As a result of our interim findings, we are considering remedies in a number of areas in order to make the market work better.
In this chapter, we set out our early thinking on remedies to help make the market work better for consumers and address the problems we have found. We would like stakeholders’ views at an early stage to help us develop these remedies. We welcome your views on the options we have identified and the most effective ways of addressing them.
Our initial thoughts on possible remedies focus on two main areas:
- Shopping around and switching
- Affordability and problem debt
We want to identify proportionate and effective measures which address these concerns without having a negative impact on a market that, overall, provides benefits for the majority of consumers.
When we propose remedies we will consider:
- how the remedy addresses the interim findings and resulting consumer detriment
- the tools we can use, including our powers and our ability to make further rules, as well as constraints from relevant EU and domestic legislation
- how effective and proportionate the remedy (or package of remedies) will be
- how the different remedies interact and work as a package to make the market work better for those consumers for whom it is not working well
- how the remedy (or package of remedies) fits in with the FCA’s other policies and actions relevant to credit cards
At this point, we are presenting early thinking on remedies for discussion. Our final report will set out the final package of remedies with supporting analysis.
As set out in our market study guidance, we have a range of options which we could explore when developing the remedies. These include using rule-making powers and publishing guidance, supervision and enforcement action as well as proposals for enhanced industry self-regulation. Any proposed rule-making remedies would require formal consultation and cost benefit analysis.
We have not yet assessed how effective and proportionate the potential remedies could be and we recognise that our approach may be constrained by EU and domestic legislation in some areas. We welcome stakeholder feedback on the most effective way to seek the outcomes identified.
We summarise below the aim of the potential remedies and how they can address the issues we have identified.
Shopping around and switching
The inherent flexibility of credit cards can make it complex for consumers to decide which card to choose. This is because their decision depends on how they will use the card, and consumers do not always use the card in the way they originally anticipated. Potential remedies in this section aim to help consumers who do shop around to cut through the complexity and make better decisions which more closely reflect their behaviour.We believe there is scope to boost the role of third party intermediaries to simplify the choice for consumers seeking the best deal. In particular, we consider that the market could be improved in the following ways:
- Allow consumers to open access to their credit card usage data to other market participants: We could consider how to build on the Government Midata initiative100 for personal current accounts, and the development of Application Programming Interfaces (APIs101) which will make the process simpler. Consumers may make more informed comparisons if they consented to third parties, such as price comparison websites and other, credit card providers, having access to their transaction history data. We are interested in views on the potential cost and benefits of developing comparable solutions for the credit card sector.
- Clearer standards for price comparison websites (PCWs): We recently consulted on introducing additional standards for PCWs which compare high-cost short-term credit products to address practices which result in consumers making poor decisions and not choosing the cheapest loan for their needs.102 These measures cover commercial relationships, rankings, advertising, input functionality and market coverage. We will use the responses to this consultation when we consider if similar standards are needed to address the issues we have found in the credit card market and so enable consumers to make more informed choices.
We found promotional offers were common in this market, and were an important spur for switching. However, our findings suggest that some consumers would be helped by being reminded of the benefits of repaying their debt or shopping around at the end of their promotional period. We consider that the market could be improved by:
- Providing timely information to remind consumers to repay their credit card debt or shop around before promotional offers expire: There may be benefits in firms giving consumers proactive warnings through text alerts, mobile applications, and/or emails to remind them that their promotional offer is due to expire and the rates they will pay on any outstanding balances when it does so. The industry’s Lending Code already includes provisions which recognise the value that information about the end of promotional periods can bring to consumers. We see further benefit in exploring how effective these provisions are and how providing information in this area can be improved. This builds on our work on consumer banking behaviour103 and smarter disclosure.104
- Promoting and facilitating the use of quotation searches: We found that some consumers with higher credit risk are dissuaded from shopping around because they are worried about the impact of multiple application searches on their credit score. We are currently considering measures to promote and facilitate the use of quotation searches across all credit sectors105 and the evidence from this market study will feed into this work.
Other concerns around conditional charges and other aspects of terms and conditions were firm-specific rather than market wide. We are pursuing these concerns with the firms in question.
Affordability and problem debt
We found evidence that some consumers borrow more than they intended when they originally intended, and repay less than they could, causing them to pay additional fees and interest. Our review of the academic evidence shows that behavioural biases play an important role and we will need to take these into account when identifying potential remedies.
There is scope for the market to work better for consumers struggling with credit card debt or paying more than they could in fees and interest. We are reviewing ours rules on creditworthiness (including affordability) across consumer credit, and our findings in credit cards will feed into this.106
Below, we outline possible steps that could (i) reduce over-borrowing and encourage earlier repayment, so reducing the amount of interest and charges that consumers pay because of the way they use their credit cards; and (ii) encourage earlier intervention by firms to identify and help consumers with potentially problematic debt.
In relation to under-repayment:
- Disclosures to encourage faster repayment: Firms could disclose in each monthly statement (i) how long it will take the consumer to repay the current balance and/or (ii) the saving in total cost from repaying more than the minimum and/or (iii) the repayment amount needed to pay off the balance within, say, one year. We are keen to hear from firms that have already trialled or are interested in trialling such an approach.
- Provide a wider range of pre-set repayment options: Firms could offer different pre-set payment options for regular automated payments, for example, reflecting target time to repay. This would help influence consumer choice on how much to repay (framing effects) and counteract the potential ‘anchoring’ effect of making the minimum repayment.107 For online payment mechanisms, firms could remove the minimum amount from the range of pre-set payment options but with a default setting to ensure that at least the minimum is repaid.
Some stakeholders have suggested simply increasing the minimum repayment across the board, i.e. mandating that consumers pay a much higher amount than our rules currently require. This has the obvious disadvantage of reducing the repayment flexibility from which many consumers benefit. However, we would be interested to hear further views from stakeholders.
For over-borrowing, the following measures could make the market work better for consumers:
- Providing timely information to remind consumers to consider how much they are borrowing: We found some consumers spent more on their credit cards than they expected to when they took out their credit card. Some credit card firms already provide proactive warnings to consumers using through text alerts, mobile applications, and/or email to remind them how much credit they have used at certain trigger points, e.g. half their credit limit. We want to better understand how effective these warnings are, and explore the scope for encouraging this practice across the market.
- Giving consumers more control during the lifetime of the credit card on variations, such as an opt-in for credit limit increases: Firms must already let consumers opt out of proposed increases in the credit limit. There may also be benefits in requiring consumers to actively opt in to an increase and to permit ‘over the limit’ transactions. Consumers could also benefit from being able to choose the same payment due date each month, to align with the time they receive their regular income where this is not currently an option.
In relation to potentially problematic debt, we consider the following measure could make the market work better for consumers:
- Earlier forbearance: We think firms could identify and address potentially problematic debt (e.g. persistent debt or systematic minimum repayment) sooner, before consumers miss payments and accumulate interest and avoidable charges. Firms are already required to monitor for signs that consumers may be struggling to repay, but could do more to respond, for example by contacting the consumer to find out if they are in financial difficulties and, if so, whether to exercise forbearance. In particular we want to explore how to rebalance the incentives for firms in the credit card market to ensure that lower cost alternative credit is offered as a matter of course to those who appear to be building up problem debt after a standard period, for example 12 months.
We recognise the challenges firms face when dealing with consumers in financial difficulties. We also acknowledge that when firms identify consumers experiencing difficulty they may have to use a stepped approach which reflects consumers’ responses and how their situation changes. This could include reminders or signposting to debt advice or potentially re-structuring the repayment arrangements. We invite views on (i) how consumers struggling with debt could be identified earlier and (ii) how interaction at that stage could best be managed.
There are more radical possible approaches to tackling problem debt. Consumer groups have suggested a cap on the costs of credit cards, similar to that in the high-cost-short-term credit (‘payday’) market, where we have capped the total cost at twice the amount borrowed. At this stage we do not intend to pursue this approach, which is hard to reconcile with the flexibility of credit cards. We want to retain the flexibility credit cards offer for those who need credit, while encouraging better borrowing/repayment habits. We consider that the package of remedies outlined above is the best way for us to strike this balance. But we would be interested to hear further views from stakeholders on this point.
101. APIs – Application Programming Interfaces – are rules that allow pieces of software to interact with each other and exchange data. They have become the de facto standard for sharing data, and have enabled organisations that hold large amounts of data to become platforms for third party innovation.
107 Please refer to the Literature Reviews published alongside this report.