Credit and Store Cards Review

Transcription

Credit and Store Cards
Review
Response to A Better Deal for Consumers: Review of the
Regulation of Credit and Store Cards: A Consultation
by the Department for Business, Innovation and Skills
January 2010
Credit & Store Cards Review
Page 1 of 230
© The UK Cards Association 2010
Foreword
By Melanie Johnson, Chair of The UK Cards Association
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Foreword
The UK Cards Association welcomes the BIS consultation - A Better Deal for
Consumers: Review of the Regulation of Credit & Store Cards: A Consultation and is
now pleased to publish its response.
The consultation document covers key features of credit cards that are fundamental
to their operation: credit limits; minimum payments; allocation of payments; and riskbased pricing. Hence The UK Cards Association has commissioned extensive
independent research to formulate this response. This reflects the industry’s firm
belief that any decisions on the future direction for the industry should be based on a
full understanding of the facts. It is vital that any far-reaching decisions are fully
evidence based.
The research shows that credit card customers are generally satisfied with current
practices in the credit card industry. Customers would not benefit from a number of
the options discussed in the BIS consultation paper. These options would reduce
competition within the industry, something that has served the interests of customers
well over many years through the operations of the market. They would also have
far-reaching consequences for customers and lenders alike and would change the
basic ‘deal’ offered by lenders to their customers and lead to increased financial
difficulties for many and to more defaults.
The research also points to the right way forward on the issues set out by BIS in the
consultation document, namely how to extend and enhance customers’ ability to
manage their money and control more effectively their credit and use of credit cards.
On allocation of payments, the credit card industry believes that there is a case for
adopting a high to low allocation so that customers’ balances above the minimum
payment would be paid off at the highest rate first. But to help preserve the
availability of balance transfers and other promotions which customers appreciate,
lenders would have leeway to decide how to allocate the minimum payment.
On the other issues on which BIS is consulting – unsolicited credit limit increases,
minimum payments and risk-based re-pricing, the evidence shows that current
standard practices are both acceptable to customers and are to their advantage.
Change could mean reduced access for some customers to credit cards and, for
others, increased financial difficulty and default. So the credit card industry is
proposing to put in place additional measures to ensure that customers understand
and exploit to the full their existing powers to make payments above the minimum
required, to decline a credit limit increase and to opt-out of a risk re-pricing.
We look forward to working with Government as it develops more detailed proposals
on the way forward.
Melanie Johnson
Chair
The UK Cards Association
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1.
Introduction and
Management Summary
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Introduction and Management Summary
1
Introduction
1.1
This response to the consultation issued by the Department for Business
Innovation and Skills (“BIS”) in October 2009 has been prepared by The UK
Cards Association on behalf of those of its members who issue credit cards
in the UK (the “Response”).
1.2
The industry has considered the issues raised and the options for change
proposed in the consultation and has taken on board the considerable
evidence that has been gathered. As a result, this Response recommends
certain changes to current practices, which are designed to put the customer
more in control, whilst also ensuring that vulnerable customers are
protected.
1.3
The proposals are tempered by the need to ensure that maximum flexibility
and consumer choice remain and because, as BIS is aware, responsible
lending does not end with the initial underwriting decision, with flexibility
being as important for the lender as it is for the customer. It is also
important to bear in mind that the consumer credit industry has been subject
to an extremely high degree of regulation in recent years that has already
served to suppress income and increase costs which has driven a reduction
in profitability, competition and innovation.
1.4
Before summarising the industry position on each of the five key areas
identified in the consultation, it is useful to make a number of preliminary
points, both about key aspects of the credit card industry and competition
within it as well as the general approach of The UK Cards Association and
its members to this consultation.
The Credit Card Industry
1.5
The UK credit card industry is one of the few industries that can genuinely
claim to be mass market with more than 30 million customers holding,
between them, 66 million cards. The industry exists to provide tailored
products for consumers to meet individual needs and to yield profits for
credit card companies, within the boundaries of responsible lending
practices. It is a key contributor to the overall UK economy both in its own
right as an employer, providing jobs for over 110,000 people, as well as a
fundamental facilitator of commerce, with the liquidity and availability of
credit provided by cards in the UK being worth £22 billion of projected GDP
growth over three years. Credit cards also provide higher levels of statutory
consumer protection and greater security than other forms of payment such
as cash or cheques.
1.6
Consumers value credit cards because they allow greater control over their
expenditure by offering an open-ended credit facility. This gives customers
the opportunity to manage their money by bringing forward spending at their
own discretion on goods and services of their choosing; and in a form which
enables the debt to be paid off at a rate that suits the individual
circumstances. There is a very high level of consumer satisfaction, with
79% of those questioned in the recent UK Cards Association commissioned
survey expressing satisfaction with their cards and 95% showing no level of
dissatisfaction.
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1.7
Nonetheless, the industry is also firmly committed to the protection of
vulnerable customers; and wishes to work with the Government to develop
practices seen to be fair to customers and to enhance further customers’
ability to manage their money effectively.
1.8
We therefore welcome the opportunity to respond to the BIS consultation
which covers some of the fundamental features of the credit card business:
minimum monthly payments, credit limits, allocation of payments and riskbased pricing.
1.9
We recognise that certain of the options advanced in the consultation paper
would enable more effective decision-taking and money management by
customers and would meet both the needs of customers and the industry’s
aspirations. We believe, however, on the basis of the evidence we have
commissioned, that several of the options for change advanced in the
consultation document would strike at the competitiveness and effectiveness
of current arrangements and would disadvantage both the credit card
industry and its customers.
The Research Evidence
1.10
In order to ensure that the conclusions of the Response are robust, The UK
Cards Association instructed three sets of external consultants, GfK, Oxera
and Argus to assist it during the consultation process. The data compiled,
survey evidence gathered and reports written, which are relied on in this
Response, are all available to BIS as appendices. The scale of this
evidence is significantly greater than anything previously produced. It has
involved data mining and analysing the behaviour of 44 million UK credit
card accounts. There were a number of occasions in the consultation paper
where assertions, unsubstantiated by evidence, were made about the effect
of certain practices on consumers. In addition to supporting the Response,
the evidence directly contradicts some of those unsupported assertions.
1.11
The research evidence commissioned by the credit card industry shows that
customers generally accept the basis on which credit cards operate. There
is a widespread acceptance among customers that when they take out credit
cards it is part of the deal that they have limits agreed with credit card
lenders, minimum monthly repayments set by credit card lenders, and that
the price may change. Among those customers who take advantage of
balance transfers and the ability to withdraw cash through credit cards, there
is a proportion of consumers who realise and maximise the benefits of the
current practice on allocation of payments – though the standard practice
here is poorly received across a broader customer base.
The evidence shows that:

the current practice relating to unsolicited credit limit increases
(UCLIs) does not lead to increased debt (but customers in practice
may use UCLIs in the same way that they generally use credit, to
bring forward spending)

the current practice relating to risk based re-pricing of debt leads to
changes in customer behaviour to reduce spending on credit cards –
which benefits both customers and credit card lenders
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
the minimum payments regime is used rationally by customers, and
customers who make minimum payments pay off debt, over the long
term, at the same speed as customers who do not make minimum
payments. The regime does not increase debt, although changes to
the regime might well do so; and

customers make significant use of the balance transfer deals on offer;
that are made possible through the practice currently operated by
most credit card lenders on allocation of payments
Effect on Competition
1.12
Over-regulation (including material changes to consumer offerings prompted
by self-regulation) is likely to affect the competitive dynamic in the market, to
the detriment of the consumer. The potential changes represented by a
number of the options in the consultation would remove some of the key
tools available to credit card lenders to enable them to compete for
business. Such a result would be inconsistent with the Government’s
position on competition in this sector and also the recent work of the UK
competition authorities, which recognise that there is a fine line between
acceptable regulation and interference with the competitive process. Certain
of the options floated in the consultation are in danger of crossing that line.
1.13
Competition and product differentiation drive innovation and give rise to
enhanced choice for the consumer, who is able to benefit as a result of
differential prices and other offerings. In the banking sector in particular, the
Government has continually emphasised the need for greater competition in
the post-credit crunch market. By way of example, in the HM Treasury
document “Reforming Financial Markets of July 2009”, the report notes that:
“Competition and choice are vital for improving the efficiency and
responsiveness of financial markets for their users. The government
remains committed to maintaining such competitive markets in the UK.”
1.14
Whilst the market is highly competitive, there are already limited forms that
competition can take given the need for a universal and co-operative
infrastructure, and partly because there are a limited number of features
which contribute to competition for consumers. It would be very unfortunate
if these features were further limited by over-regulation.
Competition Law Limits the Boundaries of Self-Regulation
1.15
In compiling this Response, the credit card members of The UK Cards
Association have been acutely aware of their own legal obligations to ensure
that competition between them is not reduced and that their competitive
behaviour is not co-ordinated. For this reason, specialist competition law
advice from external lawyers has been sought throughout the process. As
part of this advice, concerns have been raised about the legitimacy of any
industry-wide agreement to adopt certain of the options floated by BIS, in
particular those which seek to standardise certain elements of credit card
terms and statements and those which deal with caps on amounts or
frequency of action. As BIS will be aware, credit card lenders are unable as
a consequence of law to agree amongst themselves, measures which would
limit competition between them.
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1.16
The industry proposals which follow have therefore sought to strike a
legitimate balance between compliance with competition law obligations and
a recognition that certain measures do need to be taken by the industry.
These measures are therefore focussed on increased transparency and
guidance which will assist to protect consumers, whilst also allowing
competition to flourish amongst industry operators. In this way, in the one
instance where the industry is proposing a structural change to an existing
industry practice (in relation to the allocation of payments), it is vital that
scope remains for competition between lenders.
Industry Profitability
1.17
Finally, BIS will be aware that the imposition of further restrictions on the
ability of credit card lenders to offer flexible and innovative products, will
significantly reduce the profitability of the industry. The Response includes
evidence which seeks to quantify the likely industry loss in the event that
various of the options are imposed. In doing so, the Response illustrates
that the scale of loss from the most far-reaching options suggested by BIS
could be as much as £2.5 billion per annum. No doubt, each lender would
react differently to imposed changes which negatively affect profitability.
However, the evidence demonstrates that the likely response may be to :

restrict favourable consumer offerings

raise interest rates generally; or indeed

begin charging for credit card usage
1.18
It certainly seems to be the case that a reduction in profitability will lead to
less innovation and fewer choices for consumers and will reduce the
likelihood that the market opportunities are sufficiently attractive for new
entrants.
1.19
Our proposals for the way forward on the issues set out in the consultation
document therefore reflect our evidence and major, for most issues, on
improving information and transparency.
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2
Allocation of Payments
2.1
Allocation of payment methods are inextricably linked to the 0% balance
transfer offerings which drive competition and foster customer switching in
the market. It is a trade-off for these balance transfer deals that the majority
of credit card lenders allocate payments to the lowest interest bearing
portion of any outstanding balance through to the highest. In practice, this
issue affects around 28% of credit card users and yet the allocation of
payments has fostered an environment in which competition can flourish for
consumer benefit. In the consultation document, BIS makes it clear that it
wishes to see a change in the way payments are allocated. It indicates that
despite the level of information available to the consumer, there is still a high
level of misunderstanding of how payments are allocated. BIS is also
concerned that there is cross-subsidisation of customers by those that
withdraw cash (with higher interest rate payments) and that generally the
allocation model increases debt levels.
2.2
Although there are strong arguments in favour of leaving lenders to pursue
their own policies on the allocation of payments unchecked, the industry has
been mindful of the fact that its own qualitative research indicates a belief
among consumers that, whilst a subset understand the commercial logic
behind the current practice, most would wish to see change. Nonetheless,
the need for change must be seen against the context not only of the scale
of the perceived problem, but also the consequences on the consumer
offering of structural change to the existing business model.

As BIS will see, the industry evidence demonstrates that there is a far
greater awareness and understanding of allocation of payments than
the 30% of card users referred to in the consultation document. The
GfK survey demonstrates that only 12% did not know that most credit
card companies charge a different rate of interest on different borrowing
and that this surprised them

Moreover, any remedy option which will significantly impact lender
profitability must be considered against the scale of the perceived
problem. The evidence gathered demonstrates that the number of
accounts impacted by allocation of payments is around a quarter.
Whilst the industry must clearly respond to consumer concerns, all
stakeholders must also bear in mind the proportionality of any measures
taken to address such concerns

Most importantly, a consideration of the effect of allocation of payments
methods on users and lenders must take into account that the current
low to high interest allocation is effectively a trade-off for the ability of
lenders to offer attractive 0% or low rate balance transfers. Implicit in all
trade-offs is that if one side of the trade-off changes, then so will the
other
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2.3
In the event that allocation of payments policies were to be changed, the
evidence from Oxera suggests that, faced with a reversal of payment
allocation, with the resulting significant drop in profits, lenders are likely
either to:
(a) shorten the promotional period for balance transfer deals
(b) reduce the availability and worsen the terms of promotions available to
existing customers
(c) employ higher interest rates or fees for cash withdrawals or reduce the
availability of cash withdrawals altogether
2.4
This is consistent with the position in the United States following the
implementation of the relevant provisions in the US CARD Act, where a
change to the model has resulted in the reduced attractiveness of
promotional deals, with smaller promotional periods and less attractive
promotional interest rates.
2.5
Not surprisingly, the instinctive positive reaction seen in our consumer
research to changes suggested by Government in the consumer survey are
significantly modified and tempered once the potential implications for
customers are outlined. By way of example, when told that the Government
is thinking of making credit card providers allocate payment to the part of the
balance with the highest interest rate first, 44% thought that this was a good
idea. However, this favourable view reduces to only 18% when told that this
might mean that credit cards come with an annual fee in future.
2.6
However, in particular because its own survey evidence has indicated
consumer desire for change, and provided that all stakeholders recognise
the consequences of structural change on the industry model, the Response
is able to recommend a move away from the traditional low-to-high payment
allocation policy of the majority of UK lenders. Specifically, the proposal is
to move to a high-to-low payment allocation for anything above the
minimum payment, with the minimum payment allocated at the
discretion of the card issuer, thus preserving as much scope as
possible for competition.
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3
Unsolicited Credit Limit Increases
3.1
As with the other elements of the credit card offering which are the subject of
the BIS consultation, unsolicited credit limit increases (“UCLIs”) are a
cornerstone of responsible lending and enhance the lender’s ability to
manage risk on a tailored basis for each of its customers. Nonetheless, the
BIS consultation raises concerns as to whether consumers have enough
control over their credit limits and views UCLIs as contributing to the recent
growth in personal debt. As is explored in more detail in the Response, this
concern is not supported by the evidence.
3.2
As with all the issues raised by BIS, UCLIs have already been the subject of
a number of increased protections in recent years, with protections
contained in the Lending Code and as a result of the impact of the second
Basel Accord (“Basel II”) which had the effect of curbing any previous
tendencies to set excessive credit limits (since these have become costly to
maintain).
3.3
Increasing consumers’ control over credit limits is an aspiration shared by
the industry. However, BIS must recognise that a balance needs to be
struck between giving customers greater control (in circumstances were
consumer behaviour is often characterised by inertia) and the level of risk
that this injects into the credit market at a far earlier point in the customer
relationship. Responsible lending does not and cannot end with the initial
underwriting decision, but continues throughout the entire period that a
customer has a credit card account; UCLIs represent a key part of the
management of such accounts. As a consumer’s personal circumstances
change over time it is imperative that the extent to which that consumer is
able to borrow on their credit card reflects this.
3.4
It is also imperative that credit card lenders continually monitor their
portfolios and individual customer accounts, effectively re-underwriting
accounts on a daily basis. This is a characteristic of the open ended nature
of a credit card as distinct from other types of consumer lending, where
checks are not required with the same frequency. It is also the reason why
credit card customers can be selected for credit limit decreases. BIS cannot
ignore the evidence in the Response which demonstrates that credit card
risk management and responsible lending results in almost as many
decreases as increases.
3.5
Accounts will only be selected for a UCLI following stringent checks. There
is a rigorous exclusion process to eliminate non-qualifying accounts. The
result of these checks is that it is predominantly low risk customers who are
considered for a UCLI because the lender believes they can afford it and
therefore will have no problem maintaining payments on their accounts.
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3.6
The evidence presented in the Response demonstrates that greater default
levels occur where customers have sought credit limit increases themselves
(solicited increases), as opposed to UCLIs, where default rates are
comparatively low. This renders the BIS’ option to ban all UCLIs, with
increases only to be given in response to specific customer requests,
entirely counterintuitive. Equally, default rates among customers who have
been given a credit limit increase are significantly lower than among
outwardly similar customers who, as a result of credit assessment analysis,
did not receive an increase. The evidence does not support the statement in
paragraph 4.6 in the consultation paper that UCLIs have contributed to the
growth of personal debt.
3.7
In short, and contrary to the BIS position, the evidence gathered by the
industry demonstrates that:

credit limit increase strategies are robust and do not have any material
impact on delinquency rates

the vast majority of customers understand that limits on their accounts
can and do change

customers are not in favour of the consequences should a change in
practice be enforced
3.8
The evidence also demonstrates clearly that it is in any event the case that
the number of limit increases has fallen considerably in 2009, which is likely
to be as a result, not only of worsening economic conditions, but of the
measures already put in place following Basel II and within the Lending
Code.
3.9
On the basis that significant changes have already been made to the UCLI
practice in recent years, it is the industry’s view that the optimal solution to
deal with the BIS concern about control is with improved transparency and
better execution.
3.10
What cannot be justified, however, is imposing any limits, either on the
amount of an increase (whether a percentage or otherwise), its frequency, or
an opt-in requirement (which would significantly reduce take up). Such
measures represent a real threat to the long term viability of the otherwise
flexible credit card model and would result in the lenders setting higher limits
at the outset, or refusing to lend altogether. Based on current practice,
lenders are able to wait, following the opening of a new account, until they
have sufficient experience of the customer to make an informed decision
about raising the credit limit.
3.11
This is particularly important for credit offered to sub-prime consumers,
where the “start low and grow” model is absolutely key. Without the
flexibility to offer initially very low credit limits (e.g. at the circa £200 level),
then to grow these in small steps at regular intervals (i.e. every few months),
credit card lenders will not have a sustainable business model for the subprime sector, and sub-prime consumers will have to seek alternative,
potentially more expensive forms of credit elsewhere.
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3.12
On the basis of the high degree of customer inertia that must be assumed
under a model where a credit limit increase must be directly requested,
credit card lenders would have no choice but to assume that customers
would simply remain on the limits set at the outset of the agreement. The
entire business model would therefore change, with there being only one
chance to get the limit right. Moreover, any opt-in model would introduce
additional cost and bureaucracy for both lenders and consumers.
3.13
The industry therefore proposes to a strengthened version of the set of
principles discussed with BIS during the summer of 2009 to contain
key commitment including:







Provide for a 30 day notice period ahead of a limit increase
Provide clarity on the multiple channels by which the customer can
opt-out
Provide clarity that the customer can opt-out of an individual
increase and/or permanently using an industry standard document
/ format
Provide cardholders with a means to decrease their limit without a
need for personal interaction e.g. on-line; automated telephone
Incorporate an exclusion relating to habitual minimum payers
Incorporate the three core exclusions as set out in the risk-based
re-pricing principles
Commitment that customers will not find it difficult to decline the
higher limit
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4
Minimum Payments
4.1
The current minimum payment requirement is a key element of the credit
card offering and contributes to the general flexibility of credit cards which
consumers find attractive. This flexibility is a core part of the product
offering and differentiates credit cards from more inflexible products such as
personal loans, which have more structured repayment mechanisms.
4.2
The Response explains the recent practice and prevalence of minimum
payments in the industry and explores the existing protections available to
consumers. It also analyses evidence of cardholder behaviour and deals
with the potential financial impact for consumers and the industry of the BIS
proposals. The Response concludes that to the extent that there are
harmful effects for consumers of existing minimum payment practices, these
can be addressed by assisting habitual minimum payers to understand
better the consequences of making only minimum payments to pay down
credit card debt.
4.3
The Lending Code already sets out key consumer protections in respect of
minimum payments. Equally, recent evidence suggests that some lenders
are currently experimenting with increasing the minimum payment for new
customers in order to reduce risk. The industry proposal set out in the
Response will complement these existing protections, whilst ensuring that
high risk consumers are not pushed further into debt or towards default (for
example by increasing the amount of minimum payments).
4.4
The evidence presented in the Response on consumer behaviour
demonstrates that only a very small proportion of users make the minimum
payment over the long-term and that consumers have a highly sophisticated
approach to managing their accounts and to making repayments. What is
more common practice is that some card holders will take advantage of the
flexibility to pay the minimum amount on only a couple of occasions during
the course of a year.
4.5
More particularly, key facts arising from the evidence are as follows:

The majority of accounts making a minimum payment during the course
of the year did so on just a single occasion

The average number of minimum payments in the year for even the
highest risk category of consumers is only 2.4

Very few customers consistently make the minimum payment, even over
a 12-month period: only 3.1% of consumers did so in the year ending
June 2009
Page 14 of 230
4.6
The Response explains that any regulatory change is likely to harm rather
than benefit consumers. In particular, BIS should be aware that the
overriding reason why consumers choose to make the minimum payment is
that the minimum payment is all that they can afford. There is therefore a
strong possibility that increasing the minimum payment across the industry
will exacerbate the risk of getting into financial difficulties for a significant
number of customers.
4.7
The consumer research presented in the Response shows that, of those
consumers who do choose to make only a minimum payment, 56% say that
they do so because the minimum payment is all they can afford. However,
if, for example, the minimum payment across the industry were set at 5%,
nearly 40% of all accounts would be impacted in some way and the typical
cardholder would, on average, have to find an extra £99.65 a month to meet
the increased minimum payment. In other words, increasing the minimum
payment is likely to create exactly the kind of financial difficulties that BIS is
keen to avoid.
4.8
It is also the case that a sizeable proportion of those making the minimum
payment do so because they are on a promotional rate. If the minimum
payment rate were to rise, this would reduce the incentive to switch that
such promotional offers are designed to foster, thereby harming competition
in the market.
4.9
There are also real concerns that even the ‘recommended minimum’
outlined in consultation paper, sitting alongside the contractual minimum,
would simply increase complexity and consumer confusion and it cannot be
excluded that some card holders who were previously paying above the
minimum, might simply reduce their payments to the recommended amount.
4.10
Recognising that it is only habitual minimum payers who may need greater
transparency and assistance to manage their accounts effectively the
industry proposal is that:

Credit card lenders will separately contact habitual minimum
payers every 6 months to bring to their attention the implications of
adopting such a practice
Page 15 of 230
5
Re-pricing of Existing Debt
5.1
Risk based re-pricing of existing debt is essential to allow consumers access
to the full flexibility which credit cards have traditionally been able to offer.
However, BIS have raised a number of concerns, notwithstanding the recent
introduction of the Statement of Principles agreed following the Credit Card
summit in November 2008 which it has recognised has led to a marked
decrease in complaints about re-pricing. The concerns raised in the
consultation continue to focus on transparency and consumer
understanding, with residual concerns that certain instances of re-pricing
may be unjustifiable. As part of the consultation exercise, BIS is also
considering whether re-pricing of existing debt is unfair in principle and
whether consumers may be better off with greater certainty (i.e. no re-pricing
at all).
5.2
The Response explores the rationale behind re-pricing, the sophistication of
the risk-based calculation and the evidence gathered from the independent
consultants. It is a consequence of the sophisticated risk profile analysis
that any attempt to go further than increasing the transparency of re-pricing
and the opt-out opportunity embodied in the Statement of Principles can only
affect consumers in a negative way. BIS appears to ignore the key
consequences of either capping or ending the ability of operators to re-price,
which are that certain groups of consumers would be subject to higher
interest rates and increased cross-subsidisation and credit may not be
extended at all to high risk customers. Those lenders with little access to
information about potential customers (i.e. those mono-line credit card
lenders who do not offer current accounts) would be at a further
disadvantage.
5.3
Credit cards have certain key advantages over traditional loan agreements
for consumers. They are open ended credit products, where card holders
are free to borrow up to their credit limit and to repay debt over any time
period which they choose, subject to a contractual monthly minimum
payment. It is these features however which, whilst making the product
attractive to consumers, also require highly sophisticated risk profile models,
taking account of complex sets of variables in order to offer credit limits and
interest rates tailored to particular needs and the ability to repay. Inevitably,
risk profiles change and accordingly, there is a need for re-pricing, both up
and down, ensuring that the cross-subsidisation which would need to take
place without re-pricing, does not occur.
5.4
Despite the level of consumer understanding, the significant measures
which have already been taken in response to concerns raised by
Government in 2008 and the inherent rationale of keeping the risk based
pricing system in place, the industry does recognise that the evidence
indicates there is still scope for increased transparency and customer
support. There is already a high level of knowledge and understanding by
the consumer that re-pricing is a common feature of credit cards and, in this
respect, it is no different in principle from insurance, where risk profile
changes have a direct impact on premium levels.
Page 16 of 230
5.5
Although BIS appears to remain concerned about the level of re-pricing and
the amount of the re-price, the evidence in the Response demonstrates that
re-pricing takes effect in a much lower volume of accounts than seems to be
assumed and that price changes are clearly targeted only at accounts where
a change is necessary. As the Response demonstrates, sophisticated
models of risk profiling are used, resulting in re-pricing of risk downwards on
almost as many occasions as risk is re-priced upwards.
5.6
Although the segments with proportionately higher numbers of price
increases are high risk and high utilisation customers, lenders tend not to reprice the very highest risk customers, because affordability checks are likely
to reveal that these customers are more likely to default if the costs were
greater. In this way, lenders take into account the interests of the borrower,
as much as their own interest.
5.7
It is worth setting the actual scale of the problem for consumers against the
potential measures, in order to assess proportionality. On average, the cost
to a typical consumer of a rate increase will be £84 per year (ranging from
less than £10 amongst low use customers to more than £200 for high use
customers). Equally, almost 80% of accounts did not have a price increase
in the two years between July 2007 and July 2009, with 17% having one
increase and only 3.5% having more than one increase.
5.8
The evidence also demonstrates that card holders modify their spending and
borrowing behaviour in response to a price increase, with upwardly re-priced
accounts showing faster account attrition. This demonstrates customer
awareness of both the fact and effect of upward re-pricing.
5.9
The evidence is unable to link events of default to any of the industry
practices raised as potential concerns by BIS.
5.10
The industry firmly considers that the Statement of Principles agreed
following the Credit Card Summit in November 2008 is working effectively
and that consumers already have a good awareness of the availability of the
‘opt-out’. The industry is therefore committed to continuation of the
Principles and to further promotion and explanation of the opt-out.
5.11
Nonetheless, the industry recognises that transparency can always be
improved and for this reason is, in addition, ready to develop an
additional generic leaflet to help customers better understand how repricing works, why it is necessary and what options are available to them.
Moreover, the industry recognises that there is a need to make clearer to
customers how the opt-out actually works and how they will subsequently be
expected to pay down the balance at the original rate of interest over a
reasonable period.
Page 17 of 230
6
Summary & Conclusion
6.1
Should the Government decide to adopt the majority of the more farreaching proposals in the BIS consultation paper, the result would be a
much more limited and basic service being provided to consumers. Whilst
some credit card companies might still make some profit, the costs for
consumers would be higher and choice would be reduced, giving rise to a
market where:
6.2
6.3

a customer’s credit limit is fixed from the outset – where the credit card
lender has in effect one chance to get it right in what is a dynamic, datarich, risk-based business where individual circumstances often change

a customer’s pricing is fixed from the outset – where, again, the credit
card lender has in effect one chance to get it right

promotional offers and the ability to use credit cards to access cash are
much more limited as a result of requiring higher rates to be paid off first
Such options would have negative consequences for credit card customers,
including:

a reduction in the availability of credit card credit - some current
customers would no longer be able to access credit cards if a “low and
grow” strategy ceases to exist

an increase in the cost of credit card credit - the inability to re-price risk
would mean that pricing would be much higher at the outset and that
balance transfer special offers would become less generous if these
need to be paid off last; and

an increase in default levels if risk based re-pricing did not exist - the
resulting higher repayments would lead to increased hardship and
default by a proportion of customers
As a result of the factors highlighted above, the industry would also expect
to see on the part of credit card customers:

a migration to other forms of more expensive credit (e.g. overdrafts;
home credit, pawn shops, payday lending, the unregulated market etc);
and

a migration to other forms of payment (debit cards, cheques and cash –
none of which offer the same statutory level of consumer protection as
credit cards).
Page 18 of 230
6.4
Moreover, there is likely to be a reduction in price competition and in market
participants. The type of changes proposed by the Government in the
consultation paper could lead to disproportionate impacts on mono-line and
specialist lenders which make it comparatively more difficult for them to
achieve a return they may need for their shareholders and could lead to
some players leaving the market. The industry certainly does not see any
prospect of new lenders entering the UK credit card market, with competition
more likely to diminish as lenders leave the market. Alternatively the
industry might see further consolidation among credit card lenders.
6.5
In many respects customers need better information to give them stronger
control over the management of their card accounts. This will maintain the
existing levels of choice and competition for consumers with similar offerings
to those available today.
Page 19 of 230
The industry’s proposed way forward is therefore summarised in the Table below:
Policy Area
Industry Proposals

Move to a high-to-low payment allocation for anything above the
minimum payment (i.e. where any payment above the minimum is
allocated first to the card balance bearing the highest rate of interest
and then to each successive balance bearing the next highest rate of
interest) with the minimum payment allocated at the discretion of the
card lender
Unsolicited Credit Limit
Increases


Provide for a 30 day notice period ahead of a limit increase
Provide clarity on the multiple channels by which the customer can
opt-out
Provide clarity that the customer can opt-out of an individual increase
and/or permanently using an industry standard document / format
Provide cardholders with a means to decrease their limit without a
need for personal interaction e.g. on-line; automated telephone
Incorporate an exclusion relating to habitual minimum payers
Incorporate the three core exclusions as set out in the risk-based repricing principles
Commitment that customers will find it simple to decline the higher
limit





Minimum Payments


Re-pricing of Existing
Debt



Simplicity & Transparency
Continuation of the existing Statement of Principles
Produce a generic leaflet / fact-sheet entitled “Risk-based Pricing
Explained”, covering both increases and decreases. Needs to cover
what are ‘high risk’ indicators; factors that are NOT used; how to
appeal etc. Delivery options must be flexible.
A commitment to further promotion and explanation of the opt-out
Industry is happy to consider further the merits of all three suggestions post
consultation closing date



Contact ‘habitual’ minimum payers (i.e. those that are doing so with no
obvious reason e.g. benefiting from a promo rate) every 6 months to
remind them of the implications
Commitment to work with BIS in reviewing the output from Warwick
University
Annual statement
‘Stakeholder’ lending product (‘vanilla’ credit card)
Standardised product labelling / benchmarking
Page 20 of 230
Table of Contents
Page 21 of 230
Chapters
Foreword
Message from Melanie Johnson, Chair, The UK Cards Association
1
Introduction and Management Summary
2
The Facts About The Credit Card Industry Today
(Addressing questions from Chapter 1 of the consultation paper)
Introduction
The UK Credit Card Market
Profitability of Credit Card Lending and the Impact of the Economic
Downturn
Lenders’ Income Sources
Consumer Behaviour
Credit Card Holding
Customer Satisfaction
New Accounts
Credit Card Borrowing
Credit Card Transactions
Balance Transfers
Cash Advances
The Cost of Fraud and Fraud Prevention
The Cost of Providing a Service
Data on Multiple Card Holding
Data on Company Card Holding
3
Management Summary
Introduction
Current Practice
Consumer Research
Existing Protections (The Summary Box)
The US CARD Act
Balance Transfer Users
Cash Users
Financial Impact on Consumers
Financial Impact on the Industry
Consequences for the Cash Advance Facility
Further Comments on the Consultation Paper
Policy Options
Conclusions
Proposal Summary
(Cont.)
Page 22 of 230
4
Credit Limit Increases
Management Summary
Introduction
Consumer Research
Existing Protections (Basel II; The Lending Code)
The US CARD Act
Rationale
“Waterfall of Exclusions”
The Purpose of Credit Limits and Credit Limit Increases
Current Prevalence
Number of Accounts Given a Credit Limit Increase
Type of Accounts Given a Credit Limit Increase
Credit Limit Increases in Q2 2008
Customer Initiated Credit Limit Increases
Size of Credit Limit Increases
Timing of Credit Limit Increases
Credit Limit Decreases
Result of a Credit Limit Change – the Consumer
Result of a Credit Limit Change – the Lender
Communication of Limit Changes
Policy Options
Conclusions
Proposal Summary
5
Minimum Payments
Management Summary
Introduction
Recent Practice and Prevalence
Direct Debit Payment
Existing Protections (The Lending Code)
The US CARD Act
Cardholder Behaviour
Frequency of Making a Minimum Payment
Reason Consumers Make the Minimum Payment
Financial Impact on Consumers – Impact on Outstanding Balances
Impact of Increasing the Minimum Payment
Balance Transfer Customers
Financial Impact in Industry
Policy options
Conclusions
Proposal Summary
(Cont.)
Page 23 of 230
6
Re-Pricing of Debt
Management Summary
Introduction
Overview of Recent Activity and Trends
Existing Protections (Credit Card Summit November 2008; Statement
of Principles; The Lending Code)
The US CARD Act
Current Prevalence
Number of Accounts with a Price Increase
Types of Account Re-Priced Upwards
Size of Price Increase
Frequency and Timing of Rate Increases
Types of Account with Price Decreases
Results of a Price Increase – The Consumer
Results of a Price Increase – The Industry
Policy Options
Conclusions
Proposal Summary
7
Transparency & Simplicity
Annual Credit Card Statement
Stakeholder Card lending Product
Standardised Labelling System
Proposal Summary
(Cont.)
Page 24 of 230
Appendices
1
Key Information and Background
Introduction
Contribution of the Credit Card Industry to the UK Economy
Differing Business Models
Customer Complaints
Complaints to the Financial Ombudsman Service
Recent Legislative and Regulatory Activity
Impacts of Other Government Legislation and Activities
OFT Irresponsible Lending Guidance
Consumer Credit Directive
Industry Self-Regulated Improvements
The US Card Act
Impact of the US CARD Act
The Industry Evidence Base
The Government Evidence Base
2
Consultancy Profiles and Methodologies
3
Oxera - An Economic Assessment of BIS’s Proposals for Credit
Card Regulation
4
GfK Quantitative Consumer Research Tabulations
5
GfK Qualitative Research Management Report - UK Card Users
Attitude to Credit Cards and Four Industry Practices
6
Economy.com - Plastic Money: The Credit Card Industry’s
Contribution to the UK Economy
7
Irresponsible Lending - OFT Guidance For Creditors - The UK
Cards Association Response
8
Argus - Recent Trends in the US Card Landscape
Page 25 of 230
2.
The Facts About The
Credit Card Industry
Today
(Addressing questions from chapter 1 of the consultation
paper)
Page 26 of 230
The Facts About The Credit Card Industry Today
(Addressing questions from Chapter 1 of the consultation paper)
Introduction
Chapter 1 of the consultation paper – the Introduction – calls on consultees to submit
evidence about the current nature of the UK credit card market, including in particular
the profitability of the credit card industry, the incidence of multiple credit card use,
particularly among the most indebted customers; and the use of personal credit cards
by businesses.
Page 27 of 230
The UK Credit Card Industry
The UK has the largest, most mature and most competitive credit card market in
Europe and is second in size, globally, only to that in the United States of America.
Some pertinent figures are as follows:

66 million credit cards in issue at the end of 20081

57 million credit card accounts open as at the end of 2008 (this number has fallen
to around 55 million by the middle of 2009)

30.2 million credit card holders as at the end of 2008

Around 9 million secondary credit card holders as at the end of 2008

An average of 2.3 credit cards per holder during 2008

1.6 billion purchase transactions in the UK in 2008 accounting for £101 billion, an
average of 24.7 transactions per card during the year

A further 139 million purchase transaction outside of the UK in 2008 accounting
for £11.6 billion, an average of 2.1 per card

41 million cash acquisition transactions in the UK in 2008 accounting for
£5.2 billion

A further 6 million cash acquisition transactions outside the UK in 2008
accounting for £802 million

£63.1 billion of credit outstanding on credit cards at the end of October 2009
(down from a peak of £67.5 billion in December 2005)
1
All figures shown are to the end of 2008. 2009 figures will be available shortly
Page 28 of 230
Profitability of Credit Card Lending and the Impact of the Economic Downturn
At a general level some industry representatives have already shared with BIS the
view that, for most lenders, the credit card industry has moved from being an industry
that delivered reasonable returns up until 2007, through to one which generally broke
even between 2007 and 2009, to one that now is largely unprofitable.
This has been largely driven by a combination of increasing bad debt charges (due to
the economic downturn) and the unintended consequences of previous regulation
that have either driven up costs or driven down revenue.
Other than dealing in such broad generalisations it is difficult for any trade
association to be more explicit about the profitability of its member organisations
given the commercially confidential nature of the information that would be required.
This is also complicated by the fact that the UK credit card market is comprised of a
number of different types of credit card lender operating to different business models,
susceptible in different degrees to any proposals for change. Credit card lenders can
broadly be categorised as follows:

Larger high street lenders typically providing credit cards to their existing retail
bank customer base with some penetration into non-retail bank customers such
as HSBC, RBS etc

Smaller high street lenders such as National Australia Group, Co-operative Bank,
Bank of Ireland etc

Mono-line credit card lenders principally providing credit cards (and limited other
products) to the mass market, attracting customers from the high street banks
and customers new to credit cards, such as MBNA and Capital One etc, and who
have considerably increased price competition in the market since their entry in to
the UK in the mid-1990s

On-line only financial services providers such as Egg whose credit card operation
is more akin to a mono-line

Three-party credit / charge card models such as American Express, Diners Club
and JCB where the card issuer is also the acquirer (as opposed to participants in
four party card payment schemes such as Visa and MasterCard)

High-street affinity credit card providers who have emerged from the ex-store
card market or developing financial services on the back of their wider
businesses, such as John Lewis Partnership (within HSBC); Tesco Bank,
Sainsbury’s Bank (within Bank of Scotland) etc

Highly specialised lenders operating in the sub-prime / non-prime / home credit
type market such as Vanquis; SAV (within Bank of Scotland) etc
Page 29 of 230
Lenders’ Income Sources
Paragraph 1.11 comments that lenders are increasingly relying upon revenue from
those borrowers who do not pay off their balance every month rather than on income
from card transaction volumes. This is not surprising and largely reflects intervention
and regulation by Government and regulators with regard to other aspects of the
credit card business model that have diminished income from income streams other
than interest and fees.
Fundamentally card lenders have four main income streams:

Interest, fees (including annual fees) and other charges

Interchange fees

Ancillary products and services e.g. Payment Protection Insurance (PPI)

Default fees (though these can only be set at a level to cover costs)
Of these income streams:

In 2006 the OFT intervened in respect of credit card default fees which, as a
consequence, were reduced from previous levels to a maximum of £12.00.
Whatever the merits of this decision it has resulted in credit card lenders having
to adjust to a significant shortfall in cost recovery2. In addition this has
inadvertently provided an opportunity for Claims Management Companies
(CMCs) to pursue card lenders for historic fees which is proving a significant drag
on lender resources

Interchange3 fee income for card lenders has reduced steadily since the early
part of the decade as the card schemes (Visa and MasterCard) have been forced
to reduce their interchange rates. Visa reached an agreement with the European
Commission in 2002 which led to a long term reduction in interchange levels,
which are now c20-30% lower than they were in 2002, directly impacting card
lenders’ income. Interchange was eliminated altogether for European crossborder MasterCard transactions4 between December 2007 and April 2009 before
returning at a much reduced level. Interchange fees remain the subject of
investigation by both the European Commission and the Office of Fair Trading,
the outcome of which remains uncertain in terms of both prospective timing and
the magnitude of the impact of any decisions
2
For example, in June 2009 some 4.1% of accounts missed a payment and, in theory, would have been
liable for a default fee (though a proportion will have been waived). Assuming an average preintervention default fee of £25.00 and a post-intervention average default fee of £12.00 then the
difference in income for this alone would be almost £28 million that month across the industry (no
allowance being made for waived fees)
3
Interchange fees are paid between banks when consumers make a payment using a credit (or debit)
card. They are a way of correcting the imbalance in costs incurred by each party in a four-party card
payment system such as MasterCard or Visa in order to optimise the payments network to the benefit of
all. For each transaction a small payment is made by the retailer’s bank to the consumer’s bank to
compensate the latter for their higher costs. The exact fee paid between banks depends on the type of
card being used and the type of transaction being conducted. The interchange fee is a major
component of a card issuer’s income driven by card usage. For more information on interchange fees
and their regulation please refer to
http://www.theukcardsassociation.org.uk/industry_issues/interchange_fees/-/page/484/#interfee and
http://www.theukcardsassociation.org.uk/view_point_and_publications/-/page/680/
4
Accounting for 70 million transaction during 2008
Page 30 of 230

The reductions in interchange revenues resulting from regulatory intervention
have been compounded by the general stalling in credit card transaction values
and volumes seen since 2005

Following intervention by the Competition Commission and the Financial Services
Authority, Payment Protection Insurance (PPI) has now become such a regulated
product that some lenders do not see a future for the product and therefore any
income / profit associated with it
This leaves interest, fees and charges as the only area where losses in other income
streams can be recouped if they can not be absorbed. However, annual fees for
credit cards are rare in the UK despite predictions in recent years that they would be
re-introduced. The key reason for this is one of first-mover disadvantage. Whichever
lender introduces annual fees first is effectively inviting their competitors to poach
their customers – something we have been calling the annual fee cul-de-sac.
Whatever the merits of these interventions it is a fact that credit card lenders are left
with huge shortfalls in income that have to be either:

Recouped elsewhere

Simply absorbed; or

That will result in the business model no longer being viable
No industry can continue to absorb such major reductions in revenue in the short
term without consequence if they are to continue to provide the same standard of
service.
Indeed, PriceWaterhouseCoopers, in their annual Precious Plastic report for
2010, go as far as to conclude that:
“With traditional revenue lines under pressure the current credit card
business model is no longer sustainable”.
“PWC expects annual or monthly fees to become the norm. Fees will come from
both the higher end of the market (where customers will pay for access to
premium benefits) and from the lower end of the market (where more marginal
customers will be expected to pay for access to even a basic credit card)”.
Page 31 of 230
Consumer Behaviour
In addition, the credit card industry has also had to adapt to changes in consumer
behaviour, particularly since 2005, which have impacted on revenue, including:

A reduction in credit card outstandings which would have led to a reduction in
interest income had interest rates and the proportion of outstandings bearing
interest remained unchanged

A stalling in credit card transaction volumes leading to a stagnation in interchange
fee income for lenders

A reduction in balance transfer activity leading to a reduction in balance transfer
fee income

A reduction in cash advance activity leading to a reduction in cash advance fee
income

A rise in defaults since 2007 reflecting the worsened economic conditions
The evidence suggests that, at an aggregate level, consumers responded to
changing circumstances as early as 2005 when they became more cautious in their
use of credit cards, most likely translating into growth of debit cards. Consumers
apparently responded to underlying conditions and undertook a major readjustment
without regard to specific legislative or regulatory changes.
The following sections deal with each of these issues respectively.
Page 32 of 230
Credit Card Holding
The number of credit cards in issue peaked in 2004 after a number of years of steady
growth and has remained fairly stagnant ever since, albeit exhibiting a gentle decline.
Credit Cards In Issue 1998-2008 (millions5)
80
70
60
50
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: UK Plastic Cards 2009
Whilst the number of credit cards in circulation has fallen, the number of adults with a
credit or charge card has also declined to 30.2 million in 2008 from a peak of
31.6 million in 2005. This represents 62% of the adult population (down from 67% in
2005).
20.5 million credit or charge card holders used their cards regularly in 2008 (at least
once a month), up from 19.7 million in 2007. On average each regular user made
88 transactions during the course of the year, an average of 1.7 per week.
5
These figures are for MasterCard and Visa and exclude American Express credit cards, but include
MasterCard and Visa business cards
Page 33 of 230
Credit (and Charge)6 Card Holders 1998-2008
2003
2004
2005
2006
2007
2008
Change
46.0
46.6
47.0
47.4
47.9
48.3
1%
69.6
72.4
72.6
72.3
70.8
70.3
-1%
30.4
30.6
31.6
31.4
30.8
30.2
-2%
Penetration of
adults (%)
66%
66%
67%
66%
64%
62%
Cardholders
using (%)
64%
67%
68%
66%
64%
68%
Credit/charge
card users (m)
19.4
20.6
21.5
20.7
19.7
20.5
5%
1694.9
1809.2
1775.3
1769.4
1792.1
1815.1
1%
87.6
87.7
82.4
85.3
91.2
88.4
-3%
UK adult
population
Personal
credit/charge
card users (m)
Credit/charge
cardholders (m)
Personal
credit/charge
card payments
Annual credit /
charge card
payments per
user
Source: UK Consumer Payments 2009
6
Although data for charge cards can not be separated out the number of adults only have a charge card
and no credit card is very small so will not have a material impact on the numbers in the table
Page 34 of 230
GfK monitor satisfaction levels within their long-running Financial Research Survey
(FRS)7, the benchmark market research survey which informs the industry.
Customer satisfaction with credit cards is monitored within the survey, giving the
following results for respondents’ satisfaction with their main credit card:
Satisfaction With Main Credit Card (%)
Satisfaction
Extremely satisfied
Very satisfied
Fairly satisfied
Neither satisfied nor dissatisfied
Fairly dissatisfied
Very dissatisfied
Extremely dissatisfied
Don’t know
%
15
47
25
8
2
1
1
1
87
8
4
Source: GfK Financial Research Survey
In the specific quantitative consumer research commissioned by The UK Cards
Association from GfK to support this response8, respondents were taken through a
series of questions relating to each of the four main issues raised as negatives about
the credit card industry in the consultation – allocation of payments; re-pricing; credit
limit increases (and decreases); and minimum payments, along with some of the
Government’s proposals.
At the end of the questionnaire respondents were asked, taking everything into
account, how satisfied they were with their credit cards. Having had the four
perceived downsides of credit cards discussed with them it would be no surprise to
see satisfaction levels fall, which is indeed what happens, albeit to a very limited
extent.
Q: Taking everything into account, how satisfied are you with your credit card(s)? (Base: all
credit card holders)
Satisfaction
Extremely satisfied
Very satisfied
Fairly satisfied
Fairly dissatisfied
Very dissatisfied
Don’t know
%
6
39
34
13
5
2
1
1
79
13
8
Source: GfK research for The UK Cards Association, December 2009
7
GfK’s Financial Research Survey (FRS™) is the definitive consumer-based monitor of the personal
financial services sector. The FRS covers consumer behaviour in almost all personal finance sectors
including: current accounts; payment cards; loans; general insurance; savings and investments;
mortgages; life insurance; pensions; and health insurance. FRS is the largest and longest running
survey of its kind, interviewing 60,000 GB consumers in the home or online every year. The
questionnaire covers product holding; acquisition and usage behaviour; the value of holdings; and a
wealth of demographic and attitudinal data. FRS is bought by almost all major financial organisations in
the UK.
8
For details on methodology see Appendix A
Page 35 of 230
Overall, the FRS shows that 95% of card holders are not expressing any level
of dissatisfaction, compared to 92% in our specific survey.
Page 36 of 230
New Accounts
According to credit card lenders’ returns to The UK Cards Association9 during the
period January to October 2009 some 12.5 million new credit card applications were
processed (compared to 14.5 million in the same period in 2008). Of these new
applications 48% were declined, compared to 42% in 2008
In terms of the risk quality of new accounts credit card lenders’ have become more
risk averse during 2009, with the profile of new accounts skewing towards lower risk
applicants. In 2009 over three quarters of new accounts were in the lowest risk band
compared to two thirds in 2008.
Risk Quality of New Accounts 2008 & 2009
90
78.4
80
66.4
70
Distribution, %
60
50
40
33.0
30
21.4
20
10
0.4
0.1
0.3
0.1
0
Highest risk
High risk
Medium Risk
2008
Low risk
2009
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset
9
Data provided by 13 issuers accounting for c96% of the market
Page 37 of 230
Credit Card Borrowing
The amount of credit card borrowing showed steady growth until 2005 since when
outstandings have effectively stalled and, more recently, started to show a gentle
decline.
Total Credit Card Outstandings 2000-2009 (£billion)10
80
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: British Bankers’ Association (includes Visa and MasterCard only)
NB: paragraph 1.3 of the consultation notes that the level of debt on credit cards has
been falling since 2005 as consumers have become increasingly cautious about
credit cards. However, it points to an increase in credit card debt in July 2009 as
possible evidence that consumer 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. It is simply not robust to attempt to draw such a conclusion on a single
month’s data within such a volatile time series.
Credit card borrowing as a proportion of all lending to individuals has steadily fallen
from 5.1% in mid 2004 to 3.8% in November 2009. This is largely due to the rise in
mortgage lending than to any credit card related factor. In particular, housing equity
withdrawal may well have had a downward influence on credit card demand up until
Q1 2008.
More significantly, credit card borrowing as a proportion of all unsecured lending has
fallen from 27.3% in mid 2004 to 24.1% in November 2009.
Repayment levels as a proportion of credit card expenditure have increased from
typically below 90% pre-2002 to around 97% today. Although repayment levels have
edged down slightly in recent times they are still at historically high levels.
10
Figures are for MasterCard and Visa, including business cards, but do not include American Express
Page 38 of 230
Credit Card Transactions
Since the middle of 2004 spending on credit cards (volumes and values) has
plateaued at around £10.25 billion per month accounted for by some 160 million
transactions per month.
This has been in direct contrast to transactions on debit cards, which have continued
to show strong growth over the same period. Consumers have therefore not
developed an aversion to plastic cards as a payment method in general, but have
become more cautious with regard to credit cards in particular (although merchant
encouragement of alternative payment methods will also be an influence here).
This will have translated into a stagnation of interchange income for card lenders
and, in all probability, a decline in income in real terms assuming interchange levels
have continued to fall during this period.
Card Transaction Volumes 1998-2008 (£ billions)
Purchases and Cash Acquisition in the UK and overseas
9
8
Credit
7
Debit
6
5
4
3
2
1
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: UK Plastic Cards 2009; credit is Visa & MasterCard only
Page 39 of 230
The same pattern can be seen when looking at transaction values.
Card Transaction Values 1998-2008 (£ billions)
Purchases and Cash Acquisition in the UK and overseas
450
400
Credit
Debit
350
300
250
200
150
100
50
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: UK Plastic Cards 2009; credit is Visa & MasterCard only
Page 40 of 230
Balance Transfers
Balance transfer volumes have similarly shown a steady decline since reaching a
peak around 2005 and are now back to levels lower than were seen in 2002.
Monthly Balance Transfer Volumes 2002-2009 (thousands)
1200
1000
800
600
400
200
0
2002
2003
2004
2005
2006
2007
2008
2009
Source: British Bankers’ Association statistics
In part, the decline in balance transfer volumes reflects the introduction of balance
transfers fees around 2005. Industry believes that the more far-reaching of the BIS
proposals, particularly changes to the allocation of payments, will exacerbate this
long term decline due to the likely restriction on or removal of promotional offers.
The implication of this is less switching by customers and a reduction in competition
in the market.
Page 41 of 230
Cash Advances
Cash advances on credit cards have been in long term decline since reaching a peak
in 2005 and are now back at levels last seen in 1999. Revenue from fees associated
with cash advances will have fallen accordingly (assuming interest rates on cash
advances have remained stable).
Cash Advances on Credit Cards 1998-2008 (£ millions)
9,000
8,000
7,000
5,000
4,000
Value (£m)
6,000
3,000
2,000
1,000
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Year
Source: UK Payment Statistics 2009
Page 42 of 230
The Cost of Fraud and of Fraud Prevention
Meanwhile, despite continuous investment in fraud prevention measures including
major project such as chip & PIN, the industry has also seen steady fraud losses on
credit cards, peaking at around £250 million in 2008, representing a true cost to the
industry.
Gross Fraud Losses on UK Issued Credit Cards 1998-2008 (£ millions)11
300
200
150
100
Fraud losses (£m)
250
50
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Every now and again the industry will have to take major steps to keep ahead of
fraudsters, the most obvious example being the chip & PIN programme which ran
between 2004 and 2006. The cost of implementing the chip & PIN programme alone
was estimated at £1.1 billion (2000 prices) with about two thirds of the cost accruing
to the card industry (covering both credit and debit cards). Without that investment
the industry faced an uncertain future should fraud have spiralled out of control to an
extent that consumers, retailers and banks lost confidence in card payments.
Chip & PIN was but a highlight in the constant work that the industry has to
undertake to tackle payment card fraud which is ongoing and takes many forms,
such as:

online security measures

neural networks

address verification services

hot card files

the industry funded Dedicated Cheque & Plastic Crime Unit (DCPCU)

the Fraud Intelligence Sharing System (FISS) etc
11
Whilst figures for 2009 have not been finalised, the early signs are that fraud figures have shown an
encouraging reduction during 2009
Page 43 of 230
The Cost of Providing a Service
The cost of providing and maintaining a card payment service of high security and
integrity is not insignificant.
Credit card lenders have to cover significant costs, some of which are not associated
with other forms of lending, including but not limited to:

the cost of funding

the cost of authorising and processing point-of-sale payments

the issuing of monthly statements

the issuing (and reissuing) of plastic cards

collecting and processing (variable) payments by different methods

handling customer queries

the cost of fraud and fraud prevention

the cost of providing added value benefits to cardholders (where offered)

the cost of legal compliance including the processing of Section 75 claims

the cost of card scheme membership

compliance with any changes to card scheme rules and consequent IT update
requirements
Significant one-off costs can also accrue in the name of innovation (including those
required to prevent fraud), such as:

contactless card payments

mobile payments

chip & PIN (as discussed above)
Other credit products such as loans and mortgages are usually much simpler, where
the cost of funding comprises a greater proportion of the cost of providing the credit.
Page 44 of 230
Data on Multiple Card Holding
Data on multiple card holding is set out in the following table. This shows that, while
most people have more than one credit card, two thirds either have just one or two
cards.
The table does not, of course, enable conclusions to be drawn about the extent of
credit available across the cards customers are holding; any other credit facilities
they may have; and the extent to which they are being used.
For example, in terms of credit available someone with five cards, each with a credit
limit of £500, is in no different a position to an individual who has one card with a
£2,500 credit limit. They may also have other borrowing via a mortgage, personal
loans, store cards, home credit etc to take into account.
In addition, there can often be a difference between the number of cards an
individual holds and how many they regard themselves as holding/using. Accounts
that they have stopped using and are dormant may be disregarded by an individual
when considering their financial holdings.
Nonetheless, the following profile of multiple credit card holding is taken from the UK
Consumer Payments Survey. It shows that the average number of credit cards per
holder is 2.3 with higher incidences of multiple credit card holding among males, the
higher socio-economic groups and higher income groups, as might be expected.
Page 45 of 230
Multiple Credit Card Holding 2008
GB Adult credit/ charge card holding
population (millions)
Row percentages
One
Two
Three
Four
Five+
1
2
3
4
5.5
29.54
37.8%
29.8%
15.1%
8.6%
8.7%
2.33
Male
15.04
35%
27%
17%
10%
11%
2.51
Female
14.49
41%
32%
14%
8%
6%
2.13
16-24
0.92
51%
31%
9%
4%
5%
1.87
25-34
5.16
44%
25%
15%
9%
7%
2.18
35-44
6.33
37%
32%
15%
7%
9%
2.35
45-54
5.58
35%
29%
15%
10%
10%
2.43
55-64
5.33
34%
26%
18%
12%
10%
2.51
65+
6.22
38%
35%
13%
6%
8%
2.23
AB
10.34
30%
30%
18%
11%
12%
2.60
C1
9.06
38%
29%
16%
9%
8%
2.32
C2
5.68
41%
31%
12%
7%
9%
2.24
D
3.34
50%
28%
12%
7%
3%
1.89
E
1.12
59%
31%
9%
1%
0%
1.53
Employed Full/ Part Time
18.62
36%
29%
15%
10%
10%
2.42
Self Employed
3.03
37%
26%
13%
9%
15%
2.59
Up to £5000
0.46
72%
10%
13%
0%
5%
1.61
£5,000 - £9,999
2.21
45%
31%
15%
6%
4%
1.99
£10,000 - £14,999
2.67
40%
34%
12%
7%
5%
2.11
£15,000 - £19,999
2.69
42%
30%
13%
11%
4%
2.11
£20,000 - £24,999
2.95
50%
25%
15%
3%
7%
2.00
£25,000 - £29,999
2.58
38%
30%
11%
11%
10%
2.41
£30,000 - £39,999
4.26
25%
35%
21%
8%
10%
2.59
£40,000 - £49,999
2.78
31%
25%
19%
12%
12%
2.65
£50,000 or More
2.39
33%
28%
19%
9%
12%
2.56
Total
Total
Average
cards per
holder
Sex
Age
Social Class
Working Status
Household Income
NB: the base figure of 29.54 million credit & charge card holders compares to a figure quoted
elsewhere in this document of 30.2 million credit & charge card holders. 29.54 million is a Great Britain
figure whereas 30.2 million is a United Kingdom figure.
Source: UK Payments Consumer Payments Survey 2009
Page 46 of 230
Data On Company Card Holding
Data on the use of personal credit cards for company business is unobtainable.
We can provide the following information on the known prevalence of business cards
and their usage, broken down by credit and charge card.
Business Cards in Issue 1998-2008 (thousands)
Credit
Charge
Total
1998
1999
2000
2001
2002
27
45
32
24
65
788
953
1124
1311
1385
815
998
1156
1335
1450
2003
2004
2005
2006
121
131
126
306
1355
1582
1637
1649
1476
1713
1763
1955
2007
2008
356
481
1643
1625
1999
2106
As can be seen, by 2008 the number of business credit cards in issue accounts for
around 23% of the total business cards in issue.
Page 47 of 230
The value of transactions on business cards – both credit and charge – has shown
steady growth over the last decade.
Value of Transactions on Business Cards 1998-2008 (£ millions)
Credit
Charge
Total
of which
Cash
Purchases
Overseas
1998
97
3761
3858
259
3076
523
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
195
83
57
251
494
649
684
1082
1840
2603
4779
6087
7264
7778
7828
9729
10752
11750
12401
12865
4974
6170
7321
8029
8322
10378
11436
12832
14241
15468
351
367
450
489
466
482
494
530
532
515
4024
4868
5880
6545
6738
8642
9657
10736
11476
12316
598
935
992
995
1118
1255
1284
1565
2233
2637
Page 48 of 230
The Five Issues
The following five issues are now considered in more detail:



Minimum Payments

Re-pricing of Debt

Simplicity and Transparency
Whilst the following chapters consider each of the issues in isolation there are
likely to be compounding effects through combinations of policy proposals
and their interactions on top of the other recent and/or expected legislative and
regulatory interventions.
Page 49 of 230
3.
Page 50 of 230
Introduction
Most UK credit card lenders allocate payments to the lowest interest-bearing portion
of any outstanding balance through to the highest (with a few exceptions). The
breakdown of individual types of balance will be dependant on the type of transaction
undertaken by the customer. A cardholder can have more than one type of balance
if, for example, they transferred £1,000 from another card, withdrew £100 in cash and
made £500 in purchases during a month, but only paid £75 at the end of the month,
which would go towards the £1,000 balance transfer first. In effect the current
practice of most credit card lenders requires cardholders taking advantage of
promotional offers to pay back first what they have received for free, or at a
discounted or lower rate.
As such, the allocation of payments does not have any impact on the 72% of card
holders who either pay in full each month or who only make one type of transaction
(i.e. one of point-of-sale purchases, balance transfers, or cash advances).
The accounts that are impacted by the allocation of payments are those where
different rates are being applied to different parts of the balance, typically accounts
where:

There is a balance transfer at a promotional rate in operation (perhaps related to
a consolidation of their debt by the customer); or

Where the cardholder has taken cash advances against their credit card and is
revolving their balance
For many credit card lenders (often depending on the business model) balance
transfers and promotional offers are a competitive tool in order to:

Attract new customers to a lender from other card lenders

Reactivate dormant cardholders (through special offers to existing cardholders)
The allocation of payments plays a key role in enabling more generous zero percent
balance transfer deals and therefore facilitates switching and competition. As such
there is a clear consumer benefit from the way in which payments are allocated in
enabling consumers to obtain low cost credit through attractive offers on balance
transfers. Any change to current practices would inevitably impact the nature of the
deals offered by credit card lenders to their customers and produce losers from the
change as well as winners.
Evidence from the US suggests that provisions in the US CARD Act on the allocation
of payments have reduced the attractiveness of promotional deals being offered by
card lenders in terms of reduced promotional periods and less attractive promotional
interest rates.
About a quarter of accounts are impacted by allocation of payments though the
financial impact of change on industry could be significant:
Page 51 of 230

In the period July 2007 to December 2008 around 1.3% of accounts each month
had a balance transfer (or 2% of active accounts). The percentage of revolving
accounts with a balance transfer was approximately 1.75% per month. However,
these number have been in decline since December 2008 and by July 2009 had
fallen closer to 1% of all accounts, 1.5% of all active accounts, or 1.5% of all
revolving accounts per month

At the end of this period the percentage of balance transfer accounts that had no
spend in the three months following a balance transfer, and therefore taking full
advantage of the offer, was around 60% (up from around 55% at the beginning of
the period). For highly utilised accounts this figure was around 22%

In the period July 2007 to October 2008 around 3-4% of all accounts featured
cash advances (or 5-6% of all active accounts). The percentage of revolving
accounts with a cash advance was around 8-10%. However, these numbers
have been in decline since then, and by July 2009 had fallen towards 2.5% of all
accounts, 4% of all active accounts, or 7% of all revolving accounts

More than 70% of accounts and 55% of balances would be unaffected by any
changes in payment allocation. Also, approximately 35% of balances impacted
are among customers with 2+ non promotional APR balances i.e. their balance
comprises of at least two ‘buckets’ e.g. typically purchases and cash, at standard
(i.e. non-promotional) rates
According to data provided by 13 credit card lenders accounting for approximately
96% of the market to The UK Cards Association, there were around 7,000 complaints
(from a total of 30.2 million cardholders) regarding the allocation of payments
between January and October 2009, accounting for 0.82% of the total complaints in
that period.
Page 52 of 230
Current Practice
The credit card industry has already recognised the importance of providing
information on the allocation of payments and makes it readily available, with
allocation described as concisely as possible within credit card lenders’ Summary
Boxes, both the pre-contract version and the credit card statement version. The
credit card statement version ensures that cardholders are reminded of how their
payment is allocated every month. However, it may be difficult for some consumers
to translate this explanation into a tangible financial impact upon themselves
individually.
Whilst the other allocation methods proposed by BIS in the consultation document
are immediately less expensive for the consumer, there is nothing intrinsically
unreasonable in the current deals offered by credit card lenders to potential
customers – provided that they are transparent and understood by the customer and
that the customer derives additional benefit as a result.
The key questions are therefore:

Do consumers understand the trade off i.e. the deal that they are entering into
with their card issuer?; and

What are the trade-offs gained by consumers in respect of different allocation
methodologies?
For example, if a balance is transferred from Lender A to Lender B the cardholder
would only pay interest on new purchases rather than the entire balance had they
stayed with Lender A. It is then a question of whether it is ‘right’ that new purchases
on Lender B’s card should be paid off first or whether the commercial terms on which
they have offered the card should be respected.
Page 53 of 230
Consumer Research
In terms of customers’ awareness and understanding of the fact that different parts of
a credit card balance can attract different interest rates and that payments can be
allocated to pay off the highest interest bearing part of the balance first, our
consumer research shows the following:

When told that most credit card companies charge a different rate of interest on
different borrowing, for example there might be a low rate of interest on a balance
transfers, another rate of interest on spending and another for cash advances,
66% of credit card holders said that they knew this already with another 22%
saying that they did not know this but that it did not surprise them, amounting to
88% in total. 12% said that they did not know this and that it surprised them.
This suggests a higher level of actual awareness or intuitive understanding that
allocation of payments is a common feature of credit cards than other surveys
have shown. This awareness may, of course, have been heightened by the very
fact of this consultation and the publicity that it has received

When told that, if they did not pay off their balance in full, most credit card
providers will allocate the payment they make to the part of the balance with the
lowest interest first, 59% said that they knew this already and a further 25% that
they did not know this but that it did not surprise them, amounting to 84% in total.
16% said that they did not know this and that it surprised them.

BIS is concerned that knowledge of payment allocation is particularly low for
young consumers. The evidence does not support this, with our research
showing that awareness is consistent across the age groups, with 55% of 18-24
year olds being aware, in line with the figure for 25-34 year olds and 35-44 year
olds

Among those who had taken advantage of a promotional offer the level of
awareness increases to 71% (compared to 59%) with a further 16% who did not
know this but are not surprised, indicating a higher degree of awareness among
those that need to know. The equivalent awareness figure for those that pay off
their balance in full each month (and therefore to whom allocation of payments is
not relevant) is lower at 53%, as would be expected
This compares favourably to figures quoted by BIS in paragraph 2.9 of the
consultation document which quote moneysupermarket.com research that “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 first”. This data is taken from a
moneysupermarket.com press release dated 26 October 200912
12
www.moneysupermarket.com/c/press-releases/credit-card-users-dont-understand-the-order -thattheir-debt-is-paid-off/0006971/#
Page 54 of 230
The difference in results demonstrates the importance that the wording of a question
on such a topic can make and who is being asked – full payers would not necessarily
know the allocation of payments as it is not relevant to them. The precise wording in
the moneysupermarket.com research is not published. On the assumption that it
was along the lines of “Do you know how payment allocation works?” we would
expect such a question to deliver lower results than our own question which was
worded “If you don’t pay off your balance in full most credit card providers will
allocate the payment you make to the part of your balance with the lowest interest
rate first. Would you say you knew this already; did not know this and it surprises
you; or did not know this and it doesn’t surprise you?”
However, our qualitative research suggested that, regardless of the way in which
allocation of payments is explained, consumers see current practice of most credit
card lenders in respect of allocation of payments as counter-intuitive. When
questioned in depth interviews and focus groups consumers tend to see their debt as
a single entity rather than compartmentalised and therefore feel that when they pay
money this should apply equally to the whole debt. They therefore feel that they will
only know about the rules on allocation of payments if they have been caught out by
them.
This finding is, however, in stark contract with both the findings of our quantitative
research and, more importantly, with the sophisticated behaviour of balance transfer
customers who use the allocation of payments to their full advantage.
Page 55 of 230
Existing Protections
The Summary Box
Since March 2004 transparency for consumers on the allocation of payments has
been achieved through the Summary Box. The relevant excerpt from the current
Summary Box Version 3.0 (February 2009) guideline, which customers will see when
they are considering which credit card to apply for, is shown below.
Allocation of
payments
Comments
Example

If you do not pay off your balance in full,
payments we receive will be applied in
the following order of lowest first to
highest (transactions may attract different
interest rates):

Succinct description of the order in
which payments will be allocated to
the account, in numbered or bullet
format. It is acceptable, in addition,
to refer the consumer to a more
detailed description in the full terms
and conditions by means of a
footnote.
The order can be presented with
the transaction attracting the lowest
interest rate first, or from highest to
lowest as long as this is specified.
Consumers may also be referred to
the terms and conditions
1. Lower rate, promotional or balance
transfer offers p.a.
2. Cash advances
3. Purchases
For further details, please refer to your
credit card terms and conditions.
- OR If you do not pay off your balance in full,
payments we receive are applied to the
lowest / highest interest bearing
transactions first. For further details,
please refer to your credit card terms and
conditions.
These guidelines provide suggested text that a credit card issuer could use and it is
up to individual issuers to decide how this is communicated to their prospective
customers.
Page 56 of 230
Statement Version of the Summary Box
Similarly the credit card statement version of the Summary Box has a requirement for
transparency around allocation of payments with the relevant excerpt from the
Cardholder Statement Version of the Summary Box shown below:
Allocation of
payments
Succinct description of the order in
which payments will
be allocated to the account. It is
acceptable to refer the
consumer to the more detailed
description in the full
terms and conditions by means of a
footnote.
If you do not pay off your balance in full
we will allocate your payments to
balances with a 0% APR before balances
with higher APRs.
-ORIf you do not pay off your balance in full
payments we receive are applied first
towards lower rate, promotional or
balance transfer offers before cash
advances or purchases.
-ORIf you do not pay off your balance in full
when you make a payment it will be used
to pay off any special offer, balance
transfer or promotional offers before any
cash withdrawals or standard rate
purchases.
Allocation of payments is also covered as a specific item in the version of the
Summary Box that is required when issuing credit card cheques.
Page 57 of 230
The US CARD Act
The US CARD Act addresses the issue of payment allocation head on. The specific
provision is as follows:
“Upon receipt of a payment from a cardholder, the card issuer should apply amounts in excess of the
minimum payment amount first to the card balance bearing the highest rate of interest, and then to each
successive balance bearing the next highest rate of interest, until the payment is exhausted”
We understand that this provision is a compromise by legislators to deliver what they
believe to be a consumer benefit whilst also preserving an element of competition
and offering credit card lenders protection (through the effective exemption relating to
minimum payments) against the risk of being left with long-term borrowing at
un-commercial rates.
Page 58 of 230
Balance Transfer Users
Balance transfer activity has reduced in recent times with the volume of transactions
having fallen back to levels last seen in 2002.
Accounts with balance transfers are skewed heavily towards lower-risk customers
where customers are taking advantage of the cheap borrowing offered by credit card
lenders.
Distribution of Promotional Balances by Risk Band, Q2 2009
30
28.1
25
21.8
Percentage
20
15.9
15
12.8
10.3
10
6.3
5
2.4
1.5
0.9
Hi - 1
2
0
3
4
5
6
7
8
Low - 9
Risk band
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset.
Payments made towards the outstanding balances amongst the non-promotional
holding low-risk accounts are significantly higher than those with promotional
balances, demonstrating that promotional accounts change behaviour to maximise
the benefit of their low cost borrowing and reducing the effective average rate across
their total balance.
Almost half of new accounts opened on the back of a balance transfer incur minimal
interest, taking maximum advantage of the cheap borrowing. Therefore, these
customers will not be immediately impacted by any change to the payment allocation
methodology, but would be affected in the longer term if the promotional rates that
they are exploiting become less attractive or were withdrawn.
With regard to whether balance transfer customers taking full advantage of the
allocation of payments to their financial gain are being cross-subsidised by other
customers, Oxera conclude that:
“Data shows that surfer balances account for a small share of overall balances. In
the second quarter of 2007, balance transfers for surfers amounted to an average
of £85.1m per month, or less than 0.2% of total revolving balances of
£48.0 billion. The interest lost from surfers not paying a standard transactions
APR on their balances amounts to approximately £1.1 million per month and is
insignificant, implying that any distributional issues would also be small.”
Page 59 of 230
“The cross-subsidy would be further reduced if the balance transfer fees which
are paid by any user of promotional balances (including surfers) were taken into
account.”
“It is not surprising that the cross-subsidy is limited. There are a number of
market constraints that limit the extent of cross-subsidisation.”
“First, the industry has an interest in minimising surfing behaviour as much as
possible, since lenders do not want a group of consumers which is loss-making.
To discourage surfers, lenders have introduced fees for balance transfers. These
fees, which are typically 2–3% of the promotional balance, cover part of the cost
of servicing the promotional balance and therefore provide a deterrent to surfers.”
“Second, there are alternative options available in the market. Consumers who
value the benefit of reverse allocation can choose cards with different allocation
methods. Nationwide, for example, has a standard policy of using payments to
pay down the highest-interest balance first.”
Page 60 of 230
Cash Users
The largest proportion of accounts affected by the allocation of payments are those
with part cash balances. Cash advances on credit cards have been in long term
decline since reaching a peak in 2005 and are now back at levels last seen in 1999.
Cash advances are a core facility available through credit cards, providing
convenient and immediate access to cash and a contingency for many consumers in
the event of any urgent requirement. Around 12% of cash advances by volume and
13% by value are made overseas.
Cash balances are more prevalent amongst higher risk accounts.
Cash Balance by Risk Band Q2 2009
Risk band
Percent
High
Medium
Low
21
11
6
Overall
12
Customers with a cash balance are highly likely to also have a non-cash balance,
with these non-cash balances being for higher amounts.
The presence of a cash balance for an account increases the likelihood of charge-off
compared to similar customer accounts, which is one of the reasons why cash is
typically priced higher than for point-of-sale transactions (i.e. because users are
higher risk). This pricing for risk stands not to be realised if the payment hierarchy is
reversed, meaning that cash balance pricing may need to rise higher than current
levels in order to compensate.
Page 61 of 230
Financial Impact on Consumers
Changes to the way in which payments are allocated will create winners and losers
among consumers. It is difficult at this time to quantify the precise impact on different
consumer segments which will depend on the particular payment allocation model
that is envisaged.
Generally speaking, change would mean that those who are currently benefiting from
the way in which payments are allocated, perhaps by virtue of their better
understanding of how payment allocation works, will lose out to those that do not
have an understanding. In effect the more sophisticated group will be penalised for
either understanding more or having made the effort to understand more.
The reason that those benefiting from allocation of payments will lose out is through
the reduction in the attractiveness of balance transfer deals that we believe will occur
in terms of the promotional rate applied (currently many 0% offers which we believe
will be priced higher in future) and the duration of promotional periods, which we
believe will shorten.
This is borne out by Oxera who conclude that:
“A reversal of payment allocation would likely cause issuers to respond to
compensate for the loss in revenue. There could be both an output effect and a
price effect. On the output side, users of balance transfer deals could be most
directly affected, as issuers may reduce the availability of balance transfer deals
or the duration of those offers remaining. In the US, the recent CARD Act has
introduced partial reversal of payment allocation; anecdotal evidence is that
issuers are reducing both the duration and availability of BT offers.”
“On the pricing side, issuers may increase balance transfer fees or postpromotional APR rates. It is also possible that 0% deals would be replaced by
slightly higher rates. In the US, anecdotal evidence suggests that 0% deals are
no longer available to existing customers and fewer are available on new
acquisitions and some issuers have been raising BT fees. Each of these
changes could make the balance transfer product less transparent and less
attractive to consumers.”
“Another possible reaction by issuers would be to increase the transactions APR
associated with promotional accounts. Under current allocation practices, the
effective interest earned on balances in accounts with one promotional and one
non-promotional balance is 1.58% per month. Under reverse allocation, the
effective interest would fall by 25 basis points to 1.33%. To maintain the same
revenue overall, issuers would need to raise the transactions APR for promotional
accounts by 2.75 percentage points per year to 17.56%.”
The material annual cost to a customer of the allocation of payments is, on average,
£3.95 and £1.69 relative to the ‘highest first’ and ‘pro-rata’ alternatives. High-risk
customers will save, on average, £9.50 a year, while most customers (those whose
balance comprises only one type of transaction) will be unaffected.
Coupled with a restriction on re-pricing of debt, the impact could be even more
dramatic in that it would further discourage credit card lenders from offering low
promotional rates. Otherwise lenders could end up offering indefinite low-cost loans
via credit cards at un-commercial rates.
Page 62 of 230
Although the individual benefits to consumers are limited the aggregate cost to
industry is high, meaning that the financial impact on the industry of a change to
allocation of payments is potentially considerable:

In the reversal scenario i.e. allocating payment high-to-low, the cost to industry in
the first two years would be £533 million. This cost will increase in year three and
beyond, though at some point in the future the annualised cost will plateau.
However, given the limited time frame of the Argus database developed for this
project it has not been possible to model beyond a two-year horizon and
determine when the plateau occurs. The financial impact on industry reduces
among the various alternative payment methodologies that might be considered

However, across all of the payment methodologies modelled, the impact is
reduced if the minimum repayment is exempt from the regulation (as is provided
for in the US CARD Act). This provision allows for the minimum payment to be
allocated against the lowest tier APR. Nevertheless, change would still result in a
significant loss of income to lenders
Summary of Financial Impact on Industry
Allocation of payment methodology
£m - 2007-09
(i.e. first two years) #
Highest APR first
533
Highest APR first & US *
248
Pro-rated payments **
241
Pro-rated payments & US
114
Equal payments ***
311
Equal payments & US
152
Cash first then low
394
Cash first then low & US
184
* & US = including US CARD Act provision that allows minimum payment to be applied to the lowest tier first
** Prorated = applied based on the relative size of each tier balance
*** Equal payment = split up equally among all tiers
# i.e. cumulative interest yield lost during years 1&2, August 2007 to July 2009 impact
NB: due to the historical limitations of the Argus database and the absence of ‘vintage’ data it has not been able to
model a ‘first-in first-out’ scenario.
Page 63 of 230

The reduction in revenues is largely driven by the prevalence of cash balances in
the industry and is not wholly driven by promotional balances, which is what we
might have expected. Approximately 60% of the impact is due to cash balances
In the face of such reductions in revenue, credit card lenders would be faced with a
number of choices (which are not necessarily mutually exclusive), including:

Absorbing some, or all, of the reduction in revenue;

Recouping the revenue from cardholders by other means, such as higher rates of
interest, annual fees, or new types of fees and charges; or

The offering of less attractive promotional offers through shorter promotional
periods at less generous interest rates
We have already seen some evidence of this in the US following the US CARD Act,
where:

The percentage of balance transfers that involve a fee has increased by 6.6% in
the year to June 2009 to around 87%. The fee as a percentage of the transaction
amount increased by 49% in the year to June 2009 and now stands at around
2.7%

The proportion of new accounts with a balance transfer that involved a fee has
risen by 23.1% in the year to June 2009. The amount of the fee has increased by
22.9% over the same period to 2.8%
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Consequences for the Cash Advance Facility
Furthermore, the evidence shows that customers with a cash usage within each of
the risk bands are more likely to go into arrears in the following year than those
without such a cash usage. If cash were higher up the payment hierarchy, and were
therefore paid off first, then pricing methodologies to compensate for this risk (i.e. to
cover the incremental losses) would, in effect, not be realised.
Lenders would then be faced with a decision as to whether to:

Increase the price of cash advances

Increase the cost of purchases; or

To withdraw the cash advance facility altogether
As already highlighted, these conclusions are borne out by Oxera.
Page 65 of 230
Period of Repayment
Paragraph 2.10 of the consultation paper suggests that “it may take decades to pay
off a relatively small cash advance at a high cost”, though no evidence, anecdotal or
otherwise, is presented to support this assertion. This is closely associated with
assertions made about minimum repayments and consumers taking 25 years to pay
off a credit card balance, which is discussed in the chapter on minimum repayments.
Cash Users & Vulnerability
Paragraph 2.11 of the consultation paper discusses cash users and asserts that it is
likely to include a significant number of vulnerable customers, although no evidence
is presented to support this assertion. Whilst there may be an element of truth in the
statement, the scope and scale of any problem is not assessed.
The perceived vulnerability of those who use cash excessively and the industry’s
ability to identify and manage such customers was one of the driving forces behind
the Behavioural Data Sharing project mentioned in Appendix 1 which has resulted in
lenders sharing more granular data on customers’ use of cash advance facilities.
The full impact of this innovation has yet to be fully realised but it represents a
significant advance in risk management. Although this data is now widely shared it is
common for the influence of new data such as this to take some time to come
through as lenders learn how to interpret and use the new information.
Human Error
Paragraph 2.12 of the consultation paper sets out a scenario of a cardholder with a
revolving balance mistakenly using their credit card instead of their debit card at a
cash machine and thereby incurring additional cost as a result of the allocation of
payments. This implies a view that legislation is required to address all eventualities
in every walk of life where human error might occur. This view of Government is not
shared by the credit card industry.
The Case for Intervention
Paragraph 2.14 makes the case for Government intervention to alter the allocation of
payments in the consumer’s favour if they are perceived as being disadvantaged by
confusing complexity. There is a clear trade-off here, argued later in this chapter,
that what disadvantages some consumers advantages others, hence a need to be
clear on the possible inadvertent consequences of intervention.
Page 66 of 230
Policy Options
Consideration of the BIS policy options needs to be set against the following
background information on consumer attitudes derived from our consumer research.
In general, instinctive positive reaction to changes suggested by Government are
significantly modified and tempered once the potential implications for cardholders
are outlined:

When told that the Government is thinking of making credit card providers
allocate payment to the part of the balance with the highest interest rate first, 44%
thought that this was a good idea. 51% did not think that it was a good idea

Among those who thought it was a good idea, when told that this might mean
credit cards no longer offered promotional or lower interest rates, 31% changed
their mind and no longer thought it was a good idea. 65% still thought that it was
a good idea. Overall, this meant that 29% thought that it remained a good idea

Among those who thought it was a good idea, when told that this might mean
credit cards came with an annual fee in future, 57% changed their mind and no
longer thought it was a good idea. 40% still thought that it was a good idea.
Overall, this meant that 18% thought that it remained good idea
Page 67 of 230
Improve Information Transparency
Given the current information provided to consumers in the Summary Box in precontract materials and on credit card statements, the main way in which transparency
within the Summary Box approach could be improved would be to provide a ‘pounds
and pence’ illustration. This would rely on developing a set of assumptions similar to
those used to calculate an APR.
Changes to the Method of Allocation
The options for revision to the allocation hierarchy are slightly broader than
discussed in the BIS consultation document and, in fact, might include:
i.
ii.
iii.
iv.
v.
First in, first out
Proportionally to debts attracting different interest rates
Cash first
Highest interest rate to lowest for anything above the minimum payment, with
the minimum payment allocated at the discretion of the issuer13
Highest interest rate to lowest
i. First In, First Out
If transparency, understanding and intuitiveness are concerns, this method may at
first appear to be among the easiest methodologies for consumers to understand.
However, though conceptually simple to understand, payment allocation towards the
most recent transaction first and then to the next most recent, is actually highly
complex to model. Indeed, data processors that operate for credit card lenders have
stated that they can not support the requirement to store individual transactions as
distinct balances and apportion payments to the most recent balances as would be
required for this methodology without expensive, fundamental system changes.
Furthermore, the goal of providing clear and transparent processes for the customer
is lost, as explaining how interest is charged to an account across multiple
transactions, on different dates, where different APRs might be present, would be
very difficult to understand and communicate.
ii. Proportionally To Debts Attracting Different Interest Rates
Otherwise known as ‘pro-rata’ allocation i.e. to each part of an outstanding balance
based upon the proportion of the balance that it accounts for, would mean an
individual paying off part of their most expensive debt and part of their cheapest debt
(and part of anything in between) simultaneously, when rationally one would choose
to pay off the most expensive debt first.
13
This is the same method as specified in the US CARD Act
Page 68 of 230
iii. Cash First
For those consumers who take cash advances, their balances would be paid-off
more quickly, assuming that cash advances incur the highest interest rates (which is
not always the case, with some lenders offering promotional rates on cash). Again,
some consumers would repay less over the term of the agreement, for a shorter
period of time. However, in terms of indirect costs the Oxera analysis suggests that,
in the medium term, some groups of consumers will pay more.
Lenders might move to higher interest rates on other types of balance, or reduce
their offers of very low introductory rates to compensate, but in this case the impact
may be less severe compared to the scenario of allocating payments proportionally.
Alternatively, in this scenario lenders might be forced to increase the cost of cash
advances so that pricing reflected the risk associated with such transactions,
increase the cost of purchases; or withdraw cash advance facilities on their cards,
whether domestically or globally. The reduction in the utility of cards to consumers
that this would represent is difficult to quantify without fully understanding why cash
advance customers obtain cash this way, assuming that they understand that the
costs associated with cash on credit cards are generally higher (although this did not
form part of our research)
iv. Highest interest rate to lowest for anything above the minimum payment, with the
minimum payment allocated at the discretion of the issuer
If the payments were allocated in this way, assuming no other changes, consumers
would repay less over the term of the agreement, for a shorter period of time.
However, in terms of indirect costs, the Oxera analysis suggests that, in the medium
term, there would almost inevitably be a reduction in the number and duration of
promotional offers available from lenders, and those consumers who take advantage
of such offers will pay more.
The exemption for the minimum payment i.e. the contractual amount the customer is
required to pay, has the effect of preserving an element of competition and offering
credit card lenders protection against the risk of being left with long-term borrowing at
non-commercial rates whilst also meaning that anything the customer chooses to pay
in excess of the minimum will be allocated in their favour to the highest cost debt.
The provision also enables those lenders, whose business model allows, to allocate
a payment in its entirety to the highest interest rate first to do so and may actually
result in this element of competition becoming more apparent to consumers as
lenders seek to differentiate themselves on this feature.
v. Highest Interest Rate to Lowest
If the payments were allocated to the highest interest debt first, assuming no other
changes, consumers would repay less over the term of the agreement, for a shorter
period of time. However, in terms of indirect costs, the Oxera analysis suggests that,
in the medium term, there would almost inevitably be a greater reduction in the
number and duration of promotional offers available from lenders than in the scenario
above, and those consumers who take advantage of such offers will pay more.
Page 69 of 230
Conclusions
The consultation document sets out a number of options, which are set out below:
1. Do nothing beyond current legislative and regulatory activity
2. Improve information transparency
3. Allocate repayments proportionately to debts attracting different interest rates
4. Allocate repayments to the most expensive debt first
5. Allow consumers to pay off cash advances first
The view amongst many members of The UK Cards Association has been that the
allocation of payments is all about communicating with the customer to clearly
explain the terms of the “deal” between the two parties, e.g. that the customer enjoys
a period of interest free credit, or immediate access to cash when they need it, and
that this requires credit card lenders to allocate payments in a particular manner.
The rationale is that, if customers understand this scenario, they can then make an
informed choice around their particular use of a credit card facility. As such, it has
been suggested that there are further opportunities for transparency improvements,
particularly in terms of taking additional steps to strive to ensure that informative
messages are better targeted at those customers who actually plan to transfer
balances, or to use the cash facility.
This option of further increasing transparency is strongly supported by the
quantitative research carried out for The UK Cards Association. It would mean the
continuation of “allocation of payments” as a potential tool for competition within the
cards industry. And it would mean the current wide range of different “deals” in terms
of balance transfers and cash advances would remain available to consumers.
However, we are also mindful of the fact that our own qualitative research, with
consumers who are not necessarily currently enjoying the benefit of offers on
balance transfers or cash advances, indicates a belief among consumers that, whilst
understanding the commercial logic behind current practice, they would also wish to
see change.
If, therefore, the Government and other stakeholders are prepared to accept the
consequences for consumers discussed earlier in this chapter – namely a reduction
in competitiveness within the industry and less attractive deals to consumers on
balance transfers and cash advances – the industry would be prepared to move
towards a high-to-low payment allocation for anything above the minimum payment
with the minimum payment allocated at the discretion of the card issuer.
Page 70 of 230
The industry sees this as a highly significant commitment, which will lead to a
reduction in income in the region of around £250 million in the first two years.
Proposal Summary
The industry’s proposal for addressing Government’s concerns around the ‘The
Allocation of Payments’ is to move to a new model based upon a high-to-low
payment allocation for anything above the minimum payment with the minimum
payment being allocated at the discretion of the issuer.
Page 71 of 230
4.
Page 72 of 230
Introduction
Unsolicited credit limit increases (UCLIs) are the embodiment of the strategy used by
many credit card lenders often referred to as ‘low and grow’ and lie at the heart of the
operation of many modern credit card portfolios. They are a key component of
operating a successful, responsible and balanced credit limit management
programme on behalf of customers.
Lenders regard limit increases as a means of engaging customers and solidifying the
customer relationship, with many customers regarding a limit increase as a reward.
In fact, our consumer research found that 23% of customers regarded credit limit
increases positively (with a further 51% having a neutral view). We found no
evidence of serious customer concern about the basis of the current UCLI regime.
UCLIs also allow headroom to stimulate balance growth, attracting a customer’s
spending that might be made using another card, or other payment method, or for the
transfer of debt currently held elsewhere. As such, they are a means of maintaining
and possibly increasing the profitability of a lender’s better customers. But that is the
motivation of any business and the very embodiment of the intense competition that
characterises the credit card market.
UCLIs are a central feature of the way in which the use of credit cards has been
successfully extended to “high risk” groups who would not otherwise have access to
the industry and could need to turn to other sources of credit (including loan sharks
and the like). A “low and grow” strategy is the only one that enables credit card
lenders to responsibly start customers with no real credit history with a card and
gradually, as their record of payments grows, then to move to a higher credit limit.
The only way such low starts are viable longer-term is if they can be reassessed and
gradually raised where the customer is managing well. Otherwise the costs of very
small lending make such accounts unviable, thus depriving these consumers of
access to credit cards.
Changes to the UCLI regime would lead to a less competitive card industry in the UK.
For consumers, changes could well mean that some current customers become
frozen out of the credit card market (or become tied to their current provider because
they could no longer take out a new card with another provider). For all customers,
credit card companies would have, in effect, just one chance the set the “right” credit
limit which could not subsequently be altered by the credit card company to more
accurately reflect risk assessments based on customer behaviour.
Our research shows that customers taken through a ‘low and grow’ programme
experience lower default rates. The most careful assessment is carried out by credit
card lenders before granting a UCLI in order to minimise the risk to both the credit
card lender and also to the consumer.
Page 73 of 230
Consumer Research
Our consumer research shows that consumer awareness of their credit limit is high,
the main findings as follows:

78% of cardholders were able to recall the credit limit on their credit card. Of the
remainder, 11% didn’t know whilst 11% refused to answer
Consumers have either a high level of actual awareness or intuitive understanding
that the current practice around unsolicited credit limit increases and how they are
applied is a common feature of credit cards:

When asked if they knew that most credit card issuers might increase their credit
limit without the cardholder doing anything in terms of asking for or accepting the
change, 72% said that they knew this already and a further 17% that they did not
know this but that it did not surprise them (an aggregate total of 89%). 11% said
that they did not know this and that it surprised them
Within our qualitative research, whilst there was a view that the way in which UCLIs
are currently applied does not necessarily represent best practice, it was not
something that intrinsically breached what consumers might regard as a
‘reasonableness’ bar. Most customers had taken an increased limit – some had
used it and many appreciated the benefit – liking the reassurance of having further
resources just in case. Whilst some consumers saw UCLIs as a negative others
maintained that the responsibility for using or not using the facility rested with the
consumer.
Consumers’ main worries were over the increased exposure to fraud that UCLIs
create (despite the fact that they themselves will ordinarily not be accountable for any
fraud losses) and a concern that the ‘wrong’ people were being given too much credit
as a result. As such, views on what, if anything, needed to be done about UCLIs
varied, ranging from:

A need to protect vulnerable customers from their own impulses to amass debt

A need for consumers to exercise control over their limit

A need for clear communication / warning of a credit limit increase in advance in
a way that can be easily declined, along with information on the new minimum
payment that would be associated with the new limit (though the minimum
payment is determined by the balance, rather than the limit)
96% of the market to The UK Cards Association, there were around 400 complaints
(from a total of 30.2 million cardholders) regarding unsolicited credit limit increases
between January and October 2009, accounting for 0.05% of complaints during that
period. This compared to around 16,000 complaints regarding credit limit decreases,
meaning that credit limit decreases generate 38 times as many complaints as credit
limit increases.
Page 74 of 230
Basel II
Since January 2008 credit card lenders have had to comply with Basel II14.
Basel II is the second of the Basel Accords, which are recommendations on banking
laws and regulations issued by the Basel Committee on Banking Supervision. The
purpose of Basel II, which was initially published in June 2004, was to create an
international standard that banking regulators can use when creating regulations
about how much capital banks need to put aside to guard against the types of
financial and operational risks that banks face.
Advocates of Basel II believe that such an international standard can help protect the
international financial system from the types of problems that might arise should a
major bank or a series of banks collapse. In practice, Basel II attempts to accomplish
this by setting up rigorous risk and capital management requirements designed to
ensure that a bank holds capital reserves appropriate to the risk the bank exposes
itself to through its lending and investment practices. Generally speaking, these
rules mean that the greater risk to which the bank is exposed, the greater the amount
of capital the bank needs to hold to safeguard its solvency and overall economic
stability.
In summary, Basel II has had the following impacts on credit card lenders. The
amount of capital required to be held is relative to the risk of the underlying credit
card borrowing and unused credit lines.
The implication of these requirements is that it is not in the economic interest of a
credit card company to:

Extend credit to high risk customers

Provide large amounts of unused credit (‘headroom’)
To that extent, Basel II has effectively acted as an “external calibration” upon the
credit limit policies adopted by credit card lenders, curbing any previous tendencies
to set excessive credit limits which would otherwise be costly to maintain.
According to PriceWaterhouseCoopers in their annual Precious Plastic report for
2010:
“Forging an explicit link between sources of capital, credit scoring and lending will
require greater cross-functional communication and co-ordination. Capital
managers at group level have had to put new frameworks into place and
fundamentally change the way they operate to ensure that ‘capital in’ and ‘credit
out’ functions work closely together”
“For consumers this is likely to mean that the cost of borrowing will increase while
credit availability will decline”
14
See Basel Committee on Banking Supervision, 2004, International Convergence of Capital
Measurement and Capital Standards, Bank for International Settlements, Basel
(http://www.bis.org/publ/bcbs107.pdf?noframes=1).
Page 75 of 230
The Lending Code
Credit limit management has been the subject of external scrutiny for a number of
years, particularly since the Treasury Select Committee hearings in 2003 and 2004.
As such, certain protections and procedures already exist, as follows:
The Lending Code & Credit Limits
Credit card limits
Before giving a customer a credit limit, or increasing an existing limit, subscribers should
assess whether they feel the customer will be able to repay it. Subscribers should follow The
UK Cards Association best practice guidelines for credit card limit increases
http://www.theukcardsassociation.org.uk/best_practices/
Subscribers should give customers notice if they increase the credit limit on their credit card
and explain how customers can refuse the increase.
Customers can contact the subscriber to reduce their credit card limit or opt-out of the
increase.
Customers can request an increase to their credit card limit. The request should be
considered after subscribers have made appropriate checks.
Where an emergency increase to a credit card limit is granted (i.e. when a transaction goes
for authorisation and will take the customer over their pre-agreed limit) the issuer should
always assess the customer’s ability to repay.
Issuers should advise customers that checks are made before a limit is increased (the
method and timing of advice will be at the issuer’s discretion).
Credit card limit increases should not be offered on accounts that are in arrears and should
not be granted for accounts that fall below credit scoring thresholds.
Subscribers should periodically review customers’ credit card limits using credit reference
agency (CRA) and internal data. The requirement to use CRA data does not apply in
specialist customer segments, such as private banking, where use of credit reference agency
data is not always appropriate.
Where the subscriber feels it is appropriate, the credit card limit should be reduced and
notification given to the customer.
According to credit card lenders’ returns to The UK Cards Association15 the current
opt-out rate from a credit limit increase is around 0.6%.
Examples of lenders’ communication of credit limit changes are shown later in this
chapter.
15
Data supplied by 13 issuers accounting for 96% of the market
Page 76 of 230
The US CARD Act
The US CARD Act does not contain any provisions related to credit limit increases.
Page 77 of 230
Rationale
The recurrent theme of the consultation paper with regard to UCLIs is a desire to
increase customer control.
Customer control – of spending and of credit – is central to the effective
operation of all credit cards. But there is a clear trade-off between giving
customers greater control over credit card limits and the level of risk that this
injects into the credit market and at a far earlier point in the lender / customer
relationship. The “low and grow” strategy adopted by many credit card
lenders – and not a “customer control regime” – is the best way to minimise
risks to credit card lenders and card users.
In retail financial services the vast majority of decisions about providing a loan, by
whatever method, are based on a credit scoring model. Each lender has a suite of
such models, each with different inputs depending on the amount of information
available to the lender concerning the applicant.
Lenders decide upon an initial credit limit based on the information available to them
at the time of the lending decision. For example, if a credit card applicant already
has a current account, mortgage, existing credit card and/or personal loan with an
institution, all of the transactions and repayment behaviour will be used to build a
model that allows a better assessment of the risk that the individual may not repay.
However, for many credit card applications (e.g. particularly for non-retail banks) the
applicant will be new to the lender and, at the time of application, they will not have
the same level of information available to them. In these circumstances, the lender
has to rely more on their access to other data sources to help assess risk, such as
data provided by credit reference agencies (CRAs)16.
In essence, the more complete the information about an applicant, the more credit
the lender may be prepared to grant at the time of application, with less information
leading to the lender needing to be more conservative.
The best information that any lender can have, and which would lead to an
assessment that the customer can be granted a higher (appropriate) credit limit,
relates to the customer’s management of their credit card account over a reasonable
period of time. This can only be established some time after the point of application,
as the customer builds up a ‘history’ with the lender.
It is imperative to recognise that responsible lending does not end with an
initial underwriting decision, but continues throughout the entire period that a
customer has a credit card account.
The general principle is that, at whatever point in the relationship between lender and
borrower, the lender will only make a decision about whether or not to change the
terms of credit based on an objective assessment of a borrower’s risk propensity (for
a fuller introduction to credit scoring see, among many others, Thomas, 201017).
16
The three major credit reference agencies operating in the UK are Experian, Equifax and Callcredit.
Most credit card issuers will subscribe to all three providers
17
Thomas, LC (2010), Consumer finance: challenges for operational research, Journal of the
Operational Research Society, 6, 41-52
Page 78 of 230
In today’s sophisticated credit environment, credit card lenders continually monitor
their portfolios, effectively re-underwriting accounts every day – an example of how
the open-ended nature of a credit card product differs from other types of consumer
lending (e.g. personal loans) where checks are not required with the same frequency.
In recent years the increasing availability of additional internal and external data
(from the CRAs) in the segmentation of accounts, together with improved risk
management, have helped lenders to better identify customers who are
demonstrating a need for additional, affordable lending, and who represent an
acceptable level of risk.
Accounts will only be selected for a UCLI following stringent checks. In deciding to
offer a credit limit increase to a given account, credit card lenders will go through a
rigorous exclusion process to eliminate non-qualifying accounts based upon an
assessment of both internal and external information, with the latter typically being
from CRAs.
Individual lenders will have their own sophisticated and unique risk policies which
determine the frequency and scale of UCLI activity for any given portfolio or
customer. Checks will be made relating to:

Internal behaviour scores – how that particular account is performing; the age
of the account; previous credit limit history; proof over time that the customer is
able to manage their revolving debt levels etc

Other existing relationships – performance of those other products that the
customer may have with the organisation such as other credit cards; current
account; mortgage; personal loans etc

External data – relating to other credit commitments with other lenders via
credit reference agencies, including repayment histories; any arrears; levels of
indebtedness; debt stress indicators etc
Page 79 of 230
‘Waterfall of Exclusions’
The following is a typical ‘waterfall of exclusions’ that might be used by a lender to
identify accounts that are or are not eligible for a credit limit increase (numbers are
fictional and for illustrative purposes only). Simple logistics mean that there will
usually be a time lag of around two to three months between when an account is
selected for an increase and when it is applied. During this period the risk-profile of
an individual could, in theory, change (for better or worse):
Total book
% accounts
remaining
100%
Number of
accounts
1,000,000
66%
25%
22%
660,000
250,000
220,000
20%
200,000
17%
16%
170,000
160,000
15%
12%
11.5%
11%
150,000
120,000
115,000
110,000
10.5%
10%
105,000
100,000
9.5%
9%
8.5%
8.0%
95,000
90,000
85,000
80,000
8%
80,000
Exclusion factors
All customers identified for a potential increase
All customers considered profitable to increase
Below internal cards business risk criteria threshold
score
Below internal and external cumulative threshold
score
Below internal non-cards business threshold score
Subject of recent decrease (e.g. in the last six
months)
Recently had an increase (e.g. max X per year)
Debt to income ratio
Below CRA over-indebtedness index threshold
In arrears or record of recent delinquency, CCJ or
bankruptcy?
Is the account over-limit?
Recent repayment behaviour e.g. paying an
average of more than x% of their balance each
month (above minimum repayment)?
Is the account dormant?
No data available
Opted-out of limit increases
Time as a customer <X months
Total eligible population
As a consequence, only low risk customers whom the lender believes can afford it
and whom it is believed will have no problem maintaining payment on their accounts
are considered for a UCLI.
Lenders will operate sophisticated ‘test and control’ procedures which ensure that
their strategies are subject to rigorous ongoing monitoring to ensure that their models
remain effective and fit for purpose with any required enhancement or refinements
acted upon quickly.
Page 80 of 230
The Purpose of Credit Limits and Credit Limit Increases
A lender’s primary consideration in setting a credit limit is affordability. At the outset
many lenders may set a credit limit deliberately below that which the lender considers
the customer could afford, pending evidence of how the customer manages the
account, to minimise risks to the credit card lender and to the customer – a very clear
example of responsibility in lending.
With the passage of time, whilst there need not necessarily be any additional
evidence of material change to a borrower’s circumstances but where there is
evidence of their responsible management of their existing limit, a credit limit
increase will be granted. This is the first main reason for the existence of UCLIs, built
directly on a strong principle of responsible lending and of customers managing their
accounts responsibly.
A second reason for granting a UCLI, where this is warranted by the customer’s risk
profile, is to attract spend and borrowing from other cards held by the customer. The
ability to attract spend and borrowing currently on other cards is, of course, central to
the competitiveness of the credit card industry and is the essence of competition. It
is such market competition that ensures that, in general, consumers get the best
possible deals from the credit card industry. Government regulation or self regulation
which would limit competition within the industry is not likely to benefit consumers.
Generally speaking, credit limit increase strategies are implemented in order to:

Allow a graduated approach to managing risk over time

Enable the lender to learn more about the customer’s use of their credit card

Provide greater headroom for customers to attract spending and borrowing from
elsewhere

Provide headroom for balance transfers (limit increases will often be followed up
with a balance transfer offer at promotional rates)

Provide headroom for any genuinely new expenditure

Keep up with inflationary pressures that would otherwise diminish the spending
power of a card over time

Develop a positive relationship with customers
Responsible management of credit limits is a source of competitive advantage
between lenders. The better a credit card portfolio is managed:

The greater the likelihood of profitable usage by cardholders; and

The lower the delinquency rates they will experience, impacting directly upon the
price that the lender must charge for their product
There is therefore a danger that precipitate action along some of the lines suggested
by BIS would eliminate or largely remove one of the key bases for competition
between lenders.
Page 81 of 230
Current Prevalence
A major point to note regarding the following analysis is that there were sharp
changes at the beginning of 2009 in respect of credit limit increases. The Argus
dataset developed for this project covers the period July 2007 to July 2009 so earlier
data are not available. Given this limited historical perspective it is therefore difficult
to determine the extent to which these recent changes reflect changes in the overall
financial services market rather than being particular to the credit card market.
Where data are shown but not sourced individually they are taken directly from the
Argus Credit Card Dataset1819. The breakdown of accounts is as follows:
Utilisation
%
Risk band
Hi - 1
2
3
Total
4
5
6
7
< 10
10 < 20
20 < 30
30 < 40
40 < 50
543
91
83
87
98
236
35
31
30
35
573
84
75
73
77
1,407
238
183
165
163
1,582
278
203
175
161
4,341
622
453
374
328
4,491
668
435
303
241
50 < 60
60 < 70
70 < 80
80 < 90
90+
118
150
221
401
2,661
39
45
64
108
395
83
100
144
228
603
170
192
247
391
821
159
175
201
258
507
306
301
320
380
621
203
179
172
180
242
Total
4,454
1,018
2,041
3,976
3,701
8,046
7,115
8
Low - 9
3,684 13,969
665
1,870
377
1,016
250
623
183
412
149
126
108
104
119
30,825
4,552
2,857
2,081
1,698
284
207
164
145
141
1,511
1,476
1,641
2,197
6,109
5,766 18,832
54,946
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in
000s.
18
http://argusinformation.com/services/ukccps.htm
The base numbers of accounts covered by the Argus database amounts to more than 44 million
accounts which has been grossed up by The UK Cards Association to represent the total market
19
Page 82 of 230
Number of Accounts Given a Credit Limit Increase
During 2007 and 2008, each month only around 2% of credit card accounts were
given a credit limit increase. Although some of these would have had more than one
increase in a year, most will only have had one. Therefore, in the course of a year,
almost a quarter of accounts would have had a credit limit increase.
This changed substantially in February 2009, falling to just 0.7% of accounts each
month, or around only 8% of accounts for a year. The most likely reason for this is
credit card lenders adapting to changing economic conditions.
Expressing this as numbers of accounts experiencing a change, 3.7 million accounts
were given a credit limit increase during Q2 2008, equivalent to 14.8 million in the
year, compared twelve months later to around 1 million during Q2 2009, equivalent to
approximately 4.0 million during the year20.
In terms of consumer recollection of credit limit increases on their credit card
accounts, figures from our consumer research are broadly consistent with a high
level of recollection. This is coupled with a high degree of positive or neutral
reaction.

24% of credit card holders reported having had their credit limit increased in the
last two years without them requesting it

Of these, 51% regarded it neutrally, whilst 23% regarded it very positively or fairly
positively, a total of 74%. 23% viewed it fairly or very negatively
20
These figures compare to a uSwitch figure quoted by BIS in the consultation paper of 5.7 million
customers having been granted an unsolicited credit limit increase in a twelve month period
Page 83 of 230
Type of Accounts Given a Credit Limit Increase
The highest proportions of accounts given credit limit increases are low risk, and/or
those making low to medium use of existing credit, i.e. low to medium credit limit
utilisation, as the following distribution of accounts given a credit limit increase by use
and risk shows. This distinction was far more pronounced in 2008 than in 2009 and
suggests that lenders have adjusted their policies to reflect the economic conditions.
It is therefore worth examining both Q2 2008 and Q2 2009.21
The following tables summarise activity around all credit limit increases, not just
unsolicited credit limit increases. The Argus database on which the analysis draws is
unable to distinguish between an unsolicited increase and one generated in response
to a customer request.
21
Paragraph 4.5 of the consultation paper quotes the second report of the Over-Indebtedness Task
Force in 2002 as showing that 28% of credit card holders and 10% of store card holders receiving a
credit limit increase in the past twelve months, of which 90% were unsolicited. These figures will reflect
the economic conditions of the time and are no longer relevant or accurate
Page 84 of 230
The following table shows the distribution of credit limit increases across accounts in
Q2 2008 broken down by risk and utilisation, confirming that limit increases are
targeted on low risk, low utilisation accounts:
Distribution of Accounts Given a Credit Limit Increase Q2 2008 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.1
0.0
0.0
0.1
0.1
0.1
0.0
0.0
0.0
0.0
0.2
0.1
0.1
0.1
0.1
0.6
0.3
0.4
0.4
0.3
1.2
0.6
0.6
0.7
0.6
2.9
1.2
1.2
1.2
1.1
2.6
0.8
0.7
0.7
0.6
4.8
1.7
1.7
1.6
1.3
23.5
7.0
4.6
3.6
2.6
36.0
11.8
9.5
8.5
6.8
50 < 60
60 < 70
70 < 80
80 < 90
90+
0.0
0.1
0.1
0.1
0.2
0.0
0.0
0.0
0.1
0.1
0.1
0.1
0.2
0.2
0.3
0.4
0.4
0.4
0.6
1.2
0.6
0.5
0.6
0.7
1.0
1.0
0.9
0.9
1.0
1.4
0.6
0.5
0.5
0.5
0.5
1.1
1.0
0.9
0.8
0.8
2.0
1.6
1.4
1.2
0.9
5.8
5.1
5.0
5.3
6.4
Total
0.8
0.5
1.6
5.1
7.1
12.9
8.0
15.8
48.2
100.0
Overall, some 6.5% of accounts were granted a credit limit increase during Q2 2008,
suggesting around 26% of accounts during the course of the year. The following
table looks at the proportion in each risk/utilisation segment.
Proportion of Accounts Given a Credit Limit Increase by Segment Q2 2008 (%)
Utilisation
%
Risk band
Hi - 1
2
3
4
5
6
7
8
Low - 9
Total
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.7
2.2
2.5
3.1
2.4
1.7
3.1
2.4
4.7
4.3
1.9
5.1
6.8
7.8
5.9
2.5
8.5
11.8
12.6
11.4
2.2
6.9
10.1
13.1
11.9
3.9
9.7
12.4
14.9
14.4
5.6
11.2
14.6
18.8
18.0
3.1
8.9
13.5
18.7
18.7
4.6
11.4
13.7
16.9
17.7
4.0
10.0
12.6
15.5
14.8
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.8
1.7
1.2
1.0
0.4
4.1
3.3
2.9
1.9
0.8
5.6
5.2
5.5
4.7
1.7
11.0
10.3
9.9
9.0
6.7
12.2
10.9
10.3
8.9
5.6
14.0
13.4
12.2
10.8
8.8
18.3
17.0
16.3
13.6
9.5
18.5
18.0
17.4
15.6
11.4
18.5
18.0
18.3
17.3
11.2
14.3
13.0
11.7
9.2
3.9
Total
0.7
1.9
3.4
6.8
5.9
8.0
9.6
6.8
7.1
6.5
Page 85 of 230
In terms of how this translates in to the number of accounts that were granted credit
limit increases, 3.8 million accounts (out of 54.9 million) were granted an increase
during Q2 2008, broken down as follows:
Number of Accounts Given a Credit Limit Increase by Segment Q2 2008 (000s)
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
4.1
1.8
1.8
2.3
1.9
2.7
1.2
0.8
1.6
1.6
6.5
3.8
4.6
5.3
4.2
23.9
12.4
14.3
14.4
13.0
44.7
23.0
24.2
25.4
21.7
110.6
46.4
46.8
46.3
40.7
97.4
28.7
27.7
28.0
23.7
181.6
63.6
63.7
62.2
50.2
883.6
262.2
172.6
134.5
98.3
1,355.0
443.0
356.6
319.9
255.2
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.7
2.0
2.1
3.4
8.7
1.6
1.6
1.8
1.9
3.2
4.4
4.5
6.2
9.2
10.6
13.2
13.7
16.4
22.5
46.7
21.3
20.0
22.8
28.0
37.8
36.8
34.9
34.7
38.8
51.1
21.6
18.7
18.1
18.3
18.9
41.2
35.8
33.6
31.7
31.4
76.9
60.1
51.2
45.0
33.3
218.7
191.4
186.9
198.8
241.7
29.7
18.1
59.2
190.4
268.9
487.1
301.1
594.9 1,817.8
3,767.2
Total
The average size of a credit limit increase during Q2 2008 was £87922 but shows no
particularly strong pattern in relation to risk or utilisation.
Average Size of a Credit Limit Increase By Risk & Utilisation – Q2 2008
Utilisation
%
Risk band
Hi - 1
2
3
4
< 10
10 < 20
20 < 30
30 < 40
40 < 50
902
1,096
1,074
1,017
1,002
684
921
790
942
814
851
900
970
962
948
50 < 60
60 < 70
70 < 80
80 < 90
90+
775
776
832
837
640
803
1,024
856
862
739
Total
818
816
Total
5
6
7
8
Low - 9
863
976
986
997
949
909
1,069
1,092
1,078
1,046
818
1,022
1,048
1,036
1,013
672
931
946
941
932
830
1,105
1,155
1,132
1,115
762
888
891
854
816
779
953
982
965
947
928
948
974
837
773
1,006
928
886
858
863
1,031
987
935
893
906
1,017
992
959
938
911
927
910
876
863
891
1,109
1,052
1,020
988
1,021
790
810
757
728
815
942
930
897
868
866
875
914
982
952
834
1,007
806
879
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers
in £.
This table needs to be considered in conjunction with the small proportions of
customers in the tables on distribution and proportion above which show the
relatively small number of accounts in the higher risk bands that are granted credit
limit increases.
22
This compares to a uSwitch figure quoted by BIS in the consultation paper of £1,538
Page 86 of 230
However, the resultant credit limit following a credit limit increase shows clearly that
higher risk accounts and higher utilisation accounts typically have lower limits
following a limit increase than lower risk accounts.
Average Credit Limit Post-Line Increase by Risk & Utilisation – Q2 2008
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
2,749
3,462
3,329
3,183
3,128
3,594
4,423
4,181
4,245
4,132
3,492
5,062
5,101
4,949
4,801
3,759
5,696
5,679
5,543
5,264
3,815
5,297
5,371
5,319
5,111
4,356
5,702
5,768
5,780
5,648
4,859
5,931
5,943
6,064
6,047
4,584
5,874
6,023
6,159
6,098
5,792
6,592
6,351
6,357
6,449
5,184
6,114
5,950
5,891
5,743
50 < 60
60 < 70
70 < 80
80 < 90
90+
3,132
2,962
2,905
2,766
3,114
3,965
3,819
3,634
3,573
3,640
4,660
4,417
4,165
3,814
3,827
5,194
4,912
4,605
4,362
4,227
5,064
4,829
4,553
4,369
4,080
5,582
5,406
5,209
5,100
4,865
5,914
5,740
5,592
5,375
5,314
6,060
5,833
5,719
5,490
5,420
6,532
6,600
6,598
6,589
7,017
5,607
5,333
4,988
4,585
3,986
Total
3,031
3,737
4,035
4,436
4,334
4,929
5,273
5,025
5,979
5,177
in £.
Page 87 of 230
Comparing the Q2 2009 profile with the Q2 2008 profile above it is apparent that
there has been a significant shift in the way that lenders have implemented credit
limit strategies more recently. Although there is still a skew towards low-risk, low
utilisation accounts, the number of limit increases has fallen considerably, particularly
among low-risk, low-utilisation accounts. This presumably reflects the worsening
economic conditions and perhaps a continued adaptation to the Basel II
requirements.
Distribution of Accounts Given a Credit Limit Increase – Q2 2009 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.9
0.6
0.8
0.9
0.9
1.0
0.7
1.0
1.1
1.0
2.3
1.5
2.1
2.4
2.1
2.3
1.8
2.8
3.5
2.7
2.5
2.0
2.1
2.2
1.6
3.8
1.7
1.7
1.9
1.6
13.3
8.7
10.9
12.5
10.4
50 < 60
60 < 70
70 < 80
80 < 90
90+
0.1
0.1
0.1
0.2
0.8
0.1
0.1
0.1
0.2
0.7
0.3
0.3
0.4
0.6
1.5
0.9
0.9
1.0
1.1
2.2
0.9
1.0
0.9
1.0
1.5
1.9
1.8
1.7
1.7
2.3
2.3
2.1
1.9
1.5
1.7
1.3
1.0
0.9
0.6
0.6
1.3
0.9
0.7
0.5
0.4
9.0
8.3
7.8
7.5
11.7
Total
1.9
1.6
4.5
10.1
10.2
19.8
22.5
14.8
14.6
100.0
This is also demonstrated if the proportion of accounts with a limit increase by risk
propensity and use is examined too, as shown in the following table (again for
Q2 2009). Overall, in Q2 2009 1.9% of accounts were granted a credit limit increase,
suggesting around 8% of accounts during the year. The following table looks at the
proportion in each risk/utilisation segment:
Proportion of Accounts Given a Credit Limit Increase by Segment Q2 2009 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.3
1.1
1.2
1.6
1.2
0.4
2.2
2.2
3.3
2.8
0.4
2.6
3.6
4.2
4.7
0.6
2.6
4.6
5.8
5.6
0.6
2.8
5.2
7.0
6.8
0.5
2.8
5.1
7.3
7.0
0.5
3.0
7.3
12.5
12.0
0.7
3.5
6.3
9.7
9.3
0.3
1.1
1.9
3.4
4.2
0.4
2.2
4.2
6.6
6.6
50 < 60
60 < 70
70 < 80
80 < 90
90+
0.9
0.9
0.7
0.6
0.3
3.0
2.9
2.5
1.9
1.6
3.7
3.5
3.2
2.8
2.4
5.4
4.7
4.4
2.8
2.6
6.2
6.0
4.8
4.0
2.9
6.6
6.3
5.7
4.7
3.5
11.9
12.1
10.8
8.2
6.3
9.0
8.5
7.8
5.8
4.4
4.6
4.1
3.9
3.2
2.4
6.3
5.8
4.9
3.5
1.9
Total
0.5
1.6
2.2
2.5
2.8
2.5
3.3
2.7
0.8
1.9
Page 88 of 230
In terms of how this translates in to the number of accounts that are granted credit
limit increases, just under one million accounts (out of 52.5 million) were granted an
increase during Q2 2009, broken down as follows:
Number of Accounts Given a Credit Limit Increase by Segment – Q2 2009 (000s)
Utilisation
%
Risk band
Hi - 1
2
3
4
Total
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
1.6
0.9
1.0
1.3
1.2
1.1
0.7
0.7
1.0
0.9
2.4
2.2
2.7
3.0
3.6
9.0
5.9
8.0
9.4
8.9
10.5
7.2
10.0
11.6
10.4
23.5
15.5
21.2
25.1
21.6
24.0
18.1
29.3
35.6
27.7
25.4
20.8
21.9
22.6
16.4
39.5
17.9
17.6
19.6
16.4
137.1
89.1
112.2
129.0
107.1
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.0
1.3
1.4
2.4
8.0
1.1
1.3
1.5
2.0
6.7
3.0
3.4
4.6
6.3
15.7
9.0
8.8
10.8
11.0
23.0
9.4
10.1
9.6
10.2
15.6
19.1
18.3
17.7
17.8
23.5
23.4
21.9
19.1
15.4
17.1
13.0
10.7
8.8
6.7
6.4
13.4
9.2
7.0
5.4
4.2
92.4
85.0
80.3
77.1
120.2
20.0
17.0
46.8
103.7
104.6
203.4
231.4
152.6
150.1
1,029.5
Total
NB: it is worth noting that the fifteen cells in the bottom left hand corner of this table
(i.e. accounts in risk bands 1 to 3 with utilisation of 50% or more) amount to around
60,000. Across the year this would amount to around 236,000 accounts in these
cells being granted a credit limit increase. This compares to an overall estimate
(later in this chapter) that around 720,000 credit limit increases were granted in
response to a customer request during the year. The industry believes that the
majority of increases granted to this group will be in response to a request from the
customer.
As one would expect, and indeed demand, credit card issuers’ credit scoring models
are highly predictive and provide strong indicators. No statistical or economic model
is perfect, however, and a small number of people who are high risk, and with
relatively high balances, are given a credit limit increase. Such people may be seen
in the bottom left segment of the above tables. This group warrants further
investigation, but it is believed to be largely driven by customer initiated requests i.e.
they are not emanating from UCLI techniques.
The following two tables provide information to help with this group and show that in
terms of the average size of credit limit increase those in the highest risk (risk
band 1), higher utilisation (50% or more) cells are receiving lower increases, though
the overall pattern is inconclusive.
Page 89 of 230
The average size of a credit limit increase in Q2 2009 shows more of a pattern in
relation to risk or utilisation than in Q2 2008. In addition, the average limit increase
has grown. This is thought to be a function of lenders targeting, on average, lower
risk customers for limit increases and excluding higher risk customers together with
an increase in the proportion of customer initiated increases (which tends to be for
higher amounts).
Average Size of a Credit Limit Increase By Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
1,524
1,320
1,385
1,052
1,015
1,295
1,663
1,074
1,202
1,255
1,547
1,265
1,020
1,130
1,059
1,280
1,208
1,243
1,189
1,106
1,298
1,282
1,177
1,135
1,201
1,409
1,320
1,328
1,292
1,323
1,532
1,525
1,508
1,496
1,522
1,498
1,317
1,255
1,306
1,324
1,556
1,348
1,238
1,236
1,201
1,478
1,364
1,311
1,300
1,301
50 < 60
60 < 70
70 < 80
80 < 90
90+
914
814
819
750
752
1,084
936
902
925
808
970
1,071
964
848
856
1,106
1,068
1,084
949
901
1,069
1,055
1,031
938
867
1,240
1,218
1,166
1,129
1,012
1,456
1,413
1,337
1,219
1,076
1,360
1,275
1,257
1,186
1,182
1,184
1,199
1,202
1,489
1,362
1,248
1,212
1,157
1,064
938
Total
914
995
1,022
1,079
1,100
1,257
1,446
1,337
1,359
1,263
in £.
Nevertheless, the second of these tables shows that the resultant credit limit
following an increase is consistently lower amongst the high risk, high utilisation
segments.
Average Credit Limit Post-Limit Increase by Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
2,893
3,708
3,511
3,299
3,181
2,764
3,989
3,904
3,841
3,703
3,481
5,149
5,163
5,051
4,801
3,619
5,598
5,649
5,556
5,340
4,125
5,551
5,599
5,573
5,308
4,479
5,694
5,748
5,741
5,630
4,645
5,908
6,102
6,249
6,059
5,724
6,243
6,267
6,343
6,284
5,683
6,505
6,251
6,195
6,271
5,104
6,085
5,956
5,879
5,694
50 < 60
60 < 70
70 < 80
80 < 90
90+
3,239
3,217
3,181
3,042
3,217
3,565
3,611
3,377
3,161
3,434
4,693
4,449
4,222
3,830
3,805
5,145
4,876
4,584
4,219
4,104
5,134
4,904
4,558
4,320
4,391
5,473
5,309
5,144
4,941
5,012
5,886
5,666
5,417
5,110
5,082
6,224
6,160
6,220
6,179
6,600
6,371
6,507
6,610
6,697
7,306
5,517
5,286
4,956
4,525
4,051
Total
3,174
3,309
3,989
4,314
4,584
4,930
5,041
5,914
5,888
5,136
£.
Whilst it might seem counter-intuitive that some groups should be in receipt of limit
increases, lenders use all data available to them to make an affordability assessment
in reaching a decision following a request. Lender data shows that around one third
of customer initiated requests are approved given the well understood risk of adverse
selection.
Page 90 of 230
Using credit card lenders’ returns to The UK Cards Association23, these figures
can be put into the following context:

Around 1 million credit limit increases were granted in Q2 2009. This
grosses up to around 4 million in the year

1.7 million accounts requested a limit increase in the period January to
October 2009, of which 600,000 (34%) were approved. This grosses up to
around 720,000 for the year

Therefore around 17.5% of credit limit increases in 2009 were at the request
of customers
Our consumer research shows that:

23
85% of credit card holders reported that they had never requested a credit limit
increase from their card issuer. Of the 14% that had, 11% reported that the
request had been approved and 3% that it had been declined (which suggests a
degree of under-reporting among those that requested an increase but were
refused)
Data provided by 13 issuers accounting for 96% of the market
Page 91 of 230
Customer Initiated Credit Limit Increases
As shown above, the occurrence of customer initiated credit limit increases is
relatively low compared to unsolicited credit limit increases.
For the period January to October 2009 credit card lenders report to The UK Cards
Association that some 1.7 million accounts requested a credit limit increase. These
will typically be subject to rigorous manual vetting processes. Of these requests
1.1 million (66%) were declined. Of the accounts where a customer limit increase
was given in the early part of 2009, almost 5% had defaulted by the end of the year.
(This compares to lender reported data that, of accounts offered a UCLI in the early
part of 2009, around 2.5% went delinquent later in the year (3% in 2008)).
The figures for the same period in 2008 were 1.8 million requests, with 0.9 million
(54%) being declined.
Our quantitative consumer research shows that:

When asked if they would ever request a credit limit increase from their card
issuer 86% said that they would not. Only 13% said that they would.
With regard to individual lender behaviour, including experience of customer initiated
requests for credit limit increases, a number of lenders have already provided the
following additional information (confidentially) to BIS regarding their experiences:

“Of the account holders that contact us to ask for a limit increase only 27% of
those applications are approved. The first year loss rate for customers who
contact us for a limit increase is almost three times that of the population we
select for a credit limit increase”

“Accounts subject to an unsolicited credit limit increase have only 27% of the
losses seen on a typical account in the year following the increase”

“The default rate for the UCLI population is 16.1% better than the overall
population. The default rate for manual limit increase customers is 20.8% and
therefore worse, despite the same (acceptance) criteria being used”

“The default rate for accounts subject to UCLIs is 2.6% compared to 3.1% for the
total book. The default rate for accounts requesting an increase (of which only
25% are approved – accounting for less than 10% of all line increases) is 5.4%”
This is tangible evidence of the risk of adverse selection24.
24
Adverse selection is where an issuer performs an action that has a result which is shifted more
towards high risk accounts. In the case of solicited credit limit increases, the belief is that a large
proportion of people who react positively to receiving an unsolicited credit limit wouldn't necessarily
respond to accept a solicited line increase. The belief is that these customers are low risk. Conversely,
it is believed that the people who eventually go bad following an unsolicited line increase (even though
this is a small population) are the people who would take up the offer for a solicited line increase
(because they are in need of the credit and will take it whenever offered). These people would build
balances but ultimately cost the lender money due to increased bad debt write-offs as a result of the
higher balances.
Page 92 of 230
Size of Credit Limit Increases
In terms of the average amount of a credit limit increase, during Q2 2008 the average
was around £900 across all risk bands. However, during 2009 the distinction
between risk bands has become more pronounced. Whilst fewer increases are being
granted in total, lower and medium risk accounts are being granted (i) larger
increases than before and (ii) larger increases than are being granted to higher risk
accounts.
This is believed to be driven, in part, by customer-requested increases (which tend to
be for higher amounts) taking up a larger percentage of all increases.
Average Size of Credit Limit Increase by Utilisation Segments
2,000
Low
1,600
Medium
1,400
High
1,200
1,000
800
600
400
200
0
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Month
Page 93 of 230
Credit limit increase amount, £
1,800
Overall
Timing of Credit Limit Increases
Lenders grant higher-risk customers lower credit limits at the point of account
opening and then select subsets of these customers as being suitable to receive
credit limit increases over time.
As described in detail earlier in this chapter, lenders do not target credit limit
increases towards new accounts, but rather wait until they have sufficient experience
of the customer to make an informed decision, using a sophisticated range of
predictive data and behavioural scoring models.
This is illustrated by the fact that the majority of credit limit increases are granted to
mature accounts. More than 40% of limit increases are applied to accounts which
have been open for 5 years or longer. The cohort with the highest proportion of limit
increases is those that have been open for between 12 and 24 months.
Distribution of Accounts with Credit Limit Increase by Months on Books
50
43.4
45
38.8
40
Percentage
35
30
23.2
25
20.7
18.5
20
10.1
8.6 9.0
10
5
13.5
12.7
15
0.7 0.9
0
<6
<12
<24
<36
<60
60+
Months on books
Page 94 of 230
Proportion of Accounts with Credit Limit Increase by Months on Books
14
13.1
12
10
9.1
Percentage
8.6
8
7.1
6
5.0
4
3.3
2.4
2.3
2
0.8
1.8
1.5
0.4
0
<6
<12
<24
<36
<60
60+
Months on books
Page 95 of 230
Customers recruited in the lowest initial credit limit band, by virtue of being higher
risk, receive fewer limit increases over the first two years that their accounts are
open. Those who do receive an increase within this cohort are typically those who
have exhibited the characteristics of being lower risk (an assessment based, as ever,
on behaviour scoring) than those who are not offered an increase25.
Average Credit Limit Among Initial Limit Bands for Accounts Opened Q3 2007 by Months on
Books
1.1%, £97
10,000
8,000
1.5%
6,000
4.6%, £233
1.9%
4,000
10%, £280
2.3%
2,000
22%, £229
4.0%
0
1
2
0
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month since acquisition
Initial limit
£6000+
<£6000
<£4000
<£2000
25
ULR means Unit Loss Rate
Page 96 of 230
Average initial credit limit, £
Average 2-Year Increase
by % of original and £
Average unit loss rate at
6 Months on Books
Credit Limit Decreases
The other side of the coin to credit limit increases is credit limit decreases, which may
be impacted directly, or inadvertently, by any regulation.
Credit limit decreases are used by lenders as a way of managing risk, by reducing
the potential amount that customers can borrow. Indeed, since the introduction of
the Basel II regulations (discussed earlier in this chapter) banks have been obliged to
include in their capital requirements the amount of unused credit to which they may
be liable. It is therefore uneconomic, as well as potentially risky, to give customers
large (unused) credit limits.
Lenders also use credit limit decreases, targeted towards higher risk accounts, to
control the exposure for customers who show a worsening risk profile in the months
following initial acquisition. This rigour is a key component at the heart of operating a
successful, responsible and balanced credit limit management programme.
The following tables show the distribution and numbers of accounts that had their
credit limits decreased during Q2 2008. (NB: these tables can all replicated for
Q2 2009 and show essentially the same pattern).
Distribution of Accounts Given a Credit Limit Decrease by Segment – Q2 2008 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
1.0
0.4
0.4
0.4
0.8
0.1
0.1
0.1
0.1
0.3
0.4
0.1
0.1
0.1
0.3
1.1
0.1
0.1
0.1
0.3
2.5
0.2
0.1
0.1
0.3
1.9
0.1
0.1
0.2
0.3
1.0
0.1
0.1
0.1
0.1
3.0
0.3
0.2
0.2
0.3
5.0
0.6
0.4
0.3
0.3
16.3
1.7
1.6
1.6
3.0
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.6
2.0
3.1
6.9
16.9
0.3
0.5
0.7
1.1
2.7
0.5
0.7
0.9
2.0
4.1
0.8
1.2
1.8
3.5
4.0
0.7
0.9
1.2
2.4
2.3
0.6
0.7
1.0
1.8
1.9
0.2
0.3
0.4
0.7
0.6
0.5
0.5
0.6
0.9
0.7
0.3
0.3
0.3
0.3
0.2
5.6
7.2
10.0
19.7
33.4
Total
33.6
6.0
9.2
13.1
10.7
8.6
3.6
7.2
8.0
100.0
Page 97 of 230
As can be seen in the table below the likelihood of having a credit limit decreased is
much higher among the higher risk groups and higher utilisation groups.
Proportion of Accounts Given a Credit Limit Decrease by Segment – Q2 2008 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
1.2
3.2
3.8
3.9
7.4
0.6
1.2
1.4
1.9
5.0
0.9
0.5
1.0
1.4
2.5
0.8
0.4
0.7
0.6
1.6
0.9
0.3
0.3
0.5
1.2
0.5
0.2
0.2
0.3
0.7
0.4
0.2
0.2
0.4
0.7
0.4
0.2
0.3
0.5
0.8
0.2
0.2
0.2
0.3
0.4
0.3
0.3
0.4
0.6
1.2
50 < 60
60 < 70
70 < 80
80 < 90
90+
12.2
11.6
12.6
14.6
4.9
5.9
7.8
7.3
7.8
4.7
4.2
5.8
5.7
7.1
4.5
4.6
6.3
7.7
9.8
4.0
2.7
3.3
3.7
5.3
2.3
1.7
2.0
2.4
3.6
2.3
1.4
2.1
2.6
3.6
2.1
1.6
1.7
2.2
2.9
1.7
0.6
0.6
0.7
0.7
0.6
2.6
3.4
4.3
6.4
3.8
5.8
4.4
3.7
3.2
1.6
1.0
0.8
0.6
0.2
1.2
Total
The number of accounts subject to a credit limit decrease in Q2 2008 was 0.7 million,
broken down as follows:
Number of Accounts Given a Credit Limit Decrease by Segment Q2 2008 (000s)
Utilisation
%
Risk band
Hi - 1
2
3
4
Total
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
7.2
2.6
2.8
2.8
5.8
1.0
0.5
0.5
0.6
1.8
3.0
0.4
0.7
0.9
1.8
8.0
0.6
0.8
0.7
1.9
17.7
1.1
0.8
0.9
2.2
13.4
0.9
0.8
1.1
2.0
6.9
0.4
0.4
0.6
0.9
21.1
1.8
1.5
1.5
2.2
34.9
4.0
2.6
2.3
2.3
113.2
12.0
10.8
11.4
21.0
50 < 60
60 < 70
70 < 80
80 < 90
90+
11.4
13.8
21.7
48.1
117.8
2.4
3.8
4.5
7.9
18.5
3.3
5.0
6.5
14.1
28.3
5.6
8.3
12.7
24.5
28.2
4.8
6.1
8.3
16.8
15.8
4.4
5.1
6.7
12.8
13.1
1.6
2.3
2.9
4.9
4.2
3.5
3.4
4.2
5.9
4.8
2.4
2.1
1.9
1.8
1.7
39.3
50.0
69.3
136.8
232.2
Total
233.9
41.4
64.0
91.1
74.4
60.2
25.2
50.0
55.8
696.1
Page 98 of 230
The average decrease was £727. Although accounts of higher risk and with higher
utilisation were subject to lower average decreases this will reflect the fact that these
accounts typically have lower credit limits to begin with.
Average Amount of a Credit Limit Decrease Q2 2008
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
860
532
736
710
757
807
605
882
1,039
1,559
854
1,089
1,222
926
1,653
963
917
1,128
1,364
1,681
921
1,227
1,075
1,079
1,358
1,002
1,298
1,309
1,575
1,795
1,131
1,501
1,435
2,169
2,047
1,097
1,695
1,332
1,496
1,744
1,683
2,347
2,232
1,905
2,390
1,212
1,553
1,430
1,427
1,654
50 < 60
60 < 70
70 < 80
80 < 90
90+
1,031
724
559
264
186
943
917
514
355
254
1,306
964
597
362
261
1,519
1,105
750
461
279
1,523
1,039
811
525
319
1,868
1,358
1,027
635
409
1,782
1,374
986
652
448
1,886
1,363
1,000
617
518
2,203
1,820
1,439
1,087
918
1,583
1,134
795
457
252
273
448
501
655
765
973
1,058
1,124
1,764
727
Total
£.
It is clear from these tables, that, again, credit scoring has worked as is intended and
would be expected in that the customers who tend to be in the riskiest segments are
those who have had their limits reduced, demonstrating the checks and balances
operating within the system.
In terms of recollection and favourability our research shows that:

Only 7% of credit card holders recalled having their credit limit decreased within
the last two years. Of these 42% regarded it fairly or very positively, with 33%
regarding it neutrally. 21% viewed it either fairly or very negatively
Furthermore, according to our consumer research:

When asked if they would ever decline a credit limit increase if they were offered
one, 57% said that they would not decline an increase. Of these, 87% said they
just wouldn’t bother and 11% that they thought it might affect their credit rating.
However, 41% thought they would sometime decline an increase (although few
customers in fact do so - current decline levels are very low)
NB: credit card lenders do not typically give prior notice of a credit limit decrease
given the risk that a consumer will then immediately spend up to the existing limit
knowing that the opportunity to spend will soon be removed.
Page 99 of 230
Results of a Credit Limit Change – the Consumer
Consumers in receipt of a credit limit increase typically spend more than usual in the
month immediately following their limit increase, but this falls back to slightly below
pre-limit increase levels from the second month onwards. That is to say, such
consumers do not spend more in total on credit as a result of UCLIs but use the
increased limit to bring forward a portion of their spending (which is, after all, the
whole raison d’être of the credit industry) or to exploit balance transfers offers (which
will offer consumers better rates of interest on any outstanding loans than they
currently enjoy).
This is true at an industry level though it does not show how successfully or
otherwise individual credit card lenders are in increasing business through UCLIs or
the impact on particular customer groups.
This evidence does not support the assertion that consumers immediately spend up
to the new limit when granted a credit limit increase.
Index of Purchases for Q3 2008
140
130
Proxy Control
120
Increase Group
100
90
80
70
60
0
1
2
3
4
5
6
7
8
9
10
11
12
Month after increase
Balances, both total and interest bearing amounts, rise in the months following a
credit limit increase by around 10%-15% compared to similar accounts which did not
receive a limit increase. This is similar to American research26, which found that,
following a credit limit increase, balances rose about by around 10% - 15% of the
amount of the increase.
More specifically, for accounts with a credit limit increase in April 2009, calculated by
comparing the average monthly spend in the preceding 3 months from January to
March 2009 to the following six months to October 2009, the uplift in spend as a
percentage of the limit increase granted was 5.06%.
26
Gross DB and Souleles NS (2002), Do liquidity constraints and interest rates matter for consumer
behaviour? Evidence from credit card data, The Quarterly Journal of Economics, 117, 1, 149-185.
Page 100 of 230
Index
110
However, it would be wrong to assume that this uplift comprises all new expenditure
or borrowing. It will be a combination of customers taking up balance transfer offers
often offered in the months after a limit increase; a shift of spend from other cards;
and some genuinely new spend.
Page 101 of 230
Results of a Credit Limit Change – the Lender
It is not in the interest of either the lender or the card holder if the latter defaults
following a credit limit increase.
In fact, default rates among customers who have been given a credit limit
increase are significantly lower than among similar customers who did not
receive an increase, suggesting that current practice is robust. There is no
evidence to support the assertion that customers rush to spend up to a new limit that
they have been granted.
Two years following a credit limit increase (based on accounts granted an increase in
2007), debts of around 2.8% of customers were written off, compared to the debts of
around 3.4% of similar customers who did not receive a limit increase. Similar trends
are observed for limit increases granted during 2008.
Charge-off Rates Among Accounts with a Credit Limit Increase and No Change Accounts
4.0
3.0
2.5
2.0
1.5
Q3 2008 No Change
Q3 2007 No Change
1.0
Q3 2008, limit increase
Q3 2007, limit increase
0.5
0.0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month since increase
This demonstrates the careful deployment of limit increases and how lenders target
better quality customers to receive an unsolicited increase.
Paragraph 4.6 of the consultation paper suggests that there may not be a direct link
between an individual limit increase and increased likelihood of default. The above
evidence confirms this view.
Page 102 of 230
Account charge-off rate, %
3.5
The consultation paper goes on to say that “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”. 27
This statement is not supported by the evidence. The aggregate of credit limits
across the industry (the red line in the chart below) has increased at a faster rate
than outstanding credit card balances across the industry (the blue line in the chart
below), which has remained fairly stable since the beginning of 2006. This suggests
that the two measures are reasonably independent of each other, i.e. personal debt
is the amount that has been spent, as opposed to what is available to spend via
unsolicited credit limit increases.
Aggregate Industry Credit Limits vs Credit Card Outstandings28
300
Credit limit
250
Balance
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Quarter
Source: The UK Cards Association, Bank of England
27
NB: the consultation paper then relates this to the experience of people seeking debt through the
Consumer Credit Counselling Service, which is not a link that can be made on the basis of this evidence
28
Source: The UK Cards Association data covers 19 issuers from December 2001 to August 2009; 21
issuers from September 2009.
Page 103 of 230
Amount, £bn
200
In fact, outstanding balances as a proportion of available credit limits has
shown a steady downwards incline since 2002, as per the following chart.
Aggregate Credit Limit As A Proportion of Credit Card Outstandings (%)
50
45
40
30
25
20
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Quarter
Page 104 of 230
Proportion, %
35
Having said this, for those customers who do default, they default for slightly larger
amounts than similar customers who have not had a credit limit increase. In the case
of accounts that were given a limit increase in 2007, the amounts were around
£3,600 compared to £3,300; for those given a limit increase in 2008, they were
£4,700 compared to £3,600.
Average Charge-off Amount for Q3 2008, Limit Increase vs Proxy Control Group
8,000
Increase Group
Proxy Control
6,000
5,000
£4,723
4,000
£3,646
3,000
2,000
Account charge-off amount, £
7,000
1,000
0
1
2
3
4
5
6
7
8
9
10
11
12
NB: it has to be noted, though, that the increases in the recent past could equally be
a consequence of the worsening economic situation. During 2008–09,
unemployment worsened substantially, and, at the time of writing, the UK was in its
deepest recession for 50 years. Bad debt on all forms of credit worsened during
2008 and most of 200929 (the one exception being that defaults on secured lending
did not worsen in Q3 2009).
29
Bank of England (2009), Credit Conditions Survey, Q3, Bank of England, London.
Page 105 of 230
Communication of Limit Changes
Increases are commonly accompanied by statement messages or letters using text
such as:

Statement message by a major lender – “As a valued customer we are pleased
to inform you that we have increased your credit limit on your account, as shown
on this statement. If you prefer to remain at you previous limit, call us on xxxxxx”

Letter sent to cardholder by a major lender – “If you have any queries, do not
want a credit limit increase or would like to discuss a higher limit, call us on
xxx xxxx (lines open 24 hours a day, seven days a week)”

Letter sent to cardholder by a major lender – opens with “As a valued cardholder
we are pleased to advise you that your credit limit has been increased to £x,xxx
and is available to use straight away”. Letter closes with “If you’d prefer your
credit limit to stay where it is or you would like to opt out of future credit limit
increases, please give us a call on xxxx xxxx”.
All lenders offer customers the chance to opt-out from credit limit increases on
a permanent or individual increase basis as is required by The Lending Code.
According to confidential member returns the rate of opt-out from limit increases is
very low at 0.6%.
Any examples of non-compliance regarding the offering of an opt-out should be
reported to the Lending Code Standards Board or taken up through customer
complaints procedures and ultimately the Financial Ombudsman Service.
In part, the Government seeks to justify intervention on credit limit increases on the
basis of ‘popular anger’. In terms of customer complaints to card lenders, unsolicited
credit limit increases do not feature. Customer complaints (and media enquiries to
The UK Cards Association press office) are predominantly about credit limit
decreases. Indeed, there are 38 times as many complaints about unsolicited credit
limit decreases as there are about unsolicited credit limit increases.
Page 106 of 230
Financial Impact On The Industry
The impact on industry income of removing unsolicited credit limit increases is
potentially significant. The reduction in balances and spend ultimately causes a
c0.5% drop in overall revenue amounting to £305 million in 2008-09 (an average of
more than £5 per account (assuming 57 million accounts as at the end of 2008), with
a larger impact in 2007-08 of £354 million (due to the greater prevalence of credit
limit increase campaigns in that year). There is a marginal saving in bad debt losses
due to reduced exposure, but no change in the probability of default.
Impact on Industry Revenue, Cumulative % Income Lost
0.6
Aug 2007 - July 2008
0.4
0.3
0.2
0.1
0.0
1
2
3
4
5
6
7
8
9
10
11
12
Month after regulation implementation
Summary of Financial Impact on Industry
£m
UCLIs (total ban)
2007-8
2008-09
354
305

absorbing some or all of the reduction in revenue

recouping the revenue from cardholders by other means such as higher rates of
interest or annual fees
Page 107 of 230
Impact on revenue, %
0.5
Aug 2008 - July 2009
Further Comment on the Consultation Paper
People With Bipolar Disorder
Paragraph 4.9 of the consultation paper states that some consumers may be
concerned about unsolicited credit limit increases because a fixed limit on their credit
or store card would help protect them against reckless spending, and that this is
particularly true for vulnerable customers such as people suffering from certain forms
of mental illness such as bipolar disorder. The paragraph continues, saying that
studies have linked such mental disorders with exuberant spending. Our qualitative
research with focus groups also found concern about the impact of UCLIs on
consumers less able to manage their money.
How to improve money management by those with bipolar disorder is a large and
complex topic that goes well beyond the question of UCLIs. To address the issues
successfully would require major reforms of the totality of the financial services
industry. Such reforms – and any specific proposals on UCLIs (or, for example, the
issue of new credit cards) for those with bipolar disorder – would need to be framed
within the context of the Disability Discrimination Act (DDA) 1996. The DDA obliges
all providers of products and services not to discriminate against those with a
disability.
In the case of credit limit increases, lenders – whether through automated systems or
decision made by individual members of staff – would need to make a judgment over
the customer’s mental capability. The difficulty is in doing this in a legally compliant
way when lenders are effectively prohibited from asking direct questions of
customers as to their mental health, and from denying service on the basis of any
information that they might have. This is complicated by the fact that mental health
problems may not be permanent, or may be recurrent. Arguably it is the most
obvious examples where a consumer displays mental health issues where it is
easiest to fall foul of the DDA.
Dealing with customers with mental health issues is a particularly serious and
sensitive issue. Much good work has been done in this area which has resulted in
the Money Advice Liaison Group’s Good Practice Awareness Guidelines For
Consumers with Mental Health Problems and Debt 30. It is difficult to see how a onesize-fits-all constraint on the application of credit limit increases that would impact all
cardholders might help.
What can be said with certainty is that the risk-based approach that credit card
lenders adopt to setting and increasing credit card limits, the “low and grow”
approach”, offers the best prospects of ensuring that all those whose behaviour
suggests that they should not receive credit limit increases do not, in fact, do so –
regardless of whether their behaviour can be attributed to a mental disorder or illness
such as bipolar disorder.
30
See http://www.moneyadvicetrust.org/images/Mental_Health_Guidelines_2009.pdf
Page 108 of 230
Policy Options
In general, instinctive positive reactions to changes suggested by Government are
modified and tempered once the potential implications for cardholders are outlined:

When told that the Government was thinking of preventing credit card companies
from increasing credit limits without them asking for or accepting the change,
63% thought that this was a good idea. 35% thought that this was a bad idea

Among those who thought this change was a good idea, when asked how they
would respond to such an offer, 55% thought they would respond probably by
phone, 13% by letter and 21% by e-mail. 11% thought they would not respond
(NB: Acceptance by phone potentially provides lenders with a significant issue
depending on the sanction for a failure to comply. If a credit limit increase is
granted orally but the customer later denies making the request the lender would
need to be able to prove that the conversation had taken place. This would
require 100% recording and storage of telephone contacts, something which is
prohibitively expensive. To illustrate this further, it is for this reason that lenders
are unlikely to accept telephone requests for credit card cheques under the new
regulations, a point which was clearly made to Government)

When those who thought this change was a good idea were told that this could
mean people who now get cards with a low credit limit could no longer get a new
credit card when they wanted one, 38% changed their mind and no longer saw it
as a good idea. 55% of those who had thought change was a good idea still
thought that change was a good idea. Overall, taking into account those that
changed their mind, this meant that overall only 35% still thought it was a good
idea

When told that they, the respondent, might not be able to get a new credit card
when they wanted one, the percentage who changed their mind increased to
43%. 52% still thought that it was a good idea. Overall, taking into account those
who changed their mind, this meant that 33% still thought it was a good idea

When those who thought it was a good idea were told that this might mean that
credit cards came with an annual fee in future, 69% changed their mind and no
longer saw it as a good idea. 27% still thought that it was good idea. Overall,
taking into account those who changed their mind, this meant that just 17% still
thought that it was a good idea

When asked what they would do if they could choose their own credit limit31, 73%
said that they would keep it the same; 5% that they would be inclined to choose a
higher limit; and 21% that they would be inclined to choose a lower limit
31
Page 109 of 230
(Those saying that they would keep it the same may be doing so because they
think their current limit is about right but might, of course, expect their limit to
keep up with inflation. Those saying that they would reduce their current limit
may be doing so because they feel it is too high or that this is the response they
think they ought to give to the question. It is, of course, an option open to all
customers already to request a lower credit limit)
Paragraph 4.30 of the consultation paper suggests that consumers could be granted
the right to set their own credit limit at the outset of an agreement, and that if they
chose to receive unsolicited limit increases they could also choose their frequency.
They could also, if desired, set a maximum amount beyond which their limit would
never be raised. The above suggests that the majority of customers are, in fact,
content with the limit that they have been granted and therefore would have no need
to take up such options which would add considerable complexity.

When asked if they would ever decline a credit limit increase if they were offered
one, 57% said that they would not decline an increase. Of these, 87% said they
just wouldn’t bother and 11% that they thought it might affect their credit rating.
However, 41% thought they would sometimes decline an increase (although few
customers in fact do so - current decline levels are very low)
Page 110 of 230
Do Nothing
The evidence from current practice and from our customer research shows clearly
that the current system of UCLIs, the ‘low and grow’ strategy adopted by most card
lenders, is fundamentally sound.
It minimises the risks of customer default, is a cornerstone of competition within the
industry, and has ensured the extension of credit to higher risk customers in a way
that is economically viable for lenders and beneficial to those sub-prime groupings
who would otherwise depend on other sources for their credit requirements (loan
sharks and so on).
The market in this instance is demonstrably delivering the best value for customers
and new Government regulation would, at best, put this at serious risk.
That said, the industry believes that there would be some benefit to the workings of
the market – and so to both customers and the industry - from further improvements
in the transparency of information to customers (Option 2 in the BIS consultation
paper).
Page 111 of 230
Improve Information Transparency
With regard to BIS policy Option 2 – improving information transparency – the
Statement of Principles proposed by industry to BIS in June 2009 were designed to
give customers better information about increases applied to their account without
undermining the industry’s ability to lend responsibly.
The Statement of Principles on UCLIs proposed in June 2009 were as follows:
STATEMENT OF PRINCIPLES ON UNSOLICITED CREDIT LIMIT INCREASES
Purpose



This ‘statement of principles’ relates specifically to unsolicited credit limit increases. This refers to a
situation where we decide that it’s appropriate to increase the credit limit on your account, as a
service to you as a customer
The principles have been developed by the industry following discussions with the Department for
Business, Enterprise and Regulatory Reform (BERR)
The principles build on strong existing best practice guidance and with a number of additional
commitments designed to respond positively to:
-
The difficulties faced by some consumers in the economic downturn; and
The need for customers to have control over their finances
Key Messages for customers


A credit card issuer’s ability to actively manage credit limits is a key part of responsible lending,
helping to ensure that you are only provided with a level of credit that you can afford to repay
Responsible lending does not start and end when you first apply for credit – we are committed to
such practices throughout the period that you hold a credit card account with us
The Principles
1.
Where we believe that it is appropriate to increase your credit limit, we want to ensure that
you have control over this change. To support this commitment, we will:




Provide you with a clear and transparent written notification of the change by means of a
specific communication, so that you have an opportunity to consider the change
Give you the option to tell us that you do not wish to have the increased credit limit
Give you the option to tell us that you would actually prefer the credit limit to be reduced
Make it as convenient as possible for you to advise us of your preference
2.
We will fully assess whether we feel you will be able to manage the higher credit limit, with
reference to all information available to us
3.
We will not increase your credit limit more often than once every 6 months.
4.
We will ensure that our staff are able to explain to you:


Why we have increased your credit limit; and
The options available to you
In paragraph 4.19 of the consultation paper BIS express the view that these
proposals do not go far enough.
Page 112 of 230
Limit The Size And/Or Frequency Of Individual Limit increases
With regard to BIS policy Option 3 – placing a limit on the size and/or frequency of
credit limit increases – industry is extremely reluctant to implement a one-size-fits-all
solution that imposes arbitrary measures, and which would be neither practical to
implement nor, we believe, effective in achieving a desired outcome.
The industry has already engaged with BIS over the course of 2009, with a number
of lenders meeting with officials on a confidential one-to-one basis to explain their
processes and how these are robust. Furthermore, the evidence commissioned for
this consultation response supports the industry’s case that UCLI strategies are at
the heart of a responsible approach to credit limit management. This underpins the
industry’s determination to avoid solutions which undermine the strength and
sophistication of existing practices and which provide no benefit to customers.
Turning to a very specific example, in the highly specialised part of the credit card
market for the highest-risk customers – often referred to as the non-prime – a
customer will typically be offered no more than a £250 initial credit limit, with an
aspiration from the lender (for their ‘good’ customers) that the limit will increase
incrementally over time, perhaps as often as every four months, first to £500 (just
£250 more – but a 100% increase) and then again to a typical limit of no more than
£1,000.
Given the limited borrowing available to its consumers and the limited number of
transactions that can take place (that would attract interchange income for the card
issuer), it is essential to the lenders’ business model in this segment of the market
that good customers are progressed through to higher limits for the business to be in
any way viable. It is widely accepted within the industry that it is not possible to
profitably offer a credit card with a £250 credit limit.
Imposing a limit, or opt-in requirement (which would reduce take-up), on this model
represents a real threat to the long-term viability of this model (and those lenders
who are serving customers through it), as setting higher limits at the outset for all
customers would simply represent too high a risk to both lender and borrower. In
such a highly specialised segment of the market, existing and future customers
would find it difficult, if not impossible, to obtain credit cards elsewhere and are likely
to be forced into borrowing through home credit, pawn shops or payday lending at
higher cost or, in a worst case, the unregulated market (as well as losing other
benefits of credit cards such as Section 75 protection). This has the potential to
disenfranchise significant numbers of responsible customers on relatively low
incomes.
By comparison, a high street lender who offers an initial limit of £3,000 but seeks to
increase a limit after twelve months to £4,000, is increasing a limit by £1,000 but this
equates to only 33% and as such would not be as affected by an arbitrary control.
We would also repeat the Argus evidence that the propensity to change a credit limit
is influenced by the length of time the account has been open, in that:

Lenders do not target credit limit increases towards new accounts, but rather wait
until they have sufficient experience of the customer to make an informed
decision. This is evidenced by the majority of credit line increases being
allocated towards mature accounts (>40% of limit increases are granted to
accounts of 5 years maturity or longer)
Page 113 of 230

Customers recruited in the lowest initial credit limit band, by virtue of being higher
risk, receive fewer limit increases over the first two years. Those who do receive
an increase in this cohort are lower risk – an assessment based on behavioural
scoring – than those who are not offered an increase
Therefore, it is difficult to see what imposing a limit on the size and/or frequency of
individual credit limit increases would achieve, or what problem would be solved.
There is also some concern within the industry that agreeing to self-regulate on the
amount of credit limit increases could be in breach of competition law.
Page 114 of 230
Ban All Unsolicited Limit Increases
(Increases Only To Be Given In Specific Consumer Request)
With regard to BIS policy Option 4 – a ban on all unsolicited credit limit increases –
given that we know that customer-initiated requests for credit limit increases are
associated with greater risk, which the industry seeks to manage to the best of its
ability, it would seem illogical to conclude that this would be the right outcome and in
the interests of any stakeholder.
Our consumer research strongly suggests that consumers would not initiate credit
limit increases themselves were it to become a requirement. When asked if they
would ever request a credit limit increase from their card issuer:

86% said that they would not

only 13% said that they would do so
This means that consumers’ collective spending power and use of credit will diminish
over time.
Given the high degree of customer inertia that would be assumed under such a
model, lenders would have to assume the worst case that every customer would
remain on the limit set at the outset of the agreement, i.e. that there would be only
one chance to get it right, with all of the concerns around the limited availability of
data described earlier in this chapter.
Removing the capability of lenders to manage responsible UCLI strategies risks a
polarisation of ‘front-end’ (underwriting) decisions by lenders in order to compensate
for the reduced capability to appropriately manage the customer relationship over
time as the lender gets to know more about the customer’s use of their credit card
facility.
The choice for the lender then becomes one of offering more credit ‘up-front’,
or to not offering credit at all.
o
Higher initial credit limits
Brings a considerable increase in risk at the application stage and could
subsequently lead to more widespread and aggressive credit limit decrease
strategies, where accounts do not perform as expected (when approved at
underwriting at a time when the lender knows least about the customer), with
conflicting messages to customers resulting in very poor customer service. This
is not to say that granting a higher limit is irresponsible, but that it represents a
compromise compared to having the ability to reset a credit limit once a
customer’s actual behaviour has been observed.
o
Not offering credit at all
There are clearly severe risks that lenders may be forced into a situation where
they simply do not offer credit to low income consumers. If this were to happen,
hundreds of thousands, if not millions, of people could be forced into other types
of – usually expensive – borrowing. For example, home credit, payday loans or
the unregulated market.
Page 115 of 230
Industry concerns are supported by the conclusions reached by Oxera as part of their
economic impact analysis, where they conclude that:
“The most severe consequence of banning UCLI would be likely to be
experienced by high-risk borrowers. As noted…by BIS, it is standard practice
with high-risk borrowers to extend very low initial limits of credit and then increase
them slowly over time to those borrowers exhibiting good behaviour. Since, in
general, it is not profitable for issuers to have customers on low credit limits and it
is too risky to grant larger limits initially, issuers would be reluctant to offer credit
cards to high-risk borrowers at all if they were not able to choose which
borrowers receive subsequent increases.”
“As far as Oxera is aware, no issuers have been able to extend credit to the near
sub-prime and sub-prime segment by adopting any strategy other than ‘start low
and grow’, for which UCLI is necessary. Banning UCLI may therefore result in
(near) sub-prime consumers who do not currently have credit cards being unable
to obtain them and being forced to use alternative (and often more expensive)
forms of credit, such as home credit, loan sharks or pawn shops.”
“Existing (near) sub-prime cardholders would also be disadvantaged in that they
would be unable to obtain new cards and thus be locked into their existing credit
cards. Among other effects, this would reduce or eliminate their ability to opt out
of any re-pricing and so reduce switching.”
“Removing the flexibility for issuers to increase the credit limit gives issuers an
incentive to set higher limits at application. Issuers will have to assess the
potential increase in write-offs as a result of higher limits at application (when less
information is available than later on) and the potential increase in profits as a
result of higher usage of credit. Although setting higher credit limits at application
could be rational and profitable for issuers across their entire portfolio, it would
not necessarily contribute to a policy of responsible lending. In other words,
banning UCLI could make issuers move away from their responsible ‘start low
and grow’ policies to higher credit limits at the point of application. The link
between the level of credit limits at application and UCLI is also illustrated by
anecdotal evidence from an issuer which historically did not offer UCLI to
customers. When the issuer began to offer UCLI, the initial limits granted to
applicants decreased.”
“A ban on UCLI may also affect the degree of competition in the market by having
an impact on consumers’ ability to switch between providers. A new card
provider that has less information about a cardholder than the existing provider
would need to offer a lower initial limit. Without UCLI, the potential switcher
would know that it would take repeated requests over months or years to reach
the existing limit. This may deter the cardholder from seeking to switch in the first
place.”
“Competition between mono-lines and banks may also be affected. By definition,
mono-lines typically will not have any information about an applicant other than
that which is available from credit reference agencies. They therefore rely on
gaining information about customers through experience. Banks, by contrast,
may already have additional information about the behaviour of an applicant
since the applicant may hold other products. This gives banks an advantage
over mono-liners in selecting an initial credit limit. This advantage would arguably
become more important if the ability to grant UCLI were removed.”
Page 116 of 230
“…BIS’s rationale for proposing additional restrictions on issuers’ ability to grant
UCLI was based on a lack of consumer understanding and concern that UCLI
may contribute to over-indebtedness. This section has presented evidence
suggesting that most consumers have a reasonable understanding of UCLI and
has also demonstrated limited support for the concern that there is any increase
in indebtedness following UCLI.”
“While not applying to the majority or even a significant number of cardholders,
there is likely to be a sub-set of cardholders who may not have the self-discipline
to assess their ability to repay an increased level of spend when made available
to them. For example, in the qualitative GfK survey, one cardholder indicated
that she would always be tempted by increased credit availability, even though
she knew it would be likely to increase her indebtedness. To the extent that this
issue is relevant to a sub-set of cardholders, it would seem most desirable to
address it in a way that does not remove the ability of card issuers to adjust credit
limits for other consumers, particularly high-risk consumers whose access to
credit relies on the ability of issuers to adjust limits.”
“It is possible that the opt-in mechanism proposed by BIS would fulfil this role of
providing the option of a commitment device for some consumers while not
jeopardising credit access for high-risk consumers. Arguably, this would focus in
particular on cardholders with poor impulse control, but less so on those who are
also affected by inertia. It is uncertain whether the opt-out mechanism would
provide these desired benefits for one group while not imposing undesired costs
on another. Thus, it would seem advisable to conduct additional research to
assess the efficacy and costs and benefits of such an option before introducing it
across the industry.”
Page 117 of 230
Allow Customers To Opt In To Receiving Unsolicited Credit Limit Increases
With regard to BIS policy Option 5 – allowing cardholders to opt in to receiving
unsolicited credit limit increases – two scenarios are outlined:

Customers opt-in to a limit increase programme at the outset of the agreement

Customers have to opt-in to each limit increase in response to an offer from the
lender to increase the limit
Oxera have concluded on the basis of our consumer research that cardholders do
understand UCLIs but are not motivated to take credit limits into their own hands,
most (73%) being satisfied with their current limit, and 86% saying that they would
not request an increase.
This would leave credit card lenders having to assume that consumers will not opt-in
and adjust their behaviour accordingly. This option is therefore likely to have the
same practical impacts on the credit card industry and on its customers Option 4, a
total ban on unsolicited credit limit increases.
Additionally such a change would introduce additional cost, bureaucracy and
inconvenience for consumers who are largely familiar with the current model. Having
been offered an increase, consumers may believe based on their previous
experience that they automatically have that spending power without having
accepted it and spend up to or over that new limit, possibly incurring default fees
There is also some likelihood that not opting in to credit limit increases at the point of
application would in itself become a risk indicator and could result in those not opting
in as part of their application having their application declined. Paragraph 4.32 of the
consultation paper rightly points out that consumers might be concerned about
expressing a reluctance to accept credit limit increases at the application stage if they
feared it could limit their chances of being approved.
Were this option to be pursued, care would need to be taken in implementing an optin model, largely dependent upon the sanction for any failure to comply.
Using the draft new credit card cheque regulations as an example, failure on the part
of the lender to comply with the regulations is a criminal offence.
Therefore the lender must have 100% reliable documentary evidence before sending
cheques out. Whilst this can be achieved quite straightforwardly for mail and e-mail
requests, this effectively precludes a positive response to any telephone requests
unless the lender records and stores every single telephone conversation with all of
their customers through their call centres – a prohibitively expensive compliance
requirement. For many lenders this has rendered the credit card cheque regulations
as effective as a total ban, which is not what we believe was intended (otherwise a
full ban would have been implemented). If the same sanction were true for credit
limit increases then an opt-in would / could effectively be tantamount to a ban.
Page 118 of 230
Conclusions
The consultation document sets out a number of options:
2. Improve information transparency on unsolicited limit increases
3. Limit the size and/or frequency of individual limit increases
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
We believe that the evidence clearly supports the conclusion that current practice is a
cornerstone of responsible lending, proven to deliver lower delinquency rates than
alternative approaches and ensuring that customers have the flexibility and
convenience which they want and expect.
In particular, we believe that our evidence shows that:

Unsolicited credit limit increase strategies are robust and do not have any
material impact on delinquency rates, actually showing lower rates than for
customers who were not selected for an increase

Credit scoring is proven to be robust, working as intended

The vast majority of customers understand the fact that the credit limit on their
account can change

Customers are not in favour of the likely consequences should a change in
practice be enforced
It is for that reason that we disagree with paragraph 4.19 of the consultation paper
and believe that the principles already presented to BIS by the industry are
sufficiently strong and represent important additional measures around customer
convenience and control, without compromising the responsible lending practices of
lenders – a win-win.
Nevertheless, we have given consideration to how we might further strengthen the
principles and propose the following additional commitments:

Provide a customer with 30 days notice in advance of the change to the limit

Provide clarity on the multiple channels by which the customer can opt-out

Provide clarity that the customer can opt-out of an individual increase and/or
permanently

Provide cardholders with a means to decrease their limit that does not require
personal interaction e.g. via on-line or an automated telephone service
Page 119 of 230

Incorporate the three core exclusions as set out in the risk-based re-pricing
statement of principles (as below) and also an additional specific exclusion
around customers who make 6 consecutive minimum payments (on balances
which are not subject to a promotional rate):
-

Where a customer has failed to make the minimum contractual payment
requested on the last two or more consecutive monthly statements; or
Where an agreed repayment plan is in place in respect of the account; or
Where we have been formally notified by a not-for-profit debt advice agency
that the customer is in serious discussion with it
Enshrine a commitment that customers find it simple to decline a higher limit
As such, the revised principles read as follows:
REVISED STATEMENT OF PRINCIPLES ON UNSOLICITED CREDIT LIMIT INCREASES –
JANUARY 2010
Purpose

This ‘statement of principles’ relates specifically to unsolicited credit limit increases. This refers to a
situation where we decide that it’s appropriate to increase the credit limit on your account, as a
service to you as a customer.

The principles have been developed by the industry following discussions with the Department for
Business, Innovation and Skills (BIS)

The principles build on strong existing best practice guidance and with a number of additional
commitments designed to respond positively to:
o
The difficulties faced by some consumers in the economic downturn; and
o
The need for customers to have control over their finances
Key Messages for customers

A credit card issuer’s ability to actively manage credit limits is a key part of responsible lending,
helping to ensure that you are only provided with a level of credit that you can afford to repay.

Responsible lending does not start and end when you first apply for credit – we are committed to
such practices throughout the period that you hold a credit card account with us.

The principles are underpinned by the common industry practice to consider raising credit limits
incrementally over time. Such a practice is at the heart of a responsible approach to credit limit
management and is sometimes referred to as a “low & grow” approach.

This means that you may be granted a relatively low initial credit limit and, if the card is used
responsibly and the data available to us suggests that you would be able to manage a higher credit
limit, it may be increased (in stages) as we learn more about your use of the credit card.

Not all customers will have their credit limit increased, because such decisions are only taken
where we are comfortable with the level of ‘risk’ associated with a customer.
(continued on next page)
Page 120 of 230
The Principles
1. Where we believe that it is appropriate to increase your credit limit, we want to ensure that
you have some control over this change. We believe that it is important to make your options as
transparent as possible and we will make it as convenient as possible for you to act upon your
choices.
To support this commitment:
a.
We will provide you with a clear written notification of the change we’ve made to your credit limit
(by means of a specific communication), at least 30 days in advance of the change, so that you
have an opportunity to consider whether you are comfortable with such a change
b.
We will give you the option (in an industry standard format) to tell us that you do not wish to
accept this particular increase to your credit limit, or that you would actually prefer the credit limit to
be reduced
c.
We will also give you the option to tell us that you do not wish to be considered for any future credit
limit increases, until you advise us otherwise
d.
To enable you to act upon your choices quickly and conveniently, we will make it possible for you to
reduce your credit limit, with or without the need for personal interaction with us. The latter may
include via websites or an automated telephone service
e.
Where you do not have access to such means, or where you prefer not to use them, we will also
make it as convenient as possible for you to advise us of your preference in a number of other
ways, such as by letter, e-mail and a customer service telephone number
f.
Where you wish to decline or reduce your credit limit, we commit that our staff and processes will
make this as easy as possible for you
2. We will not increase your credit limit in the following circumstances:




Where you have made 6 consecutive minimum payments (on non promotional balances)
Where you have failed to make the minimum contractual payment requested on the last two or
more consecutive monthly statements; or
Where an agreed repayment plan is in place in respect of your account; or
Where we have been formally notified by a not-for-profit debt advice agency that you are in serious
discussion with it.
3. Before we decide that it is appropriate to increase your credit limit, we will fully assess
whether we feel you will be able to manage the higher credit limit, with reference to all
information available to us, which will include a comprehensive range of factors, such as
information relating to:




how you have managed the particular credit card account, including ‘behaviour scores’ and
measures around affordability/utilisation and your payment history (such as whether you often pay
the minimum payment)
any other credit card accounts you may hold with us, or other types of relevant lending accounts
you may hold with our group of companies (e.g. current account)
Information provided by credit reference agencies, including variations of risk/indebtedness
scores/indices and debt/income ratios
information that you have provided to us
4. We will ensure that our staff are able to clearly explain to you why we have increased your
credit limit and the options available to you.
Overall, with regard to the BIS policy options, we would urge Government to avoid
the imposition of any replacement of the existing UCLI model unless there is strong
and compelling evidence of consumer detriment, which industry strongly believes the
evidence proves otherwise.
Page 121 of 230
The implications of moving to some of the BIS proposals would be to introduce more
risk into the customer relationship earlier in the process, or the denial of credit cards
to a significant minority of mainly non-prime customers. This is not a sensible or
desirable outcome.
If the Government believes that there is an issue around high risk, high utilisation
customers being granted credit limit increases, and shares the industry view that
these are typically customer driven requests, then it needs to work with industry on a
targeted and proportionate solution to address these customers, rather than a onesize-fits-all solution that penalises and/or inconveniences all responsible cardholders.
Our challenge to Government is to demonstrate that moving from a model that has
been shown to be at the heart of responsible lending, to alternative suggestions,
would lead to more responsible lending or fewer indebtedness problems. Any
solution proposed:

must not compromise responsible lending practices, where this would result in
consumer detriment, including greater delinquency rates

must not inject increased risk into the system; or

must not risk the other inadvertent consequences that the evidence suggests
might happen
Making a non-evidence based change would, in effect, be a live experiment on a
mass scale with one of the fundamental features of credit cards that helps drive
manage risk and drive competition and is one of the levers of the UK economy.
Page 122 of 230
Proposal Summary
Industry’s proposals for addressing Government’s concerns around ‘Unsolicited
Credit Limit Increases’ are summarised as:
Further strengthen the statement of principles approach originally discussed with BIS
in the summer of 2009, with the following additional commitments:

Provide a customer with 30 days notice in advance of the change to the limit

Provide clarity on the multiple channels by which the customer can opt-out

Provide clarity that the customer can opt-out of an individual increase and/or
permanently

Provide cardholders with a means to decrease their limit that does not require
personal interaction e.g. via on-line or an automated telephone service

Incorporate the three core exclusions as set out in the risk-based re-pricing
statement of principles (as below) and also an additional specific exclusion
around customers who make 6 consecutive minimum payments (on non
promotional balances):
-

Where a customer has failed to make the minimum contractual payment
requested on the last two or more consecutive monthly statements; or
Where we have been formally notified by a not-for-profit debt advice agency
that the customer is in serious discussion with it
Enshrine a commitment that customers will find it simple to decline a higher limit
Page 123 of 230
5.
Minimum Payments
Page 124 of 230
Minimum Payments
Introduction
The minimum payment is the contracted amount required by the credit card lender to
be paid each month by a cardholder, usually expressed as a percentage of the
outstanding monthly balance subject to a fixed minimum (e.g. £5.00), whichever is
the greater.
From the perspective of the credit card lender the minimum payment exists for the
following reasons:

To cover the ongoing costs of providing credit

To avoid negative amortisation, i.e. where requested payments do not cover
interest charges and fees, as codified in the Lending Code

To provide a mechanism for lenders to evaluate potential financial distress

To maintain regular contact between the cardholder and the lender
From the perspective of the customer, the existence of the minimum payment and
the flexibility this offers them on an ongoing basis about the period over which credit
will be re-paid, is one of the key features that distinguish the credit card product from
other forms of credit such as a personal loan.
Our research shows that customers value the flexibility of the option to pay a
minimum payment, or more if they choose to do so, and the ability this gives them to
manage their overall personal finances. The evidence suggests that around a
quarter of cardholders take advantage of the flexibility to pay just the minimum at
least once during the course of a year. Of those who make minimum payments, 56%
say that this is all they can afford, 24% say they have more expensive forms of credit
elsewhere, whilst 15% are exploiting to the full a promotional offer (for example, on a
balance transfer).
It is important to note that very few customers make the minimum payment every
month in a twelve month period – just 3.1% in the twelve months to June 2009; and
that making minimum payments is not associated with higher ongoing levels of overindebtedness. Our research on accounts that made only the minimum payment in
Q2 2008 shows that the debt they have a year later is no higher than those that make
more than the minimum payment – across all risk bands.
Our consumer research (depth interviews and group discussions) shows that
cardholder awareness of minimum payments is high, with their statements confirming
the option each month. Transactors (i.e. those customers who always pay their
balance in full) and more sophisticated card users know that only ever making the
minimum repayment is a poor way to re-pay a balance because of the long payment
periods that result, though some minimum payers can be confused over what they
mean. Respondents viewed minimum payments both as a potential ‘trap’ and also a
god-send, offering people the opportunity to make low payments where they felt this
was necessary for them personally.
Page 125 of 230
96% of the market to The UK Cards Association, there were around 300 complaints
(from a total of 30.2 million credit card holders) regarding the level of the minimum
payment between January and October 2009, accounting for 0.04% of the total
complaints in that period.
Overall, respondents believed that whilst there may be a profit motive among
lenders, ultimately it is the consumer’s responsibility to be aware of such features
and make their own decisions. Many respondents saw the minimum payment as
being the price to be paid for maintaining an open-ended credit facility.
The evidence suggests that the current minimum payment regime is not a cause for
major concern among consumers.
To make changes to the regime would reduce flexibility for customers who
occasionally or often make minimum payments at present, such as:

Those who say they can not afford higher payments would have to do so in future
(or risk moving into default)

Those exploiting balance transfer offers to the full would cease to be able to do
so

Those paying off higher interest loans from other sources would also cease to be
able to so as effectively
Some of the changes set out as options in the consultation paper could have farreaching consequences, also impacting on the behaviour of some of the 60% of
cardholders who pay off their balance in full in each month, and those who often but
not invariably pay off balances in full each month. The preliminary findings of an
independent study into the psychology underlying consumers’ payment behaviours
by Professor Neil Stewart of the University of Warwick suggests that those who
currently pay off their balances in full could start to make lower payments instead if
the minimum payment were set at a higher level as a result of an “anchoring” effect.
The industry therefore believes that the way forward on minimum payments is to
develop further communications from credit card lenders to their customers to ensure
that all customers, and not just the vast majority, understand fully the impact that
making only the minimum payment will have on repayment periods.
Page 126 of 230
Recent Practice & Prevalence
The Argus dataset developed for this project covers the period July 2007 to July
2009 so earlier data are not available
Where data are shown but not sourced individually they are taken directly from the
Utilisation
%
Risk band
Hi - 1
2
3
Total
4
5
6
7
< 10
10 < 20
20 < 30
30 < 40
40 < 50
543
91
83
87
98
236
35
31
30
35
573
84
75
73
77
1,407
238
183
165
163
1,582
278
203
175
161
4,341
622
453
374
328
4,491
668
435
303
241
50 < 60
60 < 70
70 < 80
80 < 90
90+
118
150
221
401
2,661
39
45
64
108
395
83
100
144
228
603
170
192
247
391
821
159
175
201
258
507
306
301
320
380
621
203
179
172
180
242
Total
4,454
1,018
2,041
3,976
3,701
8,046
7,115
8
Low - 9
3,684 13,969
665
1,870
377
1,016
250
623
183
412
149
126
108
104
119
30,825
4,552
2,857
2,081
1,698
284
207
164
145
141
1,511
1,476
1,641
2,197
6,109
5,766 18,832
54,946
000s.
32
http://argusinformation.com/services/ukccps.htm
Page 127 of 230
Current Practice and Prevalence
In recent years it has been fairly common for credit card lenders to reduce the level
at which minimum payments are set across parts of their portfolio. The average
required minimum payment for the UK industry is 3% of balances. Oxera comment
that the recent decline to this level partially reflects declining credit card interest rates
over this time.
However, the required minimum payment differs by risk band. Whilst being relatively
consistent for the low, medium and high risk accounts, the average required
minimum payment for high risk accounts is closer to 5%.
Average Minimum Payment Rate Required By Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
15.5
9.1
7.9
5.7
5.0
8.3
5.5
3.9
4.2
3.2
6.8
4.1
3.4
2.8
2.8
5.8
4.3
3.4
2.8
2.8
5.5
3.6
2.9
2.6
2.7
5.5
3.5
2.9
2.6
2.4
5.3
3.9
3.3
2.8
2.7
4.0
2.8
2.5
2.4
2.3
3.7
2.9
2.9
2.7
2.6
4.5
3.4
3.0
2.8
2.7
50 < 60
60 < 70
70 < 80
80 < 90
90+
4.5
4.2
4.1
3.7
5.0
2.8
2.7
2.9
2.6
2.8
2.7
2.6
2.4
2.4
2.6
2.6
2.6
2.5
2.4
2.6
2.5
2.4
2.4
2.3
2.3
2.3
2.3
2.2
2.1
2.3
2.4
2.3
2.3
2.2
2.4
2.2
2.1
2.0
1.8
1.9
2.5
2.3
2.3
1.9
0.0
2.5
2.5
2.5
2.4
3.4
Total
4.9
2.8
2.6
2.7
2.5
2.4
2.8
2.4
2.7
3.0
%.
NB: Figures in the lowest utilisation bands will in part be influenced by the impact of a fixed minimum
monthly i.e. £5, £10 etc. The bottom right hand cell shows as 0.0% due to rounding and the relatively
small number of accounts in this segment.
In addition, Oxera have also found evidence that some lenders are now
experimenting with increasing the minimum payment for new customers to reduce
risk, partly as a response to the current economic circumstances.
Page 128 of 230
Direct Debit Payment
Most (if not all) credit card lenders offer cardholders the option to set up a Direct
Debit to pay either the minimum payment each month (thereby requiring an
additional, supplemental payment if the cardholder wishes to pay off more) or the full
balance on the due date.
According to credit card lenders’ returns to The UK Cards Association33 around 15%
of accounts make payments by Direct Debit. Just over three quarters of these Direct
Debit payments, or 4.5 million each month, are for the minimum amount.
We believe that most cardholders who set up a Direct Debit to make the minimum
payment do so in order to ensure that they do not incur a late or missed payment
charge. In such cases the cardholder would need to make an additional,
supplemental payment to pay off any more of their balance.
33
Data provided by 13 credit card issuers accounting for 96% of the market
Page 129 of 230
The Lending Code
Minimum payments have been the subject of external scrutiny for a number of years,
particularly since the Treasury Select Committee hearings in 2003 and 2004. As
such certain protections and information requirements already exist relating to (i) the
level at which they should be set and (ii) health warnings on statements, as follows:
The Lending Code & Minimum Payments
Credit Card Repayments
Subscribers should ensure that the minimum monthly repayment covers more than that month’s interest.
This means that the minimum repayment will cover that month’s interest and a proportion of the balance
outstanding from the previous month.
The principle should be that the minimum repayment on a credit card should reduce month by month if
there have been no further transactions on the card and the lower minimum payment threshold of the
card has not been reached, assuming all other conditions of the product remain unchanged. The term
‘transactions’ includes any fees, charges or PPI premiums incurred on the card.
The minimum payment amount on the account should be clearly shown. This amount should normally
be sufficient to avoid negative amortisation over a period of 12 months (i.e. the sum of 12 minimum
payments would exceed the sum of additional interest added to the account over the same 12 month
period).
It is acceptable for the minimum payment amount to be calculated as a percentage of the balance
carried forward, so long as the percentage would normally prevent negative amortisation. Other
methods for calculating the minimum payment are also acceptable, provided this principle can be
demonstrated.
Subscribers may offer payment holidays and should clearly explain the terms and that customers can
reject the holiday by continuing payment. Where a payment holiday is provided the minimum repayment
afterwards should be sufficient to avoid negative amortisation over a period of 12 months from the start
of the holiday.
Credit Card Statements
The Code also requires an estimate of the amount of interest payable next month if the consumer
makes only the minimum payment, and reads as follows:

The front of each credit card statement should show a cash figure indicative of the amount of
interest which would be payable by the customer if they paid the minimum amount and it reached
the subscriber on the last day for payment.
Health Warning
Also, since October 2004, an APACS (now The UK Cards Association) guideline has obliged all credit
card statements to include a minimum payment health warning about the risk of only making minimum
payments to appear close to the minimum payment figure on a credit card statement that reads:

“If you only make the minimum payment each month, it will take you longer and cost you more to
clear your balance”.
This guideline was incorporated in to the Code in March 2005.
Page 130 of 230
Furthermore credit card companies also agreed that additional information should be
included within pre- and post-contract information – in line with the Code – to
highlight that the minimum payment amount does not constitute a recommended
payment schedule.
In the consultation paper BIS have also observed that “some issuers have chosen to
go beyond the basic industry position, with several including a scenario showing the
relative costs of only making the minimum repayment compared with making a small
monthly payment (in excess of the minimum).”
Page 131 of 230
The US CARD Act
The US CARD Act makes provision for certain disclosures around minimum
payments to be incorporated into the Truth In Lending Act (but stops short of
regulating for a required level of minimum payments) regarding information to be
included on credit card statements, as follows:
A.
A written statement in the following form: ‘Minimum Payment Warning: Making only the minimum
payment will increase the amount of interest you pay and the time it takes to repay your balance.’,
or such similar statement as is established by the Board pursuant to consumer testing.
B.
Repayment information that would apply to the outstanding balance of the consumer under the
credit plan, including:
I.
II.
III.
the number of months (rounded to the nearest month) that it would take to pay the entire
amount of that balance, if the consumer pays only the required minimum monthly payments
and if no further advances are made;
the total cost to the consumer, including interest and principal payments, of paying that balance
in full, if the consumer pays only the required minimum monthly payments and if no further
advances are made;
the monthly payment amount that would be required for the consumer to eliminate the
outstanding balance in 36 months, if no further advances are made, and the total cost to the
consumer, including interest and principal payments, of paying that balance in full if the
consumer pays the balance over 36 months
Page 132 of 230
Cardholder Behaviour
The UK Cards Association tracks cardholder payment behaviour through the annual
Consumer Payments Survey (CPS). In terms of trends over recent years the
following behaviours have been observed:
Credit Card Repayment Behaviours 2003- 200834
%
Full
Partial
Revolvers
Minimum
2003
54.0
10.5
23.1
12.5
2004
55.3
10.4
24.3
10.1
2005
55.3
11.0
22.8
10.9
2006
58.0
10.1
21.0
10.9
2007
55.4
11.1
22.9
10.6
2008
60.3
8.6
18.7
12.4
Definitions:




Full payers always repay the full balance on all of their cards
Partial payers occasionally do not repay the full balance on at least one of their cards
Revolvers pay more than the minimum payment but less than the full payment on at least one of
their cards
Minimum payers pay only the minimum payment on at least one of their cards (this could include
those borrowing on an introductory 0% interest rate)
Source: Consumer Payments Survey 2003-2009
Our consumer research gives similar results that are broadly consistent:

Among all credit card holders, 69% of respondents reported that they paid off the
full balance each month on all of their cards. A further 18% said that they
sometimes had a balance on at least one of their cards; 4% that they often had a
balance, and 8% that they always had a balance on at least one card

30% of consumers who have an outstanding balance say that they hold a card or
cards where they just make the minimum payment every month

57% of cardholders who make the minimum payment know the minimum
payment percentage on their card in percentage (%) terms (for many it will be the
sterling amount that is important; they may know this rather than the percentage).
Of these 7% know it to be 1%; 9% know it to be 2%; 8% know it to be 3%; 3%
know it to be 4%; 12% know it to be 5%; and 18% know it to be more than 5%35
However, whilst this provides a useful overview, this data does not tell the full story of
how consumers choose to use the payment flexibility offered by credit cards, which
suggests a more sophisticated and complex approach to minimum payments.
34
The CPS question is asked as follows for each different credit/charge card held:
When making repayments on your card account do you:

Always pay-off the full amount monthly

Usually pay off the full amount monthly but occasionally carry some over

Pay off some of the amount monthly but usually carry some over

Usually pay only the minimum amount monthly

Someone else is responsible for paying off the card
35
NB: the sample size for these data is relatively small and therefore needs to be treated with caution
Page 133 of 230
Making the minimum payment is not necessarily a sign of financial distress and can
in fact be perfectly rational behaviour, though a customer’s ability to pay the minimum
can be an important signalling mechanism for a lender to help evaluate potential
financial difficulties.
Between July 2008 and June 2009, 27% of accounts made at least one minimum
payment during the twelve months (compared to 25% the previous year). It is
possible that this increase suggests that affordability is playing an increasing role in
customer motivation and therefore that increasing the minimum would increase
delinquency.
Looking specifically at Q2 2009, the proportion of accounts making at least one
minimum payment during the quarter was 20.9%, broken down as follows:
Proportion of Accounts Making At Least One Minimum Payment During the Quarter By Risk &
Utilisation – Q2 2009
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
20.9
19.6
21.9
22.6
24.0
18.9
20.0
24.9
27.0
32.4
19.0
26.3
31.9
36.7
39.5
23.6
28.0
33.3
37.8
39.5
16.6
18.3
23.2
27.8
30.0
15.7
16.0
20.4
23.3
26.3
10.3
9.9
14.5
17.9
21.5
7.3
7.2
10.9
14.0
16.8
7.2
6.2
8.5
10.6
13.2
10.1
10.7
15.3
19.5
23.5
50 < 60
60 < 70
70 < 80
80 < 90
90+
24.3
26.0
26.9
29.0
28.1
32.8
34.5
36.8
40.0
43.7
40.8
43.4
49.3
47.5
45.4
40.7
41.6
46.2
51.9
47.0
32.2
36.2
36.8
35.7
41.1
27.0
27.7
28.5
30.4
34.8
22.3
23.8
26.6
28.9
33.1
18.7
21.0
22.8
25.8
32.6
15.9
19.5
23.2
28.3
0.0
26.1
29.4
33.2
36.6
36.9
Total
27.2
38.0
41.7
40.8
29.6
23.6
16.4
11.6
9.4
20.9
%.
In general, lower risk customers make higher payments and higher risk consumers
are more likely to make the minimum payment. In other words, the percentage of
accounts making a minimum payment during the quarter increases by risk, with the
exception of the two highest risk bands where the percentage falls - possibly
because more accounts in these segments are on repayment programmes.
Accounts with high utilisation levels are also more likely to make the minimum
payment. A proportion of those in the medium and low risk segments are likely to be
balance transfer customers for whom making the minimum payment is an entirely
rational behaviour.
The percentage of accounts making at least one minimum payment during Q2 2009
is reasonably consistent regardless of the length of time an account has been open,
at around 20%-25%. The one exception to this is among long-standing accounts
(open for more than 60 months), where fewer accounts (18%) are paying the
minimum.
Page 134 of 230
Frequency of Making A Minimum Payment
Within this, most accounts making a minimum payment during the course of the year
did so on just a single occasion. This demonstrates that customers value the
flexibility provided for credit card payments and that they use the option to pay the
minimum, when it suits them, i.e. they take control.
Higher risk accounts are more likely to have made a minimum payment in the last
year. For those making at least one minimum payment in the year to June 2009, the
average number of minimum payments in the year was as follows.
Minimum Payments – Average Number and Proportion of Accounts – Year to June 2009
Highest risk
High risk
Medium risk
Low risk
Average number of minimum
payments
2.40
2.92
2.04
0.75
Proportion making at least one
minimum payment
49.7
49.5
35.3
18.3
Accounts with a balance transfer were more likely to only pay the minimum across all
risk bands, though the difference was more pronounced in the lower-risk segments.
It is often stated that cardholders can take many, many years to clear their
balance if they were only to ever make the minimum payment. Indeed, this is
one of BIS’s claims in the consultation paper (paragraph 3.4). This is a purely
theoretical, mathematical outcome that bears no relation to the evidence of
how consumers actually behave36.
Indeed, very few people consistently make the minimum payment even over
twelve months – just 3.1% in the year ending June 2009, a figure which falls to
just 1.3% over 24 months (to July 2009). It is therefore highly unlikely that
anyone would ever attempt to pay off their balance over such extreme
timescales. Therefore, we do not think this is a valid argument.
It has often been said that consumers making the minimum payments in the long
term (with no good reason, i.e. they are not benefiting from a promotional rate), can
be evidence that they are in, or approaching, financial distress. This fact is not lost
on the industry and credit card lenders will use a broad range of data to identify the
early signs of customers getting into difficulties, one component of which may be
habitually paying the minimum payment.
36
Paragraph 3.32 contains illustrative examples on minimum payment scenarios. This same example is
used in the accompanying economic impact assessment using the same assumptions but delivering
very different results.
Page 135 of 230
Reasons Consumers Make the Minimum Payment
The reasons why consumers choose to make the minimum payment has been
explored in our consumer research. Our findings show that of those who make the
minimum payment:

56% say that they make the minimum payment because the minimum is all that
they can afford

A further 24% say that they make the minimum payment because they have more
expensive debt elsewhere (in which case it is a perfectly rational behaviour)

15% say that they are on a promotional rate (again, rational behaviour)

These three groups total 94% of minimum payers
There is an underlying assumption that making the minimum payment could be an
indicator of financial distress. To address this, from the end of 2008, credit card
lenders began sharing additional information on their customers’ management of
their credit card account, including whether they pay only the minimum payment.
The project became known as the behavioural data sharing (BDS) project and the
additional data enhances the information previously shared through the credit
reference agencies, including the balance, credit limit and payment history.
The full impact of this innovation has yet to be fully realised, but it represents a
significant advance in risk management. Although this data is now widely shared, it
is common for the impact of new data such as this to take some time to be realised
as lenders learn how to interpret and use the new information. This data sharing
initiative has yet to be allowed sufficient time to truly bed-in.
Where customers are showing signs of financial distress – a conclusion that a lender
will come to using the full range of data available to them, not just information on
minimum payments – all lenders will usually intervene in some way. This can often
be a delicate conversation depending on the severity of the situation and the
customer’s willingness to recognise and accept that they may have a problem.
Hence the nature of that intervention would depend on the individual customer’s
circumstances reflecting the probability of the best outcomes for both lender and
borrower.
Page 136 of 230
Financial Impact on Consumers - Impact on Outstanding Balances
Across all risk bands those accounts that consistently made a minimum payment in
Q2 2009 had higher balances than accounts that paid above the minimum at least
once, with the average balance amongst repeat minimum payers being reasonably
consistent across the risk bands.
However, making the minimum payment does not lead to significant balance
growth – accounts that only made the minimum payment in Q2 2008 showed
comparable or higher balance attrition (i.e. reducing the debt) compared to
accounts that paid greater than the minimum by Q2 2009 across all risk bands.
In general, the charge-off rates for the next 12 months were higher for accounts that
only made the minimum payment in Q2 2008 (i.e. for three consecutive months) than
for those accounts that paid above the minimum at least once during the quarter.
Page 137 of 230
Impact of Increasing the Minimum
The potential impact on consumers of increasing the minimum payment percentage
is potentially significant, with many consumers having to find a sizeable extra amount
each month in order to continue to meet their contractual obligations.
As such there is a strong possibility that increasing the minimum payment
across the industry will exacerbate the risk of getting into financial difficulties
for a significant number of cardholders.
Our consumer research shows that:

39% of those who make the minimum payment say that they would still be able to
make the minimum payment if it were to double. 29% say they might find it
difficult to make the new minimum and a further 22% would definitely find it
difficult, a total of 51%. 10% say that they already find it difficult to make the
minimum payment
Using the Argus database, it is possible to calculate how many cardholders would be
affected by an increase in the minimum payment and to quantify how much more, on
average, they would have to pay each month.
Four scenarios have been modelled, based upon:

Increasing the minimum payment to 3%



Increasing the minimum payment to cover fees and charges plus 1% of the
outstanding balance
Page 138 of 230
If the Minimum Payment Were Set at 3%
If the minimum payment across the industry were set at 3%, 29.9% of accounts
across the industry would be affected in some way. Those accounts paying less than
3% (though this need not be the minimum payment) are more likely to be in the
higher risk, higher utilisation segments, though the larger pound impact would be
experienced in the lower risk segments (because more of these accounts are
currently paying the fixed minimum of £5 or £10).
Percentage of Accounts Paying Below 3% By Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
4.3
17.3
25.6
32.5
40.0
3.8
17.7
29.3
34.6
43.3
5.5
24.1
35.7
43.0
48.9
9.8
25.0
35.4
43.8
47.8
5.0
18.3
29.5
38.8
43.8
4.3
17.5
29.2
37.2
43.0
2.5
11.3
22.3
31.2
38.1
1.5
8.5
17.8
25.4
32.6
1.5
6.9
12.4
18.0
24.2
2.6
11.3
21.0
29.6
37.1
50 < 60
60 < 70
70 < 80
80 < 90
90+
45.9
51.7
56.5
59.4
67.7
47.4
50.9
53.9
57.0
65.2
52.7
56.9
63.0
63.9
64.9
51.3
55.0
60.3
63.2
64.8
48.9
54.0
56.2
59.0
67.3
47.0
50.6
54.4
60.1
67.9
42.2
47.4
53.1
58.7
65.8
38.5
44.5
49.7
60.9
70.6
31.0
39.3
48.5
60.3
72.3
43.2
49.5
55.4
60.7
66.8
Total
59.1
53.6
54.3
49.2
40.9
35.3
23.8
16.4
10.6
29.9
On average, the typical cardholder would have to find an extra £42.89 each month to
meet the increased minimum payment, up to a maximum (on average) of £100.93 in
some of the lowest risk, highest utilisation segments, as per the following table:
Monthly Additional Payment Needed to Achieve a 3% Minimum Payments for Those Currently
Paying Less By Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
8.97
14.09
19.12
22.38
28.20
4.57
8.54
15.13
20.42
24.48
3.63
8.34
14.32
20.96
25.15
3.26
7.70
13.05
18.21
22.33
3.83
8.89
14.64
20.80
25.46
3.65
9.24
15.80
23.66
29.45
3.46
8.52
14.66
22.14
28.35
4.12
10.84
19.31
28.77
38.13
6.30
13.13
21.98
31.96
42.24
4.47
10.18
16.93
24.31
30.45
50 < 60
60 < 70
70 < 80
80 < 90
90+
32.48
37.51
44.78
48.41
61.63
29.94
32.51
33.35
35.54
40.57
29.30
32.34
33.64
35.39
42.24
27.44
30.49
31.02
31.98
40.79
29.85
32.12
34.96
42.84
54.92
35.16
42.61
48.44
57.85
65.70
34.75
48.18
52.98
41.21
56.23
62.23
46.19
66.43
68.93
54.55
85.03
84.57
66.67 100.72 100.93
36.47
41.23
44.17
49.28
57.17
Total
55.97
36.78
35.81
31.40
37.97
43.45
38.19
42.89
53.12
48.81
£.
Page 139 of 230
would be affected in some way. The pattern of customers currently paying less than
4% is consistent with the 3% analysis.
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
5.9
22.4
33.4
41.5
50.3
5.5
23.3
36.0
43.5
53.0
7.4
29.6
43.5
51.7
57.9
12.8
31.3
44.3
54.2
59.0
6.8
23.5
37.0
48.2
53.6
5.8
22.7
36.3
45.8
52.6
3.5
14.7
28.7
38.9
47.0
2.3
11.4
23.2
32.4
40.7
2.1
8.8
15.3
22.0
29.0
3.5
14.6
26.5
36.7
45.5
50 < 60
60 < 70
70 < 80
80 < 90
90+
56.5
62.1
66.7
69.7
77.8
57.7
62.2
64.9
68.9
77.0
62.2
67.5
72.9
75.3
77.8
63.4
67.6
72.9
77.6
79.5
58.9
65.8
69.4
73.0
79.1
57.6
61.8
65.5
71.1
78.7
52.1
57.5
63.4
68.6
76.1
47.0
53.0
58.5
69.3
79.2
36.8
45.9
56.1
67.5
79.5
52.6
59.7
66.2
72.1
78.3
Total
68.8
64.1
64.6
60.5
49.7
42.7
29.0
20.1
12.7
36.0
meet the increased minimum payment, up to a maximum (on average) of £158.25 in
some of the lowest risk, highest utilisation segments. However, there is an
increasing impact among higher risk and utilisation customers, where the extra
amount starts to approach an average of £100, and the impact also starts to spread
into lower utilisation and lower risk segments, as per the following table.
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
11.62
20.22
27.77
33.95
42.53
7.39
15.58
27.04
35.56
42.31
7.05
16.65
27.90
39.20
47.13
9.84
16.24
26.79
36.87
44.92
7.40
17.27
28.32
39.51
48.40
7.27
17.71
29.74
43.15
53.12
6.72
16.61
28.13
42.27
53.53
7.44
18.93
32.72
47.87
62.49
9.91
21.97
36.42
52.02
68.14
7.98
18.57
30.60
43.36
53.84
50 < 60
60 < 70
70 < 80
80 < 90
90+
49.40
56.99
67.25
72.36
91.88
51.41
55.91
58.69
62.27
72.36
55.32
60.06
63.70
65.70
74.78
53.78
59.73
62.56
63.89
75.13
57.32
62.61
64.29
77.89
84.40
61.67
73.67
75.04
91.32
99.27
65.35
82.89
82.91 106.62 109.42
74.98
95.37
95.06 131.02 131.76
94.19 110.37 114.12 156.85 158.25
63.85
71.64
76.60
82.79
93.05
Total
83.13
64.92
64.89
60.10
67.08
71.14
73.18
66.69
81.26
74.98
£.
Page 140 of 230
would be affected in some way. More than 50% of accounts greater than 60%
utilised would be impacted across all risk segments, with a value of 5% causing
additional payments for 85.1% of accounts in the highest utilisation band.
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
7.2
26.4
39.3
47.7
57.1
6.9
27.2
41.4
50.5
59.9
8.9
33.4
48.7
57.3
63.8
14.4
34.8
49.2
59.4
64.4
8.2
27.1
42.3
53.7
59.2
7.1
26.6
41.4
51.1
58.0
4.4
17.7
33.4
44.3
53.1
2.9
13.8
27.0
37.3
46.3
2.6
10.3
17.7
25.0
32.9
4.3
17.1
30.4
41.4
50.7
50 < 60
60 < 70
70 < 80
80 < 90
90+
63.4
68.0
72.5
76.4
84.9
64.5
68.1
71.9
76.1
84.7
67.4
72.9
77.9
81.4
85.2
68.9
73.0
78.0
83.0
86.3
64.6
71.4
75.4
79.4
85.8
63.2
67.9
72.0
77.5
85.0
58.6
64.2
69.6
75.2
83.8
52.7
59.4
64.5
74.4
84.1
40.7
50.1
60.4
71.5
83.1
58.0
65.4
71.9
78.2
85.1
Total
75.3
71.0
70.5
65.6
54.6
47.2
32.8
22.7
14.3
39.7
meet the increased minimum payment, up to a maximum average of £218.27 in the
lowest risk, highest utilisation segments. However, even the highest risk, highest
utilisation customers are seeing average increases in excess of £100, as per the
following table.
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
14.39
26.44
36.66
45.91
57.36
9.92
22.68
38.14
49.49
59.62
10.23
24.67
41.00
57.22
68.57
10.38
24.85
40.73
56.24
68.29
10.68
25.48
41.65
58.68
71.64
10.55
25.97
43.39
62.93
77.68
9.72
24.02
41.33
62.05
78.29
10.57
26.81
46.53
67.34
87.23
13.10
30.67
50.58
71.80
93.29
11.22
26.74
44.14
62.59
77.51
50 < 60
60 < 70
70 < 80
80 < 90
90+
66.77
72.51
81.66
81.65
84.98
91.48
77.85
80.42
88.65
90.83
92.63 106.14
90.91
83.73
94.41
95.88
97.76 118.17
96.65
88.99
96.49
98.03 109.64 133.82
122.01 103.23 107.67 111.46 134.09 155.46
93.51
108.22
119.98
135.00
159.03
108.08
125.23
147.12
178.79
214.81
116.82
137.22
152.32
181.16
218.27
92.07
103.19
110.43
117.79
129.46
Total
110.39
93.90 109.07 100.47
99.65
< 10
10 < 20
20 < 30
30 < 40
40 < 50
92.33
94.21
90.28
96.85 103.08
£.
Page 141 of 230
If the Minimum Payment Were Set to Cover Interest and Fees plus 1% of the
Balance
If the minimum payment across the industry were set to cover interest and fees plus
1% of the balance, 19.3% of accounts would be affected in some way.
Percentage of Accounts Paying Below Interest and Fees plus 1% of the Balance By Risk &
Utilisation – Q2 2009
Utilisation
%
Risk band
Hi - 1
2
3
4
5
6
7
8
Low - 9
Total
< 10
10 < 20
20 < 30
30 < 40
40 < 50
5.0
13.2
19.5
22.1
25.7
5.3
13.6
21.9
24.6
30.7
5.1
13.3
18.3
21.3
25.3
3.8
9.5
15.5
19.1
20.3
4.0
10.6
16.6
21.5
24.5
3.6
9.9
16.5
21.0
23.8
2.1
6.0
12.0
16.1
19.6
1.2
4.3
9.8
14.5
19.1
1.1
3.3
6.3
9.6
13.5
1.9
5.9
11.3
16.0
20.1
50 < 60
60 < 70
70 < 80
80 < 90
90+
26.3
27.2
29.7
37.2
60.1
30.8
29.6
30.3
35.0
55.1
25.6
23.9
22.0
26.6
51.3
22.7
22.7
22.7
25.0
46.2
26.1
25.4
26.7
33.5
54.0
26.3
28.6
31.8
37.7
55.6
22.0
24.3
26.3
31.7
52.4
23.1
26.6
31.8
41.5
58.1
17.3
22.5
27.6
36.6
53.5
23.2
25.4
27.5
33.0
54.7
Total
48.0
41.1
33.1
25.9
25.8
23.0
13.9
10.6
6.1
19.3
meet the increased minimum payment, up to a maximum average of £57.24 in the
lowest risk, highest utilisation segments. The maximum average among the highest
risk, highest utilisation, customers is just below £40 per month.
Monthly Additional Payment Needed to Achieve Interest and Fees plus 1% of the balance
minimum Payments for Those Currently Paying Less By Risk & Utilisation – Q2 2009
Utilisation
%
Risk band
Total
Hi - 1
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
9.98
10.06
12.18
14.61
18.37
8.87
8.26
12.56
16.40
17.74
8.46
7.99
12.12
16.19
19.08
6.99
6.87
10.74
14.21
17.04
5.99
7.06
10.42
14.52
17.60
6.68
7.07
11.26
16.65
20.63
6.92
6.77
10.10
15.55
19.77
7.52
7.91
12.39
18.11
23.89
8.46
10.67
15.29
20.83
26.79
7.43
8.11
11.98
16.83
20.89
50 < 60
60 < 70
70 < 80
80 < 90
90+
20.59
21.08
22.51
22.82
38.98
21.85
24.13
23.55
23.04
28.76
22.93
24.02
24.88
24.17
29.25
21.12
22.88
23.99
23.48
29.04
22.10
24.85
26.13
27.73
34.34
24.72
27.95
31.46
34.74
41.00
24.41
28.47
33.46
36.39
43.45
30.08
34.18
40.14
45.54
57.33
32.82
38.25
41.68
46.77
57.24
25.25
28.07
30.09
30.68
36.89
Total
35.34
26.30
26.22
24.49
26.40
29.23
27.34
33.43
31.17
29.56
£.
Page 142 of 230
Overall Number of Accounts Impacted by a Change to the Minimum Payment
Amount During A Year
Whilst the above tables look at the number of accounts impacted during each
quarter, these figures will ignore other accounts impacted that made a minimum
payment during the course of the year but in one or more of the other quarters.
The overall number of distinct accounts impacted by each minimum payment
scenario is summarised below:
Number of Accounts Impacted in Different Minimum Payment Scenarios
Minimum Payment Scenario
Number of Distinct Accounts Impacted
2007-2008*
2008-2009**
3%
30,451,207
26,031,569
4%
32,074,387
27,445,780
5%
32,971,593
28,257,670
Fees+interest+1%
27,010,156
22,878,598
* = August 2007 to July 2008
** = August 2008 to July 2009
Page 143 of 230
Balance Transfer Customers
Accounts with balance transfers were more likely to pay only the minimum payment
across all risk bands, albeit that the difference was more pronounced in the low-risk
groups.
In addition, if minimum payment amounts were to be increased those customers
making the minimum payment because they are benefiting from a promotional rate
would end up paying off their balances sooner, thereby reducing the financial benefit
to them of having the promotional rate.
This effect has not been quantified.
Page 144 of 230
Financial Impact on Industry
Accounts that consistently make minimum payments are more likely to charge-off
than those accounts that pay off more than the minimum amount. The percentage of
accounts that consistently make the minimum payment increases with risk.
The potential impact on industry of regulating the minimum payment level is
potentially the most significant of the four policy issues addressed in the consultation
paper.
Financial Impact on Industry on Increasing the Minimum Payment
Minimum payment
£m - 2007-08
£m - 2008-09
Minimum payment of 3%
508
578
933
1016
1391
1492
Fees & charges +1%
311
343
The financial impact on the industry revenue increases by roughly £400-£450 million
with each 1% increase in minimum payment required. The impact on industry would
decrease significantly if the minimum payment setting was to be fees and interest
charged in the cycle plus 1% of balances.
The forecasted impact would have been higher in 2008 to 2009 due to more
customers making payments below the minimum payment scenario levels during this
period than 2007 to 2008.
In addition, there would be significant one-off systems costs for moving to a ‘fees and
interest charged plus 1% of balance’ scenario. These have not been costed.
Page 145 of 230
In paragraph 3.6 BIS assert that 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 (though no evidence is presented to support
this assertion).
It is a simplification to suggest that because someone comes to the end of a
promotional period that they can automatically afford to pay off more of their balance
than before. There may be any number of good reasons why a consumer might
continue to pay the minimum, such as it being all they can afford or that they are
repaying more expensive debt elsewhere first.
In paragraph 3.7 it is stated that recent reductions in the level of minimum payments
leave customers paying back their balance over much longer periods than a few
years ago. As stated previously, very few cardholders consistently make the
minimum payment even over twelve months – just 3.1% in the year ending June
2009, a figure which falls to just 1.3% over 24 months. Therefore, we do not think
this is a valid argument.
Paragraph 3.11 states a Government objective that consumers are encouraged to
make higher payments where they can so that credit and store card debts are repaid
over a reasonable period. The important words here are “where they can” and
“reasonable”, though it is industry’s view that the consumer is best placed to make
these judgements through their knowledge of their own individual financial
circumstances.
Page 146 of 230
Policy Options
The consumer research shows that there are no serious issues that changes to the
current minimum payments regime would address. In particular, it is our firm belief
that an increase in the minimum payment would not reduce financial difficulty but
would rather exacerbate it.
Although some customers that pay the minimum are likely to be in financial difficulty,
the level of the minimum payment is unlikely to have contributed in any significant
way to their over-indebtedness, which will have been the result of other factors. The
causes of over-indebtedness are well documented in previous work commissioned
by BIS.
The credit card industry therefore believes that the way forward on minimum
payments is to improve further the information provided to its customers, particularly
to make sure that the 3% of customers who make minimum payments over an
extended period (as well as the 97% that do not) all do really understand the impact
this will have on their repayment period.
Page 147 of 230
Setting a Recommended Minimum Payment
We believe that BIS Option 3, the setting of a recommended minimum payment (in
addition to the contractual minimum payment), would simply be confusing for
consumers and be unworkable.
One of the Government’s main objectives seems to be ensuring that consumers pay
off their credit card debt (without regard for, and in isolation of, any other
commitments) over what it regards as a reasonable timetable (36 months is
mentioned in paragraph 3.23 of the consultation paper). This is rather than allowing
consumers to make that choice dependent upon their wider circumstances, bearing
in mind any debts they may hold elsewhere or other spending priorities.
Our detailed concerns regarding this option are as follows:

Consumers will simply be confused as to the difference between what would
become known as the Government’s recommended payment amount and the
contractual minimum; why there should be two figures; and what the implications
would be of paying either. Such a figure would potentially be irrelevant to
habitual full payers but could also lure them away from full payment towards
payment of the Government’s recommended amount

Consumers are already at significant risk of information overload. Introducing
another piece of (unnecessary) information and an accompanying explanation
will simply contribute to and potentially exacerbate this problem

There is no evidence of any consumer demand for this information or how
consumers might react
As Oxera sums it up, drawing upon the work of Professor Neil Stewart:
“Introducing some form of ‘recommended minimum’ payment could cause some
cardholders currently paying amounts in excess of the recommendation to pay
less. This potential ‘anchoring effect’ is recognised by BIS, along with the
complexity of communicating the mechanics of the scheme to consumers”.
Page 148 of 230
Increase the Minimum Payments
BIS Option 4 is to increase the minimum payment, and suggests an alternative (in
paragraph 3.30) of basing the level of the minimum payment on a maximum period
over which the debt can be repaid. This would be a variable amount depending on
the spend each month.
This would effectively be the equivalent of turning a credit card into a form of
personal loan with a payment mechanism, diminishing one of the key differentiating
characteristics of credit cards i.e. their flexibility, that we believe consumers value.
In paragraph 3.36 it is suggested that an increase in minimum payment might be
limited to a defined subset of consumers who may be particularly affected by
repaying the minimum each month, such as “those that hold small amounts of debt
on higher cost credit cards” (though it is not discussed how “small amounts of debt”
or “higher cost credit cards” might be identified). The following paragraph rightly
points out the difficulties in identifying such groups of customers (including those who
might drift in or drift out of the group) and any discrimination issues. More
importantly, it is our view that this would likely create competition issues for those
lenders whose cards and customers are caught by such definitions and those that
are not.
Industry believes that the evidence shows that the financial impact on a large number
of consumers creates a significant risk that many will be tipped from a situation
where they are managing their accounts within their means into deeper financial
difficulties or indeed tipped into default. Given the magnitude of even the average
increase in payment that would be required, it is difficult to see how even a staggered
change would mitigate the impact for a large number of consumers rather than
simply delay it.
Furthermore, for consumers rationally paying the minimum, raising the minimum
marginally would reduce the financial flexibility of the card and reduce the
longer-term benefit of any promotional offer they were exploiting.
As Oxera conclude:
“Increasing the required minimum payment may actually exacerbate financial
difficulties for some cardholders, as recognised by BIS. Approximately 30% of
cardholders in March and June 2009 paid less than 3% of their balances and so
would be affected by an increase in the minimum payment to this level. As would
be expected, high-risk and high-utilisation accounts are the greatest affected”.
“The survey evidence is consistent in showing that for those consumers who
make minimum payments, an increase in the required rate of repayment would
lead to difficulty. When asked whether the consumer would still be able to make
minimum payments if the rate were doubled, 39% replied in the affirmative, but
10% said that they already incur difficulties in meeting the minimum payment,
and a further 51% identified that they either ‘might’ or ‘would definitely’ find it
difficult to meet the increased minimum repayment. While these figures are likely
inflated by the economic downturn, they do suggest that there would be a
significant number of people who would potentially be negatively affected.”
Page 149 of 230
Regulating the Minimum Payment for New Accounts
One option would be to set a statutory minimum payment for new accounts.
However, we do not believe that this would be in consumers’ interests for the
following reasons:

It would reduce the flexibility of payment associated with credit cards that
cardholders value

In effect, minimum payers would be prevented from taking up promotional offers
at lower rates if they could not afford the higher minimum i.e. the ‘payment shock’
still has an impact in this scenario

It would reduce the longer term benefits of switching as consumers would be
obliged to pay off their promotional balances at a faster rate

The financial implications for the industry would still be so significant that, if the
cost could not be absorbed, the result would be to place upward pressure on
interest rates and for the introduction of annual fees
In addition, it is apparent that regulating for a higher minimum payment would not just
impact upon those making minimum payments, but on any cardholder who is not
habitually paying in full.
Preliminary findings from Professor Neil Stewart37 suggest that:
“Analysis of monthly statements from 126,000 cardholders reveals that higher
minimum payments are associated with smaller repayments. Experimental
evidence from a hypothetical repayment task supports a causal link between
minimum payment and smaller repayments. Thus we caution against untested
rises in minimum payment or the introduction of information about alternative
repayment schedules to credit card statements”.
Industry believes that it would be a precipitate action to regulate against lenders’
ability to set minimum payment levels or, in a worst case, for increased minimum
payments until the implications of Professor Stewart’s work is fully understood.
37
It is important to understand that Professor Stewart’s work is entirely independent of the industry. The
industry has not funded or influenced Professor Stewart’s work in any way other than to provide him with
raw data across a range of credit card issuers’ portfolios so that his work can be based upon the best
possible empirical evidence.
Page 150 of 230
Conclusions
2. Improve information transparency
3. Set a recommended minimum payment
4. Increase the minimum payment
The industry believes that the answer lies in Option 2, in that measures aimed at
improving transparency around the impact of making minimum payments are the
optimal solution, picking up on suggestions made by BIS and going further.
Oxera specifically comment that
“It may be that improving information transparency would make more consumers
aware of the detrimental impact of making repeated minimum payments, as well
as potentially countering the ‘anchoring effect’ mentioned above. However, the
provision of additional information would need to be done sensitively, since some
studies have found that more information does not always lead consumers to
make better decisions (i.e. consumers may be confused due to perceived
information overload). This would require consumer testing and a clear analysis
of the costs and benefits to the consumers.”
Page 151 of 230
Proposal Summary
The industry’s proposals for addressing Government’s concerns around ‘Minimum
Payments’ are:

Credit card lenders separately contact habitual minimum payers (definition to be
agreed, but to include those that are paying the minimum with no obvious good
reason e.g. that they are benefiting from a promotional rate) every 6 months to
remind them of the implications of their behaviour

That Government and industry review Professor Neil Stewart’s research in due
course to fully assess the implications of the findings. Indeed, one of Professor
Stewart’s recommendations is that, before any changes to regulations are
introduced, they should be empirically tested with pilot studies. This is because
of the fact that changing minimum repayment levels affects all card holders, not
simply those who make minimum repayments
Industry believes that these proposals address one of BIS’s central concerns – that
there is a group of cardholders who could pay more than the minimum (and thus by
definition are not in financial distress) but choose not to do so and therefore incur
‘unnecessary’ cost, by giving cardholders additional information to help them reach
their own conclusion. We do not believe that it is advisable to go beyond the above
measures aimed at improving transparency for the following reasons:

The financial impact on consumers, particularly those who are currently
managing their debt carefully, making either the minimum payment or something
close to the minimum payment, many of whom would be tipped into financial
difficulties or delinquency

The financial impact on the industry would be the most dramatic of the four policy
issues and, if it could not be absorbed, would inevitably need to be passed on to
consumers in some form

The setting of a statutory higher minimum repayment on new accounts removes
some of the flexibility of credit cards which we believe consumers value and
could drive customers away from credit cards to other forms of credit, such as
overdrafts, where there is no minimum payment; which do not offer Section 75
type protections; and which are only offered by retail banks, potentially making
the mono-lines uncompetitive

The need to see and understand the ongoing work of Professor Stewart on the
psychology of payments within particular reference to the anchoring effects of
showing a minimum payment on statements
Page 152 of 230
6.
Re-Pricing of Debt
Page 153 of 230
Re-Pricing of Existing Debt
Introduction
The practice of risk-based pricing of credit card debt is one of the fundamentals
governing the way credit cards work.
The setting of an interest rate at the point of application is imperfect, based either
mainly on external credit reference agency information (particularly for mono-line
credit card lenders) or in combination with current account or other product
information (particularly for high street banks). Re-pricing is required at some point,
particularly if the risk profile of the cardholder changes.
At the time of opening an account, a credit card lender will assess a customer’s
individual likelihood of repaying and offer both a credit limit and interest rate tailored
to their particular needs and ability to repay38.
Over time, as the lender observes how a customer manages their credit card facility,
the risk profile of the customer may change and interest rates may be adjusted in line
with a changing risk profile.
Risk-based pricing is familiar from other parts of the financial services industry. For
example, in the case of motor insurance, different customer profiles attract different
levels of risk with newly qualified young male drivers generally attracting higher
premiums.
So, over the period that a card is held, a credit card customer may experience a
series of different life events during the period that they hold a credit card, such as
moving from an extended period of higher education through to getting married
and/or starting a family, where they may be taking on a wider range of borrowing.
There may also be periods of significant income fluctuations through employment
changes, where their use of credit could become more erratic and hence more ‘risky’.
During these periods a credit card customer might also exhibit behaviour within the
terms of their agreement that they might not regard as significant, for example using
more of their credit limit; or making a number of minimum repayments, or they may
belong to a group which may be more prone to become unemployed in the prevailing
economic environment. Any of these may suggest to the lender that they have
become more likely to default.
This increased risk of default may lead to the upward re-pricing of a customer
segment as a whole just as, in the case of motor insurance, a segment of customers
(such as young male drivers) may find that premiums change if the behaviour of just
some members of that group changes.
Finally, in relation to portfolio pricing, if the lender’s funding (or other substantive)
costs rise, it may pass on some or all of those increased costs to customers through
increasing the interest rate for some or all of its portfolio of card products (and vice
versa if costs fall), though this won’t be the only factor in pricing or re-pricing of risk.
38
Subject to the APR Advertising Regulations and the 66% rule
Page 154 of 230
Risk-based pricing is the most efficient and effective form of pricing reflecting the
costs to the lender of providing credit to cardholders. It reduces cross-subsidisation
and encourages lenders to serve all segments of the population. Risk-based pricing
also encourages the efficient use of the credit facility by customers. In theory,
customers whose credit costs increase as a result of a deterioration in their risk
profile spend less.
As with the determination of a suitable credit limit, lenders base portfolio re-pricing
decisions on credit and behavioural scoring models; they are not arbitrary decisions.
Decisions are based on highly sophisticated models, developed by statisticians with
considerable expertise and where such models must take account of a complex set
of variables in order to reach a position around changes which may be necessary for
issues to make for certain customers, along with the scale of such changes.
Our consumer research shows that there is a high level of consumer awareness,
both actual knowledge and/or intuitive understanding, that interest rates on credit
cards might change during the lifetime of an agreement.

When told that for most credit cards, the interest rate might change during the
time they had the card, 66% of all credit card holders (including those that had
not been re-priced) said that they knew this already, with a further 23% saying
that they did not know this but that it didn’t surprise them, a total of 89%. Just
11% of all credit card holders said that they did not know this and that it surprised
them
Respondents felt that it is a core issue for credit card companies and that companies
have the right to set the level, letting the market decide whether that rate is ‘fair’, and
that the right to re-price is ‘part of the deal’ when taking out a credit card.
However, there was also a strong desire for contract stability, and the notion of
substantive notice and giving a ‘reasonable’ alternative was a strong theme. Whilst
people felt that stability of contract would be ideal, current practice was largely
accepted. So favoured policy solutions focused on good communications and
alternative options for a customer who did not want to accept the price rise, with the
existing opt-out seen as a positive.
96% of the market to The UK Cards Association, there were around 11,100
complaints (from a total of 30.2 million cardholders regarding risk-based re-pricing
decisions between January and October 2009, accounting for 1.32% of the total
complaints in that period.
To make changes to current practice over and above improved communications and
alternative options would have serious implications for all customers when risk is
initially priced. In many cases (particularly for mono-line39 card issuers), only limited
data is available at the point of the original application. Credit card lenders would
need to exercise additional caution in pricing for all customers if risk-based pricing
were to become a one-off exercise which, once done, could not be undone. This
would mean interest rates would be generally higher to compensate.
39
Mono-line credit card issuers are those which issue only credit cards but do not offer a full banking
service. They may also, occasionally, offer a limited range of other products, but rarely a current
account.
Page 155 of 230
The Government’s consultation paper recognises the case for risk-based re-pricing
for new debts incurred by existing cardholders. However, Option 5 would prohibit the
re-pricing of any existing debt and essentially gives a lender in a risk-based business
only one chance to set a price for the life of a balance in a world where change is the
norm and where they do not have perfect information to make the initial decision.
But any change in the risk profile of a customer equally applies to all parts of an
existing balance, the ‘old’ as much as the ‘new’. The inability to re-price such debt
would have far-reaching consequences for the credit card industry and for all its
customers. It could be expected to lead to increased caution in pricing of risk and so
to higher costs for customers. It would also lead to extensive cross-subsidy between
customers.
Page 156 of 230
Overview of Recent Activity and Trends
The UK Cards Association has previously collated statistics around re-pricing activity
for 2008 which were reported verbally to the BIS Consumer Finance Forum in May
2009. This showed that 14 lenders had reported on their risk-based re-pricing
activity in 2008. Of these, 3 had not done any re-pricing, whereas 11 had. 8 had
provided detailed figures which, in aggregate, showed that 2.9 million accounts had
been re-priced of which 1.8m (63%) had been re-priced upwards and the remainder,
1.1 million accounts (37%), re-priced down.
Eleven credit card lenders subsequently reported on activity during the first four
months of 2009, i.e. after the new Statement of Principles had come into effect at the
beginning of the year. Three had not done any re-pricing, whereas 8 had, totalling
4.1 million accounts. Of these, data was available in respect of 3.1 million accounts,
of which 1.4 million (45%) had been re-priced upwards and 1.7 million re-priced down
(55%).
At that time, ‘opt-out’ rates (i.e. to pay down the outstanding balance at the existing
rate) ranged across credit card lenders from below 1% to 8%. Opt-out was being
communicated via a mixture of letters and statement messaging. Consumers not
taking up the option were thought to be not doing so for a variety of reasons, such as
their perception of their ability (or not) to get (cheaper) credit elsewhere; to maintain
their wider relationship with the lender; or taking up a different option such as simply
stopping using the card and taking their balance to another lender (something that
would be invisible to the original lender) etc.
As part of the response to this consultation, credit card lenders40 have been asked to
report on activity (covering the period January–October 2009). This shows that, over
the course of the year, 10.6 million accounts were assessed for a re-price (i.e. almost
2% of accounts each month). Of these, 6.4 million (61%) were re-priced upwards,
with the remaining 4.2 million (39%) seeing a reduction.
In terms of the ‘opt-out’, the numbers over the broader January–October period are
similar to the previously reported numbers (January-April), now ranging for different
lenders from below 1% to a figure of almost 5%.
(NB: these figures have changed compared to the data shared with the
Government’s Consumer Finance Forum (CFF) in May 2009. It should be noted that
re-pricing activity is particularly volatile. For example, one credit card lender
undertook a significant downward (one-off) pricing exercise in February 2009, whilst
a number of others suspended re-pricing activity in the early part of the year ahead of
becoming compliant with the new principles agreed at the Credit Card Summit. It
would appear that other lenders have undertaken similar activity from time to time
during the course of the year).
40
Based on returns from 13 credit card issuers accounting for 96% of the market
Page 157 of 230
In terms of consumers’ awareness of the opt-out option the findings of our consumer
research are highly encouraging for something introduced comparatively recently:

When told that when a credit card provider increases a customer’s interest rate
they must provide him or her with options, one of which is to close the account
and repay the remaining balance at the existing rate of interest, 45% of all credit
card holders said that they knew this already and a further 37% that they did not
know this but were not surprised, a total of 82%. 18% said they did not know this
and were surprised.
Our consumer research also sought to explore how consumers that had received a
price increase had responded, including whether or not they had taken the opt-out
option. Although a slightly higher number reported taking up the opt-out than has
been reported by lenders, over half had taken some form of action in response to a
rate increase.

47% of those who had had their interest rate increased did nothing in response.
16% stopped using the card and 9% complained to the credit card company.
11% took out or started using a different card. Interestingly, 6% reported that
they agreed with the credit card company to pay off the existing balance at the
existing rate and stop using the card i.e. as per the principles agreed following
the credit card summit (but bearing in mind that the principles have only been in
operation for eleven months when the question was asked, and the question
asked about interest rate changes over the last two years)
While use of the opt-out is relatively small, it is still a new part of the landscape. Our
research suggests that customers respond in a reasoned way to a risk-based repricing, considering what option (opt-out, ceasing to use the card, starting to use a
different card) best suits their circumstances. Many clearly believe that continuing to
use their existing card, on the basis of the revised risk pricing, represents their best
way forward. This may, for example, reflect the value they place on other aspects of
the card such as the credit limit, a rewards programme or other ancillary benefits.
We therefore conclude that the consumer response to the principles and the options
they now have is positive and encouraging. Ultimately it is down to the customer to
judge what is best for them given their individual circumstances.
However, what industry can demonstrate is a determination to continue to strive to
ensure that the availability of the opt-out is clearly positioned and that it is well
understood by customers. This is why additional improvements to explaining riskbased re-pricing and the options available to cardholders form part of the industry’s
proposed consultation response in this area.
Page 158 of 230
The Credit Card Summit – November 2008
The Government called a Credit Card Summit to address a number of issues where it
had concerns. The Summit took place on 26 November 2008 and ultimately focussed
on two main issues:

Breathing Space
The industry attendees at the Summit responded to calls for customers who are
actively engaging in discussion with a Debt Advice Agency to be given a period of
time to agree appropriate repayment arrangements.
Timely implementation was essential and a series of meetings between The
UK Cards Association’s members and a number of Debt Advice Agencies led to
agreement around a set of definitions to underpin the broad commitment statement,
creating clarity and ensuring that there was a level playing field for all stakeholders.
Subsequently, attention also turned to the need to construct a similar process for
consumers going through an assisted self-help route and this was also quickly
delivered through dialogue with the advice sector.
Whilst ‘breathing space’ is not specifically covered within the consultation it is,
nonetheless, related to the broader Consumer White Paper. This provides an
excellent example of the credit card industry responding positively to the needs of its
customers in the economic downturn, working in collaboration with a range of
stakeholders and delivering a timely solution.
This experience demonstrates the strength of self-regulation over statutory
intervention in delivering results quickly and effectively and would not be
possible to achieve if requirements were put on a statutory basis.

Risk-Based Re-Pricing
Ministers were concerned that they were hearing of individual cases where interest
rates had been raised significantly, in some cases being described as ‘almost
doubling overnight’. They called for action to stamp out the worst examples and to
present additional options and information for customers faced with a price increase.
The industry rose to the challenge set for it by government, developing a set of
principles around risk-based re-pricing.
From the industry’s perspective, these principles included a number of significant
commitments, addressing the series of concerns raised, including injecting some
frequency restrictions on re-pricing decisions into the process and agreeing a set of
circumstances where prices would not be increased where a customer was
experiencing some difficulties in meeting their repayments. Providing commitments
of this kind was seen as a strong positive in our qualitative research.
Page 159 of 230
(It is interesting to contrast this with the position adopted in the US CARD Act,
whereby one of the exemptions to a ban on the re-pricing of an outstanding balance
on an account is where the account is at least 60 days in arrears, i.e. the concept is
one of arrears being a justified reason to re-price, as opposed to being a reason to
exclude such customers from such activity. Furthermore, this is also thought to
reflect greater prevalence of re-pricing in the US and the practice known as ‘universal
default’ i.e. that the price on an account can be influenced by missed payment on an
account held somewhere else. This is not a feature of the UK market).
Furthermore, responding positively to the call for customers to have an option where
they do not wish to continue to operate the credit card at the new higher interest rate,
the ‘opt-out’ was created, allowing a customer to exercise a choice that would be
offered by all lenders to close the account and pay down the remaining balance over
a reasonable period.
Given that this self-regulation prohibits the re-pricing of customers in financial
distress the likelihood of re-pricing contributing to over-indebtedness is reduced.
Page 160 of 230
The ‘Statement of Principles’ agreed following the Credit Card Summit is set out
below:
Statement of Principles on Risk-Based Re-Pricing – December 2008
Following the Credit Card Summit in November 2008 the industry agreed a new set of principles to
cover the circumstances, alternative options, frequency and transparency of an interest rate increase.
The statement of principles read as follows:

Where we increase a customer’s interest rate, we will provide him/her with options. These will
always include the option to close the account and repay the remaining balance at the existing rate
of interest, within a reasonable period, having regard to the existing level of minimum payments and
the customer’s financial situation. Where we offer alternative lending products, we may also
provide the option to transfer the balance to such a product at the existing (or lower) interest rate.

We will not increase interest rates in the following circumstances:



o
Where a customer has failed to make the minimum contractual payment requested on the last
two or more consecutive monthly statements; or
o
o
Where we have been formally notified by a not-for-profit debt advice agency that the customer
is in serious discussion with it.
Provided a customer manages his/her account in accordance with the product’s terms and
conditions we will not:
o
Increase interest rates within the first twelve months of a customer having a credit/store card;
o
Increase interest rates more often than six monthly beyond this period.
We will always give a customer at least 30 days notice of an increase in interest rates, so that the
customer can make other arrangements, should they so wish.
If the customer asks, we will ensure that our staff are able to provide the customer with an
explanation as to why an interest rate may have been increased.
Looking at the breadth of credit regulation in recent years, few initiatives have been
given sufficient time to bed-in before results can be expected. However, our early
evaluation of this particular initiative suggests that it is already meeting a consumer
expectation and working for those consumers that, in particular, wish to take up the
opt-out option. Consequently, we believe that improving the communication of the
principles will serve to make them even more effective than they already are.
Page 161 of 230
The Lending Code
In addition to reinforcing the industry’s commitment to the Statement of Principles
and improving consumers’ awareness and understanding, the Principles have
already been incorporated into the Lending Code, which came into force in
November 2009.
In addition to establishing the Principles within the Code, other content sets out the
further protections afforded to consumers around pricing matters, such as how
consumers can find out further information on credit card interest rates and specific
information on credit card promotional periods, as follows:
Lending Code & Re-Pricing / Changes to Interest Rates
Interest rates
Subscribers should make current credit card interest rates available to customers via one or more of the
following:
•
•
•
•
a telephone helpline;
a website;
notices in branches; or
by asking staff.
Subscribers should inform customers about changes to the interest rates on their credit card in
compliance with the relevant regulatory requirement applying to the subscriber’s credit card terms.
Credit card promotional period
If a credit card has an introductory promotional rate the expiry date of the introductory promotional offer
should be shown on the front of the statement or in a separate, prominent personal notification to the
customer. This should be given between four and eight weeks before the offer expires.
It is acceptable to exceed the four or eight week period if the best way to provide information about the
expiry of an introductory promotional rate is by a message in, or with, a monthly statement.
This requirement does not apply where the customer is in breach of the terms and conditions of the
account and the subscriber is concerned that giving the customer warning that the promotional period is
about to end may result in abuse of the card, or where the account is not being used and the customer
is not receiving a monthly statement.
The Lending Code, the Lending Code Standards Board, and lenders’ robust
complaints procedures ensure maximum consumer protection and transparency
around what is expected of credit card lenders when dealing with their customers.
Page 162 of 230
The US CARD Act
The US CARD Act makes the following provisions in respect of re-pricing which
cover the notice period of a price change and a ban on the re-pricing of an existing
debt (subject to specific exemptions).
ADVANCE NOTICE OF INCREASE IN INTEREST RATE REQUIRED.—In the case of any credit card
account under an open end consumer credit plan, a creditor shall provide a written notice of an increase
in an annual percentage rate (except in the case of an increase described in paragraph (1), (2), or (3) of
section 171(b)) not later than 45 days prior to the effective date of the increase.
IN GENERAL.—In the case of any credit card account under an open end consumer credit plan, no
creditor may increase any annual percentage rate, fee, or finance charge applicable to any outstanding
balance, except as permitted under subsection (b).
(b) EXCEPTIONS —The prohibition shall not apply to—
(1) an increase in an annual percentage rate upon the expiration of a specified period of time,
provided that—
(A) prior to commencement of that period, the creditor disclosed to the consumer, in a clear
and conspicuous manner, the length of the period and the annual percentage rate that would
apply after expiration of the period;
(B) the increased annual percentage rate does not exceed the rate disclosed pursuant to
subparagraph (A); and
(C) the increased annual percentage rate is not applied to transactions that occurred prior to
commencement of the period;
(2) an increase in a variable annual percentage rate in accordance with a credit card agreement
that provides for changes in the rate according to operation of an index that is not under the control
of the creditor and is available to the general public;
(3) an increase due to the completion of a workout or temporary hardship arrangement by the
obligor or the failure of the obligor to comply with the terms of a workout or temporary hardship
arrangement, provided that—
(A) the annual percentage rate, fee, or finance charge applicable to a category of transactions
following any such increase does not exceed the rate, fee, or finance charge that applied to
that category of transactions prior to commencement of the arrangement; and
(B) the creditor has provided the obligor, prior to the commencement of such arrangement, with
clear and conspicuous disclosure of the terms of the arrangement (including any increases due
to such completion or failure);
OR
(4) an increase due solely to the fact that a minimum payment by the obligor has not been received
by the creditor within 60 days after the due date for such payment, provided that the creditor shall—
(A) include, together with the notice of such increase required under section 127(i), a clear and
conspicuous written statement of the reason for the increase and that the increase will
terminate not later than 6 months after the date on which it is imposed, if the creditor receives
the required minimum payments on time from the obligor during that period; and
(B) terminate such increase not later than 6 months after the date on which it is imposed, if the
creditor receives the required minimum payments on time during that period.
Page 163 of 230
Current Prevalence
The Argus dataset developed for this project covers the period July 2007 to July
2009 so earlier data are not available. Given this limited historical perspective it is
therefore difficult to determine the extent to which these recent changes reflect
changes in the overall financial services market rather than being particular to the
credit card market.
Data relates to all re-pricing decisions rather than just risk-based re-pricing. It is not
possible to identify the underlying reason for a re-price from the Argus database.
Where data are shown, but not sourced individually, they are taken directly from the
Utilisation
%
Risk band
Hi - 1
2
3
Total
4
5
6
7
< 10
10 < 20
20 < 30
30 < 40
40 < 50
543
91
83
87
98
236
35
31
30
35
573
84
75
73
77
1,407
238
183
165
163
1,582
278
203
175
161
4,341
622
453
374
328
4,491
668
435
303
241
50 < 60
60 < 70
70 < 80
80 < 90
90+
118
150
221
401
2,661
39
45
64
108
395
83
100
144
228
603
170
192
247
391
821
159
175
201
258
507
306
301
320
380
621
203
179
172
180
242
Total
4,454
1,018
2,041
3,976
3,701
8,046
7,115
8
Low - 9
3,684 13,969
665
1,870
377
1,016
250
623
183
412
149
126
108
104
119
30,825
4,552
2,857
2,081
1,698
284
207
164
145
141
1,511
1,476
1,641
2,197
6,109
5,766 18,832
54,946
000s.
41
http://www.argusinformation.com/services/ukccps.htm
Page 164 of 230
Number of Accounts with a Price Increase
The percentage of accounts receiving a price increase fell at the start of 2009 and
has since settled at around 1% of accounts per month, accounting for around 2% of
balances. We suspect that this represents a much lower volume of accounts than
many stakeholders might have assumed and shows that price changes are clearly
targeted only at accounts where the change is seen to be justified and therefore
necessary.
Looking at Q2 2009, the table below shows that the percentage of accounts re-priced
upwards varies across risk bands:
Proportion of Accounts With an APR Increase By Risk and Original Retail APR – Q2 2009
Retail
APR, %
7.5 - 9.99
10 - 13.99
14 - 17.99
18 - 21.99
22 - 25.99
26 - 29.99
30+
Total
Risk band
Hi - 1
2
3
4
5
6
7
8
Low - 9
Total
10.6
6.5
3.5
2.9
4.0
1.6
0.0
7.2
4.9
4.6
3.6
5.5
2.0
0.0
5.1
3.8
2.4
2.3
3.6
1.8
0.0
2.6
2.0
1.9
1.7
3.5
1.4
0.0
2.0
1.1
1.7
2.1
2.7
1.4
0.0
2.7
1.1
1.7
1.9
1.9
1.7
0.0
1.5
0.5
0.8
1.0
0.5
0.5
0.1
1.9
4.0
4.5
2.3
1.1
0.9
0.1
2.2
0.7
0.8
0.7
0.6
0.5
0.8
2.4
1.6
1.7
1.4
2.1
1.4
0.1
2.9
3.9
2.5
2.0
1.8
1.7
0.8
3.2
0.8
1.6
According to our consumer research:

23% of credit card holders reported that they had had the interest rate on at least
one of their credit cards increased during the last two years. 11% regarded this
at the time as fairly or very positive, 54% regarded it as fairly or very negative,
with 35% regarding it neutrally
Page 165 of 230
Types of Accounts Re-Priced Upwards
The segments with proportionally higher numbers of price increases are high risk /
high utilisation customers. This is in line with what one would expect to see as these
will generally be risk-based decisions. Higher utilised customers (in each risk
segment) show a significantly higher unit and charge-off rate than those with lower
utilisation levels, where re-pricing aims to mitigate this risk.
The following table also suggests that in addition to high risk, high utilisation
customers, there were significant numbers of price increases in Q2 2009 applied to
relatively low risk, low utilisation customers. This is, in part, due to the fact that the
majority of credit card accounts are in this group. The evidence shows that higher
risk accounts are proportionately more likely to receive an increase and that the
increase is also likely to be higher.
Distribution of Accounts Given a Price Increase Q2 2009 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.7
0.2
0.2
0.2
0.2
0.3
0.1
0.1
0.1
0.1
0.5
0.1
0.2
0.2
0.2
1.0
0.4
0.4
0.5
0.5
1.1
0.5
0.4
0.4
0.4
2.7
1.1
0.9
1.1
0.9
1.5
0.8
0.6
0.5
0.5
10.7
4.0
1.9
1.1
0.7
6.0
2.3
1.6
1.2
1.0
24.4
9.5
6.2
5.3
4.5
50 < 60
60 < 70
70 < 80
80 < 90
90+
0.3
0.4
0.6
1.1
9.3
0.2
0.3
0.2
0.5
2.6
0.3
0.3
0.5
0.8
2.8
0.5
0.6
0.8
1.2
3.4
0.5
0.5
0.6
0.9
2.3
1.0
1.0
1.3
1.6
3.7
0.5
0.4
0.4
0.5
1.0
0.5
0.4
0.4
0.5
0.9
0.8
0.8
0.8
0.7
1.4
4.5
4.8
5.6
7.9
27.2
13.1
4.5
6.0
9.3
7.5
15.4
6.6
21.0
16.6
100.0
Total
Though a higher percentage of increases are conducted on low utilisation accounts,
the percentage of accounts receiving an increase by utilisation band increases as the
utilisation level grows. In other words, accounts with a higher balance are more likely
to receive an increase as credit card lenders’ price according to utilisation.
Fewer lower risk accounts than the average are re-priced upwards, whilst more
higher risk accounts than the average are re-priced upwards.
In terms of the proportion of accounts by risk and utilisation that received a price
increase in Q2 2009, the following table shows that 1.4% of accounts received a
price increase in Q2 2009 (compared to 1.2% of accounts receiving a price
decrease) with the likelihood of a price increasing by both risk and utilisation.
The incidence of re-pricing among the ‘highest risk’ band (1) is slightly below the
‘high risk’ band (2). This is likely to be a consequence of the fact that some of these
accounts may be on repayment programmes. More of the accounts in this category
are likely to be delinquent than the norm, which, under the agreed Principles, means
that they cannot be re-priced.
Page 166 of 230
Further, lenders tend not to re-price the very highest risk customers because
affordability checks are likely to reveal that these customers are more likely to default
if the cost were greater (because they would have to pay a higher amount). This
would clearly not be in the interest of the borrower or the lender.
Proportion of Accounts Given a Price Increase by Segment – Q2 2009 (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.9
1.4
1.6
1.6
1.8
1.0
1.9
2.5
2.4
3.2
0.7
1.2
1.9
2.2
2.5
0.5
1.4
1.5
2.1
2.2
0.6
1.3
1.4
1.9
1.8
0.5
1.4
1.6
2.2
2.2
0.3
0.9
1.1
1.4
1.5
2.2
4.7
3.9
3.4
2.9
0.3
0.9
1.2
1.5
1.9
0.6
1.6
1.7
2.0
2.1
50 < 60
60 < 70
70 < 80
80 < 90
90+
2.0
2.0
2.2
2.1
2.7
3.6
4.4
3.0
3.6
5.2
3.1
2.7
2.8
2.7
3.5
2.3
2.6
2.6
2.4
3.2
2.3
2.3
2.2
2.6
3.5
2.5
2.7
3.0
3.3
4.6
1.8
1.8
1.7
2.2
3.1
2.4
2.5
2.8
3.5
5.5
2.3
2.8
3.6
3.9
7.4
2.3
2.5
2.6
2.8
3.4
Total
2.3
3.4
2.3
1.8
1.6
1.5
0.7
2.8
0.7
1.4
In the main, higher risk and/or higher use, accounts are re-priced upwards. This is
not surprising in that good status, higher utilised accounts are more likely to go into
arrears in the following year than lower-utilised accounts. This reinforces the
rationale behind risk-based pricing and demonstrates the effectiveness of credit
scoring.
This information is also usefully expressed in terms of the number of accounts that
were re-priced upwards during Q2 2009, amounting to 772,000 accounts, as follows:
Number of Accounts Given a Price Increase by Segment Q2 2009 (thousands)
Utilisation
%
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
5.0
1.3
1.4
1.4
1.8
2.3
0.6
0.8
0.7
1.1
3.8
1.0
1.4
1.6
1.9
7.4
3.4
2.8
3.5
3.5
8.8
3.7
2.8
3.4
2.8
20.6
8.8
7.3
8.2
7.1
11.8
6.0
4.6
4.2
3.5
82.7
31.0
14.6
8.4
5.3
46.2
17.5
12.5
9.6
7.7
188.7
73.3
48.1
41.0
34.8
50 < 60
60 < 70
70 < 80
80 < 90
90+
2.3
3.0
4.8
8.5
71.7
1.4
2.0
1.9
3.9
20.4
2.6
2.7
4.0
6.2
21.2
3.9
5.0
6.4
9.6
26.1
3.7
4.1
4.5
6.6
17.5
7.5
8.0
9.7
12.7
28.8
3.6
3.1
2.9
4.0
7.6
3.5
3.2
3.1
3.7
6.6
6.4
5.9
5.9
5.7
10.5
34.9
36.9
43.2
60.8
210.3
101.1
35.1
46.4
71.7
57.9
118.8
51.3
162.0
127.8
772.0
Total
Page 167 of 230
Further, the higher the risk, the higher the average price increase; this ranges from
around 3.1% for the lowest to 4.6% for the highest risk.
Average Size of APR Increase by Risk Band – Q2 2009 (%)
7
6
APR increase, %
5
4.6
4.3
4.5
4.2
4.1
4
3.9
3.7
3.5
3.1
3
2
1
0
Hi - 1
2
3
4
5
6
7
8
Low - 9
Risk band
Utilisation affects the average size of an increase, though not to any great degree,
with the average across all utilisation segments being banded between 3% and 4.5%
Page 168 of 230
Size of Price Increase
The following table gives further insight into how low risk, low use customers are repriced. Typically any increase they receive is much lower than for higher risk groups.
When looking at the average APR increase relative to the current rate it can be seen
that the largest increments tend to be associated with higher risk accounts and those
with the lowest current APRs, albeit that the size of the increase is reasonably
constant across the risk bands. For some of these customers the APR may double
from around 7.5% to around 15%. However, within each risk band there are very few
instances of re-pricing in double digit percentages.
Most re-prices are concentrated in the 2% to 6% range, with the percentage of
accounts receiving an increase being reasonably flat in this range also.
Number of Accounts with a Price Increase - Q2 2009 (000s)
Risk profile
Price increase, %
1
2
4
6
8
-
Very high
High
Medium
Low
Total
1.99
3.99
5.99
7.99
9.99
2.5
33.8
50.1
5.2
9.3
3.9
27.8
39.4
4.3
5.9
46.7
91.1
68.0
16.1
22.5
125.1
102.6
89.1
8.7
12.0
178
255
247
34
50
10 - 11.99
12 - 13.99
14 - 15.99
16 - 17.99
18.00+
0.1
0.1
0.1
0
0.1
0.1
*
*
0
0.1
1.1
0.3
0.5
0.2
0.4
3.7
0.8
0.4
0.2
0.4
5
1
1
0
1
Total accs
101
81
247
343
772
* = less than 0.05%
Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset,
In general, the higher the pre-increase APR, the lower the size of the increase. This
changes slightly for the accounts which already have APRs of 30% or more, but this
is only 0.1% of the total. These groups are likely to be very high risk accounts.
Though a large percentage of re-pricing is targeted towards low-risk accounts with
mid-range APRs, high-risk, low APR accounts are more likely to receive an increase
as lenders adjust the under-pricing to reflect the risk of the customer
Accounts with lower pre-increase APRs receive higher price increases as lenders
look to appropriately price these accounts for risk, which is shown in the following
table.
Page 169 of 230
Average Amount of Price Increase for Accounts Given a Price Increase Q2 2009 by Risk and
Original APR (%)
Retail
APR, %
7.5 - 9.99
10 - 13.99
14 - 17.99
18 - 21.99
22 - 25.99
26 - 29.99
30+
Total
Risk band
Hi - 1
2
3
4
5
Total
6
7
8
Low - 9
6.8
5.4
5.0
4.5
3.4
4.8
0.0
5.9
5.0
4.7
4.0
3.2
4.8
0.0
5.7
5.2
4.9
4.3
3.5
4.6
0.0
6.0
4.9
4.4
3.7
3.4
4.7
7.1
7.1
5.2
4.2
3.5
3.3
4.8
0.0
6.5
5.0
3.8
3.2
3.5
4.8
7.1
5.5
4.2
3.4
3.0
3.7
4.6
7.1
7.1
4.3
3.4
2.4
3.3
4.5
7.1
7.6
4.4
2.5
2.1
3.6
5.6
7.1
6.6
4.7
3.7
3.1
3.4
4.8
7.1
4.6
4.3
4.5
4.2
4.1
3.9
3.7
3.5
3.1
3.9
The following table shows the average rate increase in each of these cells.
Average Amount of Price Increase Q2 2009 by Risk and Utilisation (%)
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
6.0
5.3
4.9
5.0
5.2
5.1
4.5
4.1
3.9
4.2
5.5
4.8
4.4
4.4
4.4
5.0
4.0
4.3
4.2
4.2
4.9
4.0
4.0
3.8
3.8
4.8
3.4
3.5
3.6
3.7
4.3
3.4
3.4
3.4
3.5
3.6
3.4
3.3
3.3
3.5
3.8
2.8
2.5
2.5
2.7
4.1
3.4
3.3
3.4
3.6
50 < 60
60 < 70
70 < 80
80 < 90
90+
5.1
4.7
4.8
4.7
4.5
4.1
4.2
4.3
4.2
4.2
4.6
4.6
4.6
4.5
4.4
4.2
4.1
4.2
4.1
4.0
3.9
4.1
3.9
4.1
3.9
3.6
3.7
3.8
3.8
3.8
3.5
3.4
3.7
3.5
3.8
3.4
3.3
3.1
3.3
3.9
2.7
2.6
2.7
2.5
2.5
3.7
3.7
3.9
3.9
4.1
Total
4.6
4.3
4.5
4.2
4.1
3.9
3.7
3.5
3.1
3.9
The general pattern of the data in the above table is as follows.

The largest increases in APR by risk band are in the lowest utilisation group

The pattern from ‘greater than 10%’ and ‘less than 90%’ utilisation is not clear cut

Other than these two exceptions, the highest increases are generally in the
higher utilisation groups

Generally, the lower the risk, the lower the price increase
Page 170 of 230
On average, the cost to a typical consumer of a rate increase will be £84 per year.
This ranges from less than £10 among low utilisation customers, up to £222 for some
high utilisation customers. The relationship between risk and extra cost is not as
clear, although generally the lowest risk group is affected by less than higher risk
groups, as in the following table.
Annual Cost to Accounts with a Price Increase Q2 2009 by Risk (£)
Utilisation
%
Risk band
Hi - 1
2
3
4
5
6
7
8
Low - 9
Total
< 10
10 < 20
20 < 30
30 < 40
40 < 50
4
28
44
63
88
4
30
55
68
87
4
40
57
83
97
5
27
48
74
93
5
32
52
70
95
6
24
46
66
89
6
23
35
52
76
1
6
14
38
53
3
14
24
36
53
3
14
30
53
75
50 < 60
60 < 70
70 < 80
80 < 90
90+
94
97
117
129
164
125
110
127
134
172
142
164
157
168
175
111
108
129
140
162
120
131
135
162
166
98
121
144
156
182
91
99
136
145
189
78
103
117
127
222
57
75
97
107
126
95
111
131
145
171
Total
145
141
147
118
114
106
78
24
44
84
Page 171 of 230
Frequency and Timing of Rate Increases
Price increases are relatively infrequent – almost 80% of accounts did not have a
price increase in the two years between July 2007 and July 2009. 17% had one
increase and only 3.5% had more than one price increase.
Percentage of Accounts by Frequency of APR Increase July 2007 – July 2009
90
80
80
Proportion of accounts, %
70
60
50
40
30
17
20
10
3
0
0
0
0
0
0
1
2
3
4
5
6
Frequency of price increase(s)
The proportions were almost identical for price decreases, with slightly more
accounts (around 8%) having two or more decreases (see later section for more
information on price decreases).
Page 172 of 230
The percentage of accounts with an APR increase has fallen since the back end of
2007 and fluctuates between 0.5% and almost 2% of accounts in an given month.
Percentage of Accounts with APR Increase
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Percentage of accounts with APR increase, %
4.0
0.0
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Month
The proportion of accounts with an APR decrease is fairly consistent across the
period at around 2% though subject to noticeable spikes as high as 6% thought to
reflect one-off campaigns by individual issuers.
Percentage of Accounts with APR Decrease
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Month
Page 173 of 230
Percentage of accounts with APR decrease, %
7.0
Most price increases are seen on accounts that have been open for at least 5 years,
but note that this group is the largest single group. The group that had the highest
proportion of price increases was those open between 24 – 36 months, followed by
accounts open between 36 – 60 months, then 12 – 24 months.
Percentage of Accounts with Price Increase by Months on Books
3.5
3.0
Proportion of accounts, %
3.0
2.5
2.0
2.0
2.0
1.5
1.1
1.0
0.5
0.1
0.1
0.0
<6
6 - <12
12 - <24
24 - <36
36 - <60
60+
Frequency of price increase(s)
Page 174 of 230
Types of Accounts with Price Decreases
Around 1.2% of accounts received a price decrease every month during 2008-09, or
around 12% during the course of a year this compares to 1.4% receiving a price
increase). The concern expressed in paragraph 5.20 of the consultation document
that risk-based re-pricing is “only a one-way street” is contradicted by this evidence.
This reduction in interest rates was greater than 10%, on average. Note that this
amount includes promotional balances.
The proportion of accounts by risk and utilisation is shown below and again shows
that credit scoring is working with the likelihood of receiving a price decrease being
greater among low risk, low utilisation accounts.
Proportion of Accounts Given a Price Decrease by Segment (%) – Q2 2009 (%)
Utilisation
%
Risk band
Hi - 1
2
3
4
5
6
7
8
Low - 9
Total
< 10
10 < 20
20 < 30
30 < 40
40 < 50
0.8
0.7
1.0
1.1
1.1
1.1
0.8
0.7
0.8
1.1
1.5
0.9
0.9
0.8
0.9
1.4
0.7
0.8
0.7
0.8
0.8
0.8
0.8
0.9
0.9
1.3
0.9
1.0
1.0
1.0
1.7
1.2
1.2
1.2
1.3
1.1
0.6
0.8
0.7
0.7
1.7
1.3
1.1
0.9
0.8
1.5
1.1
1.0
0.9
0.9
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.1
1.3
1.1
0.9
0.7
0.9
0.9
0.8
0.8
0.7
0.9
0.7
1.0
0.6
0.7
0.8
1.1
1.1
0.8
0.7
0.9
0.8
1.0
0.6
0.6
1.1
1.0
0.8
0.6
0.6
1.1
1.2
1.2
1.0
0.8
0.8
0.6
0.6
0.5
0.4
0.8
0.6
0.5
0.4
0.3
1.0
0.9
0.9
0.7
0.7
Total
0.8
0.9
1.0
1.0
0.8
1.1
1.5
1.0
1.5
1.2
This information is also usefully expressed in terms of the number of accounts that
were re-priced downwards during Q2 2009, amounting to around 700,000 accounts,
as follows:
Number of Accounts Given a Price Decrease By Segment – Q2 2009 (000s)
Utilisation
%
Risk band
Hi - 1
2
3
Total
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
4.8
0.6
0.7
0.8
0.8
1.8
0.3
0.3
0.3
0.4
5.1
0.6
0.6
0.6
0.6
13.5
1.1
1.0
0.8
1.0
17.3
2.7
1.9
1.7
1.6
36.0
4.5
3.6
3.1
2.9
30.2
3.1
2.3
1.8
1.7
66.4
4.3
3.6
2.4
1.9
326.1
30.4
13.4
7.4
4.2
501.2
47.7
27.4
18.9
15.2
50 < 60
60 < 70
70 < 80
80 < 90
90+
1.0
1.5
1.9
2.9
16.9
0.4
0.5
0.5
0.8
2.8
0.7
0.6
1.1
1.1
4.4
1.0
1.5
1.8
2.1
4.8
1.6
1.4
2.2
2.0
3.9
2.8
2.5
2.2
2.0
3.8
1.3
1.3
1.3
1.4
1.7
1.8
1.2
1.1
1.0
1.1
3.4
2.0
1.4
0.9
0.9
14.1
12.4
13.3
14.2
40.2
Total
31.9
7.9
15.5
28.5
36.4
63.4
46.1
84.8
390.1
704.6
Page 175 of 230
In terms of the average APR decrease by risk and utilisation, the breakdown is as
follows. Again, the larger decreases tend to be associated with the lower risk
customers. (This data excludes APR decreases for balances taking advantage of a
promotional offer (defined as any decrease of more than 7%) and would have
distorted the picture).
Average APR Decrease by Risk and Utilisation (%) – Q2 2009, Excluding Promotional Balances
Utilisation
%
Risk band
Hi - 1
Total
2
3
4
5
6
7
8
Low - 9
< 10
10 < 20
20 < 30
30 < 40
40 < 50
1.6
2.3
2.6
2.3
2.2
1.7
1.9
3.3
2.2
1.9
1.5
2.5
2.6
2.4
2.6
2.0
2.2
2.3
2.0
2.1
1.8
2.3
2.2
2.4
2.3
2.4
2.5
2.2
2.3
2.1
2.1
2.4
2.4
2.5
2.3
2.7
2.8
2.5
2.6
2.9
3.2
3.0
2.9
2.8
2.7
2.7
2.7
2.6
2.5
2.4
50 < 60
60 < 70
70 < 80
80 < 90
90+
2.3
2.9
2.7
2.5
2.5
1.7
2.0
2.4
3.0
2.1
2.2
2.6
2.3
2.7
2.5
2.2
1.9
2.0
1.8
2.0
1.7
2.1
2.0
2.1
1.8
2.3
2.5
2.2
2.2
2.1
2.4
2.6
2.6
2.2
2.3
2.9
2.7
2.7
3.2
3.2
2.8
3.0
3.1
2.7
3.3
2.4
2.5
2.4
2.3
2.3
Total
2.4
2.1
2.1
2.0
1.9
2.3
2.2
2.7
3.2
2.6
According to our consumer research:

8% of credit card holders reported that they had had the interest rate on at least
one of their credit cards reduced during the last two years. 60% regarded this at
the time as very or fairly positive; 9% regarded it as very or fairly negative, with
25% regarding it neutrally
Page 176 of 230
Results of a Price Increase – the Consumer
The evidence suggests that cardholders modify their spending and borrowing
behaviour in response to a price rise. Upwardly re-priced accounts show faster
account attrition, greater balance attrition and a spike in revolving balances following
a re-price, but then faster attrition.
Revolving balances tend to rise a little in the months following a re-price, but then fall
to be the same as similar accounts that have not been re-priced. In part this will be
because cardholders that have been re-priced upwards may be paying the same
cash amount, but their balances will grow slightly faster as a result of them paying
more interest.
Indices of Revolving Balances Increase Q2 2008 Group vs Proxy Control
120
115
Proxy Control
110
Increase Group
100
Index
105
95
90
85
80
0
1
2
3
4
5
6
7
8
9
10
11
In summary, if the approximately three quarters of a million accounts with a price
increase in Q2 2009 are representative, more than three million people will be paying
an extra £84 pounds (on average) a year. And those who are higher risk, will be
paying £140 a year extra.
2.8% of accounts currently have an APR of more than 30%; of these, only 0.1%
(1,200 individuals) were re-priced upwards. Although small, this group saw the
highest increase in APR – 7.1%.
Page 177 of 230
Results of a Price Increase – the Industry
Account attrition (i.e. accounts that are closed) is higher for re-priced accounts in the
months following a re-price, though this was less pronounced in 2008-09 compared
to 2007-08. The same is true for balance attrition (compared to a proxy control group
of otherwise similar accounts). This is further evidence that a proportion of
consumers do respond to price increases and close the account that has been
subject to a re-price.
Account Survival for Q3 2007
110
105
100
90
Proxy Control
85
Increase Group
80
75
70
0
1
2
3
4
5
6
7
8
9
10
11
Page 178 of 230
Index
95
The account survival rates for accounts subject to a price increase and other
outwardly similar accounts (based on a defined ‘proxy control group’, which is similar
to the price increase group, where the only difference is the absence of a price
increase not re-priced) are similar.
Account Survival for Q2 2008
110
105
100
90
Index
95
Proxy Control
85
Increase Group
80
75
70
0
1
2
3
4
5
6
7
8
9
10
11
The presence of a re-price does not materially change the probability of a charge-off
of an account (again based on a defined ‘proxy control group’, which is similar to the
price increase group, where the only difference is the absence of a price increase).
Observed Charge-off Rate for Q2 2008
2.0
1.8
Increase Group
1.6
Proxy Control
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0
1
2
3
4
5
6
7
8
9
10
11
Page 179 of 230
Charge-off rate, %
1.4
As the above chart shows, the charge-off rate for customers who have received an
increase in interest rate in comparison to the proxy control group is only slightly
higher.
Average Charge-Off amount for Q2 2008
5,000
4,500
3,500
3,000
Increase Group
2,500
Proxy Control
2,000
1,500
1,000
Avergae charge-off amount, £
4,000
500
0
1
2
3
4
5
6
7
8
9
10
11
However, where charge-off does occur the amounts involved per account are around
6% higher (price increase 2007 - £2,800 vs £2,600; price increase 2008 - £3,800
versus £3,600), though this is to be expected if the account has been accruing
interest at a higher rate.
The implication of these two facts together is that accounts with a price increase are
more likely to default, but it is important to note that it does not follow that the price
increase is the cause of this. Indeed, it is the higher likelihood of default and the
need to take action to address this that prompts re-pricing. Accounts that have price
increases are typically higher risk and have borrowed a higher proportion of their
limit. It is these characteristics that are responsible for the higher default rates.
Accounts that are similar to those with a price increase, but where the interest rate is
unchanged, have similar rates of default. Therefore, it is the higher risk and higher
use that drive higher defaults.
NB: it must also be noted that the increases in the recent past could partly be a
consequence of the worsening economic situation. During 2008 and 2009,
unemployment worsened substantially and, at the time of writing, the UK was in its
deepest recession for 50 years. Bad debt on all forms of credit worsened during
2008 and most of 200942 (the one exception was that defaults on secured lending did
not worsen in Q3 2009).
In fact, the average retail APR overall remained at around 11.7% through the year up
to June 2009, before dropping slightly to 11.0% in July 2009.
42
Bank of England (2009), Credit Conditions Survey, Q3, Bank of England, London.
Page 180 of 230
The removal of risk-based re-pricing would have a significant impact on the UK credit
card industry’s revenue. The impact of a regulation to remove risk-based re-pricing
increases on all balances would have been £279 million in 2008-09 with an impact of
£323 million in 2007-08.
Where re-pricing would be permitted for new balances only the impact on 2008-09
would have been £215 million and £228 million in 2007-08.
Financial Impact on Industry of Restrictions on Re-Pricing of Existing Debt
£m – 2007-8
£m – 2008-09
No re-pricing on all balances
324
279
New balances only
229
216
Re-pricing

Absorbing some or all of the reduction in revenue

Not undertaking risk-based reductions

Recouping the revenue from cardholders by other means such as higher initial
rates of interest or annual fees. In effect, rates on new accounts or new balances
would need to compensate for the inability to re-price existing debt, leading to
higher prices than otherwise necessary
The choices available to lenders will depend on a complex mix of factors that need to
be considered in order to determine the viability of a particular business model.
Page 181 of 230
Policy Options
In general, instinctive positive reactions to changes suggested by Government are
significantly modified and tempered once the potential implications for cardholders
are outlined:

When told that the Government was thinking of preventing credit card companies
from changing the interest rate, either up or down, on any outstanding balance,
60% of credit card holders thought that this was a good idea. 36% thought that
this was a bad idea

Among those who thought that this was a good idea, when suggested that this
meant that credit card interest rates would generally be higher in future, 52%
changed their minds and no longer thought it was a good idea. 43% thought that
this was still a good idea. Overall, this meant that 26% thought it would be a
good idea

Among those who thought that this was a good idea, when suggested that this
meant that credit cards might also come with an annual fee in future, 67%
changed their minds and no longer thought it was a good idea. Overall, this
meant that 17% thought it would be a good idea
Overall, industry’s concern is that limitations on the ability to re-price on outstanding
debt would effectively mean that credit cards become a consecutive series of
individually priced personal loans, with just one chance for the credit card lender to
get the price right. This would be likely to result in rates being set higher at the
outset of an agreement than necessary to compensate for the inability to re-price.
Industry concerns are supported by the conclusions reached by Oxera as part of their
economic impact analysis. Oxera conclude that:
“BIS recognises that there could be a number of implications of removing issuers’
ability to re-price existing debt. It would probably limit the availability of credit to
high-risk customers (who would otherwise be most likely to be re-priced). If
issuers knew that they could not impose a re-price, they would be less likely to
offer credit in the first place. Issuers may also decide to extend smaller amounts
of credit initially. If a cardholder’s riskiness changed (or had been estimated
incorrectly), this strategy would minimise the amount of mis-priced debt that the
issuer would be unable to re-price. As the cardholder’s behaviour became better
known, the credit limit could be gradually increased.”
“This strategy assumes, however, no restrictions would be placed on UCLI (and
hence the ‘start low and grow’ approach). If issuers’ ability to increase credit
limits were also to be restricted, this would make it even more likely that issuers
would cease entirely the extension of credit to high-risk customers in the first
place.”
Page 182 of 230
“Furthermore, issuers would need to recover the losses resulting from the inability
to re-price. This could be done in a number of ways, but one option would be to
raise the initial interest rates and APRs applicable to new cards by an amount
that would compensate them for the estimated losses to be incurred from not
being able to re-price. This would result in an increase in cross-subsidisation, as
some cardholders would have rates on existing debts that were higher than
would be justified by risk-based pricing, and so would be cross-subsidising
higher-risk cardholders. On the other hand, some cardholders would have rates
lower than would be justified on risk-based grounds, which may encourage them
to accumulate a higher balance than they otherwise would.”
“…BIS’s rationale for proposing additional restrictions on issuers’ ability to reprice was based on a possible lack of justification for increases and concerns that
re-pricing may contribute to financial difficulty among vulnerable consumers.
Furthermore, BIS expressed concern that consumers may be unable to avoid
increases.”
“(We have) presented evidence suggesting that overall the amount of re-pricing
(as measured by the share of accounts re-priced) is fairly low. Furthermore, this
section has demonstrated limited support for the concern that there is any
increase in charge-off rates following RBRP. Finally, while consumers have
made limited use of the opt-out, survey data suggests that they are aware of the
option. Data on attrition and switching rates indicates that consumers are able
and willing to take action if they are dissatisfied with their cards.”
“It is, however, the case that issuers’ credit scoring models are typically complex
and that, as a result, re-pricing decisions may not appear to be directly related to
changes in consumers’ risk profiles. This could suggest a role for increased
information on how credit scores are determined and how re-pricing decisions are
made. However, the benefits of additional information would need to be
assessed first. Furthermore, the additional information would have to be
provided in a clear and considered way that did not exacerbate ‘information
overload’. Given the complexity of credit scoring and issuers’ re-pricing models,
it would seem sensible to conduct a bespoke study on what elements of repricing decisions consumers would find most useful and how these points could
best be communicated.”
Page 183 of 230
Conclusions
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 risk-based
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
The credit card industry believes that the ability to re-price on an open-ended credit
agreement in effect defines the credit card product. The industry believes that
customers understand and value the difference between a credit card and, say, a
personal loan.
The evidence we have gathered shows that the Statement of Principles agreed
following the Credit Card Summit in November 2008 are working effectively and we
believe that this will continue to improve as the Principles bed-in further. Consumers
have a good awareness of the availability of the ‘opt-out’.
The underlying positive impact of the principles should also not be underestimated, in
terms of the fact that the industry now adheres to the agreed frequency restrictions
and that many customers in difficulties (who might previously have seen their rate
increased) will have been excluded from such activity as a direct result of the
industry’s commitment.
The industry believes that the way forward on re-pricing is to build on the Statement
of Principles and to draw on some of the ideas presented by Government in the
context of Options 1, 2, and 3 to that end. Option 5 would, by contrast, lead to
fundamental changes in the industry which would not benefit credit card lenders or
their customers.
In terms of the question of limiting the size and/or frequency of existing debt repricing (Option 4), the Statement of Principles already contains some highly
significant commitments that no price increase will be made in the first twelve
months, nor more frequently than once every six months thereafter. Industry does
not believe that any further restrictions on the frequency of re-pricing are in the best
interests of customers or the industry, as to do so would adversely impact the credit
card lenders’ ability to manage risk.
In terms of the suggestion to limit the size of a re-price, this could, in effect, be a
price control that interferes with the workings of the market and there are also
concerns that such a move would be anti-competitive. Again, industry believes that
such a requirement would adversely impact the credit card lenders’ ability to manage
their risk.
Page 184 of 230
In line with the industry’s long standing commitment to transparency, it is also
recognised that we have an opportunity to make further tangible improvements in
terms of explanations relating to risk-based re-pricing decisions. A new leaflet, ‘RiskBased Pricing Explained’, could be developed and made available to help customers
to better understand how such pricing works, why it is necessary and what options
they have available to them. In developing such materials, it is essential that it is
recognised that the associated processes are highly sophisticated and that generic
explanations cannot therefore point to precise reasons for a decision relating to a
particular customer’s account.
A similar situation exists in respect of the industry’s explanation of credit scoring,
where it has been necessary to find the balance between describing the factors and
characteristics which are used, whilst also being mindful of the sophistication and
complexity of the systems, the need to protect the commercial sensitivity / integrity of
the models and to prevent the inadvertent provision of help to those intent on
committing fraud.
As another specific objective for the generic leaflet, industry also feels that there are
opportunities to make it clearer to customers how the ‘opt-out’ actually works and
how they will subsequently be expected to pay-down the balance at the original rate
of interest, over a reasonable period, as opposed to immediately.
Page 185 of 230
Proposal Summary
The industry’s proposals for addressing Government’s concerns around the ‘Repricing of Existing Debt’ are summarised as:
1. Continuation of the existing Statement of Principles, as implemented by the
industry on 1 January 2009
2. Develop a new generic leaflet – ‘Risk-based Pricing Explained’
3. A commitment to further promotion and explanation of the ‘opt-out’
Page 186 of 230
7.
Transparency &
Simplicity
Page 187 of 230
Transparency & Simplicity
The UK credit card industry is committed to transparency and the implementation of
improvements for customers. The industry is proud to have a strong record in
delivering robust solutions over recent years through a forward looking attitude and a
long standing willingness to embrace innovative opportunities for change, where
these will provide tangible and sustainable value to its customers.
The three main ideas put forward by BIS in this section of the consultation paper are
as follows:

An annual credit card statement

A stakeholder card lending product

A standardised labelling system
Each of these options has clear attractions. But the credit card industry believes that
each would merit considerable further research and analysis before legislative
requirements were introduced.
Page 188 of 230
Annual Credit Card Statement
The idea of an annual credit card statement has clear attractions. It is possible, for
example, that an annual credit card statement could provide an opportunity to
address transparency concerns around the four main issues raised in the
consultation paper.
But the industry would be reluctant to introduce something without it having been
subject to the most rigorous research with consumers. The provision of what would
be yet more information to a cardholder about the card(s) in their wallet has to be
useful and delivered intelligently, otherwise it will simply exacerbate the risk of
information overload and provide no meaningful benefit.
It would be wrong for legislation, or regulation, to specify an annual credit card
statement without properly researching consumers’ views on what it should look like,
what it should contain, and how it might be used. It is, of course, likely that
customers may wish to see certain content that isn’t immediately apparent or obvious
to the industry, input which would be invaluable in defining the real value of such a
development.
More broadly, industry already believes that much of the information that is legislated
for in terms of consumer credit has been arrived at without a proper understanding of
what consumers actually want or need, which serves to undermine credit card
lenders’ own attempts to deliver the right information themselves, based on their
understanding of their own customers.
Research should firstly look at monthly credit card statements to gain an
understanding of how they are used by consumers; what is good about them; and/or
how they might be improved etc. However, as you would expect, most, if not all,
credit card lenders will have already researched the design of their own unique
monthly statements to a high level of detail in order to ensure that they meet the
different needs of each lender’s customer base.
Given the highly competitive nature of the UK credit card market and the constant
quest for innovation and differentiation amongst lenders, had there been a demand
from consumers for an annual credit card statement then it would have more than
likely have been delivered already.
Page 189 of 230
Stakeholder Card Lending Product
There are clear merits in offering a basic ‘vanilla’ product for customers who have a
need for such services – but not, of course, as a standard product for all customers.
A number of credit card lenders already offer ‘simple’ products, as part of their
portfolio. Uptake suggests that these will tend to be are generally ‘niche’, rather than
mass market, products.
Page 190 of 230
Standardised Labelling System
The concept of a standard labelling system is one that has been put forward on a
number of occasions in recent years. It is a concept that the industry would support
– so long as a system can be developed that is consistent, reliable and not
misleading to its customers. So far, none of the proposals advanced for standards
labelling has presented a workable solution which adds tangible value to the industry
or its customers.
For example, similar ideas have previously been put forward from a variety of
sources, such as:



HM Treasury:
Hurlstons’:
Which?:
CAT43 standard credit card (circa 2000)
Responsible Lending Index
Responsible Lending
These initiatives were each not taken forward due to the myriad of different purposes
that a credit card can be used for, ranging from a short-term borrowing tool to a
simple card payment mechanism, and the fact that a cardholder may use it for
different purposes at different times. Furthermore, each of these proposed initiatives
were dependant on a high degree of subjectivity. This means that any given credit
card might be good for the way in which one customer intends, or expects, to use
their card, but unsuitable for another.
Any system that is other than wholly objective and would deliver the same results,
whatever criteria are used to assess products, simply stands to skew the market and
become the key influence on product design as credit card lenders design products
to top the table, rather than deliver the best outcome for consumers.
For example, a credit card that allocates payments ‘low-to-high’, but offers a
generously long promotional period at 0%, would clearly be highly attractive to
certain customer groups, but not to others.
One of the outcomes raised in the consultation paper is that consumers “would be
able to choose more complex options but that the labelling system could ensure that
they do so knowing the implications compared to cheaper and simpler alternatives”.
It is not clear to us what this means, but it seems to ignore the APR as a means
(albeit flawed) of comparing the price of credit products; the Summary Box; and the
forthcoming SECCI (Standard European Consumer Credit Information form, strongly
reminiscent of the Summary Box and a product of the Consumer Credit Directive).
It also ignores the fact that:

the press (including Which?) regularly provide ‘best buy’ information on credit
cards, should consumers require such advice

the FSA’s plans for their ‘moneymadeclear’ credit card comparison website

recommending a best buy credit card does not necessarily mean that the lender
will accept all applicants
43
Where CAT stands for Charges, Access and Terms
Page 191 of 230
In summary, it is essential to recognise and acknowledge that the UK credit card
market is highly competitive, as well as innovative, and that there is a need for very
careful thought in order to fully evaluate a solution such as this and to understand
where there may be risks in respect of a potential dilution of such a strong picture of
competitiveness.
Page 192 of 230
Proposal Summary
In summary, the credit card industry welcomes the opportunity to discuss these ideas
further with BIS. However, it is essential that previous work in these areas is fully
assessed and that any subsequent recommendations are reached on the basis of
solid evidence and rigorous research.
Page 193 of 230
Appendices
Page 194 of 230
Appendix 1
Key Information and Background
Introduction
The UK Cards Association is the leading trade association for the cards industry in
the UK. The Association is the industry body of financial institutions who act as card
issuers and/or acquirers in the UK card payments market. It is responsible for
formulating and implementing policy on non-competitive aspects of card payments.
The UK Cards Association was formed in April 2009 as the successor body to the
APACS Card Payments Group. Under the APACS banner – the UK payments
association – the group had a highly successful eighteen year history advancing a
progressive agenda (most notably in areas such as transparency, data sharing,
responsible lending, fraud prevention and through the introduction of chip and PIN).
The UK Cards Association accounts for the majority of debit and credit cards issued
in the UK, with members issuing in excess of 66 million credit cards and 76 million
debit cards and covers the whole of the plastic card transactions acquiring market.
The UK Cards Association membership as of January 2010 comprises the following
institutions:
Full Board Members
American Express Services Europe Ltd
Barclays Bank Plc
Capital One Bank (Europe) Plc
Clydesdale Bank Plc
Co-operative Bank Plc
Egg Banking Plc
Elavon Financial Services Ltd
HSBC Bank Plc
Lloyds TSB Bank Plc
MBNA Europe Bank Ltd
Nationwide Building Society
The Royal Bank of Scotland Group Plc
Santander UK plc
Tesco Personal Finance Plc
Other Members
AIB Group (UK) Plc
Bank of Ireland
Chelsea Building Society
C Hoare & Co
Coventry Building Society
Europe Arab Bank Plc
Northern Bank Ltd
Northern Rock Plc
Standard Chartered (Jersey) Ltd
Vanquis Bank Limited
Given the nature of the consultation, The UK Cards Association has circulated the
documentation to; has consulted with; and has sought input from its Members. As
BIS will appreciate, card portfolios will differ between issuers and we have therefore
been keen to encourage our Members to respond individually to the consultation.
However, it is also appropriate for us to provide an industry-level response focusing
on comments that are common across the whole or a significant proportion of credit
card products provided by our Members.
Page 195 of 230
Since its inception in April 2009, The UK Cards Association has been keen to
develop a progressive agenda for the card industry and to help deliver a world-class
service to its customers. To some extent that agenda has been overtaken by the
White Paper and this consultation. However, for the industry to be progressive it is
vital that decisions requiring change or retaining the status quo are fully evidence
based; are grounded in fact; and are not the result of assertion or supposition or of
emotive or short term considerations – an obligation incumbent upon stakeholders
and critics as much as the industry.
This document therefore provides a huge amount of evidence about the credit card
industry and how it operates, along with an analysis of the consequences of the
various changes proposed by BIS and by the industry.
Page 196 of 230
Contribution of the Credit Card Industry to the UK Economy
In 2005 The UK Cards Association (then operating under the APACS banner)
commissioned an independent study from economy.com (an independent
economics consultancy, now part of Moody’s) entitled “Plastic Money: The Credit
Card Industry’s contribution to the UK Economy”. We would expect the results,
findings and conclusions to remain broadly unchanged. The report is attached as
Appendix 6.
The highlights of the report were as follows:

The credit card industry directly and indirectly employs over 111,000 people in
the UK, providing jobs in communities around the country. It is a major
contributor to aggregate GDP growth, whether via wages disbursed, productive
business investment undertaken, or government taxes paid

Credit cards help smooth the boom-and-bust swings in the economy by
spreading out income gains and private consumption over time. This is true of all
forms of credit, but plastic cards are the most liquid and therefore convenient
form of borrowing

The liquidity and availability of credit provided by credit cards in the UK is worth
£22 billion of projected GDP growth over three years. Tightening up credit
constraints would weigh disproportionately on lower income households and on
those with limited access to credit

Credit cards reduce transaction and cash handling costs to both merchants and
cardholders, while at the same time offering convenience, security, dependability,
and customisability. These features are either non-existent for other payment
types, or are better realised in credit cards

Two case studies, tourism and e-commerce, demonstrate industries where these
qualitative benefits are most obviously realized. Both have been revolutionized
by the creation and widespread adoption of credit cards
In retrospect, the conclusion of the report, replicated below, seems quite prescient in
light of the current consultation:
“Credit cards — like any other form of financial instrument — will continue to have
their advocates and their detractors, but they are unquestionably an intrinsic and
indispensable part of the British financial landscape. They are the most flexible
and liquid form of credit in widespread use and without the existence of
credit…households would be forced to consume directly out of disposable
income. This would aggravate the boom and bust cycle and reduce potential
growth.”
Page 197 of 230
“The industry is also a notable employer, in several cases in areas that have lost
out through the dissolution or diminution of some other industry. We have
identified ten communities where the credit card industry directly accounts for at
least one in every 100 labour force jobs, and this does not include the people
employed in the industry’s ancillary and subsidiary companies. The earnings and
taxes paid by these corporations add to the bottom line of both households and
government, at the local and national level. By investing in human and physical
capital, these companies also boost economic growth, now and in the future.”
“Finally, individual cardholders and merchants reap the rewards of a range of
time and money saving features, some of which are common to other types of
payment, electronic or otherwise, and some of which are unique to credit cards.
These include convenience, security, and flexibility, to name just a few.”
“This is not to say that cards do not have their costs — whether in the form of
fraud or over-indebtedness. Moreover, there is room for improvement in the
communication and marketing of credit card products and the sharing of credit
information amongst lenders; this would help reduce the incidence of
irresponsible borrowing and negligent lending, to the betterment of both creditors
and borrowers. It is our belief, however, that the myriad benefits outweigh the
costs and that the breadth and depth of these benefits should not be overlooked
or marginalized in the ongoing credit card debate.”
Page 198 of 230
Differing Business Models
Within our diverse, large and economically important industry, the UK credit card
market is comprised of a number of different types of credit card lender operating to
different business models, susceptible in different degrees to any proposals for
change.
Credit card lenders can broadly be categorised as follows:

Larger high street lenders typically providing credit cards to their existing retail
bank customer base with some penetration into non-retail bank customers such
as HSBC, RBS etc

Smaller high street lenders such as National Australia Group, Co-operative Bank,
Bank of Ireland etc

Mono-line credit card issuers principally providing credit cards (and limited other
products) to the mass market, attracting customers from the high street banks
and customers new to credit cards, such as MBNA and Capital One etc, and who
have considerably increased price competition in the market since their entry in to
the UK in the mid-1990s

On-line only financial services providers such as Egg whose credit card operation
is more akin to a mono-line

Three-party credit / charge card models such as American Express, Diners Club
and JCB where the card issuer is also the acquirer (as opposed to participants in
four party card payment schemes such as Visa and MasterCard)

High-street affinity credit card providers who have emerged from the ex-store
card market or developing financial services on the back of their wider
businesses, such as John Lewis Partnership (within HSBC); Tesco Bank,
Sainsbury’s Bank (within Bank of Scotland) etc

Highly specialised lenders operating in the sub-prime / non-prime / home credit
type market such as Vanquis; SAV (within Bank of Scotland) etc
With such a variety of models it is often difficult for the industry to achieve consensus
on one-size-fits-all solutions, particularly those that affect the underlying construct of
the business and that might have disproportionate impacts on different businesses.
Page 199 of 230
Recent trends have been more towards consolidation of credit card lenders, with
names such as those below having entered the market in the mid 90s to later leave
or be taken over by larger players, reducing the choice for consumer:










GE Capital
The Associates
People’s Bank
Accucard
Liverpool Victoria
Beneficial Bank
Morgan Stanley
Goldfish
HFC; and
M&S Financial Services
We believe that this is, in part, due to the high level of regulation in the UK credit card
market and the difficulty in running a smaller scale credit card business profitably,
and that this has now created a situation that makes it unattractive for new entrants
to come into the market on any substantial scale.
Indeed, PriceWaterhouseCoopers, in their annual Precious Plastic report for 2010,
“expect to see an increase in portfolio sales as lenders seek to unlock liquidity and
buyers return to the market, (taking advantage of) opportunities for investors to
acquire assets at attractive discounts”.
Page 200 of 230
GfK monitor satisfaction levels within their long-running Financial Research Survey
(FRS)44, the benchmark market research survey which informs the industry.
Customer satisfaction with credit cards is monitored within the survey, giving the
following results for respondents’ satisfaction with their main credit card:
Satisfaction With Main Credit Card (%)
Satisfaction
Extremely satisfied
Very satisfied
Fairly satisfied
Fairly dissatisfied
Very dissatisfied
Don’t know
%
15
47
25
8
2
1
1
1
87
8
4
Source: GfK Financial Research Survey
In the specific quantitative consumer research commissioned by The UK Cards
Association from GfK to support this response45, respondents were taken through a
series of questions relating to each of the four main issues raised as negatives about
the credit card industry in the consultation – allocation of payments; re-pricing; credit
limit increases (and decreases); and minimum payments, along with some of the
Government’s proposals.
At the end of the questionnaire respondents were asked, taking everything into
account, how satisfied they were with their credit cards. Having had the four
perceived downsides of credit cards discussed with them it would be no surprise to
see satisfaction levels fall, which is indeed what happens, albeit to a very limited
extent.
Q: Taking everything into account, how satisfied are you with your credit card(s)? (Base: all
credit card holders)
Satisfaction
Extremely satisfied
Very satisfied
Fairly satisfied
Fairly dissatisfied
Very dissatisfied
Don’t know
%
6
39
34
13
5
2
1
1
79
13
8
Source: GFk research for The UK Cards Association, December 2009
44
GfK’s Financial Research Survey (FRS™) is the definitive consumer-based monitor of the personal
financial services sector. The FRS covers consumer behaviour in almost all personal finance sectors
including: current accounts; payment cards; loans; general insurance; savings and investments;
mortgages; life insurance; pensions; and health insurance. FRS is the largest and longest running
survey of its kind, interviewing 60,000 GB consumers in the home or online every year. The
questionnaire covers product holding; acquisition and usage behaviour; the value of holdings; and a
wealth of demographic and attitudinal data. FRS is bought by almost all major financial organisations in
the UK.
45
For details on methodology see Appendix 2
Page 201 of 230
Overall, the FRS shows that 95% of card holders are not expressing any level of
dissatisfaction, compared to 92% in our specific survey.
Our qualitative research46 confirms these findings. A programme of depth interviews
and deliberative group discussions examined each of the four main issues raised in
the consultation and found that most consumers were largely satisfied with their
credit cards on the basis that:

The basic service provided by credit card companies is operationally competent;

Delayed payment enables better management of bank balances;

Credit cards provided statutory insurance (under Section 75 of the Consumer
Credit Act) and, in some cases, additional protections on products purchased;

They are highly appropriate for the on-line environment, whilst also seen as being
secure;

Credit card lenders offer effective customer service and are responsive when
problems occur;

Cards provide a means for recreational spending;

Rewards (where they apply) are appreciated;

Most credit cards are free to use if paid off in full;

The tracking of spending on credit card statements is more
recognisable/comprehensible than for, for example, current accounts.
However, consumers recognise that there are some risks associated with credit
cards such as:

A temptation to overspend;

The potential for financial mismanagement and consequent inflated debt;

Residual worries over inappropriate credit being provided to ‘vulnerable’
consumers.
The main objection consumers have is to the rate of interest charged on credit cards
(which suggests that industry could do more to explain why APRs might appear
high), but this is mitigated by the understanding that credit card companies are
businesses and it is the price consumers pay for the facility.
Consumers’ attitudes to the issues raised in the consultation were
underpinned by a key attitudinal understanding that the relationship between
consumers and credit card companies is one founded on what is ‘reasonable’,
and that benefits and responsibilities apply to both parties.
46
For details on methodology see Appendix A
Page 202 of 230
The consumer view on what is ‘reasonable’ is driven by their understanding that:

Credit card companies are businesses whose objective is to make money;

Credit cards are seen as a facility that is valued and that there is a cost to this;

The use of credit is, in the final analysis, down to the consumer and people have
to be held responsible for their own actions (a point that was made time and
again).
But in this relationship consumers believe that there should be a benchmark of
reasonableness – for both the consumer and the provider. It is reasonable:

That card users are expected to know what they are doing with their cards and
stand by their actions, though of course genuine slips / accidents will occur and
these should be accommodated within the customer / provider relationship e.g.
that long-standing customers would not expect to be penalised when they forget
a payment;

That product information is clear and accessible, prioritised to tell the consumer
what the significant characteristics of the product are in a language they can
understand; what the consequences are of the way in which they are currently
using the cards; and the consequences in terms of charging, interest rates,
balances and longevity, and credit rating;

That vulnerable people at lower economic levels receive a higher level of
protection / monitoring, which may involve restricting these people’s spending
and that there should be demonstrable mechanisms in place to protect them
(which we interpret as a desire for credit card companies to exhibit a degree of
paternalism);

That credit card companies make money from providing customers with the
facility and service provided;

That interest rates and charging reflect the high levels of convenience and
flexibility that credit (cards) provide;

That even credit card companies are going to put profit-making at the heart of
their business and operations, but that this isn’t a problem so long as this is not
grossly out of line with consumers interest and practices;

That credit card companies are prevented from making money through practices
that amount to sleight of hand or deceit.
Page 203 of 230
Customer Complaints
The fact that the issues identified in the consultation paper are not a major source of
concern for credit card customers is also borne out by the experience that credit card
lenders have from customer complaints.
According to credit card lenders’ returns to The UK Cards Association47 a total of less
than 5% of the complaints they receive are in relation to the following five subjects:

Risk-based re-pricing

Allocation of payments

Unsolicited credit limit increases

Credit limit decreases

Minimum payments
Of these, allocation of payments and credit limit decreases (not increases)
accounted for more than three quarters of complaints in these areas. Credit limit
decreases resulted in the highest proportion of complaints at a little fewer than 2% of
the overall total. (In fact, there are 38 times as many complaints about unsolicited
credit limit decreases as there are about unsolicited credit limit increases).
The other 90% plus of complaints comprise interest and charges (around two thirds
of the total – often related to default charges) and then operational issues (such as
lost cards, ATMs not working, or fraud).
47
Data supplied by 13 issuers accounting for 96% of the market
Page 204 of 230
Complaints to the Financial Ombudsman Service
Paragraph 1.8 of the consultation paper comments upon the increased number of
complaints received by FOS in relation to credit cards as proof that consumers feel
they are not getting a fair deal. We believe that it is inappropriate to reach such a
misleading conclusion without first seeking the information needed to reach it.
Whilst FOS publish an annual report detailing the complaints they receive by subject
it doesn’t contain such detail that might be useful here and or allow such conclusions
to be drawn.
Nevertheless, from our members’ anecdotal reporting of the cases that they
experience being referred to FOS we have reason to believe that the bulk of these
cases relate to the application of default fees on credit card accounts, consistent with
FOS’s reported experience on current account charging, particularly in 2008. Our
members also report a reduction in the number of complaints to FOS over re-pricing
decisions since the new Principles (see section 7.3.1) were adopted in January 2009,
though we do not have an overall industry aggregate picture.
Aside from re-pricing FOS are not reporting any significant issues around unsolicited
credit limit increases, minimum repayments or the allocation of payments i.e. those
issues raised in the White Paper consultation.
We would encourage BIS to request information and commentary from FOS on the
breakdown of the credit card complaints that they receive beyond that reported in
FOS’s annual report, as follows:
Extract From Financial Ombudsman Service Annual Report 2008 / 2009
(page 35)
The further substantial increase in the number of disputes involving credit cards reflects the fact that we have
continued to receive a steady stream of complaints about so-called “default charges” – applied by credit-card
companies where a customer pays late or misses a payment, and sometimes where a customer exceeds the credit
limit on the card.
No credit-card company has so far chosen to request a formal ombudsman decision on the merits of these cases.
Instead, the companies have all preferred to settle the complaints informally by meeting their customers’ claims.
In last year’s annual review we mentioned an emerging type of complaint, where credit card companies made
substantial increases – sometimes by as much as ten percentage points – in the rate of interest charged on certain
customers’ credit-card accounts. The companies said that this reflected a move to “risk-based pricing”. We have
continued to receive complaints of this type this year, and it seemed to us that the issue was one that had wider
significance both for consumers and for credit-card companies.
We therefore raised the matter under the formal “wider-implications” procedure that we share with the Office of Fair
Trading (OFT – the body that regulates consumer credit) and the Financial Services Authority (FSA). Having
considered the matter, the OFT decided that it would not at this time pursue a regulatory solution to the issue. This
meant we were able to continue our own investigations into the individual complaints that consumers had referred to
us about rate changes already made. Separately, the government agreed a set of principles with credit-card
companies about future rate changes. These principles took effect from 1 January 2009. As part of our investigation
into these complaints, we issued questionnaires to the credit-card companies involved, to obtain information about –
among other things – the actual assessments of risk that had been carried out in relation to these customers, and
how the new rates had been calculated. Almost all the credit-card companies subsequently chose to settle the
complaints that had been brought against them, rather than have our investigation continue.
Complaints about disputed credit- and debit card transactions – made at retail outlets, cash machines or over the
internet – continued to form a significant part of our workload during the year. In line with our experience in previous
years, most complaints turned on practical issues to do with the particular case in hand, rather than on any complex
technical issue.
Page 205 of 230
Recent Legislative and Regulatory Activity and Context
It is both necessary and useful to place the current consultation in context against the
wider background of legislative and regulatory activity.
PriceWaterhouseCoopers comment in their annual Precious Plastic report for
2010 that “the growing (regulatory) challenges are creating barriers to entry
and placing such pressure on margins that the cumulative effect could be to
reduce choice and increase costs for consumers”.
With a noticeable increase in activity beginning in 2003, the consumer credit market
– and credit cards in particular – have been the subject of intense legislative and
regulatory intervention in recent years and have thus been operating in an
environment of considerable uncertainty. Specifically there have been fundamental
challenges to the credit card business model emanating from:

The Treasury Select Committee enquiry into the transparency of credit card
charges, hearings held in July 2003 and October 2004

The Competition Commission enquiry into Store Cards in 200548

The OFT’s intervention regarding credit card default charges in 2006

The OFT’s investigation of interchange fees (ongoing)

The OFT’s Credit Card Comparison study following the Which? super-complaint
in 2007 regarding the standardisation of interest rate calculation methodologies

FSA / Competition Commission interventions on Payment Protection Insurance
from 2007 to date

The Credit Card Summit of November 2008 (see chapter on re-pricing)
48
Not covered here but likely to be covered in the response from the Finance & Leasing Association
Page 206 of 230
This activity has been accompanied by a raft of legislative, regulatory and selfregulatory measures including, but not limited to:

The Consumer Credit Act revisions 200649

The Payment Services Directive 2007 (implemented in the UK in November
2009)

Basle II capital adequacy requirements (see chapter on credit limit increases)

Regulation 256050

The FSA’s Treating Customers Fairly (TCF) principles

The Banking (and since November 2009, Lending Code), revised in 2003, 2005
and 2008

Revised data sharing guidelines

Numerous APACS / UK Cards Association Guidelines (see later section)

The FSA’s Moneymadeclear programme
Further, these developments will soon to be followed by:

The Consumer Credit Directive 2008 (for implementation in the UK during 2010)

The OFT’s Irresponsible Lending Guideance

The Financial Services Bill 2010, including new regulations banning unsolicited
credit card cheques

The EU Guidelines on Responsible Lending
49
Consumer Credit Act 2006
The Consumer Credit Act 2006 (which was fully implemented on 1 October 2008) was aimed at
establishing a fairer, clearer and more competitive market for consumer credit, updating consumer credit
legislation that had been in place since the 1970s, and making it more relevant to today’s consumers.
The Act was implemented in 3 phases:

6 April 2007: the remit of the Financial Ombudsman Service (FOS) was extended to cover
consumer credit and the Unfair Relationships Test was introduced for new agreements

6 April 2008: the Office of Fair Trading’s (OFT’s) new strengthened licensing regime was
introduced, the Consumer Credit Appeals Tribunal (for appeals against the OFT’s licensing
decisions) was established, the financial limit (of £25,000) was removed so all new credit
agreements (unless specifically exempt) are regulated, and the Unfair Relationships Test was
extended to all existing credit agreements.

1 October 2008: a requirement for lenders to provide borrowers with much more information about
their accounts on a regular basis, such as an annual statement and notices when consumers fall
into arrears or incur a default sum was introduced, the OFT’s regulation was extended to credit
information and debt administration services which means debt administration and credit
information (repair) service providers need a consumer credit licence, and consumers can go to the
courts asking for longer to pay back their loan (a time order) when they receive an arrears notice
(prior to October, consumers could only seek a time order when they received a default notice)
50
Regulation 2560 - the regulation on bank charges for national and cross-border payments which
regulates the price for a cross-border transaction to the same cost as that for a domestic transaction
provided that the requirements of the CREDEURO convention have been met.
Page 207 of 230
It will not prove beneficial to this consultation process to undertake a detailed
analysis of the above measures with which BIS will already be familiar. Suffice to
say that, in combination, the measures have ensured that responsible consumers
have sufficient information available to them to make informed choices about their
selection of consumer lending products, including credit cards. All the key areas of a
lending product’s life cycle have been addressed i.e:

Pre-sale, advertising and provision of information requirements

Contractual, via presentation of key facts, responsible lending requirements and
cooling-off periods

Post-contractual, via clarity and frequency of information provision and consumer
focused default management processes
All of the above have been (or will be) developed, agreed and implemented and will
provide the highest degree of protection available in Europe for the vast majority of
UK consumers who act responsibly when managing their finances.
The net result is that UK consumers already have the most beneficent regime
of consumer protection in Europe enjoying exclusive major concessions such
as Section 7551 of the CCA.
Indeed, UK card lenders are at a considerable disadvantage when compared with
their counterparts elsewhere in Europe due to the heavy burden of additional existing
and forthcoming legislation and regulation.
It should also be understood that the benefits of some of the above measures have
not yet worked their way through the system, e.g. improved data sharing, which is the
key to the industry’s ability to assess risk and affordability.
A further step change improvement in data sharing could be achieved by the
Government making available to the credit reference agencies data on financial
commitments such as student loans, unpaid taxes, rent/council tax in arrears, unpaid
utility bills and non-consensual data.
That the industry has a consumer focused agenda cannot be in doubt when the
extent of initiatives over the last decade is examined in detail. However, in general
the net impact of these changes is either to generate additional cost for the industry
or to reduce industry revenue.
51
When a is used to pay for goods or services between £100 and £30,000, Section 75 holds the credit
card issuer ‘jointly and severally’ responsible for the purchase. This means that cardholders have the
right to claim a refund from their credit card issuer if there is a problem with the goods or services they
ordered
Page 208 of 230
Impacts of Other Government Legislation and Activities
Government also creates costs for the credit card industry through other legislative
changes that may be driven by other policy objectives or, at the time, regarded as
unrelated. For example:

Changes to the bankruptcy laws in 2005 which led to a shift in consumer attitudes
to debt (including the removal of the stigma associated with bankruptcy) and
increased activities from so-called IVA ‘factories’
Through not addressing issues of interpretation around the Consumer Credit Act
despite requests from industry to do so, the Government has (inadvertently):

Created markets that are being exploited by Claims Management Companies
(CMCs) on the back of default fees (and overdraft fees)

Depressed the market for Payment Protection Insurance (PPI), potentially leaving
many consumers unprotected against unforeseen financial difficulties

Allowed the unwarranted involvement of CMCs in disputes over the provisions of
Sections 77 & 78 of the Consumer Credit Act which lay down rules for the
disclosure of documentation relating to financial agreements. This involvement
has, in many cases, been encouraging consumers to challenge repayment of
monies borrowed, and lent, in good faith; and

Expanded the application of Section 75 of the Consumer Credit Act to overseas
transactions, effectively meaning that credit card lenders in the UK are now the
insurer of last resort for all transaction made by UK cardholders between £100
and £30,000 anywhere in the world
Page 209 of 230
OFT Irresponsible Lending Guidance
Paragraph 1.15 of the consultation paper refers to the OFT’s draft Guidance on
Irresponsible Lending “which aims to ensure that lenders do not engage in
irresponsible lending practices and that they provide affordable credit to consumers”.
The guidance identifies types of behaviour that the OFT considers would constitute
irresponsible lending.
It is important to note that the draft OFT Irresponsible Lending Guidance
currently available is only a draft and is undergoing its own review process.
By taking counsel from a draft document, the Government is interfering with
the correct and proper review of the draft document, making it far harder for
stakeholders to lobby for changes if deemed appropriate.
The Guidance is hugely relevant in the context of this consultation given that it covers
many complementary issues and will potentially exacerbate the effect of any policy
decisions. The UK Cards Association (along with other trade associations) has
provided a detailed response to the OFT on the draft Irresponsible Lending
Guidance.
Fundamentally our main concerns around the OFT draft guidance at this stage are as
follows:

The guidance is effectively a new layer of regulation and has been drafted
without any attempt at an impact analysis or evidence that might provide an
underlying justification for its content, which is largely subjective. Some view the
Guidance as creating what is, in effect, legislation without due process or scrutiny

The guidance as drafted could have a significant detrimental effect on the UK
market and place UK lenders at a significant disadvantage compared to
European counterparts

The guidance may also provide competitive advantage to overseas lenders
targeting the UK who are not bound by the same requirements

There is a significant risk of market distortion that could restrict or limit lending or
lead to the withdrawal of products aimed at certain sectors of the population

The guidance risks providing scope for interpretation increasing the risk of
vexatious and frivolous claims from consumers regarding the validity of their
credit agreements, often encouraged by the activities of Claims Management
Companies
The full UK Cards Association response to the OFT’s draft guidance is attached as
Appendix 7.
Page 210 of 230
Consumer Credit Directive
Paragraph 1.16 of the consultation paper refers to the implementation of the
Consumer Credit Directive by June 2010.
With final regulations now not expected until the end of the first quarter of 2010 it is
highly unlikely that any part of the credit industry can be compliant by the
implementation date and that a phased or staggered implementation may be
required. It is concerning that BIS are considering further regulation of credit cards
through this consultation when it has proven so difficult to implement the Directive
within the two years allowed.
In its July 2009 White Paper ‘A Better Deal for Consumers’, the Government highlighted the core
components of the CCD implementation to be:
• A duty on the lender to provide adequate explanations about the credit on offer
• An obligation on the lender to check creditworthiness before offering or increasing credit
• A requirement to automatically disclose the identity of credit reference agencies holding information
which has led to a consumer’s application for credit being rejected
• A right for consumers to withdraw from a credit agreement within 14 days, without
justification
• Requirements for credit intermediaries to disclose fees they charge for arranging credit and to make
clear whether they are tied to specific credit providers
• A new right to make partial early repayment of credit (in addition to the existing right to repay early in
full)
• A new standardised pre-contractual information sheet enabling consumers to compare offers more
easily
• A requirement to comply with the findings of the OFT’s consultation on irresponsible lending, which
has four principles:
1 appropriate business practices and procedures (e.g. lenders must assess the suitability of a product
and the consumer’s ability to repay)
2 transparency in dealings (e.g. clear language, prominence of key terms)
3 proportionality (e.g. with respect to how lenders deal with arrears, defaults
and forbearance)
4 fairness (e.g. with respect to not targeting consumers with inappropriate products or aggressive,
deceptive, unfair or prejudicial behaviour)
The key provisions of the Directive as far as they impact on credit cards, given our
understanding of the likely implementation in the UK, are summarised as follows:
Consumer Credit Directive – Key Provisions
Article 4 – Standard Information to be included in Advertising
Requirement for standard information to be provided by means of a representative example. Draft
regulations (from BIS) have indicated a requirement for information in the representative example to be
given ‘greater prominence’ in the advertisement than any other information relating to the cost of credit
(though this does not reflect the Directive which requires the information to be provided in a ‘clear,
concise and prominent way’)
Article 5 – Pre-Contractual Information
Introduces the concept of the SECCI (Standard European Consumer Credit Information) – which will
potentially impact upon current use of the Summary Box and increase the risk of information overload.
Potential requirement for a degree of personalisation to the pre-contract information which would
introduce a two-stage process if the amount of credit is not known at the initial stage. Lenders must
have the ability to show representative rates (in the case of risk-based pricing) and the provision of the
credit limit at a later stage to facilitate continuance of a one-stage process.
(continues over)
Page 211 of 230
Article 5.6 – Adequate Explanations
The Directive requires the provision of Adequate Explanations by creditors (and their intermediaries) in
order to place the consumer in a position of assessing whether the proposed credit agreement is
suitable for his needs / financial situation. UK regulations imply that under certain circumstances this
must be provided orally. Industry’s view is that there is an inextricable linkage to the OFT’s
Irresponsible Lending Guidance. The risk, given UK’s potential interpretation, is of information overload
for the consumer and UK lenders / types of credit being disadvantaged as the UK appears to be going
over and above Directive’s requirements.
Article 8 - Creditworthiness
The Directive requires that ‘before the conclusion of the credit agreement, the creditor assesses the
consumer’s credit-worthiness on the basis of sufficient information, where appropriate obtained from the
consumer and, where necessary, on the basis of a consultation of the relevant database.’ There is a
clear interaction between Articles 8 and 5.6 with the OFT’s Irresponsible Lending Guidance proposals.
Article 9 – Database Access
Member States to ensure, in the case of cross-border credit, access for creditors from other member
states to databases used for assessing the creditworthiness of consumers. Conditions for access shall
be non-discriminatory. This may provide competitive advantage to lenders from other member states
depending on how the ‘non-discriminatory’ requirement is interpreted.
Article 10 – Information to be included in Credit Agreements
Similar to existing requirements.
Article 14 Right of Withdrawal
A 14 calendar day period in which the consumer can withdraw from the credit agreement without giving
any reason. In the case of cards, cancellation rights already exist, although the difficulty in compliance
is in determining what must be included in the agreement in relation to the daily amount of interest.
Article 15 – Linked Credit agreements
Provision of rights for the consumer to pursue remedies against the creditor if satisfaction is not
obtained pursuing the supplier of the goods/services. Seems to replicate, for other forms of credit,
section 75 of the Consumer Credit Act 1974.
Article 19 (and Annex 1) – Calculation of APRs
Calculation as for UK but assumptions differ which are likely to increase the APR for all cards with an
annual fee (even if the interest rate has not changed). Implications for charge cards.
There is an important concern within the industry that the outcome of this
consultation stands to undermine the objectives of the Consumer Credit Directive
(CCD).
If the CCD is intended to encourage cross-border lending there are significant risks
that:

UK credit card lenders wishing to enter European markets from the UK will be
hindered by the more restricted nature of the products they can offer (unless they
operate parallel systems)

That foreign credit card lenders will be able to target the UK without being subject
to the same restrictions or limitations on product design
Page 212 of 230

UK credit card lenders might relocate to other members states in order to offer
credit card products into the UK
PriceWaterhouseCoopers, in their annual Precious Plastic report for 2010, conclude
that “the introduction of the Consumer Credit Directive…will bring fundamental
change to the way credit is sold. The additional onus the regulation is likely to
introduce, regarding the provision of pre-contractual information to customers, will
challenge the future of face-to-face sales. For example, this may have particular
impact on retailers’ ability to sell credit in-store”.
Page 213 of 230
Industry Self-Regulated Improvements
The industry is always looking to improve the way that it operates and interacts with
and treats consumers and to respond positively to external concerns.
The following initiatives, in chronological order, have been led through The UK Cards
Association and its predecessor body, APACS Card Payments Group (CPG). These
have been implemented in the UK credit card market either through industry led
initiatives, or in response to concerns raised by stakeholders as part of the regular
independent review of the Banking Code; at the Treasury Select Committee hearings
of July 2003 and October 2004; as part of the development of the Consumer Credit
Act 2006 and the Consumer Credit Directive 2008; and through ongoing regular
dialogue with legislators, regulators, consumer groups and the media.
The main areas that have been addressed by The UK Cards Association and its
members have been:

Best practice – addressing those business practices that critics viewed as
irresponsible or designed to mislead cardholders

Improvements to transparency – a consumer armed with better information
and understanding of the product and its costs is a better and more informed
borrower; and

Improvements to data sharing – to improve the quality of lending decisions
The consistent aim has been to raise standards across the industry via selfregulation, in the form of codes of best practice and/or additions to the UK’s Banking
Code (now The Lending Code as of November 2009), the industry’s voluntary code
that sets standards of good practice. The Code itself has been the subject of regular
independent review (in 2002, 2005 and 2008) with many of the measures below
introduced between reviews.
The following initiatives and changes are specifically of relevance:

Estimated interest amount on statements showing how much interest a
cardholder would incur if they only made the minimum repayment on the due
date, included in the Banking Code from January 2002

Improved detail on foreign exchange transactions showing the exchange rate
used and any associated fees, included in the Banking Code from September
2003

Information on the expiry of promotional rates, giving cardholders notice of when
a promotional rate will no longer apply to their outstanding balance, and replaced
by the regular go-to rate, included in the Banking Code from January 2004

Voluntary introduction of the Summary Box version 1.0 (the UK equivalent of the
US’s Schumer Box, and approved by the OFT) to appear on all credit card
marketing materials from March 2004
Page 214 of 230

Publication of a report, “Are UK Households Over-Indebted?”, commissioned
from economics consultancy Oxera by APACS, the British Bankers’ Association
(BBA), the Consumer Credit Association (CCA) and the Finance & Leasing
Association (FLA), providing a realistic assessment of the UK debt situation,
critiquing economic literature, a range of existing studies on over-indebtedness
and various statistical reports and databases, aimed at improving the
understanding of the scale and causes of over-indebtedness

Implementation of version 2.0 of the Summary Box to reflect consumer reaction
to version 1.0, from December 2004, included in the Banking Code from March
2005

Adoption of best practice guidelines for credit card cheques covering the
information to accompany credit card cheques when they are sent out and
screening of those to whom they are sent from March 2004, included in the
Banking Code from March 2005

Adoption of best practice guidelines on credit limit increases covering how they
are applied and explained to cardholders from April 2004, included in the Banking
Code from March 2005. Updated to a new version 2.0 in December 2005

Adoption of a health warning on all credit card statements advising cardholders
against making minimum repayments on a regular basis to be shown close to
minimum repayment information, for compliance by the end of October 2004, and
included in the Banking Code from March 2005

Following successful lobbying of the Office of Fair Trading (OFT) and other
parties by the credit card industry, re-convergence on a single method of
calculating APRs (the Annual Percentage Rate of Charge) (following legal
disagreement with the OFT) following publication of new Consumer Credit Act
advertising regulations in October 2004. New Consumer Credit Act agreement
regulations implemented May 2005

Introduction of a requirement to advise cardholders of where they can access
debt advice information on credit card statements (e.g. a telephone number),
from the end of 2005

Introduction of a version of the Summary Box on credit card statements, from the
end of 2005

Launch of the www.choosingandusing.com website, an impartial guide to credit
cards and their features (intentionally not a best buy table) explaining to
consumers all aspects of cards that were felt to be unclear or misleading by third
parties, launched July 2005

Introduction of illustrative examples showing how much it would cost to pay off a
given level of debt, shown on credit card marketing materials in a common format
for those that choose to use them, agreed June 2005. All but two of the thirteen
major credit card lenders chose to implement illustrative examples

Introduction of guidelines on the direct sales of credit cards (i.e. third party sales
situations in shopping malls, airports, sports stadiums etc), agreed August 2005
for implementation by end 2005
Page 215 of 230

New requirements on transparency of charges at ATMs implemented by LINK,
the UK ATM network, from July 2005. LINK also commenced regular mystery
shopping exercises to ensure compliance

Introduction of a version of the Summary Box for credit card cheques, from end
2006

Re-launch of an improved www.choosingandusing.com in May 2006, including
additional content on how interest is charged, recurring transactions, Card
Protection Agencies, chip & PIN, ID fraud etc along with improved searchability
and navigation

Standardisation of interest charging terminology for use in the Summary Box,
ensuring that common terminology was used by all credit card lenders

Introduction of best practice guidelines for pre-paid card issuers, from September
2007

Introduction of a version of the Summary Box for pre-paid cards, from December
2007

Launch of www.retailersandcards.com website, an impartial guide to card
acceptance, Q1 2008

Introduction of an improved Version 3.0 of the Summary Box by June 2009

Engagement with the OFT and FSA in the development and introduction of an
impartial credit card comparison website, now part of the White paper proposals
In addition, in the field of data sharing, The UK Cards Association members have
made the following significant advances:

Commitment across the industry to the sharing of full data on all credit card
accounts to the full extent allowed by law. As a result, full data sharing by all
credit card lenders was in place by the end of 2005

Introduction of behavioural data sharing (BDS), resulting in the sharing of an
increased level of detail on credit card accounts (e.g. where cardholders are
making minimum repayments; taking cash advances; how much they are
repaying etc). Full sharing commenced in November 2008, with information now
being shared on an estimated 70% of accounts
Page 216 of 230
The US Credit Card Accountability, Responsibility and Disclosure (CARD) Act
The consultation paper makes numerous references to the US CARD Act, the first
US legislation to regulate credit cards in a generation. As such, it is the clearest sign
of the US catching up with the UK, a market where consumers have traditionally had
a high degree of legislative protection supplemented by a self-regulatory regime
aimed at delivering additional benefits in the form of transparency, responsible
lending and treating customers fairly.
Whilst it is natural to want to understand what has been done in the US it is important
to note that the two markets are not directly comparable and that provisions in the US
do not necessarily translate into the UK, either in full or partially. As such, simply
emulating the CARD Act in the UK could have different and more severe impacts on
consumers in the UK than we see or predict in the US
For example, the underlying legislative and self-regulatory regimes are fundamentally
different. Whilst the US has developed its own regime over the years, we have seen
layer upon layer of formal regulation both domestically in the UK and out of Europe,
plus we have our own self-regulatory regime embodied, amongst others, in the
Lending Code along with the Financial Ombudsman Service.
Also, some of the key features or perceived mischiefs addressed in the US CARD
Act are not features of the UK market, such as ‘universal default’ or applying a
charge depending on the payment method used to settle a credit card bill.
The history of regulatory intervention is different too. Whilst the Federal Reserve in
the US have been fairly quiet, the European Commission, the Office of Fair Trading
and the Competition Commission have all recently exercised their powers, impacting
all the major revenue streams for UK lenders. This intervention has rendered the
business model for a UK lender fundamentally different to that of their US
counterparts, resulting in thinner profit margins in the UK and making the market
much less attractive to providers of credit.
There are key differences in the way the two industries operate that need to be
understood, such as the availability and rules around the use of credit reference data;
the ubiquity of FICO scoring in the US; transaction authorisation levels; sanctions for
legal non-compliance; the way in which APRs are calculated; the level of multi-lateral
interchange fees (much higher in the US than in the UK); and the activities of Claims
Management Companies, to name but a few;
The CARD Act is, without doubt, a technically complex piece of legislation, using
terms that may have a different meaning in the UK or no meaning at all, and warrants
a detailed forensic legal analysis. Added to this, it is not always clear what some of
the provisions are intended to achieve or what the perceived mischief is that they are
intended to address. There is also the fact that the speed with which the CARD Act
was developed – and the consequent lost opportunity for detailed consideration –
has increased the risk of serious unforeseen consequences, a message which we
have repeatedly made to the UK Government;
Page 217 of 230
It is our view that the US has embarked on a live experiment with their credit card
industry, effectively redesigning the business model through regulation.
Fundamentally we do not believe that the fact that the US has finally legislated on
credit cards automatically means that a further round of regulation in the UK is either
required or, indeed, would be beneficial for consumers.
Page 218 of 230
Impact of the US CARD Act
Although the US CARD Act does not come into effect until February 2010 the US
credit card market is already beginning to experience change as credit card lenders
react and prepare themselves for the new regulatory regime. A combination of the
declining economic environment along with the new legislation is driving adjustment
across the market, summarised as follows:

Losses as a result of bad debt have increased while lenders have tried to pull
back on underwriting i.e. making less credit available

Re-pricing actions and higher fees have become more prevalent to improve
revenue before the legislation comes into effect

Both consumers and credit card lenders are shifting to different products and
payment tools
These actions have manifested themselves in the following ways52:

The industry growth rate (i.e. the proportion of new accounts per quarter as a
percentage of open accounts) has slowed from 1.62% in Q3 2008 to 1.21% in Q2
2009, suggesting a reduction in competition, or a rationing of credit

Total credit lines53 across the US industry have reduced by $1,032 billion, a fall of
16.9%, in the year to June 2009

Revolving balances have fallen from $988 billion in 2008 to $898 billion by June
2009, a fall of 9.0%

Industry aggregate net purchase amounts54 have fallen by 12.4% in the year to
June 2009

Credit limits have been falling among existing accounts. The percentage of
accounts subject to a credit line decrease has increased by 36.4% in the year to
June 2009, with an average decrease of $6,410

Re-pricing activity has increased, even among lower risk accounts. The
percentage of accounts that have been re-priced has increased by 180.4% in the
year to June 2009, with an average increase of 6.1%. More accounts are priced
above 18% APR, less at 0%

The percentage of balance transfers that involved a fee increased by 6.6% in the
year to June 2009 to around 87%. The fee as a percentage of the transaction
amount increased by 49.0% in the year to June 2009 and now stands at around
2.7%
52
Source: Argus, unless otherwise stated
Source: Argus – total lines and outstanding for the industry is an aggregate of all issuers participating
in the Argus US Credit Card payments Study grossed up to industry based on Nilson Report April 2009
for 2008
54
Source: Argus – purchase amount is based on issuers participating in the Argus US Credit Card
Payments Study (not grossed up to Nilson reported values)
53
Page 219 of 230

The percentage of accounts with an annual fee increased by 4.3% in the year to
June 2009. The average annual fee per active account increased by 0.7% over
the same period. The prevalence of annual fees is higher among higher risk
accounts

During Q2 2008 some 1,060 million offers of credit cards were mailed to
consumers. In the same quarter in 2009 this number had fallen to 349 million.
The mail volumes for premium cards have increased by 28% as credit card
lenders focus on low risk customers to grow their businesses.

The distribution of new accounts in 2009 shows a significant skew towards low
risk accounts compared to 2008. However, despite the focus on lower risk
accounts, the average credit line for new accounts has fallen from $6,425 to
$6,127

The proportion of new accounts with a balance transfer that involved a fee has
risen by 23.1% in the year to June 2009. The amount of the fee has increased by
22.9% over the same period to 2.8%

The proportion of new accounts with an annual fee has risen by 14.7% in the
year to June 2009. The amount of the fee has increased by 13.2% over the
same period. Annual fees are more likely on riskier accounts where around 50%
of accounts involve a fee
The above information is taken from an analysis by Argus of the current US credit
card market attached as Appendix 8.
Page 220 of 230
The Industry Evidence Base
The BIS consultation, quite rightly:

Calls for proposals to be supported by robust evidence, and

Acknowledges the vital role that evidence must play in the decision making
process if optimal outcomes are to be achieved
To fulfil this requirement, the industry has engaged a number of internationally
recognised external consultancies to provide authoritative input and comment on the
options and proposals contained within the consultation. In summary, the following
work has been commissioned in support of this response:

Oxera Consulting – economic impact analysis (attached as Appendix 3)

Argus Information & Advisory Services Ltd – detailed analysis of the UK
credit card market

GfK NOP / GfK Financial – quantitative and qualitative consumer research
(attached as Appendices 3 and 4)
Profiles of the consultancies and methodological information are contained in
Appendix 2.
The industry has also referred back to a report commissioned in 2005 from
economy.com (now part of Moody’s) looking at the economic contribution of the
credit industry to the UK economy and to the annual “Precious Plastic” report
published by PriceWaterhouseCoopers.
In addition, the industry has been supportive of independent academic research
(through the provision of data), though it has not made any financial contribution to,
the following:

Professor Neil Stewart is a professor in psychology at the University of Warwick
who has been undertaking research into the behavioural psychology of
consumers relating to the making of minimum repayments55
The UK Cards Association has also collected information from individual credit card
issuers and drawn upon its own research and industry level management information
(MI), including:

Annual member returns to The UK Cards Association

The Consumer Payments Survey (CPS), a continuous tracking market research
study commissioned by UK Payments on behalf of the UK payments industry
including the Payments Council, the various clearing companies as well as
The UK Cards Association
55
More information on Professor Stewart’s work can be found at
http://www2.warwick.ac.uk/fac/sci/psych/research/nstewart/
Page 221 of 230
The Government Evidence Base
Overall, we have considered three documents:

The White Paper

The consultation paper

The economic impact analysis
The most striking thing about the White Paper and the consultation document is that
the Government presents little, if any, evidence to support its case. This goes
against the principles of better regulation established by the Better Regulation Task
Force, particularly that relating to accountability.
As a reminder, the five principles are that good regulation should be:

Proportionate: Regulators should only intervene when necessary. Remedies
should be appropriate to the risk posed, and costs identified and minimised

Accountable: Regulators must be able to justify decisions, and be subject to
public scrutiny

Consistent: Government rules and standards must be joined up and
implemented fairly

Transparent: Regulators should be open, and keep regulations simple and user
friendly

Targeted: Regulation should be focused on the problem, and minimise side
effects
It is particularly disappointing that BIS have not sought to refresh the definitive study
undertaken by Professor Elaine Kempson of the Personal Finance Research Centre,
University of Bristol, in support of the Over-Indebtedness Task Force in the early part
of the decade. This work provided an informed evidence base on which to base
policy priorities and decisions.
It is also disappointing that the Government refers to, and gives credence to,
potentially misleading data without openly questioning the impartiality of the
underlying evidence base. In particular, we are concerned about the reliance upon
provocative press releases from commercial organisations such as uSwitch (e.g.
paragraph 10, paragraph 4.556) and moneysupermarket.com, most likely aimed at
generating press coverage for these companies, increasing their profiles, and driving
visits to their non-independent websites. The figures in these press releases rarely
stand up to scrutiny57 and we would not regard them as evidence upon which any
reliance should be placed, least of all for driving long term and rational Government
policy and legislation.58
57
The UK Cards Association critique of the uSwitch press release on credit card cheques is a good
example
58
For example, paragraph 4.5 of the consultation paper quotes uSwitch claiming that the average credit
limit increase on an unsolicited basis is £1,538. The actual figure for any limit increase (including
customer requested increases) during Q2 2008 was actually £879
Page 222 of 230
This contrasts strongly with the BIS response to the annual Precious Plastic report
published by PriceWaterhouseCoopers59 which we would regard as a professional,
informed, impartial, considered and balanced assessment of the state of the industry.
It was some surprise to industry that BIS saw a need to issue a press release
commenting on the PWC report60 which contains a very important and relevant
analysis.
59
60
http://www.pwc.co.uk/eng/publications/precious_plastic.html
http://nds.coi.gov.uk/content/detail.aspx?NewsAreaId=2&ReleaseID=408409&SubjectId=2
Page 223 of 230
We would wish to draw particular attention to the following arising from our review of
the consultation document, some of which are covered in more depth elsewhere in
this response:
Complexity and Capability
Paragraph 14 of the executive summary to the consultation paper states that the
complexity of credit and store cards can lead consumers into making poor choices
and to incur greater debts and charges. It goes on to state a need for greater
transparency.
Credit cards are sophisticated products that offer a great deal of convenience and
flexibility to consumers. The industry accepts that as a result of this credit cards are
also, in some respects, complicated products and will always be prepared to listen to
and, where justified, act upon calls for improvements in transparency. Nonetheless,
it should be remembered that the features that make a credit card a sophisticated
and flexible product have arisen from fierce competition between lenders in a highly
competitive market.
The Government should not, however, draw the illogical conclusion that it is
complexity that leads consumers to make poor choices and to incur greater debts
and charges. Aside from irresponsible borrowing, there is also the issue of financial
capability, stated by Government in paragraph 10 of the executive summary to be
low. If Government wants to ensure that consumers make better choices then the
key is, surely, to address as a priority, financial irresponsibility and low levels of
financial capability rather than to artificially constrain the operation of a competitive
market.
Irresponsible Borrowing
In paragraph 4.8 of the consultation paper lists the following with respect to
consumers:

30% of survey respondents agreed with the statement that “buying things on
credit does not feel like spending”

15% agreed with the statement that “I am impulsive and tend to buy things even
when I can’t really afford them”

11% agreed with the statement that “If I want something, I am prepared to buy it
on credit and think about how I will repay the money afterwards”

6% agreed with the statement that “If lenders offer me money I will take it”
These are predominantly measures of consumers with an inclination to irresponsible
borrowing (whilst also demonstrating that the silent majority of consumers are,
indeed, responsible borrowers), and neither are they specific attitudes towards credit
cards.
The industry makes every attempt to identify such consumers – hence we see
decline rates for credit card applications currently around 50%.
Page 224 of 230
It is difficult to see how any of the measures proposed in the White Paper will
necessarily address these fundamental attitudinal problems among these
subsets of consumers. Constraining the industry will not constrain these
individuals or alter their propensity to mismanage their finances.
There is something deeper to be looked at here beyond the specifics of how credit
cards are operated in order to prevent these minority groups of consumers becoming
over-indebted. If over-indebtedness in the context of these attitudes is the major
concern of Government – as we believe it should be – then time would be better
spent addressing these errant behavioural patterns than making changes to credit
card operations which are likely to disadvantage the silent, responsible majority.
Instances of Unsustainable Debt
Paragraph 1.5 quotes statistics about the levels of indebtedness, as seen by the
Consumer Credit Counselling Service (CCCS). These figures are prefaced by terms
such as “significant numbers” and “many consumers”, without any attempt to
quantify.
Whilst the industry has the greatest respect for the CCCS and the valuable work it
undertakes, the figures presented will be representative of only a small percentage of
the total UK credit card holder population. We agree that special consideration
needs to be given to those who are unfortunate enough to need professional debt
counselling and, indeed, that measures need to be taken to learn from their
experiences such that we can try to prevent others from experiencing similar
difficulties.
This does not mean, however, that the overwhelming majority of consumers are both
not in control financially and can not interface perfectly well with a competitive market
that offers a good degree of choice. The overwhelming majority should not be
disadvantaged by the imposition of one-size-fits-all solutions that could both reduce
choice and increase prices.
Difficulties Contacting Card Issuers
In several places (e.g. paragraphs 4.8, 4.31 and 5.10) the consultation document
refers to cardholders having difficulties contacting their credit card issuer. No
evidence is presented to back-up this assertion.
With card issuers’ contact details clearly presented on monthly statements and
customer service telephone numbers on cards themselves we simply do not believe
that, if a customer wants to contact their card issuer, they would find them
unobtainable or difficult to contact.
Page 225 of 230
Appendix 2
Consultancy Profiles & Methodologies
The following section profiles the consultancies commissioned by The UK Cards
Association and the methodological approach adopted by each of them.
Oxera

Oxera is one of Europe’s foremost independent economics consultancies.
Established in 1982, they have built a reputation for providing critical economic
insight to an international list of clients including governments, regulators and
major companies.

Oxera apply innovative business economics principles across sectors, spotting
trends, analysing how markets develop and assessing the likely impact of these
developments. Oxera focus on helping businesses shape their strategies and
helping governments develop good public policy.

Oxera were been commissioned to undertake an economic impact analysis of the
BIS consultation paper and the proposals contained therein. Although paid for by
the industry the Oxera report reflects their independent assessment of the
economic basis for the proposals and their impact.
Page 226 of 230
Argus Information & Advisory Services
Overview
Argus works with most of the major US and UK credit card issuers in providing credit
card benchmarking, analytics and consulting support across the end-to-end lifecycle
of cards management. Argus’ products and services assist financial institutions in
making marketing and risk management decisions and they help institutions manage
the trade-offs among price, product, risk, and customer behaviour along the customer
lifecycle to increase profitability.
As part of these services Argus receives from card issuers comprehensive, detailed
account-level and longitudinal data covering some 75% of the UK credit card market
and over 95% of US credit card accounts. It was the account-level data (limits,
transactions, payments, balance tiers and interest rates etc) that was used in the
account-level analysis contained in this response.
Argus was selected by the largest US issuers to provide the analytical basis for their
response to proposed changes in US credit card regulations in 2008/2009.
Methodology
Using the Argus UK issuer dataset, an analytical dataset covering the two years from
2007 to 2009 was created for the purposes of this analysis. Although the Argus UK
dataset has issuer data from 2005, issuers joined the study progressively and so
2007 was selected as the starting point so as to provide the best possible coverage.
The one significant UK issuer that does not subscribe to the Argus services provided
data to Argus for their portfolio for the purposes of this exercise, to ensure the fullest
possible coverage of the UK market within the time available.
Risk Reporting
Each issuer participating in Argus’s UK Credit Card Payments Study uses custom
risk and behavioural scores. To fairly compare and benchmark performance by risk,
Argus has developed standardised risk segments.
Using historic data, Argus calculated unit loss rates for each issuer’s risk and/or
behavioural scores. Unit loss rates are expressed as the expected probability that an
account will charge-off or declare bankruptcy during the next twelve months. Argus
assigned each account to one of nine loss rate categories.
These standardised unit loss rates form the basis for much of the risk reporting in the
analysis.
Risk bands
Low – 9
8
7
6
5
4
3
2
Hi – 1
Argus Standardised Loss Rate
0.00% - 0.49%
0.50% - 0.74%
0.75% - 0.99%
1.00% - 1.74%
1.75% - 2.49%
2.50% - 3.99%
4.00% - 5.99%
6.00% - 7.99%
8.00% or greater
Page 227 of 230
Control Groups
When increasing credit limits or increasing the interest rates for existing credit
cardholders, some issuers define a control group — i.e. a group of cardholders that
does not receive a credit limit or interest rate increase but has the same
characteristics as those that do receive an increase.
This allows an issuer to assess the impact of its policies by undertaking an analysis
and comparing the behaviour of those that received an increase with those in the
control group. In its dataset, Argus cannot observe this control group and therefore
proxies it by identifying cardholders that have exactly the same characteristics as
those that receive an increase (in credit limit or interest rate) apart from the fact that
they did not receive an increase for at least three months following the increase.
By definition, such a proxy control group will never be the same as the ‘real’ control
group — for example, some members of the proxy control group may in fact have
received an increase in the credit limit within the time period studied (although after
the initial three months). The results of the proxy control group analysis should
therefore be interpreted with care. Although it does not necessarily provide
conclusive evidence, it does constitute useful indicative evidence.
Where relevant, Oxera asked issuers whether they could confirm the results of the
Argus analysis on the basis of their own internal analysis using control groups. This
has been reported in the assessment.
Page 228 of 230
GfK NOP / GfK Financial

GfK NOP provides insight through cutting-edge quantitative and qualitative
research surveys. Their market research experts cover both UK and international
markets, offering specialist knowledge and insight including a specialism within
the financial sector through GfK Financial.

GfK Financial is the premier provider of market research to the global financial
services industry. GfK have expertise in the banking, investments and insurance
sectors, as well as their trade and professional associations. GfK Financial offers
global, end-to-end solutions based on a complete range of qualitative and
quantitative methodologies and innovative techniques, together with leading-edge
syndicated studies. GfK is particularly well-known for the Financial Research
Survey (FRS™), the largest and longest running survey of its kind, interviewing
60,000 GB consumers in the home or online every year. The questionnaire
covers product holding and acquisition, usage behaviour and a wealth of
demographic and attitudinal data.

GfK NOP have undertaken both qualitative and quantitative consumer research,
supplemented by analysis of the long-standing Financial Research Survey (FRS).
Ideally we would have chosen to conduct a full conjoint analysis research project
to understand fully the trade-offs that might result from the changes proposed by
BIS but unfortunately the limited time available did not allow for this.
The quantitative study involved 1937 telephone interviews with consumers over the
weekends of 27-29 November and 4-6 December using two waves of GfK’s (weekly)
Telebus telephone omnibus.
The qualitative study involved a programme of twenty-two depth interviews together
with four deliberative group discussions. This combination of techniques has the
following advantages:

Individual interviews give experience-based feedback on the reasons for using
card-based credit and consumer attitudes towards this, in terms of benefits and
drawbacks. In these interviews we also assessed understanding of card-based
credit and how this influences current choices and usage;

Deliberative group discussions allowed us to input balanced information points –
that were considered and weighed-up by consumers – providing the opportunity
to get beyond knee-jerk reaction, to be debated and assessed in terms of
advantages, drawbacks and consequences, both at a market and an individual
level
Page 229 of 230
n
© Copyright 2010 The UK Cards Association
The UK Cards Association Limited, registered in
England and Wales (registration no. 7066141)
Page 230 of 230

Credit and Store Cards Review

Transcription

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