Eager to follow the lead of US regulators, the UK
government has issued a new consumer White Paper setting out
proposals to regulate the UK consumer lending and card industries.
But is there anything of substance to worry UK card issuers, or is
the government simply rehashing old ideas? Victoria Conroy
With the flurry of pro-consumer legislation making its way through
the halls of the US government, it was only a matter of time before
the UK government adopted a similar stance as a consumer champion
by promising to crack down on the consumer lending market in the
To this end, the UK government has published its ‘Consumer White
Paper’, setting out a number of proposals aimed at making the
personal finance market work better for consumers, while enabling
businesses to continue to meet consumer needs.
However, a cursory reading of the document throws up few surprises,
and instead regurgitates old threats to curb consumer lending
practices, while at the same time taking a rather dim view of
consumers’ intelligence and decision-making abilities.
Removing consumer choice?
For the card industry, the stand-out proposal is a ban on the
sending of unsolicited credit card cheques, which are sent without
explicit consent from the consumer, meaning the consumer has to opt
out in order not to receive them.
The White Paper also states that such cheques have a higher
interest rate than credit cards, incur a handling fee and do not
have the standard interest-free period of credit cards.
While the government says that credit card cheques are still useful
and suitable products for some consumers, its White Paper takes the
view that they risk putting “cognitive limitations on processing
complex and potentially voluminous financial information” on the
consumer, leading to a higher level of use than if credit card
cheques are sent only to those consumers who request them.
“The unsolicited nature of the cheques and the volume that are sent
out may make it easier for consumers in distress to use them,
instead of facing up to their problems and cutting expenditure or
seeking more affordable credit; the high costs associated with them
can make the situation worse,” the paper noted.
However, in backing up this assertion, the White Paper cites as
evidence just one survey conducted by pro-consumer UK money
comparison website uSwitch in 2008, which concluded that there is
“very limited knowledge about charges incurred using credit card
uSwitch’s research claimed that 86 percent of people using credit
card cheques are not aware of their full costs, with 23 percent
saying they did not know the level of fee (and 11 percent of people
believing that there is no fee). According to uSwitch, around 2.5
million people receive unsolicited credit card cheques once a month
and 5.5 million people receive them twice a year.
However, figures from The UK Cards Association suggest that fewer
than 1 percent of credit card cheques sent to customers in 2008
were used, amounting to £3.2 billion ($5.2 billion) in spending or
2 percent of all spending on credit cards, and just 0.18 percent of
total UK consumer debt.
Over the last three years, some UK issuers such as Royal Bank of
Scotland and NatWest have withdrawn credit card cheques altogether.
Despite this, the government is pressing ahead with a proposed ban
on unsolicited credit card cheques, preventing the issuer sending
out cheques except in response to a specific request from a
customer at a particular time.
The UK Cards Association, responding to the White Paper, released a
statement saying: “The government has restated its intent, first
announced back in March, to ban unsolicited credit cheques. We will
co-operate fully with them while also attempting to avoid
negatively impacting customers who may wish to continue using them
in certain circumstances such as for balance transfers on
UK regulators emulate US counterparts
On the wider subject of credit cards in general, the White Paper
states that while interest rates for loans and overdrafts have
begun to drop, credit card interest rates have changed little
during the recession.
Complaints about credit cards amounted to 75 percent of the 24,300
complaints received on consumer credit issues by the Financial
Ombudsman Service in 2008, or 34 percent of all banking and credit
complaints it received last year.
The White Paper looks to be emulating regulatory steps recently
taken in the US by indicating that the UK government wants to take
action on credit card issuers imposing increases in interest rates
for riskier customers, sometimes with no warning. This is despite
issuers themselves having already committed to providing greater
transparency and information when alerting customers about changes
to interest rates, such as during the Credit Card Summit of
“Card providers are still putting up rates without properly
explaining why and without any obvious change in the consumer’s
circumstances. We will look at whether lenders should be required
to provide more information to consumers when they raise rates, or
even whether regulation should restrict the circumstances in which
such increases can be introduced,” the paper noted.
The government is also looking at the allocation of repayments to
debts: “Currently all but a very small minority of card companies
allocate any payment from a consumer to their cheapest debts first.
We will look at whether debts should be paid off on a pro-rata
basis, or whether the most expensive debts should be paid off
Also, the White Paper suggests that minimum payments may be raised
“to enable full repayment of the debt within a reasonable period,”
and notes that a ban on increasing cardholder credit limits without
their prior consent will also be examined.
The White Paper stated that the government would publish a
consultation document on the future of credit cards later this year
for discussion with industry and other stakeholders.
However, the UK consumer lending industry will be sure to argue
that balancing consumer rights with the industry’s need to sustain
profitability should not come at the cost of removing consumer
choice over the payment methods they use – something which the
government is claiming to want to uphold.