Defined Terms and Documents

One of the commitments we made in the White Paper was to review the regulations governing consumer credit and store cards. This consultation is the first step in taking forward that commitment.

We want 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. We believe that changes to the regulatory regime are likely to be necessary to achieve this.

We have set out options for change that cover four specific aspects of the way credit and store cards operate: minimum payments, unsolicited credit limit increases, the re-pricing of existing debt and the allocation of payments. We have also identified scope to improve the simplicity and transparency of credit and store cards more generally.

We have yet to take a final decision on any of the proposals set out in the consultation document. We are specifically interested in your views on the policy options we have set out.

London, SW1H 0ET, tel: 0207 215 1923

email: cscr@bis.gsi.gov.uk

traders and partnerships) who own a credit or store card and to all credit and

store card lenders who operate in the UK. It is also of wider interest to all

consumers and businesses in the UK.

1

Foreword 3

Executive Summary 5

Chapter 1: Introduction 12

Chapter 2: The allocation of payments 18

Chapter 3: Minimum payments 27

Chapter 4: Unsolicited limit increases 38

Chapter 5: Re-pricing of existing debt 50

Chapter 6: Simplicity and Transparency 60

Chapter 7: What happens next? 66

Annex A: List of Consultation Questions 68

Annex B: Glossary 77

Annex C: List of Organisations Receiving Consultation 80

Annex D: Code of Practice on Consultations 83

3

The past few decades have seen considerable growth in the use of credit cards. They are

now the most popular form of unsecured borrowing in this country. In fact, there are now

Many consumers, however, feel that they are not getting a fair deal from their credit and

store card providers. Certain features of the way cards work appear inherently balanced

against the interests of consumers. Currently consumers have limited control over -

1. how their debts are repaid,

2. over increases to their credit limits; or

3. changes to the interest rates they are charged.

Terms and conditions can be complex and confusing, leading

consumers to incur unexpected costs. High levels of consumer dissatisfaction about

credit and store cards reflect this lack of effective consumer choice.

Whilst many of us use our cards responsibly as a convenient way to pay and as a means

of managing our short term borrowing needs, the Government is increasingly concerned

that a growing number of consumers are using credit and store cards as a form of longer

term borrowing and spiralling into increasing cycles of unsustainable debt as a result.

We believe more can be done to protect consumers from the financial pressures and the

anxiety caused by the burden of heavy debts they see little prospect of paying off in a reasonable time.

A robust and responsive regulatory system is key to ensuring sustainable financial

markets and a fair deal for consumers.

On 8 July, HM Treasury published “Reforming Financial Markets”, setting out the Government’s strategy for reform of the financial

regulation and to reinforce the institutional framework for safeguarding financial stability.

The paper also set out measures to reduce the impact of the failure of financial firms and

to improve competition in financial markets. Importantly, it also announced measures to

protect, inform and empower consumers of financial services products, by raising financial

capability, improving consumers’ access to simple and transparent products and giving

consumers a collective right of redress in cases where there are widespread complaints

about firms’ activities.

Alongside this, our White Paper: “A Better Deal for Consumers: Delivering Real Help

Now and Change for the Future” sets out the Government’s vision for a new approach to

consumer credit, an approach that works not only during these difficult times, but which

This review of the credit and store card market is set in the context of a number of

important Government initiatives outlined in the White Paper, including the implementation

will introduce important new protections for consumers. This review will build on these

initiatives by looking at the specific challenges raised by credit and store cards.

As we examine how the rules on credit and store cards need to change, we will ensure

that there is a clear and consistent regulatory picture for consumers and lenders alike.

We must of course properly assess the risks that certain interventions could inadvertently

increase the cost of credit and make it less readily available to consumers, but we will

not hesitate to take action where there is evidence of consumers being exploited or disadvantaged.

Given the scale of credit and store card lending in the UK, this review could ultimately

have far reaching consequences for levels of consumer credit in the economy. If there is

less personal lending and borrowing overall as a result of the changes we are proposing,

we want this reduction, and the way the market evolves, to be the result of consumers

taking better decisions about their finances. This will be essential to rebuilding consumer

confidence in these important financial products.

Rt Hon Lord Mandelson Kevin Brennan MP

This means that some consumers will be repaying their debts over decades and paying significant interest over the life of the debt.

The separate initial Equality Impact Assessment also includes a series of questions. A complete set of all the questions covered by this consultation document and the Equality Impact Assessment can be found at Annex A.

Consumer credit issues are reserved in Wales and Scotland. Consumer credit is a devolved (transferred) matter in Northern Ireland but the legislation (the Consumer Credit Acts 1974 and 2006 and associated regulations) apply to the whole of the UK. The Minister of Enterprise for Northern Ireland has 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. Northern Ireland would only be included in any subsequent legislation passed at Westminster with the consent of the appropriate Northern Ireland authorities.

For ease, we have referred simply to “consumers” throughout.

However, we would welcome responses from small businesses and their

representatives, in particular drawing out any areas where there may be a

divergence of interests between consumers and small firms.

27 October 2009. Responses are sought by 19 January 2010.

BIS, 1 Victoria Street, London, SW1H 0ET, Tel: 0207 215 1923,

Email: cscr@bis.gsi.gov.uk.

or representing the views of an organisation. If responding on behalf of an

organisation, please make it clear who the organisation represents, and where

applicable, how the views of the members were assembled.

welcome any suggestions of others who may wish to be involved in this consultation process.

in the first instance to Christina Anderson.

or conducted, please refer to Annex D which details the Code of Practice for

Consultations and provides contact details for complaints.

information, may be subject to publication or release to other parties or to

disclosure in accordance with the access to information regimes (these are

primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act

1998 (DPA) and the Environmental Information Regulations 2004). If you want

information, including personal data that you provide to be treated as confidential,

please be aware that, under the FOIA, there is a statutory Code of Practice with

which public authorities must comply and which deals, amongst other things, with

obligations of confidence.

the information you have provided as confidential. If we receive a request for

disclosure of the information we will take full account of your explanation,

but we cannot give an assurance that confidentiality can be maintained in all

circumstances. An automatic confidentiality disclaimer generated by your IT

system will not, of itself, be regarded as binding on the Department.

at www.bis.gov.uk/creditconsultation  along with the accompanying

Economic and Equality Impact Assessments. A Welsh language version of the

executive summary is also available at www.bis.gov.uk/creditconsultation.

A simpler, easy to read version of the consultation is also available on

www.bis.gov.uk/creditconsultation. Additional hard copies can be ordered from:

BIS Publications Orderline

ADMAIL 528

London SW1W 8YT

Tel: 0845 015 0010

Fax: 0845 015 0020

www.bis.gov.uk/publications

Where possible, we will make other versions of this document available on

request in Braille, other languages, large font and other formats.

institutions. The vast majority of this borrowing is for mortgages on houses.

However, £230 billion is unsecured borrowing, which includes personal loans,

overdrafts, credit cards, store cards and some other forms of specialist lending.

1.6 billion credit card transactions in 2008, with a value of just over £100 billion.

After the US, the UK has the highest number of credit cards per head of

at more than 23 million retail outlets worldwide. They can be used to make

purchases or to obtain cash and they are the predominant form of payment

for purchases made on the internet. 0% balance transfer deals are standard

throughout the industry, as are rewards such as cashback and points schemes,

and other benefits (some of which incur a fee) such as rental car insurance and

theft and fraud protection.

line with the pattern for unsecured borrowing more generally. In the last 10 years,

the number of credit card transactions has increased by half, along with a doubling

in the value of these transactions. This overall increase in credit card use masks

an interesting pattern during this recent period of downturn. Unlike other forms

of unsecured borrowing, such as personal loans and overdrafts, which continued

to grow until late 2008, the level of debt held on credit cards has been falling

data from the Bank of England, however, shows that whilst all other types of

unsecured consumer borrowing fell in July 2009 for the first time since records

It would appear that consumers may be turning increasingly to their credit cards

as access to other forms of borrowing dries up and as banks become more

cautious in their lending and more constrained in terms of their capital and

funding.

smaller than the credit card market, with approximately £1.9 billion of outstanding

store cards until about 2006, it has since decreased as store cards have suffered

a decline in popularity in recent years and retailers have migrated customers onto

credit card products. Whilst data on store cards is less readily available, latest

10 British Bankers Association (BBA)

11 Bank of England

12 Bank of England, reported in September 2009.

13 Finance and Leasing Association (FLA)

14 July 2009 from the Finance and Leasing Association (FLA)

14

that around 69% of consumers pay off their outstanding balances on their

credit cards in full every month or most months and that approximately 60% of

consumers pay off their outstanding balances on their store cards in full every

carry high levels of unsustainable debt on their credit cards, with little or no

prospect of paying these debts off in a reasonable period and at a reasonable

Consumers who sought debt advice from the Consumer Credit Counselling

Service (CCCS) in 2008 had average credit card debts of nearly £15,000 and store

card debts of £1,700. Nine out of ten CCCS clients had an annual income of less

than £30,000. For those clients with an income of less than £10,000 a year, the

average credit card debt was nearly £8,000 and the average store card debt was

almost £1,400.

managing cashflow and a convenient payment mechanism. Organisations

representing small firms and debt advice charities have expressed concerns that

some business owners may be using credit cards taken out in a personal capacity

to support their businesses through the downturn, incurring significant debts as a

result.

consumers are unaware of the true cost of using their card or understand how

they can make the best use of it. Many consumers may not be choosing the card

which is most suitable for their financial needs and in some cases lenders are

benefiting from consumers incurring unexpected costs as a result of the lack of

understanding about how their card works.

credit and store card lenders. Just over a third of all banking and credit complaints

received by the Financial Ombudsman Service in 2008 / 2009 were about

consumer credit issues, and of these, just over 18,000 (75%) were specifically

about credit cards. In addition, complaints to the Financial Ombudsman Service

about store cards, whilst low in number (in the hundreds), more than doubled

between 2008 and 2009.

consumer complaints about credit and store cards, and concerns about the

complexity and fairness of their key features that we made a commitment in

the Consumer White Paper to review the regulation of the credit and store card

market.

15 Competition Commission Enquiry 2005.

16 Figures from the UK Cards Association report, UK Plastic Cards 2009 show each credit or card charge holder in the

UK had an average of 2.3 cards last year.

15

Introduction

taken account of developments in financial markets over the last decades and

particularly during this last year when we have seen unprecedented financial

turbulence.

operate in the credit and store card market. In particular, we have noted that

lenders are relying increasingly on revenue from those borrowers who do not

pay off their balance every month rather than on income from card transaction

volumes. We have examined the impact this may have on their incentives to give

consumers a fair deal.

introduction of measures relating to credit cards in the US Credit Card

the fundamental differences between the US and the UK credit card markets,

including in relation to the legal environment.

picture of a range of initiatives and work taking place in this area.

financial markets and a fair deal for consumers. On 8 July, HM Treasury published

“Reforming Financial Markets”, setting out the Government’s strategy for reform

strengthen financial regulation and to reinforce the institutional framework for

safeguarding financial stability. The paper also set out measures to reduce the

impact of the failure of financial firms and to improve competition in financial

markets. Importantly, it also announced measures to protect, inform and

empower consumers of financial services products, by raising financial capability,

improving consumers’ access to simple and transparent products and giving

consumers a collective right of redress in cases where there are widespread

complaints about firms’ activities.

which aims to ensure that lenders do not engage in irresponsible lending practices

which has recently been the subject of a public consultation, identifies types of

behaviour that the OFT considers would constitute irresponsible lending.

regulations that will implement the European Consumer Credit Directive by

June of next year. Some of the provisions in these regulations, particularly the

17 http://www.govtrack.us/congress/billtext.xpd?bill=h111-627

18 http://www.hm-treasury.gov.uk/reforming_financial_markets.htm

19 http://www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/irresponsible

16

requirement that lenders must give consumers “adequate explanations” about

their products, are directly relevant to action on credit and store cards.

supersede the Banking Code Standards Board which supervises the current

standards of good banking practice for financial institutions, will be replaced by the

Lending Code, and will include all the key provisions in the existing Banking Codes

review, we will ensure that there is consistency and clarity on regulation in this

area for consumers and lenders alike.

market where:

borrowing;

consumers;

between borrower and lender;

20 www.lendingstandardsboard.org.uk

21 Throughout this document, references to the Banking Code are to the personal (consumer) Banking Code. The

Banking Codes will be replaced by the Lending Code from 1 November 2009. The FSA is taking over the regulation of

banking conduct of business in relation to deposit-taking and payment services as of November 2009, although this

will not affect those areas of regulation outside of the FSA’s responsibility, such as consumer credit and overdrafts.

17

Introduction

18

19

The allocation of payments

be paid off last. This is common practice across the credit card industry, with very

few exceptions offering cards that reverse the standard allocation of payments on

ii) £500 new purchases at 15%, and iii) £250 cash advance at 25% would see

payments reducing the £1000 balance transfer first. Only after the first £1000

has been paid off would the consumer’s payments begin to reduce the £500 new

purchases debt at 15% (and any subsequent new purchases which are made).

The £250 cash advance at 25% will not begin to be paid off until any balances

attracting a lower rate of interest have all been paid off in full, even if they are

incurred after the cash withdrawal was made. This means that it would be

possible to carry the £250 cash advance debt for a considerable time before it

was repaid, during which time the debt would be attracting the highest interest

rate of 25%.

switching between card lenders and enable lenders to acquire more customers,

fee generally charged for balance transfers, consumers are usually better off

transferring their balance rather than keeping it on another card charging standard

of risk they present to the lender. Consumers drawing multiple cash advances

present a higher credit risk because withdrawing cash on a credit card is often

correlated with financial difficulties. In addition, cash advances carry a significant

risk of fraud, which increases the cost to the lender of providing this facility.

card lenders offer the facility to withdraw cash on the card, although many will

offer promotional rates. Typical industry practice appears to be that repayments

are allocations to the cheapest debts first. However, the situation can be more

complicated because some store cards are hybrid products offering instalment

credit (often described as “buy now, pay to plan”) and deferred credit (“buy

22 A revolving credit account (where the amount of money owed can fluctuate) typically has a variable interest rate, an

open ended term and payments based on a percentage of the balance. Credit and store cards are examples of this

type of account, as opposed to loans, which have fixed terms.

23 Balance transfers do not in themselves generate profit for lenders. This comes from balances created by new

spending on the card. It is arguably rational for card issuers to allocate payment to the cheapest debt first, so that

balances attracting interest accumulate while interest free balances are reduced. Consumers benefit from 0%

balance transfer deals because lenders can recoup costs from these growing interest-bearing balances.

24 However, it should be noted that some 0% balance transfer offers require consumers to make a certain level of

purchases within a certain number of months, or lose the 0%.

20

now, pay later”) alongside traditional revolving credit (where consumers decide

how much or how little to pay off each month). In these circumstances, part of

a repayment may be allocated to repaying an instalment loan before the rest

is applied to other balances. We are advised that at least one store card lender

provides customers with the option of allocating payments to specific plans.

means that consumers do not realise that their repayments do not necessarily

requirements to disclose information on the allocation of payments in credit

agreements and periodic statements, reinforced by self-regulatory provisions in

used by different lenders varied considerably, as did the way in which information

consumers to understand how repayments are structured, and whether they are

able to make rational decisions based on this information.

structuring of repayments in this way, and who may suffer different levels of

detriment. The first group includes those consumers taking advantage of balance

transfer deals and often heavily discounted promotions, who will find that, if they

use their card for new purchases, the discounted balance is paid back first. The

second group affected are those who use the card to make cash withdrawals and

find that they are unable to pay back this borrowing (often at 1.5 to 2 times the

rate for purchases) without paying back the entire outstanding balance first.

benefit from the discount as they would have liked or expected. Combined with

promotional offers and lack of consumer understanding of different rates applied

to different forms of borrowing, the current allocation of payments may result

in consumers being unaware that the way they are using their card is increasing

their indebtedness. This practice also potentially limits the ability of consumers to

assess accurately the costs of entering into a deal, particularly where competition

between lenders focused on 0% offers masks the true price to consumers.

In fact, depending on subsequent usage of the card, the order of repayments can

25 OFT Credit Card Survey, 2004.

26 Consumer Credit (Agreements) Regulations 1983 (S.I. 1983/1553), Sch 1, para 14A and Consumer Credit (Information

Requirements and Duration of Licences and Charges) Regulations 2007 (S.I. 2007/1167), Sch 2 paras 3-4.

27 OFT Credit Card Comparisons Report February 2008

21

The allocation of payments

Moneysupermarket.com found that almost two thirds of consumers surveyed did

not know that if they made purchases on a card to which they had transferred a

balance their repayments would continue to be allocated to the cheapest balance

advances can remain on their balance for many years, attracting the highest rates

of interest. This becomes a particularly serious concern if consumers are only

making minimum payments, where it may take decades to pay off a relatively

small cash advance at a high cost.

second group of consumers. This group, while not necessarily a large proportion

of credit card users, is likely to include a significant number of vulnerable

consumers, who have limited choices of other borrowing vehicles. Withdrawing

cash on a credit card is often a sign that consumers are in financial difficulties;

they are borrowing on their card to fund essential cash expenditure.

correct a mistake. If, for example, a credit card was mistakenly used instead of a

debit card to withdraw cash, it could take years to repay the cash component, as

this could not be done without paying back the balance in full.

there may be a case for treating the allocation of payments against cash advances

differently from other payments.

lenders and borrowers, an obvious approach would be to ensure that consumers

understand the allocation of payments and are able to use their cards optimally

as a result. However, this does not take into account the fact that consumers

(particularly those lacking financial capability) may not understand the practice,

even with increased information (in addition to existing legislative requirements).

There is a case for arguing that consumers should not be disadvantaged by

confusing complexity and that the Government should intervene to alter the

allocation of payments in the consumer’s favour.

28 To add to the confusion, introductory interest-free periods can expire on different dates. For example, a typical offer

recently on the market is for 0% on both balance transfer and purchases, but this introductory offer lasts for 15

months for balance transfers, but only 3 months on purchases, which then attract a rate of 15.9%.

29 Moneysupermarket.com

22

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.

Option 1: Do nothing, beyond current legislative and regulatory activity

Lending Guidance. The current draft (which was subject to public consultation)

lists “Allocating payments to the least expensive debt first (or otherwise than to

the oldest or most expensive debt first) under circumstances in which it was not

explained to the borrower, clearly and fully, in plain and intelligible language, in

advance of him entering into the credit agreement, that this would be the case”

as an irresponsible lending practice that would call into consideration the fitness of

Credit Directive will also apply to this area, and among other things will require an

adequate explanation of the cost of credit and any special or unusual features of

and emerging OFT guidance, the Government would take no further action on the

allocation of payments.

completely removed under this option. Subject to the results of the recent

consultation by the OFT on draft Irresponsible Lending Guidance, a lack of an

adequate explanation of the payment allocation structure by a card lender could

question that card lender’s fitness to be licensed by the OFT, and could also

breach Consumer Credit Directive implementing legislation. This option would not

necessarily address the detriment faced by consumers who use cash advances,

30 Paragraph 6.9 of the draft Guidance.

31 In addition to a requirement to include information on the allocation of payments in pre-contractual information and

in agreements, Article 5.6 of the Directive requires adequate explanations to be given to consumers to help them

decide whether or not credit products are suited to their needs. Our legislation implementing this requirement

proposes to include an explanation of less obvious features of a credit product which could have a negative impact on

the consumer and the cost of credit.

32 Although the implementation of the Consumer Credit Directive Article 5.6 will also require lenders to explain unusual/

risky features of products and the effect they might have on the borrower.

23

The allocation of payments

Option 2: Improve information transparency

requirement for clearer information, that debt attracting the lowest rate of interest

would be paid off first, and that this may increase indebtedness over time

depending on their use of the card. Any additional legal requirements to provide

information, over and above that which will be required under the measures

described in option 1, would need to be consistent with the provisions of the

Consumer Credit Directive, which restricts additional legal requirements for precontractual

information, but allows flexibility in the provision of post-contractual

information. An annual statement showing how payments have been allocated

(with an accompanying explanation) could potentially be an effective illustration

to consumers of the way in which repayment behaviour affects the costs of

borrowing.

set out above. However, it is questionable that increased information in this form

would sufficiently increase consumers’ understanding of the way payments are

allocated and the impact this might have. There is a risk that consumers would

not focus on this information and its implications for sensible use of their card,

especially if it is not presented simply enough and given to them at a time when

it can be most useful.

they fully understood how the allocation of payments was structured. A better

understanding of the consequences of paying off the cheapest debt first might

lead to more consumers choosing cards that are marketed as having a different

payment structure, and, in turn, could lead to more of these cards on the market,

and a change in behaviour from lenders.

information on what consumers could do to improve their card use, rather

than explaining how the allocation of payments works. Understanding the

principle behind the way payments are allocated may be more important than

understanding how each individual payment is allocated. This could be supported

by illustrative scenarios.

24

Option 3: Allocate repayments proportionally to debts attracting different

interest rates

interest rate (e.g. cash advances) to some degree. However, it might be likely to

discourage some lenders from offering low rate promotional balances, and could

have an impact on the availability of 0% balance transfer deals. Lenders have told

us that any change to the current allocation of payments would involve significant

systems change costs at the heart of their IT systems. It might also be confusing

to consumers, particularly if they are unclear as to the make up of the current

debt.

Option 4: Allocate repayments to the most expensive debt first

in excess of the minimum payment must be allocated to the highest interest

of debt first, and would therefore reverse current practice in the UK. One of the

few lenders to offer a card in the UK with this payment structure claims that

consumers could save £224 a year as a result, based on certain assumptions

33 So, for example, for a balance comprising £300 balance transfer at 0% interest, £600 purchases at 15% interest, and

£300 cash advance at 20%, a payment of £120 would be allocated £30 to the balance transfer component, £60 to the

purchases component and £30 to the cash advance component.

34 Nationwide Building Society marketing material.

25

The allocation of payments

them to pay their debt off faster. It is the simplest and most transparent option for

consumers and it would also address the issue of cash advances being held for

long periods of time on balances attracting the highest rates of interest.

availability of 0% balance transfer deals, as the income lenders receive from

charging interest at high rates for longer would no longer cross-subsidise lower

rate deals. However, providers who apply a high-to-low allocation of payments do

still provide discounted offers.

forms of credit. In the case of these cards, a straightforward flipping of payment

structure may not be possible. This is a matter we will look at further.

allocation, and found that on an annualised basis the interest income lost on

credit card portfolios due to the reversal of the allocation of payments would

allocation of payments would involve significant and costly systems changes at

the heart of their IT systems. Finally, lenders have said that if the cash facility is

made proportionately more expensive to provide because of the way payments

are allocated, costs to consumers who use this facility will rise, and some lenders

could withdraw the cash advance facility altogether. The Government calls upon

industry to provide evidence in support of these arguments.

Option 5: Allow consumers to pay off cash advances first

Once all cash balances are repaid, any additional payments could then be allocated

according to lender preference.

consumer detriment in this area is suffered by the minority of card users who use

35 Oliver Ireland, Morrison & Foerster LLP, August 2008. The US market is, however, considerably larger than that in

the UK. If we were to assume that the allocation of payments accounts for the same proportion of yield in the UK

as in the US, a comparable figure for the UK might be likely to be somewhere in the region of £50-60m. However,

the Government is working with the UK credit card industry to deliver a more accurate impact analysis based on UK

circumstances.

26

the cash advance facility either because of financial need or because they do not

understand the implications. It would also ensure that there is minimal impact on

the availability of 0% balance transfers, which many consumers appear to value.

should not be as significant as a total reversal of the current pricing structure.

However, as for option 4, lenders have suggested it is possible that costs of cash

withdrawal for consumers could rise and that some lenders might cease to offer

cash withdrawal facilities.

may be entering 0% balance deals without a proper understanding of what that

entails and with the allocation of payments weighted against them.

27

28

month against their outstanding balance without incurring default charges from

the credit or store card lender. The minimum payment varies across different

lenders, but must be set at a level that at least covers new interest payments on

the balance of the debt to ensure that consumers do not enter a negative spiral

of debt (known as negative amortisation). This is set out in paragraph 10.13 of

the Banking Code, which states: “we will make sure that your minimum payment

covers more than that month’s interest”. It may not, however, cover fees and

charges, such as those for cash advances or balance transfers.

balance for credit cards and around 4% of the outstanding balance for store cards,

subject to a minimum amount (usually £5 or £10). Between 2002 and 2008, the

number of consumers who only made the minimum payment on their credit

card increased by a third. In 2008, the minimum payment was regularly made on

around 14% of all credit card accounts (estimates show that between 11% and

20% of store card holders make the minimum payment in an average month).

Around 69% of consumers paid off their outstanding balances on their credit

cards in full every month or most months (for store card holders, approximately

60% of consumers paid off their balances). This means that of the 31% of

consumers who borrowed on their credit card, over a third of these made only

the minimum payment. Of this 31%, a proportion will make only one or two

minimum payments over the year, while some consumers will make the minimum

payment over a period of many months or even years. Some consumers will be

consistently making minimum payments on more than one card.

increased; indeed nearly a third more consumers make only minimum payments

on their credit cards now than was the case in 2002. This rise may be attributable

to a number of factors, including the impact of recent economic conditions on

many consumers’ personal finances. It may also reflect the larger percentage

of 0% deals available over the period since 2002. These make it economically

rational to make only a minimum payment and then pay the total outstanding

balance immediately prior to the end of the promotional period, assuming that the

consumer is not incurring any further expenditure on their card.

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

of interest. The Government is particularly concerned about those consumers

who regularly make the minimum payment; they will be most at risk from longer

repayment periods and higher interest payments.

29

Minimum payments

making only the minimum payment. In 2004, the credit card industry agreed the

text of a health warning which appears on all credit card statements. This reads:

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

and cost you more to clear your balance”. The Banking Code also requires that

credit card statements include an estimate of the amount of interest payable next

month if the consumer makes only the minimum payment. Credit card lenders

also agreed that additional information should be included within pre- or postcontract

information to make clear that the minimum repayment amount does

not constitute a repayment schedule. These voluntary measures by industry

were replaced by regulations made under the Consumer Credit Act 1974, and

amended following the Consumer Credit Act 2006. These regulations, which

came into force in October 2008, incorporate the above health warning into all

credit and store card statements; although they do not prescribe how prominently

it should appear relative to other prescribed information. In addition, the Store

Cards Market Investigation Order 2006 requires store card lenders to include

the minimum payment warning in direct debit mandates and requires an interest

estimate on monthly statements.

in the UK, a significant minority of consumers make only the minimum payment

even after a 0% period has ended, and therefore continue to pay off debt very

slowly and at a high cost.

around 5% to its current average of 2–3%. Whilst this may partly be a reflection

of a global decline in interest rates, it leaves consumers who only make minimum

payments paying back their balance over much longer periods than a few years

ago.

debt on credit and store cards to be paid off last. When making only the minimum

payment, consumers will be paying off their debt at the lowest interest rate first;

a practice that further increases the costs to those consumers who make the

minimum payment has an indirect effect on those consumers who borrow on

consumers, the minimum payment acts as an “anchor” upon which they base

their own levels of repayment. The research suggests that setting a low minimum

36 This also reduces the utility of the APR as a cost comparator for such consumers, as the APR under the Consumer

Credit Directive assumes that the balance is paid off at the highest interest rate and charges applicable to the most

common drawdown mechanism (typically purchases).

37 http://www2.warwick.ac.uk/newsandevents/pressreleases/research_finds_customers146/

30

payment encourages these people to pay less than they would do otherwise.

Any policy intervention in this area is therefore likely to influence most consumers

who borrow on their cards and not just those who make the minimum payment.

means a significant number of consumers who borrow on their cards repay their

debt over long periods of time with high levels of interest, and that lenders have

not done enough to explain to consumers the implications of making only the

minimum payment. Even if they read the statutory health warning, consumers

may not fully appreciate that regularly paying only the minimum payment is not

a sustainable approach to card borrowing and that if they wish to pay off the

full amount over a reasonable period they should be repaying significantly more

each month. These issues are compounded by recent declines in the levels of

minimum payment, industry practice on the allocation of payments and evidence

that low minimum payments indirectly affect all borrowers.

necessary in this area so that consumers not only have a clearer idea of the

implications of making the minimum payment, but are also encouraged to make

higher payments where they can so that credit and store card debts are repaid

over a reasonable period.

borrow on their cards, particularly those who only infrequently make a minimum

payment or who benefit from a 0% deal, paying small amounts may be a rational

choice. The flexibility offered by the minimum payments regime on credit and

store cards enables consumers to manage their finances as their personal

circumstances alter over a period of time. For others, however, it is clear that the

current information provided is not sufficiently focused for consumers to make

informed decisions on their borrowing. This is particularly true of those consumers

who could pay more than the minimum payment on a regular basis, but choose

not to. We will also consider how action in this area might affect the credit and

store card market more generally and might impact on the range of products and

offers available to consumers.

1. Do nothing beyond current legislative and regulatory activity;

2. Improve information transparency;

3. Set a recommended minimum payment;

4. Increase the minimum payment.

31

Minimum payments

Option 1: Do nothing beyond current legislative and regulatory activity

as a result of the implementation of the Consumer Credit Directive and the OFT’s

Irresponsible Lending Guidance.

must be sufficient to enable consumers to assess whether the proposed

agreement is adapted to their needs and financial situation. Among other matters,

the draft regulations implementing the Directive will require an explanation of

“the cost to the debtor of the credit to be provided under the agreement”. The

regulations implementing the Consumer Credit Directive are expected to be

finalised by the end of the year, coming into force in June 2010.

adequate explanations to include an indication of how much is payable each

month, and the risk to the borrower “if only minimum repayments are made that

example of an unfair business practice: “Setting the minimum repayment on a

running account credit agreement at a level that would not repay capital, as well

consultation in draft form. The OFT will issue final Guidance, taking account of

consultation responses, in early 2010.

Option 2: Improve information transparency

more explicit to consumers at the start of a credit or store card relationship

and during the life of the agreement. Any action in this area would need to be

consistent with the regulations implementing the Consumer Credit Directive.

Whilst the Directive restricts additional requirements for pre-contractual

information, it provides Member States with considerable freedom regarding

the adequate explanations that must be given. It also allows for more flexibility

on post-contractual information, imposing no constraints, except with regards to

information on overdrafts and changes to borrowing rates.

38 Article 5.6 of the Consumer Credit Directive

39 Paragraph 3.15 of the draft OFT Guidance

40 Paragraph 6.2 of the draft OFT Guidance

32

proposals in relation to adequate explanations. There are also a range of postcontractual

information options that we should consider. These should help to

illustrate to borrowers the way in which their payment levels affect the costs of

their borrowing. The intention would be to really bring to life for consumers how

little of the debt they are repaying by making only the minimum payment.

much it will cost and how long it will take to repay the outstanding balance if

only the minimum payment is made. An alternative scenario could show the

implications if a larger amount is repaid each month (for example, 25% or 50%

of the outstanding balance) or if the consumer repays the same proportion of

the debt as he has done in, say, the previous six months. The statement could

also require an estimate of the interest payable the following month if only the

minimum payment is made, embedding in statute the current voluntary provisions

under the Banking Code.

be required in the US under the CARD Act of 2009. Lenders will need to display

on periodic statements how long it will take to pay off the existing balance and the

total interest cost if the consumer pays only the minimum payment. They will also

need to display the payment amount and total interest cost to pay off the existing

balance in a reasonable period, deemed to be 36 months in the US.

minimum payments should put consumers in a better position to make more

informed choices on their borrowing. However, there is no guarantee that

consumers would read or follow advice to make more than the minimum

payment, especially where this is routinely included on monthly statements,

which many consumers will not study in detail. On its own, therefore, this option

is unlikely to change the behaviour of those consumers who are most susceptible

to high levels of unsustainable debt.

33

Minimum payments

Option 3: Set a recommended minimum payment

is higher than the contractual minimum payment and allows consumers to pay off

the card over a much shorter period of time. Consumers could be encouraged to

make the recommended minimum payment rather than the contractual minimum

payment. Lenders could explain the advantages of a recommended minimum

payment at the start of a new agreement. Consumers could opt in to always

making at least the recommended minimum payment. Alternatively, Direct Debit

mandates for those who do not intend to repay in full could be set at the higher

recommended minimum payment rather than at the contractual minimum.

could be made a regulatory requirement, but we would expect it to be based on

a repayment over a reasonable period of time, probably around 36 months. This

is the same period that has been set in the US for the provision of information

on minimum payments, and anecdotal evidence shows that this period is a

reasonable estimate of the average life of a credit card agreement issued in the

current UK market. The information transparency measures set out in option 2

could include information on how much money and time could be saved if the

recommended minimum payment is made each month instead of the contractual

minimum payment.

contractual minimum payment will benefit from this option as it should allow

them to clear their debt faster over a much shorter repayment period and at a

corresponding lower cost. In addition, depending on how the recommended

minimum payment is presented, consumers should have a degree of control over

their borrowing and should be able to make a more informed decision as to how

they want to repay their debt.

on how it is implemented. If consumers are asked to opt in to the recommended

minimum payment, it is not clear whether many would choose to do so,

particularly more vulnerable consumers who may be in more precarious financial

situations and particularly if the benefits of doing so are not clearly articulated.

If the recommended minimum payment becomes the default payment option

for Direct Debit mandates, then some more vulnerable consumers may struggle

in the short term to make a higher recommended minimum payment on their

outstanding balance. We would anticipate, however, that some mechanisms

could be built in to allow more vulnerable consumers to default to the contractual

minimum payment if necessary. The new recommended minimum payment could

also be phased in order to allow those consumers, who cannot currently afford to

pay, more time to adjust their finances.

34

may actually discourage some consumers from making payments above the

recommended minimum level as they may see it to be a “desirable” repayment

level. So some consumers might end up repaying less of their debt than they

otherwise would because they mistakenly believe that the recommended

minimum payment is the payment they should ideally make.

recommended minimum payment would have on the “anchoring” effect. It is

not clear whether consumers would anchor against the higher recommended

minimum payment or the lower contractual minimum payment and whether

having two different types of minimum payments might actually be too

complicated and confusing for both lenders and consumers.

Option 4: Increase the minimum payment

of consumers who borrow on their cards) would increase, thereby ensuring

earlier repayments of the existing balance over a shorter period of time with a

lower level of interest over the lifetime of the debt.

option.

One option might be to increase the percentage minimum payment from, say,

2% to 5%, based on the outstanding balance on the card. This is the model we

have used in the illustrative examples below. An alternative could be to base the

level of the minimum payment on a maximum period over which the debt can

be repaid. The two approaches may achieve broadly the same effect. However,

presenting the minimum payment in terms of how long it will take to pay off a

debt may be more meaningful to consumers than a percentage figure.

the debt could also allow for more flexibility in the way it is implemented. For

example, the repayment period could be set in legislation, or by the credit or

35

Minimum payments

store card lender with a consumer opt-in or opt-out, or it could be agreed in direct

consultation with the consumer at the point at which they open their card. The

repayment period could be based on the overall credit limit of the card, or apply to

the actual spend on the card, and could be capped at a maximum monthly figure

agreed with the consumer.

may be easier for consumers to understand than an arbitrary percentage figure,

there are risks to this approach. Consumers may assume that their debt will be

cleared at the end of the repayment period, whereas if they continue to spend

on their card over that period, it will not. This option may therefore require the

provision of additional information to consumers to enable them to make an

informed decision as to how long their ideal repayment period should be, and the

impact of making minimum payments based on a given repayment period. There

is a risk that this could lead to information overload for some consumers.

with only £748 in total interest charges and a monthly repayment starting at

halfway through). If, however, the minimum payment was increased to 5%,

[These examples are based on BIS calculations. They assume no additional spend on the card

and a minimum payment of the % figure or £5, whichever is greatest.]

raising the minimum payment for the 14% of consumers who make the minimum

payment; they will clear their debt much faster and at a significantly lower overall

cost. As mentioned above, research by the University of Warwick also shows that

a universal increase will provide a knock-on indirect benefit for those consumers

who borrow on their card but who repay more than the minimum payment each

36

month. Increasing the minimum payment “anchor” will encourage this group to

pay off more of their debt each month.

payment, we will need to carefully consider the short term impact of an increase.

Relatively low minimum payment levels provide consumers with some flexibility

in the way in which they manage their finances, and may help to ease the

pressures on more vulnerable consumers at times of strain. This is particularly an

issue at the moment given the current economic downturn.

could lead to more people experiencing short term repayment difficulties as they

struggle initially to pay the higher minimum payment. It could also draw them to

other less appropriate short term lending options. Whilst this may only be a short

term issue (the higher the minimum payment, the smaller the outstanding balance

at the next statement date and the lower the risk of repayment difficulties), we

would need to ensure that we weigh up these short term impacts.

minimum payment to a defined sub-set of consumers who may be particularly

affected by repaying only the minimum each month. The second illustrative

example above shows that those consumers who hold small amounts of debt

on higher cost credit cards will particularly benefit from an increase in minimum

payments. For these consumers, even a small increase in the minimum payment

of only a few pounds a month can lead to the repayment of their debt over

significantly shorter periods of time.

groups of consumers and whether any discrimination issues might arise. We will

also need to evaluate whether differentiating consumers in this way may impact

on the range of lenders and products available to specific groups of consumers.

In addition, we will need to take into account the potential cost to the credit and

store card lenders in having to provide separate minimum payment calculations

for different types of consumers.

payment, either to all consumers, or to a defined sub-set of consumers, would

have to be carefully analysed and its implementation carefully managed.

37

Minimum payments

38

39

Unsolicited limit increases

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

requested an increase. Consumers will generally be informed on their statement

that they now have a higher limit and will not normally be given an explanation of

why their limit has been increased. Recent research from uSwitch shows that in

the last year an estimated 5.7 million consumers had their credit limits changed

check before they grant a customer a higher limit and when they raise someone’s

limit they must notify consumers that they can refuse the new limit if they want

to and how to do so. However, there is no requirement for a consumer to have

asked for, or actively consented to, a higher limit.

argue that this practice is a key feature of “low and grow” lending to higher risk

customers. The risk of such customers defaulting is higher so lenders can only

justify very low initial limits. Low and grow starting balances can be as low as

£250 on credit cards; for store cards initial limits can be much lower starting at

around £150. The lender will monitor the accounts during the first months of

operation, and select out poor credit risk customers by leaving their limits very

low, whilst successively increasing the limits of those who manage their accounts

effectively.

increases in their credit and store card limits. Borrowers should be better able

to make their own decisions about increases in the amount of credit they can

responsibly access. It should be noted that the Government does not propose to

constrain lenders’ ability to unilaterally decrease a consumer’s credit limit, subject

to rules on unfair terms and the provisions of the Consumer Credit Directive. The

right to reduce a customer’s limit without their consent, as long as this is done

fairly and reasonably, within the bounds of consumer protection and equality rules,

is critical to lenders’ ability to protect borrowers and themselves from problem

debt.

to be able to afford it and to be a good credit risk, their information is imperfect

and they may not be aware of, or able to respond rapidly to, a sudden change in a

borrower’s circumstances. The second report of the Over-Indebtedness Taskforce

41 12 month period from July 2008 to July 2009 figures extrapolated based on current UK credit card holders and

sourced from APACs report: UK Plastic Cards 2009.

40

in 2002 found the automatic raising of credit limits on credit and store cards to

be associated with financial difficulties and high levels of expenditure on debt

credit card holders and 10% of store card holders having received a limit increase

in the previous 12 months, of which more than 90% were unsolicited. More

recent data from uSwitch found that 19% of credit card holders surveyed had had

their limit increased on an unsolicited basis in the previous year, with an average

increased likelihood of default, the practice of increasing limits through the life

of an agreement has clearly contributed to the significant growth we have seen

in personal debt on cards. A recent study in the US found that increases in credit

limits generated an immediate and significant rise in debt; on average, 10–14%

near their credit limit. People seeking debt advice from the Consumer Credit

Counselling Service (CCCS) in 2008 had average credit card debts of £14,839

and store card debts of £1,687. The average credit card debt for clients with an

income of less than £10,000 was £7,871.

new limit, consumers can also simply choose not to use the new limit. They

believe that this provides sufficient protection for those who want to control their

access to credit whilst leaving other consumers with the flexibility to deal with

unforeseen emergencies or benefit from additional protection when buying oneoff

items without the hassle of applying to their bank for more credit.

to contact their lender to ask for their limit to be changed. With an unsolicited

increase there is a greater risk that a consumer will spend on their card without

giving proper consideration to what it will cost them, how they intend to repay it

or what they will do if they experience a loss of earnings further down the line.

Responsible borrowing considerations are much less likely to be at the forefront

of a consumer’s mind when they incur spending against a higher limit at the

checkout or when shopping online. There is some support for this view from

credit does not feel like spending’;

42 http://www.berr.gov.uk/files/file38667.pdf

43 https://www.uswitch.com/press-room/?downloadfile=CREDIT-CARD-PROVIDERS-THROW-8.8-BILLION%5B1%5DOF-

UNREQUESTED-CREDIT-AT-CONSUMERS

44 http://idei.fr/CORE/articles/gross_souleles.pdf

45 YouGov Debt Tracker

41

Unsolicited limit increases

when I can’t really afford them’;

on credit and think about how I will repay the money afterwards’, and

a fixed limit on their credit or store card would help protect themselves against

reckless spending. This is particularly true for vulnerable consumers, for example

people suffering from certain forms of mental illness such as bipolar disorder.

Studies have linked such mental health disorders with exuberant spending

have also queried whether lenders are genuinely making responsible lending

decisions when offering higher limits. They argue that lenders frequently grant

such increases even though there does not appear to have been a material

improvement in a borrower’s circumstances and that the purpose of an increase

can be merely to encourage consumers to use the card in preference to other

credit and store cards.

finances, especially where it comes to taking on potentially long term borrowing

commitments which may carry considerable cost implications. Our starting

point, therefore, is that current industry practice is unsatisfactory. We welcome

stakeholder views on measures to give consumers an active role in deciding

whether they should have a higher credit limit, including a ban on granting limit

increases on an unsolicited basis.

managing their credit limits and that they are able to do so easily, in line with

responsible borrowing and lending principles. We also want to ensure that

measures to promote greater consumer control of their credit limits do not unduly

constrain access to credit and store cards for consumers who might otherwise be

forced into more expensive and less suitable forms of credit. There are a number

of possible options to achieve our desired outcome in this area.

1. Do nothing beyond current legislative and regulatory activity;

2. Improve information transparency on unsolicited limit increases;

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

46 “In the Red: Debt and Mental Health” Mind 2008 http://www.mind.org.uk/assets/0000/0102/In_the_red.pdf

42

4. Ban all unsolicited limit increases – increases only to be given in response

to a specific consumer request;

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

Option 1: Do nothing beyond current legislative and regulatory activity

will cement existing industry practice by placing a requirement on lenders to

conduct creditworthiness checks (including consulting any relevant database

where necessary) before offering a significant limit increase. In addition, lenders

will be required to give adequate explanations to consumers before they enter

into a credit agreement.

supplemented by new Irresponsible Lending Guidance produced by the OFT. The

OFT’s draft Guidance, published in July this year, identified the following practices

in relation to limit increases as likely to call into consideration a firm’s fitness to

hold a consumer credit licence:

the borrower’s consent;

from the borrower to do so;

a specific request from the borrower not to do so;

from the borrower to do so.

responses, the OFT’s final Guidance, which will come into force early next

year, may go some way to address public concerns regarding unsolicited limit

increases, in particular concerns around consumers being able to decline a new

credit facility if they don’t want it. For the vast majority of lenders, this is unlikely

to create any significant additional compliance burden.

may not go far enough. Crucially, a requirement only to notify consumers of

a credit limit increase rather than requiring consumers to engage in a positive

decision, would mean that consumers would continue to have limited control over

the amount of credit they can access on their cards and would still be at risk of

taking on too much debt.

43

Unsolicited limit increases

Option 2: Improve information transparency on unsolicited credit limit

increases

and their option to decline it could potentially encourage more consumers to

actively manage their credit limits. A separate specific communication when

a new limit is granted could help ensure that consumers are aware of what is

happening: they may be more likely to focus on this information if it comes as a

separate letter rather than alongside other information on their statement.

are given clear, timely and accessible information so that they can make fully

informed decisions about their personal finances. However, transparency

measures alone are unlikely to be sufficient. There is a risk that consumers will

not read the information provided. Moreover, even if they are aware of their

right to decline a credit limit increase they may fail to do so because they are

concerned that it may affect their ability to apply for a larger limit in future or

because they are put off by the “hassle factor” of contacting their lender.

Option 3: Limit the size and/or frequency of individual limit increases

limit increases, which will be enforced by the Lending Standards Board. These

standards would commit lenders to:

unsolicited limit increase by means of a specific communication;

44

would actually prefer the credit limit to be reduced;

their preference;

limit, with reference to all the information available to them;

had their limit increased and the options available to them.

Association on behalf of the credit card industry. However, in their current

form these proposals do not go far enough. The commitment not to increase a

customer’s limit more than once every six months is unlikely to benefit many

consumers; few consumers currently have their limits increased more frequently

than this. To be meaningful this proposal would have to contain a commitment

to genuinely reduce the frequency of limit increases. If a longer time period were

adopted, it would be desirable to also limit the size of any single limit increase to

a maximum proportion of the existing credit facility to mitigate any risk of lenders

offering larger increases to compensate for the fact that they could offer them

less frequently.

not give borrowers any greater direct control over the decision to take on a larger

credit limit. Consumer groups have also expressed concern that in order to have

simpler systems, lenders might apply these limitations to consumer requests for

higher limits as well as lender-initiated increases, which could limit consumers’

ability to request a higher limit if, say, they were going on holiday or wanted to

make a one-off large purchase. The Government calls on the credit and store card

industry to explain what they believe the benefits of this option are over other

possible approaches.

45

Unsolicited limit increases

Option 4: Ban all unsolicited limit increases – increases only to be given in

response to a specific consumer request

credit if they make a positive request for a higher limit (and of course subject to a

proper affordability assessment by the lender). Lenders would be precluded from

giving or offering customers pre-approved limit increases, but could promote the

fact that customers can request a higher limit. The requirement to make such a

request would mean that limits would only be increased where consumers had

actively made a decision that they wished to be able to borrow more, away from

the sales environment. Consumers could also stipulate the amount of additional

credit that they would like, consistent with their ability to repay.

consumers, for whom a “low and grow” strategy would be much harder to

lenders argue that if not enough “good” low and grow customers were to ask

for a higher limit, this form of lending could become unprofitable. This is because

they rely on the ability to increase the limits of the overwhelming majority of low

and grow customers; starting balances on these products are typically too low

to make a profit (even at quite high interest rates) because of the fixed and other

costs of running a credit card account. Lenders therefore argue that there is a

risk under this option that they would no longer lend to high risk consumers, who

might then take out other less appropriate forms of credit.

lead to lenders offering higher limits at the outset to mainstream customers

(assuming that it would be consistent with statutory requirements and the OFT’s

Irresponsible Lending Guidance to do so). Although consumer groups support

a ban on unsolicited limit increases, some have expressed concern that this

might prevent lenders from temporarily extending a consumer’s limit in response

to a consumer briefly going over their limit by a small amount by accident or

where they have had to use their card in an emergency. In this circumstance the

consumer would be likely to incur a default charge or could have their transaction

declined. Consideration would have to be given, therefore, to whether a ban could

be implemented in a way that would protect consumers from incurring default

charges if they accidentally go over their limit by a few pounds.

customers, profitability would decline. This is because lenders will have set the

price and terms of their contracts with existing customers in the expectation that

47 Statistically, consumers who actively request more credit on their cards are currently more likely to default than

others. This is because, in a world where limits are generally increased unilaterally, when a customer actively asks

for more credit, this can be a sign of financial difficulties which is not evident to the card company. This means that

lenders are more likely to refuse increased limits to consumers who proactively request them.

46

they would be able to increase their limits over time if they were creditworthy and

appeared likely to use a higher limit. If those customers do not actively seek and

take advantage of higher limits they will be unable to recover the expected value

for that customer and will have effectively under-priced the card. They believe

that they would make losses and would be forced to recoup this lost revenue, and

revenue lost through an overall reduction in new lending, from other sources such

as higher interest rates or fees and charges. Some lenders whose business model

relies heavily on low and grow have said that they might see their profitability so

compromised that they may choose to exit the market altogether.

on reasonable terms is maintained for those who want to borrow and can afford

to do so. However, it is important that when they borrow consumers are placed

in the best possible position to make responsible choices and to manage their

finances effectively. Where there is evidence that industry practice is balanced

against the interests of consumers, particularly the most vulnerable, we cannot

fail to take strong action. The Government therefore calls on card companies to

submit evidence in support of their arguments.

Option 5: Allow consumers to opt in to receiving unsolicited limit increases

unsolicited limit increases. An opt-in could work in two ways. Consumers could be

required to opt in to each individual offer of a higher limit by lenders or there could

be a provision for consumers to opt in to unsolicited limit increases at the time

they enter into their agreement.

47

Unsolicited limit increases

basis but could only apply the new limit if and when the customer positively

consents to it. This approach would give consumers control over individual limit

increases and would help them to make a responsible borrowing decision before

taking on a bigger card facility, whilst preserving lenders’ ability to market credit

and make new offers to existing customers.

significant enough to undermine low and grow lending, leading to some of the

consequences spelled out above. However, others have argued that this approach

may be viable for low and grow products where there is a strong incentive for

consumers to respond; so take up rates from “good” as well as “bad” customers

might be expected to be higher.

because of concerns that consumers would not opt in to higher limits through

inertia. However, the Government would not expect any lender to offer more

credit than a consumer could afford; indeed, to do so would be in breach of

legal requirements. Furthermore, measures could be taken to ensure that it is

convenient for consumers who want a higher limit to exercise their right to opt in,

for example by providing a freephone telephone number, a tear-off slip and prepaid

envelope, or by making it possible to opt in to a higher limit online.

unsolicited limit increases at the outset of the agreement. Under this option,

consumers who choose not to opt in at the outset should be able to do so at a

later stage should their preferences change, and likewise those who have opted

in to unsolicited limit increases should be able to inform their lender that they no

longer wish to receive them at a later date. Some consumer representatives have

gone further, calling for a more flexible approach, whereby consumers would

be granted a wider range of choices about how their limits will be managed and

changed at the outset of their contract. For example, consumers could be granted

the right to set their own limit at the outset (within the bounds of what lenders

were prepared to lend). If they chose to receive unsolicited limit increases,

they could also decide their frequency. Consumers could also, if desired, set a

maximum amount beyond which they did not wish their credit limit to ever be

raised. These decisions would be taken at the time an agreement is entered into,

but customers would be able to change the way their limits were determined

during the life of the agreement if they chose.

for consumers. Consumers would be required to make a decision at the point at

which they entered into an agreement so the risk that they did not receive desired

limit increases because of inertia or difficulties in contacting their lender would

48

be minimised. This option would also be considerably less costly to introduce.

However, opting in at the outset would mean that consumers did not make

decisions about each individual limit increase in light of their circumstances at

the time, which could have changed significantly. Consumers might not be in a

position to predict at the outset how their personal circumstances may change in

future. They may also not focus sufficiently on this aspect when entering into the

agreement, given the mass of other information presented to them.

unsolicited limit increases at the application stage could limit their chances of

being approved. Indeed, consumers who are unwilling to accept limit increases

on an unsolicited basis may well be less profitable for lenders and therefore more

likely to be declined a card as a result. It might, however, be possible to introduce

appropriate safeguards to ensure that lenders could not discriminate against

borrowers who choose not to opt in, for example, making clear that a decision to

opt in could only be taken when a consumer is activating their card after they have

been accepted.

their limits should be changed, there are risks that this would lead to excessive

complexity for both consumers and lenders, who would have to develop IT

systems which could accommodate a wide range of possible permutations. For

store cards, the fully flexible approach could lead to additional complications

as the application will be handled by the staff of the relevant retailer who may

lack the expertise to fully explain to prospective borrowers what their options

are. Some consumers may find it difficult to understand these at the outset,

particularly if there are a number of different options.

impact of this approach, in particular its implications for low and grow lending and

access to credit.

49

Unsolicited limit increases

50

51

Re-pricing of existing debt

that they are open-ended products. This applies both to rates for future spending

and to rates charged on existing balances. Broadly, lenders change interest rates

in two ways. First, rates are altered as a result of changes in the cost to the lender

of providing credit to all consumers, such as increases in the cost of funds for the

lender. Generally, these rate changes are applied across a whole portfolio. Some

lenders only do this form of “re-pricing”. Most of the largest credit and store card

companies 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

re-pricing can result in consumers’ interest rates falling, as well as rising,

where the perceived risk of default for a consumer or group of consumers falls.

consumer behaviour, for example, previous defaults, how a credit limit is utilised,

number of cash advances, information from the credit reference agencies

(including information about the consumer’s borrowing commitments with other

lenders) and how other products by the same lender are used. Where behaviours

are statistically associated with consumers not meeting their payments, lenders

may assign a higher risk score to all customers who behave in a similar way.

The lender cannot know why a consumer has behaved in a particular way and

whether they genuinely do pose a higher risk; their decision is based on the fact

that customers who have behaved this way in the past have been more likely to

default.

whether an account should be re-priced (up or down). Other lenders will use

a recognisable event as a trigger for an automatic increase, such as two late

payments in the last 12 months.

having their interest rates dramatically increased on existing balances without

adequate explanation. In some cases consumers’ interest rates were doubled

with little prior warning, ostensibly due to risk-based re-pricing.

Card Summit in November 2008. Following the summit, credit card and store card

lenders produced a Statement of Fair Principles which stated that they will:

48 Some credit and store card providers do not operate risk-based re-pricing.

52

on a credit or store card if it is being changed as a result of risk-based re-pricing;

existing interest rate, within a reasonable period;

held; or more often than once every 6 months after that;

rate of interest.

will not increase a borrower’s rate where:

payments;

agency that consumers are discussing a repayment plan with them.

Government’s swift intervention and industry’s response in establishing the

Statement of Principles has led to a marked decrease in the very worst examples

of re-pricing, with the volume of complaints received by the Financial Ombudsman

Service falling. It would appear that rate rises have been more limited in scale and

at least one lender has instituted a freeze on risk-based increases, which would

suggest that the Statement of Principles put a ceiling on the very worst behaviour.

to protect some consumers from unjustifiable interest rate rises on existing debt,

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

to close credit card accounts and repay balances at existing rates. Initial evidence

from the industry suggests that the majority of consumers who are subject to

a re-price are choosing (albeit passively) to remain with their current lender and

have their existing debt re-priced at a higher rate of interest. This could be due to

the desire of consumers to maintain their relationship with their credit card lender.

The fact that consumers have to make a positive choice to close their account

49 http://www.theukcardsassociation.org.uk/best_practices/-/page/681/

53

Re-pricing of existing debt

may also have an impact on the low levels of take up, either because of inertia or

because consumers may not find it easy to contact their lender. Other consumers

may be choosing not to opt out of their relationship with their existing lender,

but rather to pay off their balance (even at a higher rate) and maintain their card

without any further spending. Some consumers may have limited scope to switch

to other products.

explained to consumers. Price increases are seen by consumers in the context

of falling base rates and falling rates on other products. Whereas consumers can

generally understand how a change in the interest rate on their savings account

or their mortgage relates to changes in the base rate, interest rate increases

on credit cards can be unpredictable and poorly explained. Consumers do not

always understand the reason why they have been subject to a re-price and what

they can do to improve their price. It is vital that consumers who have their rate

increased understand their options and what a decision to accept the new price or

reject it and pay off their debts will mean for them.

information, meaningful options and time to make the right choices. But we also

need to make sure that risk-based re-pricing happens for the right reasons and is

fair to consumers. We are concerned that lenders may be using risk-based repricing

in order to shore up their profitability following the financial crisis, rather

than in response to genuine changes in consumer risk. This would mean that

some borrowers (usually those who can least afford it) are unfairly shouldering a

greater share of lenders’ increased costs. Consumer groups report incidences of

re-pricing in the absence of an obvious increase in risk. Inadequate explanations

of why a consumer’s interest rate has been increased only exacerbate this

perception. For consumers who have used their cards responsibly and never

missed a payment over the years, there is understandable anger that they feel

they may be paying the price for excessive risk-taking by financial institutions. It

may be necessary therefore to define more clearly what factors can be considered

legitimate justifications for risk-based re-pricing.

principle and whether consumers should have greater certainty that debt they

incur at a particular interest rate should not become significantly more expensive

later on. The US CARD Act prohibits the re-pricing of existing debt, except

increased if a consumer defaults on a repayment) is permitted in the US, riskbased

re-pricing for other reasons (such as repeated use of cash advance facilities)

50 These include the expiration of promotional rates, an increase in index for variable rate accounts, and default

re‑pricing (where an interest rate is increased if a consumer defaults on a payment).

54

is prohibited. In contrast, the Fair Principles in the UK commit lenders not to raise

rates where the customer has missed two consecutive payments or is in financial

difficulty.

There are a number of possible options to achieve this outcome:

1. Maintain the Statement of Principles, if sufficient evidence shows that this has

removed consumer detriment in this area;

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.

Option 1: Maintain the Statement of Principles

follow the Statement of Principles. If we are to accept that current industry selfregulation

has been sufficiently effective, we will need to see evidence of how

consumer detriment has been reduced as a result of its first year of operation.

A key element of the current consultation is to collect and assess this evidence.

concerns that consumers are still suffering detriment from risk-based re-pricing.

It may be that the Statement of Principles could be enhanced by placing them

on a statutory footing to ensure that tougher enforcement action could be taken

against any lenders who fail to apply the rules properly, or by extending some

of the principles to provide additional protection, for example requiring a longer

notification period.

55

Re-pricing of existing debt

Option 2: Further measures to provide consumers with better information

about risk-based re-pricing decisions

explain why an interest rate has been increased on the basis of individual risk if a

consumer requests this. As a minimum, lenders could increase transparency by

proactively providing an explanation to consumers alongside any notification of a

rate increase or decrease.

re-priced consumer’s cost of credit is calculated, perhaps breaking down the cost

of credit into components relating to wholesale re-pricing and re-pricing linked to

consumer risk and setting out the sort of factors which contribute to a lender’s

assessment of individual risk. This could help consumers to understand why their

price had gone up or down.

best practice lines) of how re-pricing is communicated to consumers, setting out

56

information to help consumers behave in ways that would improve their future

price.

have more information, and in turn be able to exert more pressure on lenders,

to reduce price when they clearly have demonstrated improved credit behaviour

street would therefore be tackled. This approach might also have the

consequence that lenders would come under pressure to re-price only as a result

of clearly identifiable changes in the individual consumer’s risk, as risk-based

approaches which cannot make that clear link would be harder to explain.

Directive. These will require lenders to provide adequate explanations about

the cost of credit and how the agreement will operate. Such explanations could

include details of how risk pricing operates and why rates may change.

Option 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

risk-based interest rate increases in circumstances where they can explain to

consumers that they have legitimate reasons for doing so. However, this approach

leaves the onus on individual consumers to switch lenders or seek redress if they

feel that they have been subjected to an unfair increase. In practice, this might

leave those consumers with low levels of financial capability or limited alternatives

unprotected from unjustified re-pricing. Greater transparency would also not

directly resolve the debate about what constitutes unfair re-pricing, leaving this

51 Providing consumers are able and willing to switch if the lender does not re-price.

57

Re-pricing of existing debt

down to the Financial Ombudsman Service or the courts to consider on a case by

case basis.

be considered fair to change an individual’s price on grounds of risk. This

approach could provide greater clarity and certainty for both consumers and

lenders. A definition of the factors that lenders can legitimately take into account

when changing a consumer’s price on the basis of risk would provide a clear

benchmark against which the Financial Ombudsman Service (FOS) and consumer

groups could assess complaints from individual consumers. It would need to

be developed in consultation with both lenders and consumers and be flexible

enough to respond to developments in credit scoring and modelling techniques.

of an unfair lending practice:

Option 4: Limit the size and/or frequency of existing debt re-pricing

contained in the Statement of Principles. This could be expanded (and possibly

placed on a statutory basis) with a commitment that any rate increases (both riskbased

and wholesale) would be no more than a certain amount and/or by setting a

maximum frequency for interest rate increases. The maximum size of an increase

52 Paragraph 6.13 of the draft OFT Guidance

58

could be a set proportion of the existing rate (e.g. any individual increase should

add no more than a third of the current rate) or a set absolute amount

(e.g. 5 percentage points)

consumers, helping them to better manage their borrowing. However, it may be

more appropriate to ensure that any rate increases are objectively justifiable rather

than potentially artificially capped at a specified percentage ceiling, which could

unduly constrain pricing decisions.

lender’s ability to respond to changing economic circumstances or changes in

consumers’ risk profiles. Lenders might respond by charging a higher price for

all consumers at the outset. This could result in the supply of credit to vulnerable

consumers becoming prohibitively costly. In addition, restrictions on re-pricing

could limit the potential benefits to consumers who might otherwise have seen

their interest rates lowered as a result of risk-based re-pricing.

Option 5: Prohibit re-pricing of existing debt

existing debt, or a more specific prohibition on risk-based re-pricing. A complete

ban would mean that consumers would have certainty when they borrowed

money on a credit card that their interest rate on that debt would not change

at all, while a targeted prohibition on risk-based re-pricing would give greater

transparency and predictability to any change. This would not prevent lenders

charging different rates for new debt.

53 Although see above for differences in the UK and US systems.

59

Re-pricing of existing debt

could re-price existing debt to general movements in the cost of funds or base

rates. It would remove the risk of lenders making arbitrary changes to the price of

debt that had already been incurred.

different elements of the debt (incurred at different times) may become subject to

several different rates, and the starting rate across the board would be very likely

to increase. Lenders would face a variable risk profile, but would be constrained

by a fixed income stream, so would be likely to charge more for initial borrowing.

If this were combined with measures to reverse the way payments are currently

allocated (see Chapter 2), the availability of cheap introductory offers may be

severely curtailed. As in the previous option, the availability of credit to high risk

consumers is likely to be severely curtailed, leading them to seek alternative,

possibly more detrimental, forms of borrowing. This option also presents major

systems implications for lenders.

60

61

Simplicity and Transparency

in understanding precisely how they work and how to make best use of their

card is a theme that runs through all of the four issues we have explored so far.

This complexity and opacity not only risks consumers making poor choices and

incurring greater debts and interest charges; it also has a detrimental effect on

competition in the market, making it harder for consumers to compare different

cards effectively.

to five, measures to provide consumers with better information or the provision

of a simple “stakeholder” product could help to restore consumer confidence and

trust in credit and store cards and promote competition.

transparency for credit and store cards in recent years. Treasury Select Committee

investigations into credit cards in 2003 and 2004 led to the enhancement of

summary boxes on pre-contractual material and their introduction in periodic

The Consumer Credit Act 2006 led to new requirements on monthly statements

for credit and store cards, including a warning about the consequences of making

only the minimum payment. The Competition Commission Store Cards Order

2007 also required store card lenders charging an APR (annual percentage rate of

charge) of 25% or more to include in statements a warning that customers could

access cheaper forms of credit through other means.

Standard European Consumer Credit Information (SECCI) form, which will provide

a single consistent summary of the key features of unsecured lending products,

including credit and store cards and personal loans, to be given to consumers

before they enter into an agreement. In addition, the regulations implementing

the Consumer Credit Directive, which are expected to be finalised by the end

of the year and will come into force in June 2010, will require lenders to provide

customers with an adequate explanation (including an oral explanation where

appropriate) of the key features of the product and the risks associated with it

before an agreement is entered into.

transparency requirements, ensuring that customers have the information they

54 Summary boxes were recently updated to ensure that consistent terminology is used by all lenders and information

is presented in ways consumers find easier to understand. This followed the OFT Credit Card Comparisons Report in

February 2008: http://www.oft.gov.uk/shared_oft/reports/financial_products/oft978.pdf

62

need to make a responsible decision about taking on a new credit product and to

assess whether the product is appropriate for their needs at the time they enter

into a new agreement. However, they do not help consumers to understand how

they could use an existing card more responsibly or save money on their card

borrowing by changing the way they use it or moving to another provider. Monthly

statements provide some key information, but there are limits to how much

information can be meaningfully provided in a printed form on statements; it is

likely that the inclusion of additional information could lead to overload and could

be simply ignored by consumers.

information they need, in ways they find easy to understand, at a time they can

make best use of it. More can also be done to take advantage of the opportunities

offered by technology to present information in ways that are tailored to the

needs and preferences of individual consumers.

and lenders about their products and the accounts they hold with that institution,

the Government believes it is important to give consumers impartial information

and guidance they need to choose products and manage products effectively

throughout their lifetime. In the paper “Reforming Financial Markets”, HM

Treasury recently announced its intention to roll out a national Money Guidance

service, currently being piloted in the North West and North East of England under

the Moneymadeclear brand, from spring 2010. The service will offer impartial,

sales-free information and guidance on all kinds of money issues online, over

the phone and face to face; guidance will be tailored to an individual’s needs and

circumstances.

announced that, subject to consultation and feasibility, an online credit card

comparison tool will be added to the Moneymadeclear website, the online

strand of the Money Guidance service. This comparison tool will help consumers

to make informed decisions about which credit card would suit their needs

depending on the way they expect to use their card.

existing card would enable consumers to get the most out of the tailored

individual advice provided to them by the impartial Money Guidance service.

This information would also be useful for those who wish to seek independent

financial advice from reputable commercial providers. The Government therefore

considers that there may be benefits in providing consumers with an annual

statement about their credit and store card usage, showing, for example:

63

Simplicity and Transparency

interest-bearing balance on their card);

building societies covering 95% of the UK personal current account market and

the OFT to provide similar annual cost summary to current account holders which

will help them to focus on the value they are getting in a similar way to annual car

the costs of their credit card in the form of an annual “e-statement” from which

data could be exported into easy to use programmes (for example, the noncommercial

credit card comparison tool on Moneymadeclear) so that consumers

could easily input data about their actual usage to check whether their current

product offers a good deal and help them shop around for other suitable products.

promotional rates and reward schemes, for some the sheer complexity of card

products presents a barrier to using their card with confidence, even with better

information.

55 http://www.oft.gov.uk/advice_and_resources/resource_base/market-studies/current/personal/pca/

64

cheap and accessible credit card product that consumers could use with

confidence. This sort of product might be particularly well-suited to consumers

who are new to credit or who have had difficulties managing credit in the past.

Card companies, however, have questioned whether such a basic product could

be designed without removing the flexibility that distinguishes cards from other

forms of unsecured borrowing and whether a card of this type could be made

profitable.

could be assessed against a set of agreed standards. The system could require

lenders to indicate the implications for the consumer of a particular feature where

it might have an adverse impact for the consumer compared to the benchmarked

standard. Such a system could allow freedom over product design while guiding

those people who would be best served by a basic product in the right direction.

People who wished to take advantage of other features would be able to choose

more complex options, but the labelling system could ensure that they do so

knowing the implications compared to cheaper and simpler alternatives.

the Government announced further analysis on these issues, which will

include working with the FSA and other stakeholders, with a view to exploring the

issues and developing potential solutions in order to undertake a more detailed

consumers.

the European Union through the revised Consumer Credit Directive, which

comes into force in June 2010. Any additional legal requirements on the labelling

of credit and store cards would therefore need to be developed and agreed

with our European partners. UK lenders could, however, follow the example of

major supermarkets and food manufacturers, which have worked with the Food

Standards Agency to implement a voluntary labelling scheme. The Government

invites views on whether a next phase of its work on simple, transparent products

should examine the scope for such a system in the area of credit and store cards.

56 www.hm-treasury.gov.uk/reforming_financial_markets.htm

65

Simplicity and Transparency

66

67

What happens next?

credit and store card market by 19 January 2010, we will publish a Government

response to the consultation by 20 April 2010. Any proposal for legislative change

will be for the next Parliamentary session and will undergo further consultation.

If legislation is taken forward, it will be subject to a Post-Implementation Review,

which would be undertaken 3 to 5 years after implementation.

68

Annex A:

List of Consultation Questions

Chapter 1: Introduction

of the UK credit and store cards markets, including in particular:

consumers;

firms;

and

downturn on both consumers and lenders.

Chapter 2: The allocation of payments

order of payment allocation and its implications.

guidance, provide sufficient consumer protection in this area?

Would it sufficiently address consumer detriment?

the longer term cost?

proportional basis?

69

the longer term cost?

expensive debt first?

the longer term cost?

advances first?

the longer term cost?

Chapter 3: Minimum payments

guidance, provide sufficient consumer protection in this area?

and how often could it be provided?

Would it sufficiently address consumer detriment?

the longer term cost?

payment? How might it impact on consumer repayment behaviour?

70

the longer term cost?

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?

of consumers?

the longer term cost?

in the level of minimum payments on cardholders?

Chapter 4: Unsolicited limit increases

associated with financial difficulties?

Guidance, provide sufficient consumer protection in this area?

consumers?

cardholders to be more proactive in managing their credit limit?

the longer term cost?

address the issues in this area?

71

preserved?

the longer term cost?

significantly worse credit risk than consumers that do not?

apply to all consumers?

are any risks?

the longer term cost?

on both consumers and lenders?

rectify the problems identified in relation to unsolicited credit limit increases?

implications for low and grow lending?

increases?

chances of getting the card they want?

the longer term cost?

prefer?

Chapter 5: Re-pricing of existing debt

Statement of Principles has been effective. In particular, we would welcome

evidence since November 2008 of:

72

Principles on the scale and nature of re-pricing activity;

Principles and able to exercise them effectively;

take up of the option to pay down their balance at the existing price, take up

of alternative products, switching);

explanations provided to them by lenders;

or FOS) and the nature of those complaints;

the Statement of Principles be extended, for example, by providing a longer

notification period?

would it be most appropriate to provide additional information (e.g. pre-contract,

monthly statements, when customer requests)?

information overload?

the longer term cost?

be sufficient to address problems reported by consumers?

changing an individual’s price on grounds of risk?

73

debt? What should these be?

What should these be?

the longer term cost?

the longer term cost?

Chapter 6: Simplicity and Transparency

better information about credit and store cards.

to all consumers or only to a subset of consumers? What information should be

included in such a statement?

What would be the costs of providing such a statement? How could we ensure

that consumers without internet access also benefited?

beneficial to consumers? What might such a card look like?

74

cards? Could this be taken forward on a voluntary basis pending revised EU

legislation?

75

Context

varies amongst different groups of consumers (e.g. older people, younger people,

ethnic minorities, people with disabilities or long term health conditions, single

parents, households on low income etc)?

cards amongst different groups of consumers?

Chapter 2: The allocation of payments

cards varies amongst different groups of consumers?

difficult? Is this more of an issue for some groups of consumers?

Chapter 3: Minimum payments

payment than others?

impact different groups of consumers?

Chapter 4: Unsolicited limit increases

disadvantaged by a ban of unsolicited credit limits?

an opt-in model for credit limit increases?

Chapter 5: Re-pricing of existing debt

vulnerable to interest rate re-pricing?

groups of consumers?

76

Chapter 6: Simplicity and Transparency

be useful?

should consider that would be of particular value for certain groups of consumers?

77

Annex B:

Glossary

Allocation of

Payments

The method whereby any credit or store card payment

from a consumer is allocated to different elements of the

debt attracting different interest rates or charges.

APACS Card

Payment Group

The predecessor to the UK Cards Association.

Balance transfer

deals

A balance transfer deal allows consumers to transfer

some of their debts from another card and pay the sum

off at a reduced interest rate (often 0%) for a set period of

usually between 3 and 14 months. After this period ends,

the balance will usually attract the standard variable rate

of interest.

Banking Code This is a voluntary code that sets standards of good

banking practice for financial institutions (including

credit card issuers) to follow when they are dealing with

consumers in the UK. It is supervised by the Banking Code

Standards Board. The provisions of the Banking Code

which relate to credit cards will become part of the Lending

Code from 1 November 2009.

Banking Code

Standards Board

This body supervises the Banking Code. It will be

succeeded by the Lending Standards Board from

1 November 2009.

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 other rates are based.

Credit Card A card issued by banks, retailers and other financial

institutions that 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.

78

Credit Limit The maximum amount a consumer can spend 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 a 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.

Consumer Credit

Directive

The Consumer Credit Directive is EU legislation that must

be implemented by all EU countries by June 2010. It aims

to create a common credit market across the EU and to

ensure 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

This draft Guidance was launched for public consultation

by the OFT in August 2009. The consultation closed on 21

October 2009 and the OFT will issue the final Guidance in

early 2010. The Guidance will provide guidance on lending

behaviours and practices which the OFT considers to be

irresponsible and would call into consideration a firm’s

fitness to hold a consumer credit licence.

The Lending Code The Lending Code replaces the Banking Code from

1 November 2009. It includes all the key credit related

provisions in the existing Banking Code. It will also include

the fair principles on risk based re-pricing agreed by

lenders at the Credit Card Summit.

79

The Lending

Standards Board

This succeeds the Banking Code Standards Board from 1

November 2009. It will supervise the Lending Code.

Member State A Member State is any one of the 27 sovereign states that

are members of the European Union.

Minimum Payment The minimum amount that a consumer must pay on the

outstanding debt on their credit or store card each month.

Office of Fair Trading

(OFT)

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. It administers

and enforces the Consumer Credit Act and licenses credit

and store card providers.

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.

Self-regulation This is the practice whereby regulation is not imposed by

Government, but is undertaken voluntarily by industry.

UK Cards

Association

The UK Cards Association is a trade body that represents

credit, debit and charge card issuers.

US CARD Act 2009 The Credit Card Accountability Responsibility and

Disclosure (CARD) Act 2009 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 purposes.

uSwitch uSwitch.com is an online and phone based comparison

and switching service that provides comparisons on a

range of services including gas, electricity, home phone,

broadband providers and personal finance products.

80

Annex C:

List of Organisations Receiving

Consultation

Advertising Association

Advertising Standards Authority

Advice UK

Age Concern

Association of Finance Brokers (AFB)

Association of Independent Financial Advisers (AIFA)

American Express

Arab Bank plc

Association of British Credit Unions Ltd (ABCUL)

Auriemma Consulting Group

Banco Santander

Bank of England

Bank of Ireland

Banking Code Standards Board

Barclaycard

Bar Council

Berwin Leighton Paisner LLP

Britannia Building Society

British Bankers Association (BBA)

British Chambers of Commerce

British Cheque Casher Association (BCCA)

British Retail Consortium (BRC)

C Hoare & Co

Callcredit Ltd

Capital One

Cattles plc

Chelsea Building Society

Church Action on Poverty

Citigroup

Citizens Advice

Citizens Advice for Scotland

City of London Law Society

Communities and Local Government

Community Development Finance Association (CDFA)

81

Competition Commission

Confederation of British Industry (CBI)

Consumer Council for Northern Ireland

Consumer Credit Association (CCA)

Consumer Credit Counselling Service (CCCS)

Consumer Credit Trade Association (CCTA)

Consumer Finance Association (CFA)

Consumer Focus

Consumer Focus Scotland

Consumer Focus Wales

Co-operative Bank

Council of Mortgage Lenders

Coventry Building Society

Credit Action

Credit Services Association (CSA UK)

Debt Resolution Forum

Debt Management Standards Association (DEMSA)

Department for Food, Environment and Rural Affairs

Department for Work and Pensions

Department of Enterprise, Trade and Investment Northern Ireland

Elavon

Equality and Human Rights Commission

Equifax

European Commission

European Credit Research Institute (ECRI)

Experian

Federation of Small Businesses (FSB)

Finance and Leasing Association (FLA)

Financial Markets Law Committee

Financial Services Authority (FSA)

Financial Services Consumer Panel

Financial Ombudsman Service (FOS)

Forum of Private Business

Help the Aged

HM Treasury

HSBC

Information Commissioner’s Office (ICO)

Insolvency Service

Institute of Credit Management (ICM)

Institute of Directors (IOD)

Joseph Rowntree Foundation

Laser UK

82

Law Society

Law Society of Scotland

Local Authorities Coordinators of Regulatory Services (LACORS)

Local Better Regulation Office (LBRO)

Lovells

Lloyds Banking Group

MBNA

Mind

Ministry of Justice

Money Advice Liaison Group

Money Advice Trust

Money Advice Scotland

Moneysavingexpert.com

Moneysupermarket.com

National Australia Group

Nationwide Building Society

Northern Bank

Northern Ireland Assembly Government

Northern Ireland Insolvency Service

Northern Ireland Office

Northern Rock

Office of Fair Trading

Provident Financial plc

Royal Association for Disability Rights (RADAR)

Rethink

Royal Bank of Scotland

SAGA

Scotland Office

Scottish Government

Standard Chartered

Tesco Personal Finance

Trading Standards Institute (TSI)

Trades Union Congress (TUC)

UK Cards Association

UK Card Services Ltd

University of Bristol Personal Finance Research Centre

University of York

Vanquis Bank Ltd

Wales Office

Welsh Assembly Government

Which?

83

Annex D:

Code of Practice on Consultations

policy outcome.

longer timescales where feasible and sensible.

being proposed, the scope to influence and the expected costs and benefits of

the proposals.

at, those people the exercise is intended to reach.

to be effective and if consultees’ buy-in to the process is to be obtained.

provided to participants following the consultation.

consultation exercise and share what they have learned from the experience.

If you wish to comment on the conduct of this consultation or make a complaint about the

way this consultation has been conducted, please write to:

Tunde Idowu,

BIS Consultation Co-ordinator,

1 Victoria Street,

London

SW1H 0ET

Telephone Tunde on 020 7215 0412

or e-mail to: Babatunde.Idowu@bis.gsi.gov.uk