Credit card providers will come under the spotlight of the City regulator, amid concerns that vulnerable customers are being offered "payday loans with plastic" and paying high interest rates which subsidise wealthier borrowers.
The Financial Conduct Authority, which took over regulation of firms offering consumer credit on Tuesday, said it would launch an investigation into competition in the £150bn-a-year market before the end of the year.
The FCA's chief executive, Martin Wheatley, told a meeting of credit providers that among the more than 30 million credit cardholders in the UK, more than 1 million made only minimum repayments for 12 months or more, while 700,000 did the same for at least two years.
While only the minimum is being paid off, the cost of borrowing can swiftly add up as interest is added to the remaining debt.
Wheatley said there was "significant anecdotal evidence of hardship" from charities like StepChange, where around 10% of people seeking help with the debts had five or more credit cards.
"While we know the majority of people are aware of their personal duty to plan for the future – does this mean there's no corporate responsibility for issuers to minimise long-run hardship?
Maybe by limiting lines of credit to those who are already stretched. Maybe by showing greater forbearance for those in arrears," he said.
The scope of the inquiry was yet to be decided, he said, but the regulator would be attempting to clarify if competition was working in the interests of consumers.
"Is there sufficient debate at the margins of the industry, particularly where we see cards issued with low credit limits of a couple of hundred pounds and high APRs – payday loans with plastic, if you will?" said Wheatley.
"Do consumers who leave balances every month – so-called 'revolvers' – subsidise those who pay off their credit card balances at the end of every month – the 'transactors'?
This might not be the case in a classic two-sided market, where the transactor may be generating a strong level of merchant fees from retailers every month."
David Kenmir, financial services conduct and culture leader at PwC, said: "This review could help consumers exhibiting signs of financial distress so their situations are not worsened, and it could cause a fundamental rethink in how people regularly paying minimum payments are identified and then supported by credit card firms.
"Both the industry and consumer groups should get involved in this study so that any future changes reflect the inherent tension between the interests of shareholders and the interests of cardholders."
theguardian.com
The Financial Conduct Authority, which took over regulation of firms offering consumer credit on Tuesday, said it would launch an investigation into competition in the £150bn-a-year market before the end of the year.
The FCA's chief executive, Martin Wheatley, told a meeting of credit providers that among the more than 30 million credit cardholders in the UK, more than 1 million made only minimum repayments for 12 months or more, while 700,000 did the same for at least two years.
While only the minimum is being paid off, the cost of borrowing can swiftly add up as interest is added to the remaining debt.
Wheatley said there was "significant anecdotal evidence of hardship" from charities like StepChange, where around 10% of people seeking help with the debts had five or more credit cards.
"While we know the majority of people are aware of their personal duty to plan for the future – does this mean there's no corporate responsibility for issuers to minimise long-run hardship?
Maybe by limiting lines of credit to those who are already stretched. Maybe by showing greater forbearance for those in arrears," he said.
The scope of the inquiry was yet to be decided, he said, but the regulator would be attempting to clarify if competition was working in the interests of consumers.
"Is there sufficient debate at the margins of the industry, particularly where we see cards issued with low credit limits of a couple of hundred pounds and high APRs – payday loans with plastic, if you will?" said Wheatley.
"Do consumers who leave balances every month – so-called 'revolvers' – subsidise those who pay off their credit card balances at the end of every month – the 'transactors'?
This might not be the case in a classic two-sided market, where the transactor may be generating a strong level of merchant fees from retailers every month."
David Kenmir, financial services conduct and culture leader at PwC, said: "This review could help consumers exhibiting signs of financial distress so their situations are not worsened, and it could cause a fundamental rethink in how people regularly paying minimum payments are identified and then supported by credit card firms.
"Both the industry and consumer groups should get involved in this study so that any future changes reflect the inherent tension between the interests of shareholders and the interests of cardholders."
theguardian.com
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