New Deal with Credit Card Lenders

The Government will announce a new deal with credit card lenders today designed to end what Gordon Brown has called their “sharp practices” in charging interest.

Gordon Brown said:

“Step by step, we are reinventing the financial services industry after the global financial crisis and moving the balance of power back towards consumers. These new rights will put an end to the irresponsible lending practices that people have been most concerned about, and help cut the cost of borrowing.”

The Government’s agreement with the card companies will mean the most expensive debt is paid off more quickly, better repayment plans for new customers, a ban on credit limit and rate increases for people at risk of financial difficulty and a right to 60 days to reject interest rate increases. The Government estimates the new rights will save consumers almost £300 million a year and one industry forecast predicts customers will gain around £500m.

Payments will go towards debt with the highest interest rates first, reversing the industry practice that prevented consumers clearing their most expensive debt until after they had paid off debt at lower rates, including 0 per cent balance transfers.

Consumer Minister Kevin Brennan said:

“This is a big win for consumers and helps to put them back in the driving seat with their finances. When we asked the public what changes they wanted to see we discovered most people did not know the charges worked this way. They thought it was unfair and confusing, and they naturally wanted to pay off their most expensive debts first.

“This is a fair framework of rights and rules that makes sure easy and convenient lending for the majority doesn’t lead to unmanageable debt for the minority who may be in financial difficulty.”

Other measures designed to encourage responsible borrowing and lending and help people avoid taking on unmanageable debts include:

· The new Consumer Credit Directive regulations and OfT Irresponsible Lending Guidance to be introduced before the summer, requiring lenders to check customers can afford a loan, give clear information on new loans and give a 14-day cooling off period during which new loans can be cancelled. Lenders who fail to comply run the risk of having their licence to lend withdrawn.

· All consumers to have access to their credit records online for £2 or free of charge from June 2010, under a new agreement with the three main credit reference agencies secured by the Department for Business, Innovation and Skills. Access will be free for victims of ID fraud and people receiving debt advice.

· Stronger protections under the Lending Code agreed between the British Bankers Association and the Ministry of Justice, so that lenders consider reducing or freezing interest and charges, and accepting token payments, from people who suffer a sudden income shock.

· For those suffering the most serious financial hardship, proposals by the Department for Work and Pensions to reform the Social Fund, so that it will be more efficient, easier to understand, and families will be given independent money advice to help them manage their debts.

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 they will provide targeted support to consumers at risk.

The Government threatened regulation last year after it found that many credit and store card issuers were using customers’ minimum monthly repayments to pay low-interest debt first, leaving high-cost loans unpaid.

Now it and the industry have agreed five new “rights” for card borrowers.

Under a new right to repayment, issuers will agree to use customers’ monthly repayments to pay their most expensive debt first. For customers opening new accounts, the minimum payment will always cover at least interest, fees and charges, plus 1 per cent of the principal. Formerly, the minimum repayment often covered interest alone without denting the size of a customer’s loan.

Lenders will agree not to raise interest charges on existing loans for customers without giving customers time to reject them. Consumers will also have the right to reject raised credit limits.

The card companies will agree to work with consumer groups to “assess the case” for giving customers an annual statement that will allow them to compare charges with other lenders easily.

The new voluntary rules will come into effect by the end of this year, so that consumers do not have to wait for new legislation. However, the Government will promise today to place the new code on a statutory footing if companies do not stick to it.

The UK Cards Association, which represents the card issuers, and the Government estimate that the deal will cost the industry, and save customers, £533 million over the first two years of its operation.

Melanie Johnson, chair of The UK Cards Association, said: “We are pleased that … existing practices do not need to be overhauled. Now that we have an agreement in place, we can focus on the important task of implementing these changes so that customers can benefit. The key changes will be in place by the end of this year and will become part of The Lending Code.”

The latest industry data reveals that there were 30.3 million credit cardholders holding 58 million credit cards in the UK in 2009, down from the same number holding 66 million cards the previous year. Last year 61 per cent of credit cardholders paid off their bills in full every month, up from 55 per cent in 2007.

In his podcast this weekend, Mr Brown promised to “rewrite the rules on lending to end the sharp practices” of lenders. He said: “We will ban companies from hiking interest rates they charge, or increasing credit limits without being asked. Lenders that don’t comply will face tough sanctions, like having their licences revoked … Never again should banks and credit card companies encourage you to borrow more than you can realistically repay.”

Total household debt in Britain has reached £1,460 billion, of which £55 billion is on credit cards.

We are setting out five new consumer rights which we believe give consumers a fairer deal and more control over the way in which they can choose and use their credit and store cards.

The five new rights are:

Right to repay: consumers’ repayments will always be put against the highest rate debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal to encourage better repayment practice.
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 be able to do both of these online.
Right to reject: consumers will be given more time to reject increases in their interest rate or their credit limit.
Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little; and all consumers will be given clear information on increases in their interest rate or their credit limit including the right to reject.
Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers
In addition, consumers who are at risk of financial difficulties will be protected through a ban on increases in their credit limit as well as the ban on increases in their interest rate, and card companies will work with debt advice agencies to agree new ways they will provide targeted support to consumers at risk to help improve their situation before they are 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.

Tags: uk credit card regulation

Category: Credit Cards