New Markets - New Opportunities?

MONEY ADVICE SCOTLANDANNUAL CONFERENCE

Changes in Credit Card Practices

Paul McCarron23 June 2011

Background

The Government’s Credit Card Summit (November 2008)

The Consumer White Paper (July 2009)

Credit & Store Cards Consultation (October 2009)

BIS Credit & Store Cards Consultation

Four main issues:

• The Allocation of Payments• The level of Minimum Payments• Unsolicited Credit Limit Increases• The Re-pricing of Existing Debt

Other issues:

• Unsolicited Credit Card Cheques• ‘At Risk’ Customers• Automated Regular Payments• Annual Credit Card Statements

The industry’s response

• evidence, evidence, evidence – avoid assertion & supposition

• an industry that is not in denial

analysis of 44m accounts (Argus) economic impact analysis (Oxera) consumer research (GfK)

• 230 page response and 600 pages of appendices

• 15 March 2010 joint statement – a proportionate outcome

Criticism & Rationale – Allocation of Payments

Critics say:

• it’s confusing - customers don’t understand that different parts of the balance attract different rates of interest ….

• and many didn’t know the order in which they were paid off

The industry view:

• it allowed card issuers to provide a range of promotional offers

• it’s part of the ‘deal’, i.e. a 0% period required a certain AoP

The outcome:

• industry agreed to a full reversal to a ‘high to low’ model

Criticism & Rationale – Minimum Payments

Critics say:• minimum payment levels are too low, meaning that customers may

take significantly longer to pay off a debt• and they’re paying a lot more interest

The industry view:• provides flexibility to pay the minimum when it suits a customer• negative amortisation already prevented under the Lending Code

The outcome:• industry has agreed to contact frequent low/minimum payers • a new calculation for new accounts (and potentially ‘back book’)

Criticism & Rationale – Unsolicited Credit Limit increases

Critics say:• customers may be ‘enticed’ into spending more• they need to have more control over their own credit limit

The industry view:• current practice is underpinned by a ‘low & grow’ model • allows limits to be increased incrementally over time• strong existing protections (Lending Code/Best Practice commitments)

The outcome:• better communications and 30 days notice• customers can reject the increase, opt-out of future increases and

reduce their limit at any time …… and in easier ways, such as on-line

Criticism & Rationale – Re-pricing of Existing Debt

Critics say:• rate increases not adequately explained• not clear what cardholders can do to influence changes

The industry view:• an essential tool for managing ‘open-ended’ & flexible credit products• customers’ circumstances (and risk) change over time (up & down)• industry had delivered a set of principles (with opt-out) in Jan 2009

The Outcome: • better communications and a new 60 day ‘rejection’ period• previous principles voluntarily extended to general re-pricing • a ‘re-pricing explained’ fact-sheet (Plain English approved)

So, in short, how do customers benefit?

• The most expensive debt on your credit card will always be paid off first

• Paying the minimum payment on new accounts will reduce your balance

• You’ll have more control over increases to your credit limit

• You’ll receive clearer communications if your interest rate is to be increased

Additionally:

• If you frequently pay the minimum, or close to it, you may be contacted

• You will not be sent credit card cheques unless you request them

• You’ll start to see annual credit card statements from early 2012

• There will be more flexibility to choose the regular amount you wish to pay

Other more generic changes for ‘lending’

• Stronger requirements for responsible credit assessment

• More support for customers in (or approaching) difficulties

• Breathing space carefully extended to (structured) self-help

• Credit searches – indicative quotations explained

• Limit reductions – contact details must be provided

Working with debt advice agencies

Extensive collaborative work has been undertaken to seek to help those in (or at risk of) financial difficulties:

• What are now the ‘common denominators’?

• ‘At risk’ customers:

- who should be excluded from ‘UCLI’s?

- which minimum/low payers should be contacted?

• Joint consumer leaflet with Citizens Advice

• An ongoing positive and focussed dialogue is essential

The Lending Code – ‘codifying’ the changes

Implementing the agreed changes was addressed as follows ……

• Decision taken to build the changes into the Code via an interim Addendum, pending the revised Code (31 March)

• Extensive dialogue with members & the Lending Standards Board ensured that the changes were ‘live’ in January

• Now being incorporated into the revised Code, working through BCAP, and where a strong working relationship with the Lending Standards Board has been essential

Changes in Credit Card Practices

Any questions please?