions (PIs) who also become authorised under FSMA for
consumer credit activities. The PSRs and related FSA/FCA Approach Document
relating to the payment services regime establish some specific and independent
requirements regarding status disclosures for some PIs, pursuant to which those PIs
are expected to disclose in their customer agreements and otherwise the following
statement:
“[Name] is authorised by the Financial Conduct Authority under the Payment Service
Regulations 2009 [register reference] for the provision of payment services.”
In respect of consumer credit activities that also constitute, or directly relate to, the
provision of payment services (e.g. in respect of credit cards), it would appear that
some PIs may be expected to use both disclosures. The consultation does not appear
to address this point. It would be disproportionate and confusing to require firms to use
both disclosures.
Our members would also welcome a clarification that the disclosure related to the
consumer credit authorisation (whether interim or full) does not apply to a consumer
credit activity undertaken outside the UK. For example, some UK PIs may conduct
consumer credit activity through branches in other EEA countries. Only the PSR status
disclosure should be relevant in this scenario, in addition to any relevant locally
required details.
For PIs we would also welcome confirmation that the reference number for firms will not
be changed when authorisation for consumer credit activities is obtained.
It is also unclear what transitional arrangements will apply where, when the final rules
are published in February/March, a new element or requirement is introduced or there
is a subtle change that has a significant effect on lenders. Furthermore, a more
fundamental question is whether there will be transitional relief where there is no
previous relevant requirement under the existing regime. We believe it would be
unreasonable for the FCA to expect lenders to be complaint from 1 April 2014 where
new requirements are introduced in the final rulebook and we would hope that a
pragmatic approach would be adopted. In this respect it would be helpful to understand
what the FCA believes are the requirements where a ‘big bang’ approach to
implementation (i.e. delivery on 1 April 2014 without any grace or transition period) is
the expectation as this is not entirely clear. We believe all parties would benefit from
clarity and the avoidance of ambiguity.
3.2
Definition of high-cost short-term credit
There is some concern that the way in which high-cost short-term credit is defined
(within section 6 of the consultation document). This could unintentionally capture other
credit products, which are arguably not within the contemplation of the FCA and
consumer groups because they are not products offered by pay day lenders.
We would also express concern over the robustness of the 100% APR threshold; in the
case of running account credit it isn’t readily apparent at what point in time the APR
calculation is made; the APR is set at the point of making the agreement and takes no
account of changes that may be made during the lifetime of that agreement.
It may be appropriate for the FCA to consider additional wording along the lines of ‘any
multiple agreement (under section 18 of the CCA) of which at least one part is a
borrower-lender-supplier agreement for running account credit’ (which would then avoid
any issue of cards being captured). It is the ‘borrower-lender-supplier’ agreement that
needs to be clarified as being excluded from the definition of high-cost short-term credit.
An innovative approach to pricing can be difficult to accommodate within the existing
APR calculation. We do not believe it is the FCA’s intent to see innovation stifled by the
definition of short-term high-cost credit.
Therefore, for the avoidance of doubt, we would welcome the FCA’s clarification that
references to ‘high cost, short-term’ credit are not intended to capture products in the
traditional card market as we do not believe this to be the FCA’s objective.
3.3
Formalisation of current guidance
The FCA has stated that it has carried across guidance into a rule where this is
“appropriate and necessary”. This represents a significant shift in the regulatory
landscape because of how guidance has been interpreted differently by lenders. The
degree to which specific guidance has been operationalised into lenders’ businesses
will need to be reviewed and reassessed. This does not appear to be a proportionate
approach as it is not clear in each case why there has been an elevation or promotion
of the guidance to a rule.
We would therefore welcome the FCA’s further consideration of the ‘appropriateness
and necessity’ of elevating guidance to rules within the sourcebook.
The FCA’s stated approach in paragraph 7.45 of CP13/7 is that guidance will be turned
into rules where the current drafting reflects the OFT’s intention that firms must follow
the guidance in all cases, i.e., where there is no discretion.
This approach does not take into account the fact that the OFT’s position, and
therefore, its interpretation of legal requirements, in relation to some aspects of the
Consumer Credit regime, has not always been aligned with that of firms (nor
necessarily those of the Courts).
For example, the OFT’s interpretation in its Advertising Guidance in relation to
incentives is very wide, to the point that almost anything advertised in connection with a
credit product could be regarded as an incentive, which in turn, would always trigger the
Representative APR. This is not the intention of the legislation. Firms in the industry
have therefore historically taken differing risk-based approaches to incentives because
the OFT Guidance on this issue has not been meaningful. The FCA approach, which
replicates the OFT, is therefore likely to have the same effect.
Secondly, the OFT have taken the view that banner, pop up or homepage credit
advertising online which makes use of “click throughs” because insufficient space is
available for advertisers to include all of the information they would ordinarily be able to
do offline, is not compliant with the CCA because the information is not being shown
together as a whole (see OFT Guidance on Credit Advertising, paragraph 4.9). This
view does not take into account the realities or restrictions of online advertising. It is
possible to ensure all relevant information is provided to consumers before they apply
for credit in a way that is not hidden or unlikely to be read, and there is no consumer
detriment if “click throughs” are used even if the information is not shown “together as a
whole”. BIS, when it produced its Guidance on the implementation of the Consumer
Credit Directive in the UK, was not entirely aligned with the OFT’s strict interpretation in
relation to “click throughs” (see BIS Guidance on the Regulations Implementing the
Consumer Credit Directive, paragraph 6.26).
Further, when the OFT Guidance on Mental Capacity was issued, the OFT themselves
acknowledged the difficulty faced by lenders in identifying customers with mental health
problems and how business processes should be adapted to operationalise the
guidance.
Promoting OFT guidance into rules, which then become definitive statements of the
law, therefore needs to be considered carefully and we request that where guidance is
being carried across, this is done so in an appropriate way.
3.4
‘Pipeline’ Applications
There will be cases of applications for credit from consumers that will be in the pipeline
as at 1 April 2014 which is the date for authorisation wording changes. If a customer
has received an application form pre 1 April 2014 which, correctly, shows the
organisation to be licensed and regulated by the OFT, but does not return the
completed form until after the transition date, it is not clear how this should be treated.
A similar scenario would arise with other certain documentation (e.g. card carrier terms
and conditions) matching up with credit agreements. We would welcome clarification
from the FCA on this and whether consideration could be given to a transitional period
during which references to the OFT could also be regarded as meaning the FCA for a
limited period to address this particular issue.
3.5
Business Lending
The defined terms “Total Charge for Credit” and “Total Amount Payable” require firms
to use assumptions taken from Total Charge for Credit (Amendment) Regulations 2012
(TCC). However, firms who rely on the pre-CCD “opt-out” regime lending to business
customers, in the running-account credit space, are permitted to use the assumptions
set out in the Schedule 7 of the Consumer Credit (Agreements) Regulations 1983. We
assume that this is unintentional and business lenders can continue with current
practices? We would welcome the FCA’s confirmation that this is the case.
3.6
Role of Complementary Industry Codes
As the FCA will be aware, The UK Cards Association strongly believe that there
continues to be a role for independently monitored codes once the consumer credit
regime has transferred across to the FCA so that the industry can continue its
complementary work in promoting transparency and setting standards of good practice.
An important part of a code such as the Lending Code is its ability to provide a vehicle
to embody (and then monitor compliance of) industry best practice within a formal
monitoring and enforcement regime. Additionally industry codes facilitate the
formalisation of provisions and requirements that do not lend themselves to other
regulatory vehicles (e.g. where a change to primary legislation or a full consultation
might otherwise have been required) and can be significantly more detailed in their
requirements.
We are therefore pleased to see that the consultation recognises the value of industry
codes in translating how regulatory requirements can be adopted in particular industry
sectors.
As a Lending Code sponsor we look to promote the benefit of adoption of the Lending
Code and indeed codes more generally within the industry, in order to raise standards
and ensure a level of consistency for consumers.
4.
Response to CP13/10
4.1
Authorisation and the potential alternatives
The FCA will appreciate that a significant number of our members are already
authorised by the FCA under the FSMA regime. It is therefore disappointing that
greater consideration does not appear to have been given to ‘grand-fathering’ in such
cases (especially for those that are already category 1 or 2 authorised) to reduce the
immediate burden of authorisation on the FCA as well as the requirements on the
individual organisations who are already subject to this type of regime.
Additionally, it would be helpful to the industry if the FCA could clarify the process for
approved persons, including how the approved persons regime will operate for PIs
whose directors and senior management are subject to the “PI Individual” registration
regime under the PSR framework.
4.2
Supervision and data collection
In relation to the submission of data, the consultation document refers (in paragraph
4.12) to firms being required to submit their data within ’30 business days’ of the firm’s
financial year end. We would express concern as we do not believe this period to be
sufficiently practical for firms to meet as it is highly unlikely that all firms will have
figures finalised within this timescale. We would therefore ask that the timeframe for
submission of data is reviewed to ensure it is practical and workable for all firms.
The FCA may wish to consider how and where it makes reference to ‘PSD rules’
(meaning Product Sales Data) as this will take on a dual meaning for our members as
PSD also relates to the Payment Services Directive and associated regulations. We
would not want to see the potential for reference to ‘PSD’ in relation to the consumer
credit regime to be taken out of context. We do, however, understand that this may be
an existing term and difficult to remove such references completely.
The FCA will appreciate that if it were intended to extend the scope of product sales
data requirements (as defined in paragraph 4.15), firms would require sufficient notice
of such a change in order to be in a position to submit any new data requirements. In
respect of this paragraph, it is not entirely clear whether reference to the extension in
scope is in relation to its broader application or in relation to the pool of data being
sought by the FCA.
Firms may need between 3 and 6 months dependent on what additional information is
being sought to amend IT systems to ensure all required data captured.
We also note from table 4.2 that information on ‘date of birth’ and ‘postcode’ is required
to be reported. It is unclear to us whether lenders’ consent provisions would cover this
data and ensure their compliance with data protection and equality legislation.
4.3
Rules on conduct standards for all consumer credit firms
On a general note, the extent to which OFT guidance has been carried across is not
clear. The consultation document details those areas of OFT guidance that have been
carried across and also clarifies two areas where it has not been appropriate to carry
guidance across. We have therefore assumed that any other guidance not referenced
within the sourcebook is no longer (with effect from 1 April 2014) deemed to be
appropriate or applicable. Clarity is required to ensure certainty for all parties.
Creditors and others would find it difficult to understand their obligations if crossreferences are made to old regulatory guidance (even if it is in substantially the same
form as the new guidance). Confirmation of our assumption would therefore be
appreciated.
New proposals for financial promotions
Depending on the definition of high-cost short-term credit (please refer to our earlier
comments), reference to a ban on the approval of a financial promotion made in the
course of a personal or other interactive dialogue (paragraph 5.20 in CP13/10) may
present a significant challenge in those circumstances where, as a result of an
unprompted approach, literature regarding, for example, a credit card, is provided to the
customer. We believe that the intent of the FCA is to capture ‘cold calling’ activities.
However, when read in conjunction with 3.11.2 there is a significant risk that activities
initiated by a prospective customer may be caught. For this reason, confirmation of the
exclusion of cards and also customer initiated approaches from the definition would be
extremely helpful.
We refer to our general comments under section 2 of this response where we have
indicated our concern over the practicality of a six month grace period. Our
understanding is that there is no transitional period in relation to status disclosures –
however, it would be helpful if the FCA could clarify whether status disclosures for a
period can refer to both the OFT and FCA/PRA (and referring to effective dates) in
order to prevent the need to switch all documentation references overnight. It would
also be helpful for the FCA to clearly articulate what elements the grace period applies
to as we appreciate that some of the disclosure requirements may be excluded.
On a related point our members have disclosure wording for the PCCI and credit
agreements but references to the OFT in relation to information sheets required to be
sent with default notices and notices of sums in arrears (NOSIAs) have not, as yet,
been updated in the subordinate legislation. It would be helpful to our members to
understand when references will be updated and confirmation of the amended
disclosures so that documentation can be updated. This is particularly important given
the consequences of defective notices.
The consultation document indicates that the FCA has not substantially changed
relevant CCA provisions. It is not clear to us whether these changes, even where they
are not deemed to be substantial, have been factored into the Cost Benefit Analysis to
ensure a comprehensive and complete assessment. We would appreciate the FCA’s
confirmation whether this is or is not the case and, if not, would request that the CBA be
recast.
4.4
Cost Benefit Analysis
It has been noted (within chapter 13: Next steps) that a post-implementation review of
the overall approach to the transfer will be undertaken in due course and that, among
other things, this will take particular account of the effects of the new regime on
competition.
We would welcome the FCA’s confirmation that the post-implementation review will
also include a review of the Cost Benefit Analysis to assess its accuracy in terms of the
costs to industry. We would encourage this as we believe that it is an imperative in
proving the value of a significant course of action such as the transfer of the regime and
a move from a formal legislative framework to a principles-based approach. This would
allow it to be used as a model for subsequent activities such as when the FCA reviews
those elements of the CCA that have, for the time-being, been retained.
4.5
Consultation Questions
Q1.
Do you have any comments on the way our threshold conditions are being
applied to consumer credit firms and/or updates to our Handbook rules?
When authorised PIs seek authorisation as an authorised consumer credit firm,
will they be assessed against the threshold conditions for consumer credit and
non-consumer credit activities? We would also welcome some additional
clarification as to what is expected in an application for authorisation from a firm
which undertakes non-consumer credit activities in addition to consumer credit
activities. To what extent will the non-consumer credit aspects of an applicant’s
business and operations, and the organisation and control over this activity,
need to feature in the application? For PIs again, to what extent would the
regulated payment service activity related to consumer credit, or unrelated
regulated payment service activity, be a feature of application for authorisation?
We would wish to avoid firms having to subject their business and operations to
two separate applications for authorisation that cover much of the same ground.
Q2.
Do you agree with the updates to our draft Handbook rules for approved
persons for consumer credit firms?
There are a number of firms who are already subject to FSMA regulation and
are, for example, operating under the ‘approved persons’ regime. Similarly,
firms operating as payment institutions (PIs) under the Payment Services
Regulations 2009 (PSRs) operate under the “PI Individuals” regime. We would
very much welcome clarity over whether the existing regimes will simply be
‘grand-fathered’ into the FCA regime, or whether the approval process must be
completed again in its entirety which would, we believe, be disproportionate
under the circumstances.
In the event that PI Individuals are not grand-fathered into the FCA regime, it is
not clear whether the regime for PI Individuals and the approved persons
regime for consumer credit firms under the FCA would continue in parallel or
whether the regimes would be assimilated. We would not wish to see separate
and overlapping registration regimes for senior management of PIs who are also
consumer credit firms.
Q3.
Do you have any comments on the updates to our draft rules regarding
appointed representatives of consumer credit firms?
We note the consultation confirms that firms who are today operating as
appointed representatives of existing FSMA-regulated firms may continue to
operate as an appointed representative whilst holding interim permission to
carry on consumer credit activities. Today some non-FSMA authorised lenders
may operate as appointed representatives in connection with insurance
mediation activities related to their consumer credit businesses. We understand
that following the transitional period when consumer credit firms obtain
authorisation under FSMA that they will no longer be able to operate as an
appointed representative of another authorised insurance mediation firm (as the
exemption from authorisation under FSMA available to appointed
representatives is not available to authorised firms). It seems a disproportionate
effect of the legislation to require these lenders to cease insurance mediation
activities or to apply for authorisation directly for insurance mediation activities.
We would welcome a carve-out from this rule for consumer credit firms wishing
to continue to operate under appointed representative arrangements with other
authorised firms.
Q4.
Do you have any comments on the criteria that we are proposing a person
would have to fulfil to be a self-employed agent to a principal firm (as set out in
Appendix 2)?
We have no specific comments.
Q5.
Do you have any comments on our proposed regulatory reporting regime?
We would refer to our comments under section 3.2 of this response in respect of
data collection.
Q6.
Do you agree with our proposals to collect product sales data on high-cost
short-term lending and home collected credit?
As previously stated, we have assumed that the definition of high-cost shortterm credit does not capture the cards market. We therefore have no comment.
Q7.
Do you have any comments on how we propose to carry across CCA and OFT
standards, in particular in the areas highlighted above?
We would refer to our earlier comments regarding guidance being elevated to a
rule. We believe it would be helpful to lenders to understand the rationale.
Q8.
Do you have any comments on our proposed approach to financial promotions?
In respect of CONC paragraph 3.5.7(1)(b) on advertising - this provision is
difficult to understand as currently drafted. It also extends the requirements of
the existing CCA Advertisements Regulations 2010 significantly, potentially
catching phrases which are intended to reassure the customer about the
application process. We believe that the FCA should refrain from extending the
scope of the existing rules in this way. There is a real risk that creditors may be
prevented from using non-promotional messages referring to ‘ease’ or ‘speed’ in
many different contexts.
We believe that ‘speed’ and ‘ease’ should only become APR triggers where the
statement has been used as an incentive.
In relation to CONC paragraph 3.11.12 - this provision is unclear. Does it just
relate to approval by a firm of a third party’s non-written communications?
Clarification by the FCA would be welcomed.
Q9.
Do you agree with the definition of a high-cost short-term credit provider as set
out at the start of this chapter?
We would refer to our comments under section 3.2 regarding the definition of
high-cost, short-term credit.
Q10.
Do you have any comments on limiting rollover to two attempts?
We have no specific comments.
Q11.
Do you have any comments on whether one rollover is a more appropriate cap?
We have no specific comments.
Q12.
Do you have any comments on our proposal to introduce a limit of two
unsuccessful attempts on the use of CPAs to pay off a loan?
There may be a need for clarity - payments under a CPAs do eventually 'pay off'
the loan, but the correct context of the FCA’s proposal might better be
expressed as "use of CPAs to collect instalments or full/partial repayments
towards paying-off a loan".
Given the problems with debit cards being swamped by repeated further
authorisation requests following an initial 'decline' response there is support for
the proposal to introduce a limit of two unsuccessful attempts.
We would encourage the FCA to confirm the proposals as quickly as possible, in
order to avoid any uncertainty in the next few months and to enable any
changes to systems, operational procedures, etc. to be implemented within
timescales.
Q13.
Do you have any comments on our proposal to ban the use of CPAs to take part
payments?
We have no specific comments.
Q14.
Do you have any comments on our risk warning?
The risk warning is unlike any other existing risk warning in that it quotes figures
relating to a specific time frame. The concern is that this may set precedents for
existing or future risk warnings. We are curious as to how often these figures
will be updated and the mechanism for instigating change, given that this would
result in a need to replace existing stationery and/or promotional materials.
Q15.
Do you have any comments on our proposals to require high-cost short-term
lenders to provide information on free debt advice before the point of rollover?
We believe that it is incumbent on lenders to signpost customers to debt advice
where there is evidence of, or early warning signs of, financial difficulties.
Q16.
Do you have any comments on the effectiveness of price capping?
We recognise that this question and the effectiveness of price capping is
directed at pay day lending. However we have previously provided comments
to BIS on rate capping and our position is detailed in the attached appendix.
Q17.
Do you agree with our proposals on how to calculate our prudential requirement
for debt management firms and some not-for-profit debt advice bodies? If not,
what amendments would you suggest, and why?
We have no specific comments.
Q18.
Do you agree with our proposal to apply a transitional approach to prudential
standards for debt management firms and some not-for-profit debt advice
bodies?
We have no specific comments.
Q19.
Do you have any comments on our draft guidance on the debt counselling
activity and our draft rules covering the provision of debt advice?
We have no specific comments.
Q20.
Do you have any comments on the rules that we propose to apply to peer-to
peer lending platforms to protect borrowers?
N/A to the cards industry.
Q21.
Do you agree with our proposals for debt management firms and not-for-profit
debt advice bodies that hold client money? If not, which aspects of the regime
do you disagree with and why?
We have no specific comments.
Q22.
Do you agree with our proposed implementation timetable? If not, please give
reasons.
We have no specific comments insofar as this question relates to debt
management firms.
Q23.
Do you agree with our suggested amendments to the reporting requirements for
second charge loans?
We have no specific comments.
Q24.
Do you agree with our proposal to allow all microenterprises to complain to the
ombudsman service?
We have no specific comments.
Q25.
Do you agree with our proposal to include not-for profit bodies providing debt
advice in the Compulsory Jurisdiction?
We believe that a level playing field approach should be adopted.
Q26.
Do you agree with our proposals on recording, reporting and publishing
complaints?
We have no specific comments.
Q27.
Do you agree with the costs and benefits identified?
It is unclear whether all aspects of the transfer have been taken into account
when developing the Cost Benefit analysis.
Q28.
Do you agree with our assessment of the impacts of our proposals on the
protected groups? Are there any others we should consider?
We have no specific comments on the assessment.
5.
Comments on the Consumer Credit Sourcebook (CONC) – Appendix 2
Annex A
5.1
General comments
Throughout the draft document there is reference to ‘credit brokers’. We understand
that this is now intended to also capture the activities of credit intermediaries (as
defined in the CCA). However, we are concerned that some of the provisions will
effectively represent new requirements for those who operate as credit brokers in
today’s environment but may not have current requirements applied to them such as
comparison sites. Consideration should be given to ensuring a smooth transition and
whether it is indeed intended that all requirements should apply to those with a credit
intermediary function.
In addition, there is currently a requirement in the CCA to disclose credit intermediaries
used in the SECCI and Credit Agreement. It is unclear to us what impact the proposed
changes will have on the disclosures which firms will be required to make, and whether
this will result in costly terms and conditions changes having to be notified to all
customers where there is arguably no customer benefit in doing so.
On a more general point, the different use of terminology across CONC and the CCA
(and specifically the merging of two definitions within CONC) gives rise to potential
confusion in interpretation and application of requirements. A consistent approach
would minimise this risk.
We are concerned that if the consequence of being refused for mainstream credit is
that a consumer may be regarded as in financial difficulties (1.3.1(4)), consumers will
avoid making applications for ‘prime’ market products with lower interest rates and
higher credit scoring thresholds. The result may be consumer detriment, with
consumers opting for more expensive credit for fear of the impact of a decline decision
on their CRA credit record.
5.2
Section 2 - conduct of business standards: general
Quotation searches
CONC 2.4.3 and 2.5.7 – The industry has a number of concerns about the clarity and
intention of the guidance regarding the use of quotation searches and the practicality of
implementation within the prescribed timeframes.
The second sentence of CONC 2.4.3 would, on the face of it, appear straightforward in
terms of requiring lenders to treat customers fairly by not leaving evidence of an
application search on the customer's credit file unless the customer is actually applying
for the product. The first sentence, however, does not expand on what actions are
required of a lender (or other associated party) for a customer to compare offers of
credit. Additionally, it does not suggest that creditors need to provide quotations,
although the subsequent ILG reference concerns the provision of quotation searches.
If the FCA's intention is that comparing "offers of credit" should be facilitated by the
lender providing quotes (without an application search being recorded against the
customer’s file), then this should be made explicit. This would then mean that clarity
will be necessary to determine what a quote must constitute in order for it to satisfy the
FCA’s view of what is suitable to allow the customer to compare offers of credit. Would
a quote need to be the price at which the credit would be offered or simply an
indication? Should an offer indicate whether an application would be successful?
Changing the basis on which application searches are made by creditors and/or
requiring that quotation search facilities are offered by creditors cannot practically be
achieved by October 2014. Systems changes have to be incorporated into firms
change programmes to complement and align with other systems changes being made
to comply with regulatory and business needs. Such changes need to be developed
and tested and are, therefore, more likely to require a longer implementation time than
is provided for within CONC. A move towards using quotations would have implications
for the way in which risk-priced products are developed, marketed and sold. Potentially
this could result in a move away from risk-pricing for lenders.
We would welcome the opportunity to work with the FCA and other trade bodies to
consider how best to achieve a practical and proportionate approach to meet the
outcomes envisaged by the FCA within a practical timeframe.
Targeting customers and discrimination
There is a real risk that industry could start to unwittingly and unintentionally
discriminate against consumers due to concerns over the application of, and their
compliance with, CONC 2.2.2(1). By that, lenders may introduce additional eligibility
criteria for credit products in an attempt to demonstrate compliance with CONC, which
may actually have the indirect effect of excluding the types of customers listed in CONC
2.2.2(1). This in turn exposes the industry to potential claims of discrimination under
the Equality Act. Guidance and/or clarification from the FCA, particularly in relation to
the interpretation of the ‘age, health, disability or any other reason’ wording would assist
us in understanding the FCA’s rationale for this. Our preference is that CONC 2.2.2(1)
is removed.
Consistent terminology for telephone call rate charges
In CONC 2.5.8 there are numerous references to different types of telephone call rate
charges – special, premium, geographic and local. To avoid any uncertainty, these
terms need to be clearly defined in the rules. CONC 2.5.9, 3.3.9, 4.3.17 and 7.10.5
among other provisions provide further examples where different terminology has been
used.
Sustainability of borrowing – customers with mental capacity limitations
Where a customer may lack mental capacity, we do not see how a more stringent
affordability assessment would help (CONC 2.10.19). It is potentially discriminatory in
that it applies a higher standard for a customer with a disability, and does not address
the point that the customer may not understand the terms of the credit offer. This is
(and has always been) an extremely difficult provision for lenders to comply with without
being in breach of other legal obligations.
Prescribed wording overrides alternative formats
Within CONC 2.10.14, the FCA should acknowledge that lenders are not free in all
cases to use the language or format of their choice (or even those of customers) due to
other legal requirements. For example, lenders must use the prescriptive template for
the SECCI and cannot make any modifications.
5.3
Section 3 - Financial promotions and communications with customers
General
CONC 3 is wider in scope applying to financial promotions and all other
communications with customers; this is a different approach to the current regime.
CONC 3.3.3 R states that firms must not state credit is available regardless of a
customer's financial status. However it is unclear how this fits with CONC 3.5.11 R
(1)(d) where loan guaranteed or loan pre-approved could be used where the agreement
is free of any conditions regarding credit status.
CONC 3.5.5(1)(a) and CONC 3.5.6 G (2) appear to go beyond existing requirements in
the Advertisements Regulations by requiring the effective annual interest rate to be
used rather than the simple rate when the Regulations provide for both.
Incentives
CONC 3.5.7 makes reference to incentives ‘…including but not limited to gifts, special
offers, discounts, rewards and statements about the speed or ease of, processing,
considering or granting an applications or of making funds available, to apply for credit
or to enter into an agreement under which credit is provided.’ This appears to us to be
a significant change in substance when compared to what is required of lenders today
and it is not clear what is intended or captured by this provision. Clarity on the
objectives of the enhanced provision and specifically the definition of ‘incentive’ is
needed.
Risk warnings
CONC 3.4.2 addresses the need for a risk warning in the case of high-cost short-term
credit. We refer to our earlier comments regarding the definition of this type of credit
and our assumption that this will not apply to running account credit products.
We would also encourage the FCA to consider the practicality of risk warnings that
contain very specific data e.g. number of customers, etc. This data will be subject to
fluctuation and will, very soon, become out of date.
Financial promotions and personal visits
CONC 3.11.2 states that a form must not approve a financial promotion to be made in
the course of a personal visit, telephone conversation or other interactive dialogue. It is
unclear what the rule is trying to achieve and we would welcome clarification as to the
objective.
5.4
Section 4 – Pre-contractual disclosure
General
CONC 4.3.5 extends the scope by including guidance from the ILG into rules. (2)(d)
refers to explaining the principal consequences arising from a failure to make payments
at the times required including: the total cost of the debt growing, incurring any default
charges or interest including approximate level of charges or interest in the event of
default, impaired credit rating and its effect on future access to or cost of credit, the
associated costs of legal proceedings, and the implications of insolvency. Whereas
S.55A(2)(d) only refers to legal proceedings and repossession of debtor's home. This
removes the discretion of the firm as to what they consider should be included. Firms
can no longer decide on the content of their adequate explanations depending on type
of product and borrower. It is not practical to require creditors to provide an
"approximate level of charges or interest in the event of default".
CONC 4.3.7 R refers to the factors lenders should consider on deciding the extent of
adequate explanations. This is now a rule and the creditor discretion has been
removed and now requires specific considerations in all circumstances.
Telephone numbers
In CONC 4.3.17 we note the reference to ‘local rate’ telephone contact details. This,
and similar terms regarding categorisation of telephone numbers, is a thread that runs
throughout the sourcebook. It is not entirely clear what is captured and appears to
introduce an additional requirement on lenders. Please can the FCA clarify its thinking.
Adequate and additional explanations
CONC 4.3.15 details the information that must be provided to customers preapplication. However it would appear that where the current OFT guidance suggests
that lenders should explain to the customer the different rates or charges that may
apply, the CONC rule requires that the actual rates and charges that may be applied
must be disclosed. We would ask the FCA to confirm whether this is a drafting error or
whether the drafting reflects the FCA’s intention. If the latter, this represents a
significant change to current requirements. Also, CONC 4.3.15 details further
information to be included in the adequate explanations for credit cards. Much this
information is already in the PCCI and there is significant risk of information overload
for customers.
In relation to pre-sales explanations (4.3.6), given the quantity of information required,
we would ask for the FCA’s confirmation that lenders may rely on a script provided that
they do not rely on this exclusively. For example, the creditor or broker should offer the
chance to raise questions, use FAQs or speak to a telephone adviser, depending on
how the pre-contract information is provided. Offering to answer any further questions
together with the use of script to convey the mandatory information should be sufficient
in our view.
Commissions for credit brokers
In CONC 4.6.2, we think the wording referring to “volume” and “profitability” is unclear.
We would ask the FCA to reconsider the wording adopted by the OFT in para 5.5 of
their Irresponsible Lending Guidance which provides greater clarity as it refers
specifically to “volume over-riders” and “differential commission”.
5.5
Section 5 – Responsible Lending
Incorporating the affordability assessment with creditworthiness
It is worth highlighting that lenders will comply with the requirements of the ILG using a
variety of tools and sources of information available to them to ensure responsible
lending. We would not want to see overly prescriptive requirements being introduced
which may, ultimately, impact on ensuring a proportionate and right consumer outcome.
CONC 5.2.1 extends the CCD requirements by incorporating the assessment of
affordability (which was previously guidance in the ILG) into that of creditworthiness
(given that the CCD is a maximum harmonisation Directive). What is unclear to us is
whether this creates an entirely new standard of compliance for lenders when
compared to the current OFT regime, i.e. the Rules and Guidance are not clear insofar
as the following key questions: Will it be mandatory for lenders to request income and
expenditure details in order to lend or increase a limit? Will lenders be required to
obtain evidence to prove the accuracy of the information provided? To what extent will
such checks be required during the duration of any agreement in the event of, say, an
increase to the credit limit?
If lenders will be required to undertake such actions, this will represent a significant and
disproportionately costly change to current practices in the card industry. Lenders
already have a number of tools available to them to check or validate information
provided, and will often do so on a risk based approach – taking into account a number
of factors, such as information already held, the amount of credit being provided.
Requiring this level of assessment for unsecured borrowing, particularly where there
are smaller amounts will result in increased costs to lenders and a poor customer
experience
Conduct of business – assumptions
CONC 5.3.1 (6) represents a subtle shift from what is contained within the Irresponsible
Lending Guidance. In the ILG, lenders have been asked to ‘consider using’ certain
information/assumptions outlined in the document. This has now become ‘should use’
in CONC – whilst this appears to be a minor wording change it is, in fact, a significant
change for lenders. The requirements under CONC 5.3.1(6) (a) and (b) appear out of
step with the general position that the transfer of the consumer credit regime to the FCA
should not see any substantive changes to the existing regime of CCA and OFT
guidance. The current guidance, which the FCA has broadly tried to replicate, allows
creditors to consider the comparison of a fixed sum loan as one of the potential
measures that may be used.
It would appear that the draft rules only permit proportionality within affordability
assessments for excluded agreements (such as pawn agreements) and that if this
assumption is correct then 5.3.4 seems to imply that lenders will be required to verify
the income information that customers provide on their application form. If income
verification is indeed is the FCA’s intention, this would be a very significant and material
change to the way lenders process applications. We therefore seek the FCA’s
confirmation of its intentions in this respect.
Customers use credit cards as a more flexible alternative to other forms of credit. As
part of that flexibility they are entitled to repay any part of the balance each month. We
believe that card providers should be able to take into account the minimum contractual
payment when assessing affordability, just as for a loan where affordability is based on
instalments which represent the contractual minimum. Many customers do in fact make
payments well above the minimum, but this does not mean that we should take a higher
value as representing the affordable amount each month.
We have identified a number of issues associated with responsible lending (as detailed
above). However, as members conducts more detailed reviews and gap analysis, there
may be further issues that are identified, in particular associated with the concept of
affordability, that
5.6
Section 6 – Post-contractual requirements
Affordability and creditworthiness
From a first reading it would appear that CONC 6.2.1 (2) is an ILG provision that has
been carried across as a rule. Whilst this would not appear to be significant there is an
unhelpful conflation of the ILG requirements under the ‘Assessment of Affordability’ with
‘Assessment of Creditworthiness’ as suggested by the provision in CONC. This is
further exacerbated by the subtle change in requirement from assessing ‘a borrower’s
ability to be able to meet repayments under the credit agreement in a sustainable
manner’ (ILG 4.2) to considering ‘the ability of the customer to make repayments as
they fall due over the life of the regulated credit agreement, or for such an agreement
which is an open-end agreement, to make repayments within a reasonable period’.
This conflation is further reinforced within Annex B: Amendments to the Glossary of
Definitions.
In relation to the issue of affordability, CONC seems to suggest that the application
process approach should also be adopted in post-contract situations. However, postcontract, lenders will have an enhanced range of up-to-date information available to
them on which to base decisions. This would include information on how the customer
is maintaining their account, payment behaviour and more general usage information.
We would therefore strongly encourage the FCA to ensure that the rules also
acknowledge the availability and use of this information.
Although 6.7.3(b) is only guidance, it would seem to cover all situations when a
customer fails to make a number of consecutive minimum required repayments. The
agreement that industry reached with BIS was that this excluded situations where there
was rational behaviour (e.g. a customer on 0% offer; customer know to be servicing
more expensive debt elsewhere, etc.). We would therefore ask that this exclusion be
reflected in the wording, perhaps by adding words to the effect “without good reason”.
CONC 6.7.3(c) appears to represent a new expectation in relation to the level of
communications to the customer which is not currently required. Over and above this
being an additional communications requirement [and it is not clear whether the
requirement is for written notification or whether verbal notification will be sufficient
particularly in cases where payments are taken over the telephone], the associated
provision (d) makes reference to ‘escalating debt’ whereas industry has, to date,
focussed its commitments on ‘the most expensive way to pay’. Additionally the
commitment to provide debt advice contact details (as referenced in (e)) should, we
believe, be in the case of ‘high risk’ accounts only. As a new requirement, lenders will
need to review the implications and lead times for implementation of such a change to
process.
Minimum payment calculations
CONC 6.7.5 – the BIS White Paper recommendations and the industry’s commitment in
respect of the Minimum Payment calculations specified a date from which the
requirement came into effect (i.e. 1 April 2011). This therefore made it clear that the
provision related to new accounts as opposed to also capturing the ‘back book’. We
are concerned that CONC does not reflect the date agreed between industry and
government. It would be a helpful clarification to confirm that this does not capture the
‘back book’ as we do not believe that this could be the FCA’s intention. This could be
addressed by changing the first line of 6.7.5(1) to read “A firm must set the minimum
required repayment in any new regulated credit agreement …”.
In addition to the comment made above that application of CONC 6.7.5 should apply to
new accounts only, the drafting should reflect paragraph 160 of the Lending Code to
clarify that it is only that month's interest/interest applied to the account since the last
statement date that must comprise the interest element of the calculation. While
reference solely to interest is adequate for those customers that are up to date with
payments, an amendment is required so that there can be no implication that amounts
previously demanded are to be included in the calculation for future minimum
payments. This provision must also make it clear that "fees and charges" does not
include fees for services such as cash advances and balance transfers (it should refer
to default charges and annual fees only) and that the cost of any annual fee can be
added to the minimum payment as a single sum, 12 equal instalments or other
method.
The way in which the calculation has been transposed in CONC, if carried across into
made rules, would not necessarily reflect how issues have implemented the White
Paper requirement and the industry’s commitment to government.
It is perhaps worth highlighting that the provisions within the ILG covering this and other
certain other areas (detailed below) are not in themselves a comprehensive description
of the industry’s commitments to government as a result of the BIS White Paper. A
more detailed position is set out in the Lending Code (paragraphs 144 – 162).
Credit card repricing
CONC 6.7.7 – 6.7.11 sets out to define ’at risk’ using the same three criteria for both
UCLIs (unsolicited credit limit increases) and re-pricing. In respect of the exclusion for
re-pricing, the industry’s statement of principles has made it very clear that this should,
in fact, be where the customer is “currently two or more payments in arrears”. This is
embodied within the Lending Code. Additionally, in the case of UCLIs, the industry’s
best practice guidelines contain risk indicators that may demonstrate where an account
is at risk of financial difficulties. These do not appear to have been captured in CONC.
We have also noted that in respect of risk-based re-pricing, CONC does not make
reference to any timescales. In our discussions with BIS following the Credit & Store
Card Review, there was a very specific requirement regarding timescales i.e. that a
customer would not be subject to risk based re-pricing within the first twelve months of
having a credit card and that re-pricing would not happen more often that six monthly
other than in exceptional circumstances.
Although it is the customer who has the right to ‘reject’ the rate increase, it is the lender
who then needs to close the account (as a direct consequence). The ILG refers to the
customer closing the account but the equivalent revised CONC rule appears to
represent a shift in focus, whereas CONC 6.7.13 implies that it is the customer who
gives notice that they wish to close the account. This shifts the balance of
responsibility. We are unclear as to the objective of this change. It should be for the
creditor to close the account if the customer opts out, not the customer. We would
suggest that the wording should be amended accordingly.
We highlight the fact that CONC 6.7.10 would seem to preclude the withdrawal of a
promotional rate in circumstances where the customer’s actions have resulted in a
breach of the terms and conditions of the promotional rate. We seek clarification as to
whether cases where a promotional rate exists are excluded from the provision/
CONC 6.7.9 prohibits credit limit increases without 30 days notice. That would mean
emergency credit limit increases requested by customers would not be allowed; this
does not seem appropriate in all cases. CONC 6.7.9 has taken what is specified in the
Irresponsible Lending Guidance (paragraph 6.17) as potentially being indicative of
irresponsible lending and unintentionally creating an automatic breach of CONC (as the
flexibility built in to the OFT’s guidance is not replicated in CONC). A specific carve-out
is included in the Lending Code to deal with this issue (paragraph 157) – such a carveout is not carried over into CONC and leads to the unintended consequence.
CONC 6.7.14 is an example of guidance moving to a rule where the net result appears
to extend the legal requirements of the Unfair Terms in Consumer Contracts
Regulations and introduces a new obligation. We are unclear as to the rationale behind
the introduction of this additional requirement. Our members have expressed concern
that this is a new requirement that will not be practical on a volume basis.
We therefore believe that 6.7.14 is inconsistent with the Unfair Terms in Consumer
Contracts Regulations 1999 (UTCCR) insofar as the credit agreement is an agreement
of indeterminate duration. This would include credit and charge cards. Paragraph 1(j)
in schedule 2 to the regulation highlights that a term may be regarded as unfair if it
enables the seller or supplier to unilaterally vary the contract without a valid reason
specified in the contract. However, paragraph 2 of the schedule clarifies the scope of
1(j) and, at para 2(b) ,confirms that it is without hindrance to the terms which allow for
unilateral variation provided the seller/supplier is required to inform the consumer with
reasonable notice and the consumer is free to dissolve the contract. We would
therefore ask that the FCA review this requirement and how it aligns with the UTCCRs.
It should be made clear that the specific examples given in CONC 6.7.15 are not
intended to be prescriptive, nor should these be exhaustive. The wording in the second
example is unhelpful. It should be made clear that a single default may be taken into
account, even if by itself it does not justify a re-price, because it is one of the most
obvious signs of risk.
Additionally, CONC 6.7.16 suggests that lenders must provide an explanation (i) to all
customers and (ii) providing details, particular to the customer’s circumstances, of the
reason for an increase in the rate of interest. Currently, the industry agreed principles
require lenders to provide such an explanation only if the customer requests it [and
there is evidence that customers do request the information today]. It is unclear
whether the FCA’s intention was to introduce a new requirement for lenders, and if so,
we think this is a disproportionate requirement on lenders with no substantial consumer
benefit. We have assumed that this provision is note designed to capture portfolio-wide
rate increases.
We are concerned that the reference to ‘refinancing’ in CONC 6.7.17 could capture
payment due date changes. We do not believe that this is the intent but would
welcome the FCA’s confirmation that our understanding is correct. This should be
clarified to make clear that it does not cover a change in payment due dates at the
request of the customer or by the lender, where the customer is not in financial
difficulties. A customer may legitimately change their payment date for convenience (to
a date near to their salary date, for example) and card issuers would have concerns if
they were no longer able to offer this to customers without inadvertent consequences.
The definition appears to apply to all lenders and would include unilateral variations to
agreements. This appears to extend the scope beyond what is currently required within
the ILG.
5.7
Section 7 - Arrears, default and recovery
It is unclear from CONC 7.2.1 what the scope of this provision is trying to achieve. We
would be very willing to work with the FCA as it develops its thinking on vulnerable
consumers and specifically as it relates to the provision of consumer credit.
Breathing space
The FCA will be aware that the principle of ‘breathing space’ was one that was
introduced following high-level discussions between the industry and government in
2008 (formalised in 2009). The industry’s commitment was, in the first instance, to
allow 30 days breathing space where customers can demonstrate that they are making
a genuine effort to develop a repayment plan. CONC 7.3.11 appears to be very open.
We would encourage the FCA to include reference to the initial 30 day period to ensure
a consistency of approach and facilitate the resolution of such cases in a timely
manner.
We consider that 30 days is a reasonable period and a stipulated timeframe provides
both lenders and customers with a clear framework to work within and take appropriate
action. If lenders all took different views on what they considered reasonable, some
customers may be treated differently and be given less or more time which creates
uncertainty for customers and the potential for poor customer outcomes.
Proportionality in debt recovery
CONC 7.3.16 R makes it a rule that a lender must not take action against a customer in
arrears or default, without having fully explored any more proportionate options. In
addition to converting existing guidance into a rule containing a general prohibition, the
current drafting also widens the scope of existing guidance by omitting the word
“disproportionate” before “action” and including the words “fully explored” and “any” in
relation to more proportionate options.
In addition, the references in current OFT guidance quoted in CONC focus primarily on
repossession of a debtor’s home and applying to have a borrower made bankrupt
whereas, the reference to “action” rather than “disproportionate action” would appear to
extend beyond this. The current drafting of CONC 7.3.16R would therefore suggest
that no action can be taken where a customer is in arrears or default unless any more
proportionate options have been fully explored. CONC 7.3.18R would also seem to
support the view that CONC 7.3.16R extends beyond orders for sale and bankruptcy
petitions as it states that a firm must not take steps to repossess a customer’s home
other than as a last resort having fully explored all other possible options.
If CONC 7.3.16R is not intended to have wider application than to orders for sale and
bankruptcy it is not clear why the rule in CONC 7.3.18R is required, particularly as
CONC 7.3.17G(1) references applying for a an order for sale or submitting a
bankruptcy petition as examples of action in relation to which a firm should consider
and fully explore other actions. Please could the FCA clarify its intention.
Premium rate telephone numbers for customers in arrears
CONC 7.10.5 – It appears that the reference to premium or special rate telephone
numbers applies to contact made with customers who are in arrears. However, we are
concerned of the potential read-across to other dealings with the customer.
Gone away accounts
CONC 7.14.4 – The FCA will be aware that ‘gone away’ accounts have in the past
presented challenges for lenders under the CCA regime and this continues to be the
case. Lenders will always use reasonable steps to ensure the accuracy of data so as
to ensure that the correct customer is pursued for any outstanding debt. However, this
must be without prejudice to members’ obligations under s176 of the CCA which permit
lenders to serve notices to a customer’s last known address even though the lender
knows or might reasonably suspect that the customer no longer resides there. Lenders
must be entitled to effect service of notices under the CCA which, in some cases (e.g.
notices of sums in arrears) is essential to their ability to enfo9rce the agreement.
It would appear that the requirements of the ILG have been taken in a broad brush
approach across industry when we believe they were intended to be focussed on
certain particular market practices. We would therefore encourage a more targeted
provision if this is the case.
5.8
Section 13 – Guidance on the duty to give information under s77, 78 & 79
of the CCA
CONC 13.1.6 addresses the consequences of failure to comply with the duty to give
information under sections 77, 78 and 79 of the Consumer Credit Act. However, in the
CCA, section 78(6) which contains the unenforceability sanction only applies to a failure
to comply with section 78(1) – providing a copy of the agreement – and not to section
78(4) – which is the requirement that lenders must provide monthly/annual statements
to customers.
CONC should reflect the current CCA requirements and make this clear that it only
relates to the lender’s obligation to provide a copy of the credit agreement and not other
obligations contained in sections 77/78/79 of the CCA.
The provision of statements to Card customers has been a long standing requirement
which lenders have been complying with for a number of years. We do not see there is
any need to change the current CCA framework in this regard as there are few, if any
issues of widespread customer detriment or lenders not providing monthly and annual
statements.
CONC 13.1.4 G (4) states a reconstituted agreement must be headed 'credit
agreement regulated by the Consumer Credit Act 1974" and must contain the
cancellation notice sent in the executed agreement – in practice there are many copy
agreements which must not use this wording e.g. for credit cards it would say "Credit
Card Agreement regulated by the Consumer Credit Act 1974". Cancellation will only
apply where the agreement is cancellable and cancellation notices were served at the
start and card agreements have a right of withdrawal rather than a right of cancellation.
APPENDIX
EXTRACT FROM THE UK CARDS ASSOCIATION SUBMISSION TO:
MANAGING BORROWING AND DEALING WITH DEBT - HMT/BIS CALL
FOR EVIDENCE IN SUPPORT OF THE CONSUMER CREDIT & PERSONAL
INSOLVENCY REVIEW (DECEMBER 2010)
10.
Rate Capping and the Re-Pricing of Existing Debt
Q9
Should interest rates on credit and store cards be subject to a cap? If
so, should this apply to all interest rates or only those which apply to existing
borrowing?
Q10
Are there any alternative measures which would reduce the scope for
consumers to be exposed to higher interest rates on credit and store cards?
The UK Cards Association does not believe that credit and store cards should be
subject to a cap, nor that any additional restrictions should be placed on the
ability of a credit card lender to increase the rate on existing borrowing.
The origins of the above questions are based up the Coalition Government’s
manifesto commitment, as follows:
•
We will give regulators new powers to define and ban excessive interest rates
on credit and store cards; and we will introduce a seven-day cooling-off period for
store cards.
In responding to the Call for Evidence, The UK Cards Association has taken the
opportunity to address the questions on rate capping as asked and to explore related
issues – specifically the shortcomings of the APR calculation for revolving credit
products such as credit cards – that we believe are driving some of the concerns
referred to in the Call for Evidence. We believe that by consolidating our views and
evidence in this way will lead to a fully rounded fact-based debate on the merits or
not of rate capping.
Introduction
The basic question posed in the Call for Evidence appears to be straightforward –
whether or not credit and store cards should be subject to rate capping. However, in
framing the question the Call for Evidence raises and conflates a number of issues,
including the following, which we address below:
•
•
•
•
•
•
The difference between interest rates and APRs;
The perceived disparity between base rates and credit card APRs possibly
leading to a perception of excessive profitability;
The virtues of a highly-targeted rate cap;
A lender’s ability to re-price existing debt on an open-ended credit agreement;
Switching and customer inertia; and
The ability for consumers to compare products.
This also leads to the need for a discussion of the shortcomings of APRs as means of
comparing credit products.
Base Rate vs Credit Card APRs
Paragraph 42 of the Call for Evidence states that “interest rates on credit and store
cards have been rising in recent years, despite the record low base rate of interest”.
Paragraph 46 of the Call for Evidence suggests that the questions in the Call for
Evidence reflect concern that “interest rates on credit and store cards have risen
whilst base rates have fallen and that very high rates are often targeted at those
individuals whose credit rating is impaired”.
It is true that base rate is at an extraordinary low level not seen in three hundred
years and is, by any standards, highly anomalous. The Call for Evidence echoes
criticism that average credit card rates have recently been edging upwards.
However, we do not believe that this is necessarily a unique feature of the credit card
market at the present time. In its quarterly bulletin for Q3 2010 the Bank of England
comments that “while Bank Rate was reduced significantly during the recent financial
crisis, new lending rates to households fell by a much smaller amount – and in some
cases rose” 8 .
The average credit card APR is, in fact, itself at a relatively low level historically, as
can be seen in the chart below:
Average Credit Card APRs
25
20
15
10
5
0
Source: Bank of England
8
p172 Bank of England Quarterly Bulletin 2010 Q3 Volume 50 No.3
The explanation for this is fairly straightforward. Credit card companies face a
number of running costs that do not exist with other forms of lending such as
mortgages or personal loans due to the additional payment functionality of the
product which requires an expensive supporting infrastructure 9 . Greater influence will
be exerted by other cost and income components such as risk (a variable cost);
operational expenses (generally fixed costs); and non-interest income (including
default fees, cash charges and interchange).
Discussion with our members suggests that margins for main stream credit card
companies are typically currently in the region of 1.5% to 3%. However, there may be
variations around these figures due to the different business models operated by
different cards companies 10 and the fact that key cost components are cyclical in
nature.
However, a lenders’ ability to influence its various revenue streams have been
severely curtailed in recent years following regulatory intervention. Rightly or wrongly,
this has seen default fees effectively capped at £12.00; the virtual elimination of PPI;
and downward pressure on interchange rates. At the same time the industry has
incurred considerable costs relating to new legislation and self- regulatory initiatives
voluntarily agreed with Government. Legislators and regulators have to accept that
the reductions in revenue that result from these interventions have to be made up
elsewhere if they can not be absorbed.
This leaves interest on borrowing as the only revenue stream that card companies
can lever to balance their falling revenue against increasing costs (beyond the
possible introduction of annual fees or transaction fees or other innovations in
pricing).
The cost of borrowing money to finance cardholders’ balances generally accounts for
only a proportion of a credit card issuers’ costs. Changes in base rate, and the rates at
which different types of bank are able to borrow, need to have a substantial effect on a
card issuer’s total costs to justify a change in the interest rate charged to customers.
Price changes are not undertaken lightly given the expense involved in communicating
changes, replacing point-of-sale literature and making systems changes, and the
customer attrition that results 11 .
Other costs incurred by credit card companies that do not occur with other forms of
lending include:
•
•
•
•
•
•
•
•
9
The cost of authorising and processing point-of-sale payments
The issuing of monthly statements
The issuing (and reissuing) of plastic cards
Collecting and processing (variable) payments by different methods
Handling customer queries
The cost of fraud and of fraud prevention
The cost of providing added value benefits to cardholders (where offered)
The cost of legal compliance including those that create additional cost for
lenders such as Section 75
This area was covered in The UK Cards Association response to the recent BIS Credit & Store Card
Review, with some of that content repeated here
10
Discussed on p199-200 in The UK Cards Association response to the recent BIS Credit & Store Card
Review
11
Typically around 10%-20% of cardholders who are re-priced upwards will close their accounts or stop
using their cards – hence card issues do not increase rates lightly
•
•
The cost of card scheme membership (giving access to the global payment
system)
Compliance with any changes to card scheme rules and consequent IT update
requirements (to maintain global interoperability)
These costs, along with other costs shared with other lending products, such as the
cost of covering bad debt, may be rising while base rates are falling. Whilst some of
these costs will taken into account in the calculation of interchange rates 12 (itself the
subject of regulatory intervention at both a European and UK level), others will not.
Even if a credit card lender can secure funding at, say, 2%, there are still considerable
other costs to be covered. For example, assuming fixed costs for a medium risk main
stream credit card were around £40 per account per year, this would account for
around 4% interest on an average balance of £1,000 – fixed costs being relatively high
for what are generally comparatively low level borrowings. So
the price to the customer is beginning to build even before any consideration of risk is
taken into account or the recent considerable reductions in non-interest income (from
default fees; cash charges, PPI, interchange etc).
Significant one-off costs can also accrue in the form of innovation (including those
required to prevent fraud), such as:
•
•
•
Chip & PIN
Contactless card payments
Mobile payments
Other credit products such as loans and mortgages are much simpler, less dynamic
and less interactive, where the cost of funding comprises a greater proportion of the
cost of providing the product, and there is less involved in the day-to-day
management of accounts 13 ..
Card issuers have also had to adapt to a market where there have been significant
changes in consumer behaviour where consumers have adopted a more cautious
approach to their use of credit cards since 2005 which has, in turn, generated less
revenue for card issuers.
12
The full detail here is a matter for the card schemes such as Visa and MasterCard and are, rightfully,
outside of the domain and knowledge of a trade association such as The UK Cards Association
13
COST OF FUNDS AS A PROPORTION OF TOTAL COSTS: ‘Specifically, cost of funds represents 79
percent of the total costs of providing residential mortgage loans, 60 percent of the cost of bank
instalment loans, and 27 percent of the cost of credit card operations. Accordingly, we would expect a
close correspondence between changes in the cost of funds and average mortgage loan rates, and a
somewhat weaker relationship for other types of loans for which funding costs represent a smaller
portion of total costs.’ Source: Canner and Luckett, Federal Reserve Bulletin, September, 1992.
Impact of An Interest Rate Cap
Rate capping ought not to be considered in isolation but rather in the context of wider
policy objectives. Specifically, rate capping would have an unpredictable but
probably negative knock-on effect on the role played to be played by consumer credit in
the economic recovery.
Rate capping can be viewed in two ways:
•
Firstly, and most obviously, a rate cap might be thought of as the maximum
interest rate and/or price that a lender may charge for lending. This ignores the fact
that, as with any commodity, fixed costs mean that providing smaller amounts of
something will always be more expensive than providing larger amounts, and will
therefore have a disproportionate effect on the ability of consumers to borrow
smaller amounts 14 . As such it becomes a tool to define the point at which
smaller consumers stand to be excluded;
•
Secondly, a rate cap relates directly to the maximum level of risk that a lender
may assume in relation to a given customer above which they may not lend if it means
pricing above a certain level. As such it becomes a tool to define the point at
which higher-risk consumers will be financially excluded.
The fundamental issue at stake here is access to card products that come with a line of
credit. However, exclusion from such products would also reduce the range of
opportunities for groups of consumers to participate in the payments system that the
majority of the population take for granted, including many of the benefits of ecommerce which are best realised through card payments, along with consumer
protections that come with credit cards (but not with other products such as debit
cards) such as Section 75 of the Consumer Credit Act.
Any interest rate cap would require extra regulation, something that the new
Government has indicated should only be pursued as a last resort, and would
inevitably lead to further major re-engineering of credit card companies’ business
models. As already discussed, credit card companies have already had to adapt to
shortfalls in revenues resulting from recent regulatory intervention (e.g. on default
fees, PPI, interchange etc) and changes in consumer behaviour.
14
This common sense relationship has long been recognised and was documented as long ago as 1951
in THE SOCIAL CONTROL OF CONSUMER CREDIT COSTS: A CASE STUDY Clyde William
Phelps, University of Southern California 1951 and remains true some sixty years later
‘…The social agencies which took the initiative in developing the Uniform Small Loan Law, as well as
the legislators who enacted it into state legislation, realized the unavoidable cause and effect
relationship between size of loan and percentage rate of charge. Now, as then, very small loans and
very high rates inevitably go together. So do small loans and moderate rates. And so do large loans
and low rates. This relationship is inescapably true no matter who is the lender - whether commercial
bank, industrial or Morris Plan bank, industrial loan company, credit union, or consumer finance
company. The smaller the average loan made, the higher must be the percentage rate charged to cover
expenses because many of these expenses are the same in dollar amount regardless of the size of the
loan...’
In the absence of any actual experience of implementing a cap in the UK it is difficult to
provide any firm evidence of what the impact would be. However, we would suggest
that the following consequences are more than likely:
a)
An increase in the number of customers excluded from credit cards i.e. an
exacerbation of financial exclusion, particularly in the so-called sub-prime and nearprime markets;
b)
A migration of these customers to higher cost credit products such as home
credit or payday loans or, in the worst case, the unregulated market (i.e. loan
sharks);
c)
A migration of credit card interest rates/APRs towards the cap as it becomes
regarded as a market norm;
d)
A reduction in competition and less product diversity, with credit card
companies specialising in the so-called sub-prime market the most vulnerable to the
extent of no longer having a viable business model;
e)
The fundamental undermining of risk-based pricing for credit and an increase in
cross-subsidisation of riskier customers by less-risky customers;
f)
Increases to the amount and incidence of ancillary fees and charges to cover
lost revenue and increased risk (most likely those not covered in the APR
calculation) relating to default as business models change to reflect extra regulation;
g)
Growth in the unregulated illegal lending market, where there would have to be
a compensating increase in the effort to tackle loan sharks.
We DO NOT believe that a rate cap would have any impact in reducing consumer
demand for credit or the incidence of financial difficulties. On the contrary, it will have
an adverse impact on supply.
These thoughts are borne out by a report published by Policis for the then-DTI in
2004 entitled “The Effect of Lending Controls in Other Countries” based upon research
in the US, France and Germany where similar themes and conclusions are reached.
Whilst this report is now six years old we do not think that the findings should
have changed significantly since 2004 and should not be ignored. Neither are
we aware of any subsequent reports that have reached contrary conclusions.
We RECOMMEND that BIS consider refreshing this study either (i) to re-prove or
(ii) challenge / disprove its conclusions before setting potentially far- reaching
and profound policy decisions in this area.
In summary, the 2004 Policis report found that:
•
Demand for credit appears to be constant irrespective of the regulatory or
cultural context, with low income households having an irreducible need for
credit (p10)
•
There is less product diversity in markets with ceilings (p17)
•
Lenders may respond to ceilings by raising access hurdles to high risk
borrowers (p18)
•
Lenders withdraw from the market where ceilings are newly imposed (p18)
•
Lenders may adapt pricing structures so that less of the ultimate cost of credit
to the consumer is captured within the usury cap (p19)
•
In both the UK and US the major development in sub-prime markets has been
the extension of credit cards to high-risk borrowers (p19)
•
Rate ceilings appear to have no impact on the price of credit for low risk
borrowers which is determined by competition (p22)
•
The consumers most likely to be affected by rate ceilings are those operating
outside of the financial mainstream (p23)
•
Mainstream market expansion to low income borrowers has occurred using
behaviour-driven pricing (p23)
•
The price of credit effectively transferred from front end rates to back end
penalty and ancillary charges (p23)
•
For sub-prime cards and mainstream cards used by high-risk borrowers,
charges are more frequent and are high relative to balance values (p24)
•
Price transparency would appear to be compromised where the cost of credit
depends on ancillary and behaviour-driven pricing (p27)
•
Dedicated sub-prime models are often cheaper than the mainstream
alternatives under uneven repayment conditions (p28)
•
Rate ceilings affect the availability of dedicated sub prime models and create
credit exclusion for those who cannot access the credit mainstream (p37)
•
In states with ceilings borrowers are diverted to second choice products such
as pawn-broking, and to the credit mainstream (p38)
•
The distortion of the natural patterns of consumer choice can expose borrowers
to delinquency charging and increase default (p39)
•
The incidence of delinquency, and thus penalty charging, on mainstream cards
is consistently higher in states with ceilings (p39)
•
Those experiencing credit difficulties in France and Germany (where caps exist)
appear more likely to suffer significant detriment compared to their counterparts
in the UK (p42)
•
French and German borrowers with credit problems are much more likely to
face complete financial breakdown than borrowers in the UK (p42)
•
An extra dimension is added by the absolute exclusion of the credit impaired in
France and Germany which has created the conditions for illegal lending (p44)
•
The credit impaired in France and Germany appear more likely to use illegal
lenders than in the UK where there are legal credit options for such borrowers
(p44)
We would also point out comments made by other parties following publication of the
2004 Policis report – from Which? and Citizens’ Advice – with which we have some
sympathy:
•
Which? said that price caps could not be introduced until the Government
offered greater protection against underground lenders 15 ;
•
Citizens’ Advice supported the then-Government’s decision not to cap interest
rates, saying that “our evidence is that extortionate credit is about much more
than the interest rate – high pressure selling, unfair terms and conditions, hefty
charges for letters and statement, expensive add-ons like insurance can all hide
behind an interest rate” 16 – most of which have been addressed to some extent
through regulatory intervention in the intervening years.
In addition to refreshing the Policis report, the Government should wait for the
European Commission to publish its study of rate caps commissioned from IFF,
a consultancy based in Hamburg, which we understand will be published in
early 2011.
We understand that this report has already been received by the Commission and may
be published early in 2011 with or without a Commission future policy statement. The
report is intended to document two things:
•
An inventory of rate cap mechanisms that can be found in Europe (and possibly
elsewhere in the world); and
•
The testing of various hypotheses of the effects that have resulted.
We have no reason to think that IFF has carried out its work other than in strict
accordance with the European Commission’s tender’s conflict of interest rules.
However, the record does show that IFF has in the past been involved in activities
related to introducing interest rate restrictions. When the report is published it is
possible that a consultation exercise could be launched at the same time. Industry’s
only input has been via questionnaires issued by IFF, which were disappointing in that
their focus was on gathering high level opinions and speculative thoughts rather than
statistically representative data. In some cases the questions were, in our view, not
entirely balanced, which risks jeopardising the presentation of purely empirical findings.
15
16
http://news.bbc.co.uk/1/hi/business/3601122.stm
http://news.bbc.co.uk/1/hi/business/3601122.stm
Distribution of Credit Card APRs and the Affect of a Rate Cap
The simplest analysis of the potential impact of a rate cap on credit cards in customer
terms is to look at the distribution of APRs across the UK credit card market and
consider how many credit card accounts would be ‘lost’ at different levels of cap.
The following chart shows the distribution of APRs across the credit card market as of
May 2010.
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset
Looking at this same data cumulatively (i.e. the proportion of credit cards that are
accounted for by each additional % of charge) results in the following chart.
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset
Presumably, the point of a cap is to restrict pricing and/or lending and therefore
would have to be set at a level that was meaningful, had an effect and resonated with
consumers and other stakeholders. Even at levels that consumers might consider
relatively high compared to base rate (say in the 20%-30% APR range) the number
of credit card accounts that stood to be ‘lost’ and the number of consumers affected
(who might consider themselves mainstream) would be substantial, running into
millions of accounts 17 .
As can be seen the following proportion of accounts would be ‘lost’ at different levels of
a cap:
Level of Cap
APR of 39%+
APR of 35%+
APR of 30%+
APR of 25%+
APR of 20%+
% of credit card accounts ‘lost’
3.0
3.8
7.1
14.0
26.4
Number of credit card accounts
‘lost’ (million)
1.6
2.0
3.7
7.3
13.8
Cardholders holding cards at this price level are, by definition, either (i) amongst the
highest risk, holding cards targeted at the sub-prime market or (ii) high net worth
individuals holding premium cards with high annual fees, with the majority likely to be in
the former group. Sub-prime customers in particular, are less likely to hold more than
one card and less likely to be eligible for cards from another provider at a lower cost.
On page 46 of The UK Cards Association response to the recent BIS Credit & Store
Card Review 18 we presented evidence on multiple credit card holding by demographic
groups in 2008. This data has been updated below for 2009. The evidence shows that
multiple card holding is less a feature among groups that might be considered proxies
for the sub-prime, as follows:
Demographic
All adults
Age
16-24
Social class
D
E
Household Income
Up to £5,000
£5,000-£9,999
Average cards per holder
2.22*
Proportion with one card only
38%
1.49
51%
1.84
1.69
50%
59%
1.81
1.75
72%
45%
Source: UK Payments Consumer Payments Survey 2010
* NB: the average credit cards per holder at the end of 2009 had fallen to 2.22 from 2.33 at the end of
2008 reflecting a significant drop of 8 million credit cards in circulation during 2009.
17
For those card issuers disproportionately affected, this could diminish economies of scale, putting
pressures on margins and creating a need to re-price – a vicious circle.
18
The UK Cards Association: Credit & Store Card Review – Response to A Better Deal for Consumers:
Review of the Regulation of Credit & Store Cards: A Consultation by the Department for Business
Innovation and Skills (January 2010)
It is a flawed assumption to believe that a lender which has assessed that it is
prepared to lend to an individual at a given price, were this price to turn out to
be above the cap, would still be willing to lend to that individual at the level of
the cap or below the cap. A more likely response is that they will not lend at all, or
only adjust prices down for customers at the very margin.
Were the very marginal customers to be accepted at lower price (perhaps because
they hold other products with the card company or have a perceived future value –
this would require cross subsidisation for a period of time), this would inevitably
increase costs that in turn would be borne by better customers i.e. increasing the level
of cross-subsidy; diminishing the rationale for, and effectiveness of, risk-based
pricing; as well as having knock-on consequences for the prudential aspects
associated with pricing for risk.
No retailer would sell goods at a price below cost price as a standard way of doing
business (other than as a deliberate loss leader). A lender is no different in that
respect.
For those cardholders who will no longer be eligible for a credit card the question
remains as to what they will then do:
•
With regard to credit, will they decide not to borrow at all? We believe this is
unlikely.
•
Or will they decide to borrow from an alternative source, one that is likely to be
more expensive and perhaps outside of the regulated sector?
•
With regard to payments, what alternatives will they use? Debit cards? Cash?
Cheques? What impact might this have on the Payment Council’s cheque
replacement programme?
Given our recommendation that the Government work with industry to work together
on a radical review of the APR we now go on to consider the shortcomings of the APR
itself.
Definition of an APR
The APR has long been the standard method for showing prices of lending products,
the key objective being to enable consumers to compare the cost of credit both
(i) within a single type of credit product (i.e. between one credit card and another)
and (ii) between credit products (i.e. between a credit card and a personal loan).
Whilst this is a worthy objective it is one that it is not possible to achieve given the way
in which different credit products work. The main reason for this is that APRs are only
comparable if the same amount of money is borrowed and repaid in exactly the same
way, something which is not a problem for fixed term credit such as personal loans
and mortgages.
An APR is not an interest rate but an expression of the total cost of credit. One of the
consequences of this is it can be prone to distortion or, worse, manipulation. Indeed,
the DTI itself said in 2003 19 :
“A high APR is not necessarily indicative of an extortionate or high-cost loan. For
example, the amount of interest repayable for very short term loans may appear
relatively modest, and yet can result in a very high APR…
…Creditors could manipulate the APR by extending the minimum term over which
credit can be taken. This would result in the APR being reduced, although the total
interest payable might actually increase”.
19
st
DTI, Fair, Clear and Competitive: The Consumer Credit Market in the 21 Century
(http://www.berr.gov.uk/files/file23663.pdf)
How APRs for Credit Cards are Calculated
The APR for an open-ended revolving credit product such as credit card, where the
amount borrowed and the term over which it is repaid are unknown at the outset of the
agreement, has to be calculated using a series of assumptions of key features of the
borrowing.
The assumptions to be used are handed down in the Consumer Credit Directive
2008, the latest in a number of attempts at a European level to harmonise
successfully across Europe the way in which APRs are calculated, and are
implemented in the UK by the Consumer Credit (Total Charge for Credit)
Regulations. These regulations have themselves been altered twice in recent
memory, in 2000 and 2006.
In summary, the basic assumptions for a revolving credit product are as follows:
•
The borrower draws down £1,500 on the first day of the agreement (where the
maximum credit limit is less than £1,500 then that maximum should be used instead);
•
This amount is paid back in twelve equal monthly instalments; and
•
The cardholder makes no further transactions.
It is unlikely that consumers understand that these assumptions are used or would
recognise them as features of their own behaviour.
Whilst a credit card can be used in a infinite variety of ways by a cardholder (in terms
of spending, borrowing and repayment) we would strongly suggest that the
assumptions used are a most unlikely behaviour.
By 1 February 2011 when the Consumer Credit Directive comes into force, the
assumed borrowing will be reduced to £1,200. This means, that for any product
with annual fee, the mathematics will result in the APR increasing immediately
(perhaps by 1%-2%) despite the fact that the cost to the consumer (the monthly
interest rate, the annual fee) has not changed. Meanwhile, products without a
fee will see no change in the APR.
This demonstrates how, by regularly altering the APR calculation, legislators
themselves can exert as much, if not more, influence over the level of APRs in
the credit card market as lenders themselves.
Credit Card Products With Seemingly High APRs
Two types of credit card product tend to have seemingly high APRs compared to
classic mass-market products, albeit for differing reasons. These products can
typically be divided between premium products and sub-prime products.
NB: once again, it is also worth reminding ourselves that for the 61% of cardholders
who currently pay off their balance in full each month the interest rate and the APR is
irrelevant.
Premium Products
What these cards have in common is that they are generally targeted at high-networth individuals and, in return for an annual fee, provide a range of benefits over and
above the simple provision of a credit line including rewards schemes; access to
airport lounges; concierge and personal assistant services; travel insurance; roadside
cover; home emergency cover; purchase protection etc.
For such products the annual fee has to be included in the APR calculation even
though it is self-evidently intended to cover the provision of the non-credit related
added value services, and has an inflationary effect on the APR.
In fact, for many of these products the actual monthly interest rate is typically
cheaper than for mass market credit cards, reflecting the lower risk profile associated
with the target market.
Sub-Prime Products
For products targeted on the sub-prime market, these are often available with
comparatively low credit limits (c£250). The way that APRs are calculated means
that this lower limit is used in the APR calculation rather than the usual £1,500. For
products with an annual fee this has a marked inflationary effect on the result.
Credit Card - Comparison Tables of Monthly Rates and APRs
In order to demonstrate the shortcomings of the relationship between the monthly interest rate, the annual fee, the assumed borrowing and the
resulting APR, the following table takes a random selection of credit card products from four product groups – (i) classic mass market credit cards;
(ii) low-cost (no frills) cards; (iii) cards targeted on premium cardholders; and (iv) cards targeted on so-called sub-prime cardholders.
Ranked by APR
Product
Annual Fee
Barclaycard
Simplicity (ii)
Halifax Clarity
(ii)
Capital One
World
Santander
Credit Card (i)
Barclaycard
Business
Platinum
Barclaycard
Initial (iv)
Capital One
Progress
Starwood
Preferred
Guest (Amex)
Capital One
Classic
Aqua (SAV)
(iv)
Virgin Atlantic
Black (iii)
Vanquis (iv)
BA Amex
Premium Plus
(iii)
NatWest
Black (iii)
0
Monthly
Interest Rate
0.553
Assumed
Borrowing
1500
APR
0
1.017
1500
12.9
18
0.830
1500
12.9
0
1.294
1500
16.9
78
1.189
1500
26.9
0
2.207
1500
29.9
0
2.210
1500
29.9
75
1.530
1500
32.0
0
2.530
1500
34.9
0
2.592
1500
35.9
115
1.4566
1500
37.1
0
2.840
250
39.9
150
1.530
1500
250
1.160
1500
6.8
Ranked by Monthly Interest Rate
Product
Annual Fee
Barclaycard
Simplicity
Capital One
World
Halifax Clarity
0.830
1.017
NatWest
Black
Barclaycard
Business
Platinum
Santander
Credit Card
Virgin Atlantic
Black
BA Amex
Premium Plus
1.160
1.530
46.0
Starwood
Preferred
Guest (Amex)
Barclaycard
Initial
Capital One
Progress
Capital One
Classic
Aqua (SAV)
54.2
Vanquis
2.840
Source: credit card issuer websites 2 November 2010
Page 45 of 97
Interest
0.553
© The UK Cards Association 2010
1.189
1.294
1.4566
1.530
2.207
2.210
2.530
2.592
Assumed
Borrowing
Taking the information from the above tables we have constructed the chart below to
shows how the ranking by monthly interest rate compares to the ranking by APR and
the extent to which that ranking changes depending on which measure is used.
Given the significant reordering in ranking that occurs the conclusion must be that
there is no direct correlation between monthly interest rate and APR.
Page 46 of 97
© The UK Cards Association 2010
How Do Advertised APRs Relate to What Cardholders Actually Pay?
Whilst the APR was supposed to provide a consistent measurement of the cost of a
credit card to the user it is clear that, depending on the behaviour of the customer, the
relevance of the APR becomes questionable.
For the 61% of customers who pay in full each month the APR is, of course,
meaningless because they do not pay interest.
For customers who carry a balance forward, the APR becomes less reliable the more
variable their behaviour. Behaviour can include the mixture of transactions they
make (for example, purchases, cash advances, balance transfers, other promotional
offers etc); the frequency of use (anything from once or twice a year, to many times a
week); and different repayment patterns (the proportion they repay and the time they
take to repay). Given this variability it might be expected that, given the simplistic
assumptions, the APR is going to have drawbacks and this is, indeed, the case.
The APR delivers a single figure for a card account designed to represent the ‘total
cost of credit’ on that account. This figure is dependent on three things only – the
monthly interest rate, the credit limit and the annual fee. If there is no annual fee (as is
currently the case for the vast majority of UK issued credit cards) the APR is
dependent only on the monthly interest rate.
Examination of data from actual card usage (using the Argus database) shows that
while cost is – very – broadly related to the APR, the range of costs seen by any
group of card holders can be extremely variable for any given APR, as shown in the
following chart:
Source: Argus Information and Advisory Services, UK Cards Analytical Data Set
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© The UK Cards Association
For any customer who borrows, the quoted APR may bear little relationship to the
annual cost, when the latter is expressed as a cash amount. This is because there is a
wide range of behaviour, and every difference in how the card is used is likely to affect
cost. Some variations in behaviour are the amounts borrowed, the amounts spent, the
different combinations of different balance types, the interest rate on each of these and
the time in the month when the customer makes a repayment.
As part of its investigations into the relationship between APR and cost, The UK Cards
Association divided credit card borrowers into several hundred different behavioural
groups. The aim was that these groups should be relatively homogenous. The chart
shows a subset of 24 of those groups, each of which should have similar costs at
particular APRs, because they had comparable balances (between £2,000 and £2,250)
and each paid interest in 12 consecutive months.
However, even among these (apparently) similar groups, the range of costs is
apparent. It is clear that there are four broad ranges of APRs, indicated by the four
groups of points running vertically up the chart at around 12%, 18%, 23% and 30%.
Each point on the chart shows the quoted APR (on the horizontal axis) and the
average amount (on the vertical axis) a customer in each group was charged. The
solid blue points show the maxima and minima for each broad APR band. Thus, for
accounts which had APRs of around 18%, annual costs varied from around £200 to
almost £500 (the lowest and highest blue points at 18% APR).
In conclusion, this analysis demonstrates that there is misalignment between the
advertised (headline) APR and the ultimate cost to the card holder. The APR
demonstrably does not correlate well with the actual cost of borrowing
incurred by the customer.
This analysis reinforces the point that the APR is merely an illustration of the cost of a
credit card (based on a set of unlikely assumptions) that allows one card to be
compared with another. The APR is NOT an indication as to the eventual or likely cost
to the consumer of using a particular card which is entirely dependent upon their actual
behaviour.
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© The UK Cards Association
How Can the Assumed Repayment Pattern Affect the APR?
By way of a further example of how the assumptions can affect the APR – this time
looking at how the outstanding balance is repaid – consider the following examples:
•
If a consumer spends £1,000 on the first day of their credit agreement and repays
a lump sum of £1,200 (capital and interest) twelve months later to clear the debt then
the APR is 20.0%;
•
If a consumer spends £1,000 on the first day of their credit agreement and repays
£100 per month (capital and interest – total amount repaid being £1,200) for twelve
months to clear the debt then the APR is 41.3%. So despite repaying the
same amount in cash terms as in the first scenario the APR is more than
doubled;
•
If a consumer spends £1,000 on the first day of their credit agreement and repays
£92 per month (capital and interest – total amount repaid being £1,104) for twelve
months to clear the debt then the APR is approximately 20.0%. So, despite repaying
£96 less than in the first scenario, or just about half as much interest,
the APR is actually the same;
•
If the amount repaid each month is anywhere between £92 and £100 then the
perverse outcome is that the APR will be higher than in the first scenario despite the
fact that the amount repaid is less.
The above scenarios again demonstrate the unreliability of the APR for revolving
products.
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© The UK Cards Association
How Can the Assumed Term of the Loan Affect the APR?
As an aside, the following chart demonstrates the high degree of variation delivered by
different assumptions of term associated with the same borrowing and repayment.
Source: The UK Cards Association
As can be seen, in the basis of the same borrowing and repayments – a £1,000 loan
repaid in one payment of £1,200 (i.e. 20%) the APR can vary from c800% for a one
month loan to a figure closer to 20% for periods closer to one year or more.
This relationship explains some of the very high APRs associated with the home
credit and payday lending markets, even where the amounts borrowed and repaid
are the same and/or relatively small.
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© The UK Cards Association
Other Problems with the APR
There are further reasons why revisiting the APR methodology would be a good idea
for all stakeholder. For example:
•
The APR inhibits a lender’s willingness to apply annual fees, were this to be
considered part of the solution to rebalancing the costs across the credit card user
base where many cardholders (typically full payers) use the product fee- free.
Introducing an annual fee immediately increases the APR and makes the card
concerned less competitive. The interest rate would have to be significantly reduced in
order to retain the existing APR.
•
The APR inhibits innovative pricing approaches and structures that may not fit
within the traditional APR calculation, where such pricing approaches may in fact be
more transparent and simpler to understand for the customer. Whilst we see many
innovative pricing structures in other markets such as mobile phone tariffs and utility
pricing we do not see such innovation in credit card pricing, despite the fact that it
might be more transparent and easier for consumers to understand.
A critical outcome that we would like to see from this Call for Evidence is the creation of
a regulatory regime that actually encourages and promotes innovation rather than
imposing more and more constraints that simply serve to stifle innovation.
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© The UK Cards Association
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Consumer Understanding of APRs
We do not believe that consumers currently have a good understanding of APRs i.e. how
they are calculated and what is taken into account; how they relate to their actual
behaviour; how they are best used for making comparisons etc.
The APR is only an effective tool if consumers understand the concepts behind present
values of future cash flows, and what those mean. However, it relies on the fact that
card holders understand – and fully – the nature of ‘net present values’ of future cash
flows and the impact those will have on his or her budget at the future time. The UK
Cards Association believes that consumers would struggle to do so, unless they have
some financial or accounting qualifications. Few people who are not trained in financial
planning are likely to be readily familiar with such concepts.
Risk-Based Pricing and the Re-Pricing of Existing Debt
The second part of Q9 of the Call for Evidence asks “Should a cap apply to all
interest rates or only those which apply to existing borrowing?”
Paragraph 43 of the Call for Evidence states that “a separate problem for some
consumers is that the variable interest rates which apply to credit and store cards mean
that the cost of existing borrowing can increase suddenly; and in a way which the
consumer cannot control. Risk-based pricing means that in some cases costs
will rise because a consumer is in difficulty and therefore precisely when he can least
afford it”.
This comment would appear to duplicate the issues raised in the BIS Credit & Store Card
Review where we addressed concerns about re-pricing in depth as part of our response.
This chapter of our previous response is therefore replicated in full as Appendix A to this
document as the content (including information on the prevalence of re-pricing within the
industry and the outcomes for consumers following a re-price) remains relevant.
However, in addition to that evidence (the key points of which are summarised
below) we would make the following additional comments:
•
It is simple common sense that there is nothing to be gained by increasing the
price of credit to a customer who is experiencing or showing signs of financial
difficulty. However, if a customer is showing signs of riskier behaviour then it
seems perfectly legitimate to reflect that increased risk in pricing (which will serve
to reduce the extent to which riskier customers are cross-subsidised by better
customers). It is a myth to believe that lenders recklessly price-up individuals who
are showing signs of getting into financial difficulties with no regard for adverse
outcomes. This is demonstrated by the fact that the default rate for cardholders
who have had their interest rate increased is virtually the same as those that
have not been re-priced.
•
The statement that consumers “cannot control” re-pricing is no longer strictly
true. BIS will be aware that following the Credit Card Summit in November
2008 the credit card industry implemented arrangements whereby a cardholder
whose interest rate had increased could opt-out of the price increase and pay
off the existing balance at the existing rate over a reasonable period, provided
they stopped using the card (in our view, a sensible quid pro quo). Credit cards
FCA Oct 2013 response (6)
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have therefore since offered borrowers more control over changes to interest
rates than any other form of credit, and a cardholder need not pay more for
their borrowing than the rate that applied at the time it was borrowed.
•
Credit cards serve a market where spending (draw down), borrowing and
repayment over the long term is unknown at the outset of the agreement but where
the flexibility is part of the Unique Selling Proposition (USP) associated with the
product. Where borrowers want or need certainty over draw down and
repayments, then this market is serviced by personal loans. Hence, to restrict a
credit card lenders ability to re-price their product is to effectively convert a credit
card into a personal loan (or a succession of personal loans) whilst losing one of
the key benefits that defines and differentiates credit cards from other lending
products.
•
We do not believe that variability of rates is an alien concept to consumers. This
was borne out by our consumer research conducted by GfK for the recent BIS
Credit & Store Card Review. Variable rates are something that consumers are
familiar with from other forms of long-term lending such as mortgages – where the
impact of an increase in interest rate is likely to be more financially significant for
individual customers given the different order of magnitude in the amount borrowed.
If a prohibition was to exist on re-pricing of credit card debt, what would be the logic
for not applying a similar cap to mortgages or other lending products?
•
The financial impact on a cardholder of an increase in the APR on a credit
card of 1% will be in the range of £5-£9 (depending on their repayment
behaviour) for each £1,000 borrowed across the course of a year (assuming
equal payments are made across the year and they make no further
spending).
•
We can not see the logic of prohibiting the re-pricing of c£58.5 billion (c4% of
the total UK personal debt) of outstanding credit card debt when consumers
have more than £1.3 trillion of additional outstanding debt on other products,
much of it at variable rates on more significant levels of borrowing. This
suggests that the underlying concern is not simply about the principle of variable
rates. We are not clear why credit cards should be considered different to other
forms of lending.
•
Preventing re-pricing of existing debt would result in credit card lenders
exercising additional caution in pricing for all customers if pricing were to become
a one-off exercise which, once done, can not be undone. This would mean
interest rates would be generally higher to compensate and that re- pricing will
not occur – either upwards or downwards (where downward pricing is often used
as a lever of competition). It would also lead to increased cross- subsidy
between customers.
•
Many UK card issuers arbitrarily apply internal price maxima for reputational,
governance or other reasons.
•
Following the recent BIS Credit & Store Card Review 2010 the opt-out was
extended to all forms of re-pricing activity, including general portfolio
pricing. The credit card industry also committed to developing a factsheet
which informed card holders of why re-pricing occurs, what their options are;
and what they can do in terms of behaviour to reduce the chance of being re-
FCA Oct 2013 response (6)
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priced, shown in the following box, which will be available imminently. The
factsheet has been approved for a ‘crystal mark’ by the Plain English Campaign.
Conclusion
In summary, we do not believe that rate capping is the answer to external concerns
about credit card pricing, especially if the debate is being driven by perceptions and
misunderstandings of APRs and where there are underlying concerns are not yet being
fully articulated.
What we can say is that, given the self-evident shortcomings, the APR is not
the right basis for a discussion about the problem or its capping being any part of
the solution. With the APR so demonstrably flawed it would make no sense to use
it as the basis for a cap.
Our Suggestions
If the Government wishes to pursue a debate on rate capping we believe that it first
needs to articulate better the concerns that it has. We believe that at a very minimum
the Government should consider revisiting some of its past studies in this area,
specifically:
•
Kempson: Over-Indebtedness in Britain – September 2002
•
Policis: The Effect of Interest Rate Controls in Other Countries – July 2004
We also believe that the Government needs to address the shortcomings of APRs for
comparing revolving credit card products. We recognise that this is a long term initiative
that would mean revisiting the Consumer Credit Directive. We believe that the problem
with APRs for credit cards has become so acute that the UK should not be dissuaded
from raising this issue in Europe despite the long-term nature of the process.
As such, The UK Cards Association would be happy to work with the Government on a
consultation on the alternatives to the APR with a view to identifying something that works
better for both consumers and industry.
FCA Oct 2013 response (6)