Defined Terms and Documents    

Three consecutive U.K. Govt. Regulator Reports established 'Five New Rights' for U.K. credit and store card users - effective 31 Dec 2010

1st UK Regulator Report  -  July 2009

In July 2009, the Secretary of State for Business, Innovation and Skills, by Command of Her Majesty, presented to the U.K Parliament "A Better Deal for Consumers - Delivering Real Help Now and Change for the Future" which included:

"This paper represents a new approach to consumer credit.

Our key objectives for the future are:

􀁌􀀀 Continuing access to credit for the most vulnerable in society to smooth income flows

􀁌􀀀 Fewer people taking on unsustainable amounts of debt

􀁌􀀀 Help for people to keep their finances on a solid footing

􀁌􀀀 Profitable businesses, which treat their customers fairly.

Actions to support these objectives include:

􀁌􀀀 A review of the regulation of credit cards and store cards, including a ban on the sending of unsolicited credit card cheques

􀁌􀀀 Ensuring consumers can access impartial support on choosing and managing credit cards and other consumer credit products"

Chapter One:  Real Help for Vulnerable Consumers

􀁌􀀀 Swift enforcement action against debt write-off scams and against firms who exploit the vulnerable in debt

Chapter Two:  A New Approach to Consumer Credit

The Government has been working closely with consumer groups and lenders to understand the scale of the challenge facing UK consumers and to identify how best to respond. The issues are complex but we are already clear that both credit cards and the high cost credit sector need to be looked at particularly closely.

2.3.1 Review of how we regulate credit and store cards

Consumers value the flexibility of credit cards and their use has risen dramatically in the past decade. There are now 66 million cards in circulation, accounting for around 22% of all unsecured borrowing. Outstanding balances on credit cards amount to around £53 billion with the average card holder owing approximately £1,800. Store cards are a smaller market with about £2 billion of outstanding debt.

We will therefore review the regulation of credit and store cards, considering, in particular, where indebted consumers may be most at risk of incurring increased costs as they try to repay their debts. This includes whether future regulation should explicitly:

􀁌􀀀 Place restrictions on card providers’ ability to raise interest rates on existing debt. Card providers are still putting up rates without properly explaining why and without any obvious change in the consumer’s circumstances. We will look at whether

We plan to publish a consultation document on the future of credit cards in the autumn for discussion with industry and other stakeholders.

Chapter 5:  Next Steps

Review of high cost credit markets by the Office of Fair Trading to determine whether competition in high cost credit markets (products with a typical APR of 50% or more) is effective in current conditions.  The Office of Fair Trading will call for stakeholder evidence in the summer and will publish interim findings by the end of 2009 and a final report early in 2010.

Creditors to check borrowers’ creditworthiness. There will be a new requirement on all lenders to check a consumer’s creditworthiness before lending to them.

This will be implemented via the Consumer Credit Directive. The Government consulted formally with stakeholders on the implementation of the Directive in spring 2009.

An impact assessment on the proposals was published in April 2009.

The Consumer Credit Directive will be implemented in June 2010.

2nd UK Regulator Report  -  Oct. 2009

In Oct 2009, the UK Department for Business, Innovation and Skills, known as BIS, published A Better Deal for Consumers - Review of the Regulation of Credit and Store Cards: A Consultation which included:

"Executive summary

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.

5. The Government wants to see a better deal for consumers in each of the five areas covered by the review. We recognise the need to consider the impact of reform which favours one group of consumers over other types of consumers, in particular the potential impacts on the more vulnerable if access to credit were to be restricted.

A.    Allocation of payments

6. General industry practice is that when a consumer makes a payment against their credit or store card debt it is allocated to the cheapest debt first. However, many consumers do not understand that this is common practice, and may therefore not realise that balances accruing interest at a high rate will be paid off last. Consumers end up paying a lot more interest over a longer period as a result. This is a particular problem in relation to consumers who regularly withdraw cash on their card; typically charged at 25% or more. These consumers are often those most likely to be vulnerable to financial difficulties. Through this system of allocation of payments, most card lenders are profiting from the lack of understanding and limited choices of vulnerable consumers.

7. We want this to change. This consultation examines whether we should reverse the allocation of payments to ensure that expensive debts are paid off more quickly, as a very small number of lenders already do. An alternative, more targeted, measure would be to enable consumers always to pay off any expensive cash lending first, ensuring that vulnerable consumers who use their cards to withdraw cash are not doubly penalised.

B.    Minimum payments

8. Evidence suggests that last year around 14% of cardholders made only the minimum payment most months on active credit card accounts, equivalent to roughly one third of the people who regularly use their card for borrowing, rather than paying it off in full each month.7 Minimum payments are currently set at a level which just covers that month’s interest charges, but does not make significant inroads into the capital borrowed (and may not cover fees and charges).

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

9. A mandatory higher minimum payment to be paid by consumers would reduce their exposure to the burden of high cost lending lasting for decades. However, there is a possibility that this could expose consumers to greater risk of default at difficult times and could limit consumers’ flexibility to adjust their repayments to help manage short term pressures. This consultation therefore also seeks views on alternative approaches such as the introduction of a recommended minimum payment that is higher than the contractual minimum. This amount would be set to pay off the card over a much shorter period of time (say three years) and could be the default level of payment for those who choose to pay the minimum by Direct Debit.

C.    Unsolicited credit limit increases

10. It is common practice for credit and store card lenders to increase consumers’ credit limits without their active consent. Recent research from uSwitch shows that in the last year, 5.7 million consumers may have seen their credit limits changed in this way.8 The lack of consumer information and control over the timing and scale of limit increases, alongside low financial capability and in some cases the difficulty of rejecting an increase, undermines consumers’ control over their borrowing.

11. In considering the options here we will take into account the interests of lower income consumers and those who are new to credit who often rely on being given low initial limits which then grow. This consultation calls for views on the impact of options for intervention including banning unsolicited increases altogether or requiring consumers to opt in to credit limit increases, either in general at the outset of the agreement, or to each specific increase.

D.    Re-pricing of existing debt

12. We are concerned about the continuing practice amongst credit and store card lenders of increasing interest rates on existing debt (“re-pricing”) without properly explaining why they are doing so. Some lenders claim to be changing a consumer’s interest rate because they pose a higher risk, but often there is not any obvious change in the consumer’s circumstances and the reason for the increase is not properly explained. 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.

13. We want to ensure that consumers with limited choices are not subjected to unfair interest rate changes, that consumers are given clear information about how and when their rates might change, and that this is a genuine two‑way street; rates should go down as well as up. We are therefore looking at a range of options, including banning all interest rate changes on existing debts or placing restrictions on the circumstances in which lenders can carry out risk-based re-pricing.

E.    Simplicity and transparency

14. The complexity of credit and store cards can lead consumers to make poor choices and to incur greater debts and charges; it also has a detrimental impact on levels of switching in the market. The need for greater transparency runs through each of the four specific practices that we examine as part of this review.

15. We are particularly attracted to the suggestion of an annual electronic statement setting out the total cost of running the card for the previous year along with information on specific fees and charges incurred. This could then be used by the consumer not only to enable them to change their own behaviour in the light of experience, but also as a basis for identifying cheaper alternatives in the market."

3rd UK Regulator Report  -  March 2010

In March 2010, the UK Department for Business, Innovation and Skills, the known as BIS, published A Better Deal for Consumers - Review of the Regulation of Credit - and Store Cards: Government - Response to Consultation that included:

"New Rights For Credit And Store Card Users

Joint commitment by the government and card companies

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

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

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

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

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

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

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

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

The Government and the card companies have agreed that the key consumer benefits will come into effect by the end of the year (by 31 Dec 2010). This means that consumers do not have to wait for legislation to be passed to benefit from these measures. These measures are in response to the Government’s recent public consultation on the regulation of credit and store cards."