Defined Terms and Documents

A Better Deal for Consumers - Review of the Regulation of Credit - and Store Cards: Government - Response to Consultation - MARCH 2010

Foreword 3

Executive Summary 5

Chapter 1: Introduction 12

Application to Northern Ireland, Scotland and Wales 16

The Consultation Process 17

Chapter 2: Right to Repay 20

Allocation of payments 21

Minimum payments 23

Chapter 3: Right to Control 26

Unsolicited credit limit increases 27

Automated payments 29

Store card cooling off period 30

Chapter 4: Right to Reject 32

Re-pricing of existing debt 33

Unsolicited credit limit increases 35

Contents

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

2

Chapter 5: Right to Information 37

Minimum payments 38

Re-pricing of existing debt 39

Unsolicited credit limit increases 40

Education 41

Chapter 6: Right to Compare 43

Annual statement 44

Labelling 45

Basic credit card 46

Chapter 7: Next Steps 47

Annex A: List of Consultation Questions 51

Annex B: List of Respondents 58

Annex C: List of Organisations BIS Met 60

Annex D: Glossary 62

Annex E: Contact Details 65

3

Foreword

Last year in our White Paper, A Better Deal for Consumers, we set out our vision for a

new approach to consumer credit which works in today’s difficult financial times but is

also fit for tomorrow’s brighter economic future. In our consultation on credit and store

card reform, we set out some ideas as to how credit and store card regulation could

change to secure a better deal for consumers. Given the scale of credit and store card

lending in the UK, we were conscious that changes would have an impact across society

and we asked for your views on what you felt we should do to improve the credit and store card market.

You responded in your thousands to our online poll and we received hundreds of

responses to our consultation. Responses came not only from credit and store card

lenders and consumer groups, but also from many, many individual consumers. The scale

of the responses received has emphasised to us the importance that so many of you

attach to this issue and the need for us to come up with the right solution, one which

is fair to consumers, proportionate for lenders, targeted at the real problems and which

avoids unintended consequences.

It was clear from the responses we received from individuals that many of you value

the flexibility and security offered by credit and store cards, and particularly the ability

they provide to borrow large sums of money on a flexible and unsecured basis. Many of

you also take advantage of the benefits associated with credit and store cards such as

rewards schemes, cashback and theft and fraud protection. However, the responses to

our consultation confirmed that more can, and needs, to be done to tip the balance of

responsibility and control away from lenders and towards individual consumers, whilst

ensuring that we do all we can to protect the more vulnerable consumers who are most

at risk of struggling with unsustainable debt.

We have given very careful consideration to all the consultation responses received and

evidence from new research into this area. We are setting out five new consumer rights

which we believe give consumers a fairer deal and more control over the way in which

they can choose and use their credit and store cards. These new protections strike

the right balance, protecting consumers from what they see as unfair and misleading

practices and empowering them to take greater control of their borrowing, whilst at the

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

4

same time minimising the risk of higher rates and increased red tape for the responsible

majority of consumers who manage their cards well. We have made tough demands of

industry. The implementation of these new consumer rights will hit their bottom line and

involve extensive changes to their IT systems. It is to their credit that they have agreed

that the key benefits to consumers will come into effect by the end of the year without

the need for legislation. We are particularly pleased that by next year, the counterintuitive

practice of allocating payments to the cheapest debt first will be reversed. Interest will

build up less rapidly on expensive debts like cash withdrawals and consumers will be able

to pay off their debts more quickly.

These changes need to be seen alongside the extra protections we are introducing for

consumers in the Consumer Credit Directive and through the Office of Fair Trading’s

Irresponsible Lending Guidance. We believe this framework will result in a new, more

responsible culture of credit card lending and borrowing. We want credit and store card

borrowing to be based on a fair and transparent relationship between borrower and

lender; necessary if card lending is to remain an innovative, viable and profitable sector in

the longer term. We welcome industry’s willingness to work with us on this. We will hold

them to the spirit as well as the letter of the agreement, and we will monitor the impact

closely to ensure these changes are delivering positive results. We are convinced they

will, and indeed that this agreement will prove to be a positive next step towards restoring

consumers’ and taxpayers’ trust in financial services.

Rt Hon Lord Mandelson Kevin Brennan MP

5

“The measures we are announcing here set a new standard for the relationship between card companies and their customers”

Executive Summary

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

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1. This document is the Government response to the consultation on the review of the regulation of credit and store cards.

2. The Government has set out five new rights for credit and store card users and we are pleased that credit and store card lenders have agreed to implement these voluntarily. The five new rights are:

●● Right to repay: consumers’ repayments will always be put against the highest rate debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal to encourage better repayment practice.  1.    Allocation of payments    2.    Minimum payments

●● Right to control: consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time; and consumers will have better automated payment options. Consumers will have access to these options online.3.    Unsolicited credit limit increases

●● Right to reject: consumers will be given more time to reject increases in their interest rate or their credit limit.

●● Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little. Consumers will be given clear information about increases in their interest rate or their credit limit, including the right to reject.

●● Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.

3. In addition, consumers who are at risk of financial difficulties will be protected through a ban on increases in their credit limit as well as the ban on increases in their interest rate, and card companies will work with debt advice agencies to agree new ways in which they will provide targeted support to consumers at risk to help improve their situation before they are in too deep.

4. These new rights, together with the existing right to redress via the Financial Ombudsman Service (FOS), mean a better deal for consumers, giving them improved control of their credit and store card borrowing.

5. The Government and the card companies have agreed that these measures will come into effect by the end of the year (by 31 Dec 2010). This means that consumers do not have to wait for legislation to be passed to benefit from these measures. These measures are in response to the Government’s recent public consultation on the regulation of credit and store cards. The full text of the agreement between the Government and the card companies can be found in the box on page 9.

6. These measures strike a new balance, protecting consumers against practices they feel to be unfair and misleading, and empowering them to take greater control of their borrowing, whilst ensuring that the majority of responsible consumers who manage their cards well are not penalised through higher rates or increased bureaucracy. They bring an end to the confusing practice which most card companies have employed up to now of putting consumers’ repayments towards their cheapest debts first, obscuring the real cost of borrowing on their card and leading many to pay higher interest over a longer period. They ensure that consumers are given clear information about changes to their account, and meaningful options which they can exercise freely and easily if they do not like those changes.

7. The measures we are announcing here set a new standard for the relationship between card companies and their customers. We will be monitoring that relationship closely to ensure that these new rights for consumers are being honoured in the spirit as well as the letter of the agreement we have reached with card companies and further action will be taken if necessary. We expect, in particular, to see an improvement in lending practices leading to fewer cases of avoidable problem debt. The reversal of the allocation of payments and the new minimum level for the minimum payment at least will require changes to most lenders’ terms and conditions, providing enforceable rights for consumers. The new rights we have secured for consumers will be incorporated into industry Lending Codes and the Office of Fair Trading (OFT) will take them into account for enforcement purposes. Likewise, consumers will be able to take complaints about a breach of these rights to the free and impartial Financial Ombudsman Service which can require firms to provide redress, including compensation, where complaints are upheld. Furthermore, following a review of the impact and effectiveness of these voluntary arrangements, we will legislate to place these new rights on a formal statutory footing as soon as practicable, ensuring that they have the full force of the law.

New Rights For Credit And Store Card Users

Joint commitment by the government and card companies

The Government and credit and store card companies have agreed to introduce five new rights for credit and store card users. These are:

●● Right to repay: consumers’ repayments will always be put against the highest rate debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal to encourage better repayment practice.

●● Right to control: consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time; and consumers will have better automated payment options. Consumers will have access to these options online.

●● Right to reject: consumers will be given more time to reject increases in their interest rate or their credit limit.

●● Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little. Consumers will be given clear information about increases in their interest rate or their credit limit, including the right to reject.

●● Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.

In addition, consumers who are at risk of financial difficulties will be protected through a ban on increases in their credit limit as well as the ban on increases in their interest rate, and card companies will work with debt advice agencies to agree new ways in which they will provide targeted support to consumers at risk to help improve their situation before they get in too deep.

These new rights, together with the existing right to redress, mean a better deal for consumers, giving them improved control of their credit and store card borrowing.

The Government and the card companies have agreed that the key consumer benefits will come into effect by the end of the year. This means that consumers do not have to wait for legislation to be passed to benefit from these measures. These measures are in response to the Government’s recent public consultation on the regulation of credit and store cards.

Right to repay

Consumers’ repayments will always be put against the highest rate debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal to encourage better repayment practice.

●● Consumers’ monthly payments will always pay off their most expensive

card debt first. This fully reverses current widespread practice. Consumers

are confused by the current system, and research commissioned by the UK

Cards Association found that regardless of the way in which the current way of

allocating payments is explained, consumers find it counterintuitive.

●● For consumers opening new accounts the minimum payment will always

cover at least interest, fees and charges, plus 1% of the principal. This

means that some minimum payments on new accounts will be higher in future

to ensure that at least 1% of the loan itself is paid off as well as the interest

and any fees and charges incurred. US based firms already have to do this in

the UK, and this agreement will level the playing field. We want to encourage

more responsible borrowing and lending in future, but have seen from the

consultation evidence that it could be harmful to apply this increase to existing

accounts.

Right to control

Consumers will have the right to control their borrowing limits and how they repay their

card debts. And to protect people who are struggling with their debts, card companies will

observe a ban on limit increases for people at risk of financial difficulties.

●● Consumers will have the right to tell their card company at any time that they

want to reduce their current limit. This will be available online or through an

automated telephone system so consumers can do so without having to speak

to an adviser.

●● Consumers will be able to tell their card company at any time that they don’t

want to be given limit increases at all in future.

●● The Consumer Credit Directive will introduce a new legal requirement to

undertake a creditworthiness assessment before offering a significantly

higher limit, and the OFT’s new Irresponsible Lending Guidance will expect

firms to check that any new limit is affordable. In addition, card companies

will observe a ban on limit increases for consumers at risk of financial

difficulties. They will work with debt advice agencies to agree how they will

identify consumers at risk.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

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●● Consumers will be able set up an automated payment to pay any amount

they choose on a regular basis. Previously, automated payment options for

many consumers were limited to paying the full amount each month or the

minimum payment. This will be available to all consumers online.

Right to reject

Consumers will be given more time to reject increases in their interest rate or their

credit limit.

●● Consumers will now have 60 days to tell their card company they want

to reject an interest rate increase, close the account, and pay down the

outstanding balance at the existing rate. This doubles the time consumers have

to consider an interest rate increase and take action. In addition, consumers will

be notified at least twice during the 60 days that they have the right to reject

and card companies will tell them how much their borrowing will cost at the

higher rate so they are able to see the real impact of an interest rate increase

when making their decision.

●● Consumers will be able to reject any increase in their credit limit at any

time. Card companies will make it as easy as possible for people to do so, in

particular by automating this process.

Right to information

Consumers will have new rights to information about their card account, tailored to their

own personal circumstances.

●● A new minimum payments warning communication will be sent to

consumers who are using their card in ways which may be putting them at

risk of financial difficulties or incurring high levels of interest on their debts, for

example making repeated low payments. This will illustrate how their current

behaviour is costing them more money and will explain what they can do to

improve their situation, including providing details of independent sources of

advice and support.

●● A new separate interest rate increase communication will be sent to

consumers facing an interest rate increase at least 30 days before the change.

Previously, some lenders only notified consumers through their monthly

statement. Consumers will also be reminded after this that they can reject

the interest rate increase within 60 days, close the account and pay down the

outstanding balance at the existing rate. These communications will explain in

clear and simple language how their rate is changing, what it will cost them and

that they have a right to reject the new interest rate.

New Rights For Credit And Store Card Users

11

●● A new credit limit increase communication will be sent to consumers

offered an increase in their credit limit at least 30 days before the change.

This will explain in clear and simple language how their limit is changing and

what they can do if they wish to reject the new limit. The communication will

reassure consumers that their card company will not treat them any differently

simply because they have exercised their right to reject a limit increase or

reduce their limit.

●● Card companies will work with debt advice agencies to agree how they

will identify consumers at risk and to ensure that the communications they

send out are clear and easy to understand.

Right to compare

Consumers will have a right to be given the tools they need to easily compare the costs of

different credit cards and how they could save money by choosing the card best suited to

their needs and the way they typically use their card.

●● Card companies will work with consumer groups and the Government to

develop an annual statement which will give consumers clear information

about how much it has cost them to use their card over the last year. This

statement will be available electronically so that consumers can easily use

this information to compare the cost of their current card with other offers

online, in particular through the forthcoming impartial credit card comparison

tool on the Moneymadeclear website (www.moneymadeclear.fsa.gov.uk). The

statement will be fully tested with consumers to ensure that it is easy to use

and understand.

The Government is also making a longer term commitment to place these

principles on a statutory footing, taking account of the effectiveness of these

voluntary arrangements. This will lock in good practice, and give these new rights

the full force of the law.

12

Chapter 1: Introduction

Chapter 1: Introduction

13

1. Following our commitment in the Consumer White Paper to review the regulation

of the credit and store card market, the Government published a consultation on

this issue on 27 October 2009. This consultation was set in the context of rising

levels of consumer indebtedness, increasing consumer complaints about credit and

store cards, and concerns about the complexity and fairness of their key features.

The purpose of the consultation was to secure a better deal for consumers, giving

them improved control of their credit and store card borrowing, whilst also ensuring

that any intervention is proportionate, transparent and targeted. The consultation

document and this Government response (including plain English versions) in

addition to the summary of responses and the final economic and equality impact

assessments are all available at www.bis.gov.uk/creditconsultation/response.

2. UK consumers currently owe around £1.4 trillion to banks and other financial

institutions. £230 billion of this borrowing is unsecured borrowing, including

personal loans, overdrafts, credit cards, store cards and some other forms of

specialist lending. Overall, there were around 1.9 billion credit card transactions

in 2009, with a value of over £100 billion (the comparable figure for store cards is

approximately 52 million transactions). After the US, the UK has the highest number

of credit cards per head of population (1.2 cards per adult) with 60 million credit

cards in circulation at the beginning of 2010.

3. Credit card use continues to remain strong. Net lending for credit cards amounted

to £2.3 billion in 2009, in contrast to –£3.3 billion for other types of consumer credit.

This shows how valuable credit cards have been to consumers in the current

economic conditions, as their use of alternative forms of borrowing has decreased

and banks have become more cautious and constrained in their lending. In contrast,

the store card market has shown a decline in popularity in recent years and retailers

have increasingly migrated customers onto credit card products. Data on store

cards is less readily available, but latest figures indicate that lending fell by 13% in

the past 12 months.

4. There are many benefits associated with credit and store cards. These are important

financial products that allow consumers to borrow reasonably large sums of money

on a flexible, unsecured basis. The convenience, flexibility and security they offer

are valued by large numbers of consumers who use them to make a wide range of

purchases. They are accepted at more than 23 million retail outlets worldwide and

are the predominant form of payment for purchases made on the internet. They

can be helpful in giving consumers the ability to cover periods of particularly high

expenditure or temporary shortfalls in income and many come with rewards such

as cashback or points schemes and other benefits such as rental car insurance and

theft and fraud protection.

5. Consumer research confirmed how much consumers value their credit cards. In

focus groups conducted by TNS-BMRB, consumers identified a number of reasons

why they felt credit cards are essential. These included coping with emergencies,

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

14

providing protection and security and the fact that credit cards are very widely

accepted by retailers, including overseas. This was mirrored in a consumer survey

carried out by GfK NOP which found that many expressed a high degree of

satisfaction with their credit cards citing a number of benefits, including that they

represent an easy, accessible and effective payment mechanism, and provide

reassurance and flexibility for spending.1

6. Furthermore it was clear from consumer research that many consumers take

advantage of the numerous benefits associated with credit cards. Research by

TNS-BMRB, for example, shows that the most popular feature of credit cards was

the protection they offer against fraud or goods not arriving (selected by 34% of

customers), the next most popular was having a low interest rate on purchases

made with the card (25%). Grouping together the different rewards offered, around

a third (31%) of customers felt cashback, travel insurance or airmiles were most

valuable. For store card users, two-fifths (38%) said that reward schemes were

valuable, followed by interest rates on purchases (16%), signing up offers (16%)

and retailer special events (15%).

7. The majority of credit and store card customers use their credit and store cards

responsibly and indeed, many consumers use their cards astutely to take the

greatest possible advantage of the benefits they offer. In our consultation, our

concern was in providing a fair deal to all consumers. Consumer research showed

that consumers recognise that lenders are businesses and that it is necessary for

them to profit from the provision of credit. They also recognise that credit and store

cards offer a facility to consumers and that there is a cost associated with accessing

and using this facility.

8. However, the research shows us that consumers also expect that the relationship

between consumers and lenders should be fair and reasonable. In part, this means

accessible and clear product information. Credit and store cards are complex

products, and even the most financially astute may not be fully aware of the true

cost of using their card or understand how they can make the best use of it. These

consumers may all benefit from simpler and clearer information on their cards, and

better opportunities to make decisions about their credit and store card use.

9. Another issue to consider is where the responsibility lies for credit and store card

debt. On forums and our website, a number of consumers argued that it should not

be the responsibility of Government or even lenders to police consumer borrowing

behaviour. Comments such as these were typical of those views: “The minority

who do allow their debts to run out of control are behaving irresponsibly and need to

be made to take responsibility for their own choices” and “consumers are free not

to use any cards or if they do use such cards then they are free not to accumulate

debts on them”. Others, however, expressed concern that card companies are

1 Available at http://www.theukcardsassociation.org.uk

Chapter 1: Introduction

15

not taking sufficient responsibility for protecting their customers, particularly the

most vulnerable. This was backed up by research by TNS-BMRB which found that

consumers felt that card providers had a duty to behave responsibly, particularly in

relation to more financially vulnerable groups.

10. Our consultation set out our concerns about these more vulnerable consumers,

who, whilst a minority, are more likely to struggle with unsustainable credit or

store card debt. We believe that more can be done by lenders to help these more

vulnerable consumers, many of whom may find it more difficult to resist the

temptation of spending on a credit or store card. We want to ensure that these

consumers have the ability and opportunity to choose a card product that is right for

them and that they are not, unwittingly or otherwise, put in a situation which causes

them financial harm.

11. We have looked carefully at the situation in the US following the recent introduction

of measures relating to credit cards in the US Credit Card Accountability,

Responsibility and Disclosure (CARD) Act. The impact of these measures is yet

to be fully realised, but it is clear that certain practices adopted in the US would

not be appropriate for the UK market. In other areas, for example the allocation of

payments, the measures we are setting out here go further than the US authorities

have chosen to go.

12. We are also conscious that the credit and store card market is already a highly

regulated market and where there are a number of forthcoming developments

that have a direct read across to this consultation, not least of which are the

implementation of the Consumer Credit Directive and the publication of the OFT’s

Irresponsible Lending Guidance. The consumer credit landscape is changing rapidly.

It is important to ensure that there is certainty for both lenders and consumers

about the regulation of this area and how it impacts them. It was precisely because

of the need for the OFT to take account of our credit and store card review in

its Irresponsible Lending Guidance that the OFT delayed the publication of its Guidance.

13. We have set out in detail in the forthcoming chapters our views on the five new

rights for credit and store card consumers which correspond to the five areas

covered in our consultation document. You may make copies of this Government

response without seeking permission. Printed copies of this Government response

can be ordered from the Publications orderline. It may also be possible to make

other versions of this document available on request in Braille, other languages,

large fonts and other formats. Please contact the Publications orderline at Annex E

for details.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

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Application to Northern Ireland, Scotland and Wales

14. The consultation on the regulation of credit and store cards applies to the UK.

Consumer credit issues are not devolved to Wales or Scotland. Consumer credit

is a devolved matter in Northern Ireland, but the legislation (the Consumer Credit

Acts 1974 and 2006 and associated regulations) applies to the whole of the UK.

The Minister of Enterprise for Northern Ireland asked that Northern Ireland be

included in this consultation with a view to ensuring that people in Northern

Ireland would benefit from the proposed reforms.

15. The Government has worked with the Northern Ireland Assembly to ensure

that consumers in Northern Ireland have been able to participate fully in this

consultation. The views of these consumers, and of industry in Northern Ireland,

have been included in this consultation and have been considered by the

Government in this response.

16. Following initial discussions with the Minister for Enterprise for Northern Ireland,

the intention is that the proposals set out in this Government response will apply

across the UK. Our intention to place these new rights on a formal statutory

footing will only apply to Northern Ireland following consent from the appropriate

Northern Ireland authorities.

Chapter 1: Introduction

17

The Consultation Process

17. The consultation was conducted between 27 October 2009 and 19 January 2010.

The consultation asked 80 questions covering a range of issues. The consultation

questions are attached at Annex A.

18. The consultation launch was supported by a press notice, coverage in most

national and regional newspapers and a publicity campaign which included GMTV,

BBC Breakfast, Today programme, BBC News 24, ITN (National and Regional),

Sky and a number of radio interviews. During the consultation period, the Minister

for Consumer Affairs, Kevin Brennan MP, also did a podcast with FT.Online and a

live webchat on the Number 10 website.

19. Copies of the consultation document and the draft economic and equality impact

assessments were sent to key stakeholders, placed onto the BIS website at

www.bis.gov.uk/creditconsultation and hardcopies were made available via the

BIS Publications Orderline. In addition, BIS worked with Simply Understand to

create a plain English version and an audio summary of the consultation, both

of which were also available on the BIS website. We also worked closely with a

range of key interested stakeholders to publicise the consultation through internal

company intranets, conferences and email newsletters.

20. Over the period of the consultation, 3950 respondents voted in our online poll

(see Figure 1 for results), 742 respondents left comments on our website and 204

commented directly via our dedicated email address cscr@bis.gov.uk. All these

comments have been read and analysed by BIS officials and have been taken into

account in our Government response.

21. In addition, we are aware of many comments on other websites and forums,

including the BBC Have your Say webpage, www.moneysupermarket.com and

www.moneysavingexpert.com. The comments made on these external forums

were similar in nature and tone to those that were made on our website and by

email. Whilst the comments made on these external websites are not official

responses to our consultation, they have also been considered by BIS officials,

and have helped inform this Government response.

22. A total of 35 formal responses to the consultation were received from institutions

and organisations. Figure 2 shows a breakdown of responses by sector. A list of

those respondents who did not request confidentiality can be found at Annex B.

23. To supplement the consultation process, the Minister for Consumer Affairs held

a series of meetings with a number of relevant organisations. BIS officials also

attended a number of committee meetings and workshops, as well as holding a

series of meetings on an individual basis with industry participants. A list of the

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

18

organisations we met with can be found at Annex C. The points raised in these

meetings have been taken into account in this Government response.

24. To help inform the Government’s response, BIS also commissioned two research

projects late last year and the findings of both have been taken into account.

One of these conducted a consumer survey, and also involved a number of focus

groups to explore consumer attitudes and behaviour in greater depth. The other

research project looked at international experience of credit card regulation,

including the recent US CARD Act. The results of both research projects are

available at www.bis.gov.uk/creditconsultation/response.

25. This Government is grateful for all the consultation responses received and all the

comments made both directly to BIS and on forums.

26. Figure 1 Results of online poll: most important issues for consumers

The question asked read: “The Government wants to secure a better deal for

consumers, giving you better control of your credit and store card borrowing,

whilst ensuring that any regulation is proportionate, transparent and targeted. We

are consulting on changes to credit card and store cards. Which of the following is

the biggest issue for you?”

Allocation of payments 1423

Minimum repayments 519

Unsolicited credit increases 457

Re-pricing of existing debts 802

Simplicity and transparency 749

Total voters 3950

Results of online poll

36%

13%

12%

20%

19%

Allocation

of payments

Minimum

repayments

Unsolicited credit

increases

Re-pricing of

existing debt

Simplicity and

transparency

Chapter 1: Introduction

19

27. Figure 2 Responses from organisations by sector

Academia/Think tanks 2

Commercial comparison site/advice providers 3

Consumer bodies/debt advice agencies 10

Individual credit and store card companies 11

Trade Associations/Industry bodies 5

Credit reference agency 1

Local authority 1

Regulatory bodies 2

Total 35

Responses from organisations by sector

Academia/

Think tanks

Comparison sites/

advice providers

Consumer bodies/

debt advice agencies

Credit and store

card companies

Trade Associations/

Industry bodies

Credit reference

agency

Local authority

0 Regulatory bodies

2

4

6

8

10

12

2

3

10

11

5

1 1

2

Number of respondents

20

Chapter 2: Right to repay

Chapter 2: Right to repay

21

Right to repay: Consumers’ repayments will always be put against the highest rate

debt first. For consumers opening new accounts the minimum payment will always

cover at least interest, fees and charges, plus 1% of the principal to encourage better

repayment practice.

Allocation of Pa yments

1. General industry practice is for the most expensive debts held on a credit or store

card to be paid off last, with the cheapest paid off first. This means that the debts

attracting the highest level of interest payments (usually cash advances) will

not begin to be paid off until any balances attracting a lower rate of interest (for

example, those arising from a 0% balance transfer deal) have been paid off in full.

2. In its consultation, the Government set out its concerns that consumers do not

realise that this method of allocating payments is common practice, and we

proposed the following options to address the issue:

1. Do nothing beyond current legislative and regulatory activity;

2. Improve information transparency;

3. Allocate repayments proportionally to debts attracting different interest rates;

4. Allocate repayments to the most expensive debt first;

5. Allow consumers to pay off cash advances first.

3. In our consultation, we were concerned that two groups of consumers suffered

particular detriment under the current system: those who withdraw cash on credit

cards, and balance transfer users who might not be receiving all the benefits of

0% deals that they believed they signed up for.

4. In the first group, we were particularly concerned with the impact of the

current method of allocating payments on consumers who withdrew cash and

made minimum payments. According to TNS-BMRB research for BIS, 42% of

consumers making minimum payments also withdrew cash on their credit cards.

Full reversal of the current method of allocating payments (option 4), would help

these consumers.

5. While we did consider whether there might be a case for treating cash advances

separately (option 5), on the basis of the consultation evidence we believe that

all consumers, including balance transfer users, should benefit from a reformed

system.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

22

6. We were also concerned with 0% balance transfer users who were not benefiting

from the discount as they would have liked or expected. Money Advice Trust

reported a number of clients who transferred balances to 0% or low interest

cards, with the intention of reducing their indebtedness, only to find their plans

go wrong because they did not understand how payments to the new cards

were allocated. Around 15% of consumers said that they currently choose to

make the minimum payment because they are on a promotional rate/offer. These

consumers would also benefit from a full reversal of the current method.

7. It is clear from the responses to our consultation that the status quo is not

acceptable. In our online poll, 37% considered the allocation of payments to be

the most important issue in our consultation. The vast majority of respondents

commented on the confusing and counter intuitive nature of the current practice

of allocating payments to the cheapest debt first. There is a general feeling that

further transparency measures (option 2) would not affect consumer behaviour

because however it is explained, the allocation of payments is very difficult to

understand. The vast majority of individual consumers and consumer groups,

supported by Nationwide Building Society, called for a full reversal of the method

of allocating payments (option 4). The UKCA, on behalf of the rest of the credit

card industry, proposed a variation on this option, with payments above the

minimum payment being allocated to the most expensive debt first. However,

about 20% of consumers, including many at risk of financial difficulty, make only

the minimum payment in any given month, and would not benefit from a partial

re-allocation of payments.

8. The Government agrees that the method for allocating payments must

change. We have seen extremely strong consultation evidence that consumers

are confused by this issue, and this is supported by our own research. Consumer

focus groups displayed a low awareness of the issue, and considered the current

practice to be “sneaky” and counterintuitive. The Government shares the view

of many consumer groups, supported by evidence from US-based research,

that increased information and transparency alone would be unlikely to help the

majority of consumers better understand the allocation of payments. The fairest

and simplest option that best addresses this consumer confusion is to

reverse completely the current method of allocating payments, so that in

future, the most expensive debt on a credit or store card would be repaid

first (option 4). Credit and store card companies will implement this change

by the end of the year.2 Some store cards are “hybrid” products where, as well

2 The requirement to allocate payments to the most expensive balances first applies to all revolving

amounts on a credit or store card. Where such an agreement includes a fixed-sum credit plan agreement

(for example an instalment loan on a store card under which the consumer undertakes to pay regular

fixed instalments over a certain period) the requirement applies to payments beyond those required to

satisfy the fixed instalments.

Chapter 2: Right to repay

23

as using the card as a revolving credit product, consumers can take out fixed

instalment plans under which they undertake to pay regular fixed instalments over

a certain period. In these situations, the requirement to allocate payments to the

most expensive debt first applies to payments beyond those required to satisfy

the fixed instalments.

Minimum Pa yments

9. The minimum payment is the minimum amount that consumers must pay each

month against their outstanding balance without incurring default charges from

the credit or store card lender. In the consultation document, the Government set

out its concerns that minimum payments are set at such a level that if consumers

were only ever to make the minimum payment they would end up paying off

debt very slowly, in some cases over decades, and paying significant amounts

of interest. The Government proposed a number of options to address these

concerns:

1. Do nothing beyond current legislative and regulatory activity;

2. Improve information transparency;

3. Set a recommended minimum payment;

4. Increase the minimum payment.

10. Individual consumers were nearly all against a sudden universal increase to

minimum payments and were supported by many lenders who worried about the

effect of an increase on the ability of consumers to meet higher repayments. In

contrast, a number of consumer groups were keen to see a managed increase in

minimum payment which was phased and/or applied to new debt only thereby

minimising harm and distress to the most vulnerable consumers. Only one or two

consumer groups called for a blanket increase in minimum payments.

11. In our consultation, we were concerned about those consumers who make

minimum payments over the long term. A study of UK credit card accounts carried

out by Argus on the behalf of the UK Cards Association showed that of those

consumers who make the minimum payment, almost 3 in 10 do so only once

over the course of a year, with few making consecutive and regular minimum

payments (just 3.1% of all consumers make the minimum payment every month

for 12 months).3 However, whilst consumer research carried out by TNS-BMRB

for BIS confirmed that the majority of consumers who say they make minimum

payments do so for less than a year, it also showed that a significant proportion

3 Study cited in the UKCA’s response to the Credit and Store Cards Review Consultation. Available at

http://www.theukcardsassociation.org.uk/view_point_and_publications/what_we_think/-/page/881

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

24

of minimum payers have been doing so for many years with over 1 in 10 doing

so for over 5 years. There would seem to be, therefore, a significant minority of

consumers who are long term habitual minimum payers and who may be more at

risk of longer repayment periods and higher interest charges.

12. Whilst this research indicates that higher minimum payments would benefit

habitual minimum payers in the longer term, we are also conscious of consumer

research which shows that many consumers who make the minimum payment

do so because that is all they can afford; over half of minimum payers according to

GfK NOP and 37% according to TNS-BMRB. This high percentage of consumers

who say they make minimum payments for affordability reasons was supported

by concerns voiced by many individual respondents to the consultation that

a significant and blanket increase in minimum payments would cause them

considerable financial difficulty.

13. Analysis carried out by Argus for the UK Cards Association modelled clearly the

impact of various increases in minimum payments on consumers. This showed

that for an increase in the minimum payment to 5%, the average customer would

have to find close to an extra £100 per month and that this increase would affect

nearly 40% of accounts. Consumer research carried out by GfK NOP further

showed that over 60% of those consumers who currently make the minimum

payment might or would definitely find it difficult to meet increased minimum

repayments.

14. We have considered carefully the merits of increasing the minimum payment

(option 4). We are aware of the strong views of consumers that an increase

in minimum payments might exacerbate financial difficulties and the evidence

from commissioned research which confirms the financial impact of an increase

in minimum payments on some consumers. We have also taken note of initial

research by Professor Stewart and colleagues at the University of Warwick which

shows that increasing the minimum payment level could decrease the percentage

of consumers who make full or part repayments. Finally, we have been advised

by lenders that an increase in minimum payments would have an impact on their

profits, which they might seek to recoup from customers in other ways (e.g.

increased interest rates, annual fees).

15. We agree that a blanket, sudden increase in minimum payments would carry

significant risks. Whilst we want to encourage more responsible borrowing and

lending in the future, we are conscious that any increase in minimum payments

on existing accounts could have significant short term negative consequences for

some consumers. We are therefore of the view that there should be a small

overall increase in minimum payments and that any increase in minimum

payments should apply to new accounts only. Applying this change only to

Chapter 2: Right to repay

25

new accounts will protect those most at risk from higher minimum payments as

these consumers will not be affected unless they open a new card account or

transfer their existing balance onto a new card.

16. We have considered carefully at which level to set this increase in minimum

payments for new accounts. A number of US providers with a base in the UK

have been required since last year to set their minimum payments on new

accounts so they cover fees and interest that have been applied to the account

plus 1% of the principal. This is a departure from the current requirement for UK

lenders which states that the minimum monthly repayment should cover more

than that month’s interest but sets no other requirements.

17. It seems sensible that all lenders operating in the UK should be able to operate

on an equal playing field whilst at the same time allowing those lenders that

want to set their minimum payments at levels higher than this new threshold

to do so, as a number already do. We also believe that it is right that consumers

paying the minimum should be able to decrease their outstanding balance each

month assuming no further spend on their card. This is not currently the case

in all circumstances. Increasing minimum payments by a modest amount will

ensure that they are meaningful without giving rise to the risks highlighted in

Professor Stewart’s research. On this basis, we have decided that by the end

of the year, the minimum payment on new accounts will always cover at

least interest, fees and charges plus 1% of the principal.4 Making this change

is technically complex, and some card companies have indicated that it may be

difficult to implement this particular element of the agreement by the end of

the year. The Government will be monitoring implementation and is confident

that card companies will make strenuous efforts to ensure that this measure is

implemented as soon as possible.

4 Where a lender applies interest for a period which covers more than one month (e.g. in the case of a buy

now, pay later agreement or where interest is backdated on the expiry of a balance transfer deal), the

level of the interest component within the minimum payment for any month shall be proportionate to the

period over which the lender accrues the interest.

26

Chapter 3: Right to Control

Chapter 3: Right to Control

27

Right to control: Consumers will have the right to choose not to receive credit

limit increases in future and the right to reduce their limit at any time; and consumers

will have better automated payment options. Consumers will have access to these

options online.

Unsolicited credit limit increases

18. It is standard practice for credit and store card companies to grant their customers

higher credit limits on an unsolicited basis, that is, without the customer having

requested an increase. In our consultation document, we set out our concern that

consumers do not have enough control over increases in their credit and store

card limits. Consumers have a lack of consumer information and control over the

timing and scale of limit increases, some will have low financial capability, and

some may find it difficult to reject an increase. We believe that further action is

necessary in this area, and propose a number of options:

1. Do nothing beyond current legislative and regulatory activity;

2. Improve information transparency;

3. Limit the size and/or frequency of individual limit increases;

4. Ban all unsolicited limit increases;

5. Allow consumers to opt in to receive unsolicited limit increases.

19. Of all the issues covered by this consultation, unsolicited credit limit increases

attracted very few comments from individual consumers. It is, interestingly,

the only area where at least some consumers who responded felt strongly

that lenders were doing enough and no further action was required (option 1).

However, at the other end of the spectrum, a few consumers felt equally strongly

that consumers should be able to request or opt in to a credit limit increase

(option 5), or that there should be a complete ban on increases initiated by lenders

(option 4). Many consumers commented that it was difficult for them to reduce

their credit limit if they wanted to, and some explained that their card company

had pressured them not to reduce their limit when they rang up. Which? reported

that consumers they spoke to complained of similar experiences, for example,

being told that they would not able to request a higher limit for a year if they

reduced it now. However, TNS-BMRB found in their research that a large majority

of those consumers who did contact their lender after a credit limit change found

it easy to do so. Most consumer organisations and debt advice agencies were

in favour of a ban (option 4), or requiring lenders to seek consumer consent

each time they wished to increase their limit (option 5). Card companies argued

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

28

strongly against a ban or a requirement for consumers to opt in to limit increases.

Industry instead proposed a number of changes, including giving consumers

more information about limit increases, and making it easier for them to reduce

their limit.

20. Debt advice agencies referred to cases they saw where consumers who were

given unsolicited limit increases when they were already in, or at serious risk of,

financial difficulties. Citizens Advice, for example, cited individual cases where

clients on benefits or out of work had been given limit increases even where they

were already heavily indebted and experiencing financial difficulties. Industry data,

however, showed that such cases are the exception; in general, limit increases are

not given to high risk customers who are already close to their limit. This evidence

also suggested that receiving an unsolicited credit limit increase may not increase

the likelihood that consumers will get into financial difficulties. In fact, consumers

who receive a credit limit increase are less likely to default than similar consumers

who are not given a limit increase. Research conducted by TNS-BMRB showed

that 84% of consumers questioned who had had an unsolicited limit increase said

that it had no effect and was not important to them. Only 3% said they increased

their spending on the card. Research evidence about what consumers feel would

be the best approach was mixed. TNS-BMRB research found that consumers

favoured a full ban. This finding was mirrored by research conducted by GfK NOP

which found 63% of consumers thought a ban would be a good idea. However,

only 35% of consumers still favoured a ban if it would mean that some people

would find it harder to get a card, and only 17% favoured a ban if it would mean

that they themselves would find it hard to get a card.

21. It seems likely that lenders would respond to a ban or an opt-in in two ways. First,

they may offer higher credit limits at the outset. This could lead to higher levels

of problem debt. At the moment, lenders can manage their and their customers’

exposure by giving them a low initial limit, slowly increasing this over time if the

consumers demonstrate they can use the card responsibly (a “low and grow”

model of lending). If those consumers cannot manage their card properly then

the amount they owe will be limited; with higher initial limits such consumers

may end up owing considerably more. Second, card companies may not offer

credit at all to low income consumers and consumers who have little or no credit

record. Those consumers might then be forced to use more expensive types of

borrowing such as payday lending or home credit.

22. This is a finely balanced issue. The evidence shows that most consumers don’t

care strongly about limit increases. Whilst the Government is very sympathetic

to the concerns of debt advice agencies and consumer groups about negative

selling techniques in credit, the evidence does not show that unsolicited limit

increases are linked with problem debt and that the costs of change in this area

Chapter 3: Right to Control

29

could significantly harm the interests of many consumers. It is important to

balance protections for vulnerable consumers with the interests of the majority

of card users who manage their own spending and borrowing responsibly. In

particular, it is important that consumers who rely on “low and grow” products

and use them responsibly should not lose access to credit cards. However, it is

clear that more can be done to give consumers better control of their credit limits.

In particular, consumers should have the right to reduce their credit limit to a level

they are comfortable with at any time, and without incurring any penalty or being

pressured by their card company to change their minds. The Government has

therefore proposed, and card companies have agreed, that consumers will have

the right to tell their card company at any time that they want to reduce

their current limit without incurring any sort of penalty. They will be able to

do this online or through an automated telephone system if they want to so that

it is easy to do and card companies cannot talk a consumer out of their decision

or try to sell them another product. Consumers will also be able to tell their

card company at any time that they don’t want to be offered or given limit

increases at all in future, without incurring any sort of penalty.

23. Although in general the evidence suggests that unsolicited credit limit increases

are not leading to high levels of over-indebtedness, the Government remains

concerned that there are still too many individual cases where consumers are

finding themselves in over their heads on credit or store cards. The experience of

debt advice agencies shows that there are still times when consumers already at

risk of financial difficulties are being granted a higher limit. The Consumer Credit

Directive will introduce a new legal requirement to undertake a creditworthiness

assessment before offering a significantly higher limit and the OFT’s new

Irresponsible Lending Guidance will expect firms to check that any new limit is

affordable. In addition, we have secured agreement that card companies will

observe a ban on limit increases for consumers at risk of financial difficulties

and do more to ensure they have properly identified those consumers. Card

companies have agreed with us that they will work with debt advice agencies to

agree how they will identify those ‘at risk’ consumers to whom they are banned

from offering a limit increase.

Automated payments

24. In general, lenders provide customers with two options for automated payments:

direct debits or standing orders. Direct debits tend to be for either full repayment or

minimum payment each month. Of those customers who want to make a payment

between the minimum and the full amount, the majority will have to top up their

automated payment for the minimum every month by phone, online or by post.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

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30

25. Many respondents to the consultation were keen to see more flexibility on

payment mechanisms, particularly when it came to direct debit and online

payments. Research carried out during the consultation period confirmed that

a significant proportion of customers choose to make the minimum payment

by these methods. For example, TNS-BMRB research showed that 21% of

consumers who did not make the full payment on their credit card paid their credit

card bill by direct debit and a further 33% paid their bill online.

26. It may be that consumers are making a rational decision to pay the minimum.

Some choose to make automated payments to avoid late payment charges and

then top up their payments manually if they want to pay off more of their debt.

However, this requires self-discipline; consumers may find their good intentions

to pay more go by the wayside in the face of pressing expenses. In our view,

however, and based on comments from many individual consumers on this

issue, it is likely that some of the habitual minimum payers who make automated

payments would like to use them to pay more than the minimum, but not the full

amount, and are currently unable to do so.

27. Lenders agree that there should be better payment options for consumers

wishing to pay using automated payment mechanisms. We have therefore

agreed with industry that by the end of the year, all customers will be able

to set up automated payments to pay any amount they choose (as long as

this is equal to, or greater than, the lenders’ minimum payment).

28. There were calls from a number of respondents that it should be made impossible

for consumers to make a credit card payment using another credit card. We have

spoken to the UK Cards Association about this issue and they have assured us

that it is standard practice in the industry not to accept credit to pay for credit.

Under exceptional circumstances a small number of consumers are able to do

this (and indeed consumer research from TNS-BMRB puts the figure at 3% of

customers), but lenders would always make consumers aware of the implications

of their actions. At this point in time, therefore, we do not propose to take any

action in this area although we will keep this matter under review.

Store card cooling-off period

29. A number of respondents to the consultation, in particular a number of consumer

groups, suggested that there should be cooling-off periods for store cards

where consumers could reflect on whether they would like to keep a store card

before making any purchases with it. This reflects concerns that consumers are

drawn into expensive borrowing on store cards because of promotional offers

or pressure selling at the check out, without giving proper consideration to the

costs of using a store card to make their purchase. In research conducted by

Chapter 3: Right to Control

31

TNS-BMRB, nearly half of store card borrowers reported that they had made their

decision to apply for a store card whilst talking to a member of staff, yet many

respondents felt that the members of staff they spoke to were fairly ill-informed

about the store cards they were selling.

30. An estimated 70-75% of store card customers pay off their debt in full during

the interest free period and incur no charges at all. Furthermore evidence from

industry suggests that over half of store card borrowers have either a credit

or a zero balance on their account, and more than half of them use their card

only once. It is therefore not clear that this is an issue for the vast majority

of consumers using store cards. However, the Government recognises that

responsible consumers ought to make a purchase on credit only after careful

consideration, and with all the right information at their disposal.

31. The implementation of the Consumer Credit Directive will introduce a right to

withdraw from consumer credit agreements made in face-to-face situations.

This will give consumers 14 days to withdraw from their agreement without

giving a reason. This is not the same as a cooling-off period, as it will not prevent

the customer from making a purchase with the store card, but it will allow the

customer an opportunity to reconsider their borrowing once they have made the

purchase. The Consumer Credit Directive will also introduce a requirement on

firms to provide an adequate explanation of any new credit before a consumer

signs the agreement. This means that retail staff encouraging consumers to take

out a store card will have to explain all the key features of the product before a

customer takes out a new card.

32. We are aware of the strong feeling on this matter and we share concerns that

store cards should be responsibly sold in circumstances where consumers can

properly reflect on their decision with the right information before them. However,

as we have indicated above, the scale of the problem is unclear, and there is

a risk that introducing a cooling-off period straight away could be bad for both

consumers and retailers, making it very inconvenient for responsible consumers

who have properly thought through their decisions to buy the goods and services

they want on credit, or take advantage of beneficial offers.

33. We believe that the measures introduced by the Consumer Credit Directive

represent a significant improvement in the protections for prospective store card

users. For this reason, whilst we are not ruling out the possibility of further action

in this area in future, it is our view the measures introduced by the Consumer

Credit Directive should be given time to take effect before we consider any

additional measures.

32

Chapter 4: Right to Reject

Chapter 4: Right to Reject

33

Right to reject: Consumers will be given more time to reject increases in their interest

rate or their credit limit.

Re-pricing of existing debt

34. Interest rates on credit and store cards can change over time, reflecting the fact

that they are open-end products. Lenders can change interest rates in two ways.

Firstly, rates can alter as a result of changes in the cost to the lender of providing

credit to all consumers and, generally, these rate changes would apply across a

whole portfolio. Lenders can also alter interest rates in response to changes in

the “risk cost” of serving a particular consumer, or group of consumers, because

of changes in the perceived risk that those consumers will default (risk-based

re‑pricing).

35. In our consultation document, we set out our concerns about the continuing

practice amongst credit and store card lenders of increasing interest rates

on existing debt (re-pricing) without properly explaining why they are doing

so. Despite recent moves by the industry to make re-pricing fairer and more

transparent (through a Statement of Fair Principles), we expressed concerns that

some consumers might be subjected to unjustifiable interest rate rises on existing

debt, and that risk-based re-pricing is still not sufficiently transparent.

36. We want to ensure that consumers with limited choices are not subjected to

unfair interest rate changes, that consumers are given clear information about

how and when their interest rates might change, and that this is a genuine two

way street: rates should go down as well as up. In our consultation we proposed

a number of options in this area:

1. Maintain the Statement of Fair Principles;

2. Further measures to provide consumers with better information about riskbased

re-pricing decisions;

3. Define the factors that it would be fair for lenders to take into account when

changing an individual’s price on grounds of risk;

4. Limit the size and/or frequency of existing debt re-pricing;

5. Prohibit re-pricing of existing debt.

37. There was a high level of concern from consumers on interest rate re-pricing.

Many would like to see either an outright ban of interest rate re-pricing (option 5)

or a cap on interest rate re-pricing (option 4). Consumer groups and debt advice

agencies, with a couple of exceptions, generally favoured a ban on the re-pricing

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

34

of existing debt except where there has been a change in the base rate or LIBOR

or where the consumer has missed a payment (option 5). Consumer groups also

generally felt that the existing Statement of Fair Principles should be improved

and placed on a statutory footing.

38. Industry respondents pointed out that a credit or store card is an open-end loan

where there is no requirement for the consumer to repay over a particular period

of time; the lender does not know when the debt will be repaid and consumers

can keep their card for 20 years or more. In their view that means that if the risk

that consumers will not be able to repay changes over time, then lenders must be

able to change the price to reflect this. Banning interest rate increases on existing

debt could lead to annual fees, higher interest rates for new customers, and

riskier consumers not being given a credit card at all. Card companies said that

the current Statement of Fair Principles was working well and should be allowed

to embed further, although they acknowledged that more could be done to

promote the fact that people have the right to reject the interest rate increase and

pay down their balance at the existing rate of interest over a reasonable period.

Industry also acknowledged that consumers find it hard to understand how riskbased

pricing for credit works, and therefore proposed that they would produce a

leaflet for consumers which would explain how it works.

39. Industry submitted evidence which showed that, in general, over the last two

years, re-pricing decisions have been related to risk and do not appear to be

pushing consumers into financial difficulties. Consumer research by TNS-BMRB

found that although around 13% of card holders receive an APR increase on their

main card per year, the majority of interest rate increases range between 1-5%,

and around 4% of card holders receive an APR decrease each year. A ban on

the re-pricing of existing debt has been introduced in the United States. The ban

only came into force in February 2010, but initial evidence suggests it has had a

significant impact on American credit card users, who are seeing higher interest

rates and reduced credit limits. The UK Cards Association also quoted data on the

impact of the reforms in the US, where there was a 180% increase in accounts

facing an interest rate increase as firms rushed to put interest rates up before the

ban came into force and the average increase was 6.1%.

40. Evidence about consumer attitudes is mixed. Few consumers complain about

interest rate increases, yet research conducted by TNS-BMRB found that

consumers were generally in favour of a ban on the re-pricing of existing debt. GfK

NOP research, on the other hand, suggested that consumers favoured solutions

focused on good communications and alternative options for consumers who did

not want to accept the interest rate increase. GfK NOP’s quantitative research

showed that a majority of consumers thought a ban on the re-pricing of existing

debt was a good idea in principle. However, only 26% of consumers would

Chapter 4: Right to Reject

35

still support a ban if it led to higher interest rates in future and only 17% would

support a ban if it led to annual fees.

41. Evidence about how well the current Statement of Fair Principles is working was

mixed. Consumer research found that awareness of the right to reject was very

low. Card companies themselves reported that take up of the right to reject varied

from firm to firm, from 1% to 5%. The Lending Standards Board conducted a

review of how the Statement of Fair Principles is working. This found that lenders

could do more to ensure consumers are properly informed about interest rate

increases and their right to reject them.

42. The Government understands the anger of consumers who feel that their rate has

been increased without a reasonable explanation and who are concerned about

rising interest rates on their existing debt. However, the initial evidence shows

that a ban on the re-pricing of existing debt such as that adopted in America could

lead to worse outcomes for consumers through higher interest rates for new

customers, annual fees and some people finding it impossible to obtain a card at

all. We do not, however, accept the industry’s argument that the Statement of

Fair Principles is working as it should. Clearly there is a lot more that can be done

to ensure consumers are fully able to exercise their right to reject an interest

rate increase. We have therefore agreed with credit and store card companies

that consumers will now have 60 days to tell their card company they

want to reject an interest rate increase, close the account, and pay down the

outstanding balance at the existing rate over a reasonable period. This doubles

the time consumers have to consider an interest rate increase and take action.

In addition, consumers will be notified at least twice during the 60 days that

they have the right to reject and card companies will tell them how much their

borrowing will cost at the higher rate so they are able to see the real impact of an

interest rate increase when making their decision. Lenders have also committed

that they will not increase interest rates at all for consumers at risk of financial

difficulties. They will work with debt advice agencies to agree how they will

identify those ‘at risk’. These rights will apply to any interest rate increase which

is not directly linked to a change in an external reference rate such as the base

rate or the inter-banking lending rate (LIBOR), and not just to individual risk-based

re-pricing.

Unsolicited credit limit increases

43. Under the existing Lending Codes, when card companies increase borrowers’

limits they must tell them that they have a right to reject the increase and keep

their existing limit. Consumer groups generally felt that the right to reject should

be more clearly explained and more easily implemented. Some cited cases of

consumers being dissuaded from exercising their right to reject, finding it hard to

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

36

get through on the phone, or being forced to put a request in writing even if they

had telephone banking services. Moneyfacts argued that it should be possible to

reject a new limit by any channel: by post, telephone or online.

44. Industry data shows 0.6% of consumers given a limit increase exercised their

right to reject.5 TNS-BMRB research found a significantly greater proportion (6%)

reported having contacted their bank to ask for the limit to remain unchanged,

still a very low figure. Interestingly, a majority of consumers who did contact their

lender after the credit limit increase found it easy to do so. Of those who didn’t

contact their lender, 81% were unconcerned about the limit increase. However, of

the remaining 19%, over half didn’t do so because it would be a hassle.

45. The evidence suggests that consumers understand the way the current system

of increasing limits works, and are generally comfortable taking responsibility

for how much they borrow. However, a majority of those consumers who

might wish to reject a limit increase appear to perceive contacting their lender

as a hassle, and there is evidence that, for a minority of consumers at least,

exercising their right to reject a limit increase is made more difficult than it should

be. The Government believes that the current right to reject is not made clear

enough to consumers or easy enough to take up. We have therefore proposed,

and card companies have agreed, that consumers will now be given 30 days

notice of an increase in their credit limit and will be given clear information

setting out what they can do if they want to reject the increase, as well

as a guarantee that they will not incur any penalty if they choose to do so.

Furthermore, card companies will make it as easy as possible for consumers

to reject an increase, in particular by ensuring that they can do this through

an automated telephone system or online, ensuring that consumers don’t have

to hold to speak to an adviser during peak periods and need not be concerned that

an adviser might seek to dissuade them from their decision or sell them another

product.

5 Data from 13 issuers representing 96% of the market

Chapter 1: Introduction

37

Chapter 5: Right to Information

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Right to information: Consumers at risk of financial difficulties will be given

guidance on the consequences of paying back too little. Consumers will be given clear

information about increases in their interest rate or their credit limit, including the right

to reject.

Minimum payments

46. Currently, credit card lenders are required to ensure that all credit card statements

include the following health warning about the risk of only making the minimum

payment: “If you only make the minimum payment each month, it will take you

longer and cost you more to clear your balance”. The Lending Code also requires

the statement to include an indicative case figure for the amount of interest if only

a minimum payment is made. Store card lenders need to include similar warnings

and estimates of interest. In the consultation document, we set out our concerns

that lenders have not done enough to explain to consumers the implications

of making only the minimum payment. We proposed that consumers could be

provided with better information about the consequences of making a minimum

payment (option 2).

47. A significant minority of consumers who responded to our consultation said that

they would be interested in better information. Pretty much all consumer groups

thought that better information provision on minimum payment options would

be a good thing. Many supported the idea of illustrative scenarios. Many industry

players acknowledged that more could be done to improve information for those

consumers who make minimum payments, or who are at risk of doing so, and

proposed a specific targeted information measure to help these consumers.

48. Consumer research carried out by two independent organisations both showed

that the majority of consumers paying the minimum have made a rational decision

to do so. Many consumers pay the minimum because that is all they can afford,

and a significant proportion do so because they have more expensive debts

elsewhere (24% according to GfK NOP, 16% according to TNS-BMRB) or because

they are on a promotional rate (15% according to GfK NOP, 13% according to

TNS-BMRB). Analysis from Argus confirmed that some consumers do make a

rational decision to pay the minimum; in the main (except for the highest risk

band) consumers with balance transfer deals were more likely to make repeat

minimum payments.

49. It is clear to us that additional information on minimum payments is of no real

use to the vast majority of consumers making full or partial repayments. Such

additional information would be unnecessary and cumbersome. Nor do we think

that any additional information would be of any benefit to consumers making very

Chapter 5: Right to Information

39

occasional minimum payments or who have clear and rational reasons for doing

so. These consumers are unlikely to be at risk of unsustainable debt. However,

we do agree that more can be done to educate habitual minimum payers.

50. In the UKCA’s response to the consultation, lenders undertook to contact those

consumers who have made the minimum payment for 6 consecutive months.

We agree with the UK Cards Association that it is a subset of minimum payers

who need to be targeted for more information on minimum payments. We are not

convinced that contact after 6 months of minimum payments is sufficient, nor are

we convinced that the trigger for contact should be paying only the minimum over

a period. Indeed, industry experts have suggested that those consumers who pay

just more than the minimum are also likely to be at risk. Consumers who regularly

repay very small amounts of their debt are using their card in ways which may

be putting them at risk of financial difficulties or incurring high levels of interest

on their debts. In addition, in order to influence consumer behaviour, it is also

important to reach these consumers when they may still have choices available

and to reach them with information that means something specific and real to

each consumer.

51. We have therefore agreed with industry that lenders will send a separate

communication to those customers who make repeated low payments on

their credit or store card. Lenders can choose whether to communicate with

those consumers by post or electronic means but will need to do so in writing,

and separately from the monthly statement. This communication will illustrate

how the consumers’ current behaviour is costing them more money and will

explain what they can do to improve their situation, including providing details of

independent sources of advice and support.

52. Exact details of when this communication should be sent and the information that

it should contain are still to be determined with industry following consultation

with the OFT and consumer groups and testing with consumers.

Re-pricing

53. As noted in the section on the right to reject, the evidence from the review

suggests that consumers are often not given clear enough information about

increases in their interest rate and their right to reject it. A number of respondents

to consultation proposed improvements, for example, the Lending Standards

Board recommended that a separate notification should be sent which makes

clearer that the interest rate is increasing and precisely what the old and new

rates are. Many respondents, including the UK Cards Association, felt there was

scope for improving consumer understanding of risk-based re-pricing.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

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54. Consumer research by TNS-BMRB found that less than half of consumers who

had had their interest rate increased felt that it was adequately explained. Perhaps

more alarmingly, a third of respondents said they did not know whether their rate

had changed in the last year. Qualitative research also revealed a low awareness

of the practice of risk-based re-pricing, as compared to interest rate increases as

a result of changes in the base rate, and a low awareness of the existing right to

reject, even among those consumers who had had their interest rate increased.

However, of those consumers that were re-priced and felt that they received

an adequate explanation, a majority said that the change was reasonable, even

where their interest rate had increased.

55. The Lending Standards Board review of compliance with the current Statement

of Fair Principles found that around half of companies did not send a separate

letter to notify the consumer, putting the information on their monthly statement

instead. It found that the quality of communication with consumers about repricing

decisions was unclear in some cases: some firms did not say clearly that

the consumer’s interest rate was increasing, and by how much, but simply told

them that their terms and conditions were changing or what the new rate would

be without making clear that it was going up.

56. It seems clear that consumers are not receiving good enough information about

risk-based re-pricing decisions. The Government has therefore secured industry

agreement always to send a separate interest rate increase communication

to consumers facing an interest rate increase at least 30 days before the change.

The communication will explain in clear and simple language how their rate is

changing, that they have a right to reject the new interest rate within 60 days,

and how they can exercise that right if they want to. The communication will be

in the form of a letter, unless consumers have indicated that they would prefer

their bank to keep in touch with them by electronic means. Card companies

have agreed that they will work with consumer groups and debt advice agencies

to ensure that the communications are clear and easy to understand. We also

welcome industry’s commitment to develop a leaflet, “Risk-Based Pricing

Explained”, to help consumers better understand how such pricing works.

Unsolicited credit limit increases

57. The Government believes more should be done to ensure that consumers are

aware of increases in their credit limit and what they can do to reject them.

Respondents to our consultation suggested a number of ways in which such

communications could be improved. These included explaining why the credit

limit has been increased and what the lender has done to check that the new

limit was affordable, as well as providing information to help consumers decide

whether to reject the new limit, such as illustrations of how much the minimum

Chapter 5: Right to Information

41

payment would go up if the consumer used the higher limit, and how much their

existing borrowing is already costing them.

58. The Government has therefore agreed with industry that new separate

credit limit increase communications will be sent to consumers facing

an increase in their credit limit at least 30 days before the change. The

communication will explain in clear and simple language how their limit is

changing and what they can do if they wish to reject the new limit. The

communication will be in the form of a letter, unless consumers have indicated

that they would prefer their bank to keep in touch with them by electronic means.

Card companies have agreed that they will work with consumer groups and

debt advice agencies to ensure that the communication is clear and easy for

consumers to understand.

Education

59. A few individual consumers, supported by one or two consumer groups and

industry organisations, argued that one of the most effective means of ensuring

that consumers don’t experience problem indebtedness would be to promote and

encourage more education, at school and in adult life, about these issues.

60. In January, Ed Balls, Secretary of State for Children, Schools and Families,

announced that from September 2011 all pupils from the age of 5 to 16 will be

taught about handling money, savings and the financial skills they need as adults.

These lessons in “economic wellbeing and financial capability” will form part

of the new compulsory personal, social, health and economic education. The

specific programmes of study, which outline the broad topics that will be taught,

will be consulted on later this year. The details of the consultation, including the

timing, will be announced on www.dcsf.gov.uk/consultations. Expectations are

that children aged 11-14 will be taught about borrowing products, including credit

cards, mortgages and loans, with tips on how to pick the deals that suit them

best.

61. In addition, the Department for Children, Schools and Families has committed

£10 million over three years (2008 – 2011) to support personal finance education

in schools through the My Money programme. This programme provides local

authorities with support and training to help them get personal finance education

into every primary and secondary school under their care.

62. The Government also believes that ensuring individuals have access to

preventative financial education and impartial, easy to access help and guidance

on money in their adult lives is equally important and complements the provision

of financial education in schools. In April 2009 the Government and the Financial

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

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Services Authority launched a large pilot Money Guidance service, called

Moneymadeclear, in the North West and North East of England. The service

delivers free and impartial information and guidance on personal finance. It

provides detailed information about credit cards, including a new impartial

credit card comparison table to be launched shortly on its website. The service

is available to all, but targeted at those most vulnerable to the consequences

of poor financial decision making. The Government launched national roll‑out

of the service in March 2010 and the Government and FSA have made a

joint commitment to put forward £20 million in 2010-11 to support national

implementation of the Money Guidance service. This will allow the service to help

1 million people manage their finances better.

63. The Government has brought forward provisions in the Financial Services Bill to

establish a new independent consumer finance education body. This will take

forward and expand the reach and profile of the FSA’s financial capability work to

date and will lead national implementation of the Money Guidance service.

43

Chapter 6: Right to Compare

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

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Right to compare: Consumers will have an annual statement that allows for easy cost

comparison with other providers.

64. The consultation document examined whether, in addition to the options for

increased transparency outlined in the four areas covered by the consultation,

there should be additional measures to improve transparency. The Government

suggested three specific ideas in the consultation, namely providing consumers

with an annual statement about their credit and store card usage, developing a

benchmarking or labelling system for credit and store cards and designing a basic,

cheap and accessible credit card that consumers could use with confidence.

65. Overall, there was wide acceptance amongst the respondents to the consultation

that there is merit in improving information to consumers, but many cautioned

against the risks of information overload and the risk that too much information

can actually harm consumers. Some respondents also had reservations about

how these proposals could be implemented in practice, particularly given the

complexity of credit and store cards, and many stressed the importance of testing

any proposals directly with consumers before implementation.

66. In proposing three ideas for improving transparency and simplicity, the

Government’s aim was to deliver tangible and real benefits to consumers. We

want to make it easier for consumers to compare credit and store cards, to

understand better their purchase and borrowing behaviour and to be able to make

a more informed decision on their use of credit and store cards.

Annual statement

67. We believe that there is merit in the idea of an annual statement for credit

and store cards and we are pleased that industry has agreed to work with

consumer groups to develop this and to consider its content and format. The

annual statement will give consumers clear information about how much it has

cost them to use their card over the year, including information on all interest and

charges for the year.

68. In order to maximise consumer benefit from an annual statement, the annual

statement should be available online where online facilities are available and

where consumers have signed up to these. This will help facilitate the ability of

consumers to compare the cost of their current card with other offers online,

including through the FSA’s impartial Moneymadeclear credit card comparison

website when this is available. It is also important, and this was highlighted by a

number of respondents to the consultation, that the annual statement should be

available in hard copy for those consumers who do not have online accounts.

Chapter 6: Right to Compare

45

69. We will be guided by the results of the discussions between industry and

consumer groups over the coming months. We also agree with the many

respondents who emphasised the importance of consumer testing an annual

statement. This is clearly a prerequisite for its development. However, unless

there is convincing evidence that consumers would not materially benefit from an

annual statement, we would expect industry to confirm the development of

an annual credit and store card statement and to announce the timetable for

rollout by the end of the year.

Labelling

70. We also believe that there are some clear attractions to a labelling

scheme as a way of improving transparency for consumers. HM Treasury has

commissioned consumer research, carried out by GfK NOP, which showed that

there is a need for greater fairness, transparency and clarity to help consumers

make more effective and confident decisions when selecting financial products.6

Consumers were particularly positive about the suggestion for simpler labelling.

71. We are conscious that before any decision can be taken on whether to

take forward a labelling scheme, there are important issues that need to be

considered about the practicalities of doing so. We are mindful of the many

ways in which consumers can currently make informed comparisons of credit

and store card products. There are already best buy information and tables,

and an impartial online credit card comparison tool is being developed for the

FSA’s Moneymadeclear service. The forthcoming Standard European Consumer

Credit Information Form will also provide consistent and comparable information

on cards. Concerns raised by some respondents to the consultation that the

complexity of credit and store cards do not lend themselves well to a simple

labelling scheme. We agree that there are challenges in simplifying a financial

product that is used by consumers for different reasons and in different ways, and

which individual consumers may use in different ways over time. However, these

issues do not appear to be insurmountable and it would not be impossible to

develop a labelling or benchmarking scheme that would be useful and beneficial.

72. The Retail Financial Services Forum, established by HM Treasury, has been

tasked with developing policy options to make products simpler and easier

for consumers to understand; this is likely to include proposals around

simpler labelling. We look forward to seeing the recommendations of the

Forum in the autumn.

6 Unpublished research

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

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Basic Credit Card

73. We are of the view that there are many attractions to a basic credit card. We

believe that this could incorporate many of the issues that have been addressed

in this consultation and be a means of providing a credit card product, the features

of which are aimed at preventing problem debt. Such a basic credit card could be

targeted at the most financially vulnerable who may otherwise struggle to gain

access to credit cards. It would therefore not disproportionately affect the vast

majority of customers who may not benefit from these kinds of features.

74. We are conscious that there are a number of valid and important concerns about

the practicalities of taking forward the idea of a basic credit card. These include

the argument, made by both lenders and some consumer groups in responses to

the consultation, that it may be difficult to make a basic credit card a competitive

product and that other credit card products currently on the market may already

deliver many of the benefits that we are keen to see in a basic credit card. We

are also conscious of evidence which shows that, where lenders have developed

such products in the past, there has been little take-up by consumers.

75. We are attracted to developing a basic credit card, but we are not blind to the

difficulties. That is why we are pleased that the Retail Financial Services

Forum is likely to also be considering basic products, as part of their work to

improve simplicity and transparency of financial products.

47

Chapter 7: Next Steps

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76. The table below sets out a summary of the rights that are being taken forward,

the timing for when these will be available to consumers and how they are being

implemented.

New Consumer Right Measure How Delivered Date

Right to repay

Consumers’ repayments

will always be put against

the highest rate debt

first. For consumers

opening new accounts

the minimum payment

will always cover at

least interest, fees and

charges, plus 1% of the

principal to encourage

better repayment

practice.

Consumers’ monthly payments

will always pay off their most

expensive card debt first. This

fully reverses widespread practice

of allocating payments to the

cheapest debt first.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Consumers opening new credit

card accounts will pay minimum

payments covering at least

interest, fees and charges, plus

1% of the principal.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011.

Some lenders

may require

longer

because of

technical

difficulties

Right to control

Consumers will have

the right to choose not

to receive credit limit

increases in future and

the right to reduce

their limit at any time;

and consumers will

have better automated

oayment options.

Consumers will have

access to these options

online.

Consumers will have the right to

tell their card company at any time

that they want to reduce their

current credit limit.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Consumers will be able to tell their

card company at any time that

they don’t want to be given credit

limit increases at all in future.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

The Consumer Credit Directive

will introduce a new legal

requirement to perform a

creditworthiness assessment

before offering a significantly

higher credit limit.

Consumer Credit

Directive (legislation)

January 2011

Card companies will observe a ban

on limit increases for consumers

at risk of financial difficulties.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Consumers will be able to set up

an automated payment to pay any

amount they choose on a regular

basis.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Chapter 7: Next Steps

49

New Consumer Right Measure How Delivered Date

Right to Reject

Consumers will be given

more time to reject

increases in their interest

rate or their credit limit.

Consumers will now have 60 days

to tell their card company they

want to reject an interest rate

increase, close the account and

pay down the outstanding balance

at the existing rate.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Consumers will be able to reject

any increase in their credit limit

at any time. Card companies will

make it as easy as possible for

people to do this, in particular by

automating this process.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Right to Information

Consumers will have

new rights to information

about their card account,

tailored to their own

personal circumstances.

A new separate minimum

payments warning communication

will be sent to consumers who

are using their card in ways

which may be putting them at

risk of financial difficulties or

incurring high levels of interest on

their debts, for example making

repeated low payments.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

A new interest rate increase

communication will be sent to

consumers facing an interest rate

increase at least 30 days before

the change.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

A new credit limit increase

communication will be sent to

consumers offered an increase in

their credit limit at least 30 days

before the change.

Lending Code and

changes to lenders’

terms and conditions

where appropriate

January 2011

Card companies will work with

debt advice agencies to agree

how they will identify consumers

at risk.

Industry/Debt Advice

Agencies working

group

June 2010

New responsible lending

requirements through the

Consumer Credit Directive will

ensure new standards for the

sale of credit products. These

will particularly impact store card

providers and others providing

retail credit who will need to

ensure that when they are

promoting their products at point

of sale, their staff are sufficiently

well trained and the environment

is properly conducive to meeting

these new standards.

Consumer Credit

Directive (legislation)

End January

2011

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New Consumer Right Measure How Delivered Date

Right to Compare

Consumers will have

a right to be given the

tools they need to easily

compare the costs of

different credit cards

and how they could save

money by choosing the

card best suited to their

needs and how they

typically use their card.

Card companies will work

with consumer groups and

the Government to develop an

annual statement which will give

consumers clear information about

how much it has cost them to use

their card over the last year.

Industry/Consumer

Group/Government

working group

Timetable for

roll-out to be

announced by

January 2011

All new rights The Government is also making a

longer term commitment to place

these principles on a statutory

footing.

Legislation TBC subject to

Parliamentary

timetable

Annex A: List of Consultation Questions

51

Annex A: List of Consultation Questions

Chapter 1: Introduction

1. The Government calls on consultees to submit evidence about the current nature

of the UK credit and store cards markets, including in particular:

●● The incidence of multiple credit card use, particularly among the most indebted

consumers

●● The use of personal credit cards for business purposes by the owners of small

firms

●● The consumer experience of using credit cards and dealing with their lenders

●● The profitability of credit card lending and the impact of the economic downturn

on both consumers and lenders.

Chapter 2: The allocation of payments

Option1: Do nothing beyond current legislative and regulatory activity

2. We would welcome evidence on the extent of consumer understanding of the

order of payment allocation and its implications.

3. Will the implementation of the Consumer Credit Directive, combined with OFT

guidance, provide sufficient consumer protection in this area?

Option 2: Greater information transparency on the allocation of payments

4. How could the allocation of payments be made more transparent for consumers?

5. What effect is improved transparency likely to have on consumer behaviour?

Would it sufficiently address consumer detriment?

6. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

Option 3: Allocate repayments proportionally to debts incurring different

interest rates

7. What effect might this option have on consumers?

8. How might lenders react to a requirement to allocate repayments on a

proportional basis?

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9. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

10. Are there alternative ways of structuring repayments which would be preferable?

Option 4: Allocate repayments to the most expensive debt first

11. What effect might this option have on consumers?

12. How might lenders react to a requirement to allocate repayments to the most

expensive debt first?

13. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

Option 5: Allow consumers to pay off cash advances first

14. What effect might this option have on consumers?

15. How might lenders react to a requirement to allow consumers to pay off cash

advances first?

16. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

17. Of the 5 options for reform of the allocation of payments, which do you prefer?

Chapter 3: Minimum payments

Option 1: Do nothing beyond current legislative and regulatory activity

18. Will the implementation of the Consumer Credit Directive, combined with OFT

guidance, provide sufficient consumer protection in this area?

Option 2: Greater information transparency on minimum payments

19. What information on minimum payments would be the most useful to consumers

and how often could it be provided?

20. What effect is improved transparency likely to have on consumer behaviour?

Would it sufficiently address consumer detriment?

21. What might be the costs to lenders of implementing this change? What might be

the longer term cost?

Annex A: List of Consultation Questions

53

Option 3: Set a recommended minimum payment

22. Should there be a recommended minimum payment?

23. How could the recommended minimum payment be set?

24. What might be the unintended consequences of a recommended minimum

payment? How might it impact on consumer repayment behaviour?

25. What might be the costs to lenders of implementing this change? What might be

the longer term cost?

Option 4: Increase the minimum payment

26. Should the minimum payment increase?

27. How could this increase in minimum payment be set?

28. How many consumers would be affected by an increase in the minimum

payment, for example, if it were raised to 5%? How many of these consumers

would be unable to meet these higher repayment levels? How many consumers

holding balances on more than one credit card are likely to be affected?

29. Should an increase in the minimum payment apply to all consumers or to a subset

of consumers?

30. What might be the costs to lenders of implementing this change? What might be

the longer term cost?

31. What evidence do you have about the impact of previous reductions or increases

in the level of minimum payments on cardholders?

32. Of the 4 options for the reform of minimum payments, which do you prefer?

Chapter 4: Unsolicited limit increases

Option 1: Do nothing beyond current legislative and regulatory activity

33. What evidence do you have that unsolicited credit limit increases are not

associated with financial difficulties?

34. Will the implementation of the Consumer Credit Directive, combined with OFT

Guidance, provide sufficient consumer protection in this area?

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Option 2: Greater information transparency on unsolicited credit limit increases

35. How could information about credit limits be made clearer and more accessible to

consumers?

36. What particular information do you think would be most effective in encouraging

cardholders to be more proactive in managing their credit limit?

37. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

Option 3: Limits on the size and/ or frequency of individual limit increases

38. Would limits on the frequency and/ or size of credit limit increases be sufficient to

address the issues in this area?

39. What would be appropriate limits? Who should set them?

40. Under this approach, how could consumers’ ability to request a new increase be

preserved?

41. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

Option 4: A ban on all unsolicited limit increases

42. Do you have evidence that consumers who apply for a credit limit increase are a

significantly worse credit risk than consumers that do not?

43. Should lenders be banned from offering unsolicited limit increases? Should a ban

apply to all consumers?

44. What do you believe would be the benefits and risks to consumers? How severe

are any risks?

45. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

46. How could a ban be implemented in a way which minimises unintended impacts

on both consumers and lenders?

Option 5: Allow consumers to opt in to receiving unsolicited limit increases

47. To what extent do you think that an ‘opt-in’ model for credit limit increases would

rectify the problems identified in relation to unsolicited credit limit increases?

Annex A: List of Consultation Questions

55

48. What might be the unintended consequences of this option, including the

implications for low and grow lending?

49. Should consumers be required to opt in to each individual increase or to all

increases?

50. How could an opt in be implemented so that consumers would not harm their

chances of getting the card they want?

51. Could a fully flexible approach be made to work?

52. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

53. Of the 5 options for the reform of unsolicited credit limit increases, which do you

prefer?

Chapter 5: Re-pricing of existing debt

Option 1: Maintain the Statement of Principles

54. The Government would welcome further evidence of whether or not the

Statement of Principles has been effective. In particular, we would welcome

evidence since November 2008 of:

●● Trends in re-pricing activity by lenders and the impact of the Statement of

Principles on the scale and nature of re-pricing activity;

●● Whether consumers are aware of their choices under the Statement of

Principles and able to exercise them effectively;

●● How consumers have chosen to exercise their choice following a re-price (e.g.

take up of the option to pay down their balance at the existing price, take up of

alternative products, switching);

●● The extent to which consumers understand risk-based re-pricing and the

explanations provided to them by lenders;

●● Volume of complaints on re-pricing (received by lenders, consumer groups or

FOS) and the nature of those complaints;

55. Should the Statement of Principles be placed on a statutory footing?

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Option 2: Further measures to provide consumers with better information about

risk-based re-pricing decisions

56. How could transparency on risk-based re-pricing be improved? At what stage

would it be most appropriate to provide additional information (e.g. pre-contract,

monthly statements, when customer requests)?

57. How could measures to improve transparency be balanced against the risk of

information overload?

58. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

59. Do you think that increased transparency around changes to interest rates would

be sufficient to address problems reported by consumers?

Option 3: Define the factors which lenders can take into account when changing an

individual’s price on grounds of risk

60. Should there be a list of the factors that lenders can take into account when

changing an individual’s price on grounds of risk?

61. Who should decide what those factors are?

62. How could such a definition be made flexible enough to adapt to future changes?

63. What are the possible unintended consequences of this approach?

Option 4: Limit the size and frequency of interest rate increases on existing debt

64. Should there be limitations on the size of any interest rate increase on existing

debt? What should these be?

65. Should there be further limitations on the frequency of interest rate increases?

What should these be?

66. What effects might these limitations have on consumers?

67. How might lenders react to these limitations?

68. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

Option 5: Prohibit re-pricing of existing debt

69. What effect might a ban on re-pricing of existing debt have on consumers?

Annex A: List of Consultation Questions

57

70. How might lenders react to such a ban?

71. What might be the cost to lenders of implementing this change? What might be

the longer term cost?

72. Of the 5 options for the re-pricing of debt, which do you prefer?

Chapter 6: Simplicity and Transparency

Annual e-Statement

73. The Government invites views from stakeholders on ways to give consumers

better information about credit and store cards.

74. Would an annual statement be beneficial to consumers? Should it be provided

to all consumers or only to a subset of consumers? What information should be

included in such a statement?

75. Could such a statement be provided in a consistent, portable electronic format?

What would be the costs of providing such a statement? How could we ensure

that consumers without internet access also benefited?

76. How would this approach fit with the other policy options discussed?

Simpler card lending products

77. Would a “stakeholder” card lending product with basic and accessible features be

beneficial to consumers? What might such a card look like?

78. What would be the costs to lenders of offering such a card?

79. Is there merit in considering a standardised labelling system for credit and store

cards? Could this be taken forward on a voluntary basis pending revised EU

legislation?

80. How would this approach fit with the other policy options discussed?

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

58

Annex B: List of Respondents

In addition to over 900 comments received online and by email, there were 35 formal

responses to the public consultation. These are listed below, with the exception of 1

respondent who wished to remain anonymous.

American Express

Barclaycard

British Retail Consortium (BRC)

Callcredit Ltd

Capital One

Confederation of British Industry (CBI)

Citizens Advice

Citizens Advice Scotland

Consumer Credit Counselling Service (CCCS)

Consumer Focus

Credit Action

Finance and Leasing Association (FLA)

Financial Services Authority

Foundation for Information Policy Research

Home Retail Group plc

HSBC

Islington Debt Coalition

Knowsley Metropolitan Borough Council

Local Authorities Coordinators of Regulatory Services (LACORS)

Lending Standards Board

Lloyds Banking Group

MBNA – Bank of America

Money Advice Trust

Money Facts Group plc

Money SavingExpert.com

Money Supermarket.com Financial Group Ltd

Nationwide Building Society

R3

Annex B: List of Respondents

59

Royal Bank of Scotland (RBS)

The Consumer Council

UK Cards Association

University of Warwick

Vanquis Bank

Which?

In addition to the above named organisations 204 formal responses from individual

consumers were also received. These have not been named in this list.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

60

Annex C: List of Organisations BIS met

●● Dr Neil Stewart – 9 November 2009, 26 January 2010

●● RBS – 10 November 2009

●● OFT – 16 November 2009

●● The FLA and a range of store card providers – 18 November 2009

●● CBI Consumer Credit Working Group – 23 November 2009

●● Consumer Focus – 3 December 2009

●● PricewaterhouseCoopers – 9 December 2009

●● UK Cards Association – 4, 16 December 2009, 23 February 2010

●● Nationwide Building Society – 17 December 2009, 13 January 2010 and 17

February 2010

●● Consumers Union of the United States – 5 January 2010

●● US Public Interest Research Groups (PIRG) – 5 January 2010

●● Consumer Federation of America – 5 January 2010

●● Federal Trade Commission Bureau of Consumer Protection – 5 January 2010

●● US Department of Treasury – 5 January 2010

●● Barclaycard US – 5 January 2010

●● Independent Community Bankers of America – 5 January 2010

●● Office of the Controller of Currency, US Department of Treasury – 5 January

2010

●● Capital One Financial Corporation – 6 January 2010

●● American Bankers Association – 6 January 2010

●● Subcommittee on Financial Institutions and Consumer Credit, US House of

Representatives – 6 January 2010

●● Bank of America – 6 January 2010

●● US Senate Banking, Housing and Urban Affairs Committee, Majority and

Minority Staff – 6 January 2010

Annex C: List of Organisations BIS met

61

●● Federal Reserve Board of Governors – 6 January 2010

●● Federal Reserve Bank of New York – 6 January 2010

●● JP Morgan Chase Bank – 7 January 2010

●● Citicards – 7 January 2010

●● American Express – 7 January 2010

●● Argus Information and Advisory Services– 10 February 2010

●● MBNA – 10 and 17 February 2010

●● Barclaycard – 10 February 2010

●● Capital One – 10 and 19 February 2010

●● Finance and Leasing Association – 10 and 19 February 2010

●● Home Finance Group – 10 February 2010

●● HSBC – 10 February 2010

●● Laser UK – 10 February 2010

●● Lloyds Banking Group – 10 and 19 February 2010

●● Oxera – 10 February 2010

●● Royal Bank of Scotland – 10 and 17 February 2010

●● Santander – 10 February 2010

●● UK Cards Association – 10 and 23 February 2010, 2 March 2010

●● Vanquis Bank Ltd – 10 February 2010

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

62

Annex D: Glossary

Allocation of Payments A practice whereby any credit or store card payment

from a consumer is allocated to the debt incurring the

lowest interest rate first.

Balance transfer deals A balance transfer deal allows consumers to transfer

some of their debts and pay the sum off at a 0% interest

rate for a set period of usually between six and 14

months. After this period ends, the balance begins to

attract interest.

Base Rate This is now officially called the bank rate. It is the

main interest rate in the economy, set by the Bank Of

England, upon which others’ rates are based.

Credit Card A card issued by banks, retailers and other financial

institutions which allows the card holder to make

purchases on credit. A credit limit is established on

an individual basis and interest is charged on the

outstanding balance.

Credit Card Summit This took place in November 2008 and was chaired by

the Consumer Minister and attended by all key players

in the credit and store card market. They agreed a

Statement of Fair Principles which governs how and

when they will change a customer’s interest rate when

their individual risk profile alters.

Credit Limit The maximum spend a consumer can make on a credit

or store card.

Credit Reference Agency Credit reference agencies provide lenders with

information about potential borrowers, which they then

use to make lending decisions. The information shared

may include information about borrower’s previous credit

history. They hold certain information about most adults

in the UK. This information is called your credit reference file or credit report.

Annex D: Glossary

63

Consumer Credit Directive The Consumer Credit Directive is EU legislation which

needs to be adopted by all EU countries by June 2010.

It aims to create a common credit market across the EU

and to maintain high levels of consumer protection.

Finance and Leasing Association The Finance & Leasing Association is the leading

trade association for the asset, consumer and motor

finance sectors in the UK. Its members include banks,

building societies, finance houses, credit and store card

providers, motor finance companies and asset finance

and leasing companies.

Financial Ombudsman Service The Financial Ombudsman Service is a public body set

up by Parliament. It is the official independent expert in

settling complaints between consumers and businesses

providing financial services.

Financial Services Authority The Financial Services Authority is the main City

regulator whose job is to protect investors’ interests.

Irresponsible Lending Guidance The draft Guidance was launched for public consultation

by the OFT in July 2009. The consultation closed on 21

October 2009 and the OFT expects to issue its Guidance

around the end of March 2010. The Guidance will

identify lending behaviours and practices which the OFT

considers may be irresponsible.

Lending Code A voluntary code of practice which sets standards for

financial institutions to follow when they are dealing with

their personal and small business customers in the UK.

Lending Standards Board The LSB is responsible for the Lending Code, and helps

firms to interpret and meet its requirements. It also

monitors and enforces compliance with the Code, and

identifies any gaps or deficiencies in the Code that could

lead to consumer detriment.

Minimum Payment The minimum amount that a consumer must pay each

pay period (usually monthly) on the outstanding debt on

their credit or store card.

A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards:

Government Response to Consultation

64

Office of Fair Trading The OFT is the UK’s consumer and competition

authority. Its mission is to make markets work well

for consumers. It is a non-ministerial Government

department.

Risk-based re-pricing This is the practice by which interest rates are altered

in response to changes in the “risk cost” of serving a

particular consumer or group of consumers because of

changes in their credit score.

Store Card A card issued by a retailer or group of retailers

(sometimes financed by a third party lender) which

only allows the card holder to make purchases on

credit in certain stores. A credit limit is established

on an individual basis and interest is charged on the

outstanding balance.

UK Cards Association The UK Cards Association is a trade body that gives

credit, debit and charge card issuers, and merchant

acquiring banks a forum where they can work together

on non-competitive issues.

US CARD Act 2009 The Credit Card Accountability Responsibility and

Disclosure (CARD) Act of 2009 or is a federal law passed

by the United States Congress and signed by President

Barack Obama on May 22, 2009. It is comprehensive

credit card reform legislation that aims to establish fair

and transparent practices relating to the extension of

credit under an open end consumer credit plan, and for

other purpose

Annex E: Contact Details

65

Annex E: Contact Details

In case of enquiries please contact:

Paul Liddle

CCP

Department for Business, Innovation and Skills

1 Victoria Street

London

SW1H 0ET

Tel: 020 7215 6146

Fax: 020 7215 0357

Email: paul.liddle@bis.gsi.gov.uk

Additional copies:

This Government response is available electronically at www.bis.gov.uk/creditconsultation/

response. You may make copies of this document without seeking permission. Printed

copies of this Government response can be ordered from:

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London SW1W 8YT

Tel: 0845-015 0010

Fax: 0845-015 0020

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Department for Business, Innovation and Skills. www.bis.gov.uk

First published March 2010. © Crown copyright. BIS/0.05k/03/10/NP. URN 10/768