The political and legal environment
In the aftermath of the credit crisis, governments and regulators are strengthening consumer protections and promoting the concept of responsible lending; new developments are being made with the customer’s interests in mind, ensuring that the customer is in control of their own finances,. The Consumer Credit Act section 75 provides added protection to consumers, offered for transactions over £100. It is notable that higher earners, are among the financially savvy, are among the most likely to be aware of this cover. In an uncertain economic environment, using a credit card provides a sensible solution should something go wrong. The sector has faced further regulatory pressure with the introduction of more stringent rules from the Credit and Store Card Review and the implementation of the EC’s Consumer Credit Directive.
From 1 January 2011, consumers now have five new rights regarding their credit and store cards, following an agreement between the U.K’s Department of Business, Innovation and Skills (BIS and the U.K Cards Association, this will mean major changes in the practices and business models of the credit card business. These changes are summarised in the table below.
Benefit to consumer
| What this means
1. Allocation of payments
| Ensures highest debt on a credit card is paid off first, enabling consumers to pay off their debt faster when they need to
| Lower income from interest. This legislation may impact cardholders’ payment and spend patterns, resulting in assessing scoring models accurately
| 2. Unsolicited credit line increases
| Issuers will be prevented from offering an unsolicited credit line increase to any customer facing financial difficulty, while other customers will be given a 30-day notice period and a simple means of opting out.
| Need to develop clear and consistent processes for helping customers decline limit increases. Procedures for handling complaints and requests to reject limit increases may need to be created or enhanced.
| 3. Minimum repayments
| Under the new agreement, issuers must contact customers who repeatedly make minimum payments to inform them of the financial implications of doing so. For new customers, the minimum repayment must cover at least interest, fees, charges, and 1% of the principal. This shows consumers how much they spending, losing and paying back.
| Could reduce profitability if consumers increase payments. Could also reduce bad debt.High risk portfolios may require significant changes to minimum payment calculations, resulting in unpredictable changes to arrears levels and collections performance. Procedures for identifying and contacting habitual minimum payers must be created.
| 4. Re-pricing existing debt
| The commitment requires that card issuers provide a 60-day notice period and notify consumers twice before increasing rates on existing debt.
| Delay in ability to pass on increases in cost of funds.Will lessen the effectiveness of upward re-pricing.
| 5. Simplicity and transparency
| The card industry has agreed to work with consumer groups and the government to assess the need for an annual credit card statement that sets out the total cost of running the card for the previous year and specific information on fees and charges incurred.
| Better understanding of terms could cause consumers with choice to shift to issuers with lower APRs/fees.
| Adapted from The Path Forward in an Intensified Regulatory Environment By Kim Purcell - http://insights.mastercard.com
All these legislative pressures will mean important sources of revenue will be eliminated while substantial incremental costs will be incurred as credit card providers are facing pressure on margins due to lower revenue, increased costs from regulation and losses due to defaults and card write-offs.
In a positive development fraud losses have continued to decline over the last couple of years, as a range...
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