Posted: 10th August 2016


On the 26 July, the FCA published its much-anticipated Final Report on the recent Credit Card Market Study (MS14 / 6.3).

The investigation’s scope includes:

  • Discerning whether the market is sufficiently competitive
  • Establishing whether there are any specific barriers to competition in the sector
  • Considering whether the market is working well for the consumers it services
  • Setting out recommendations for any changes that need be made to the market

As one of the largest pieces of FCA work to date, the study has generated much industry discussion as firms try to establish whether their products and processes will be affected by the regulator’s findings.

The Final Report builds on the Interim Report, published in November 2015, which concluded that competition in the credit card market is working well for the majority of customers, but that the FCA had significant concerns about the scale of “problematic debt”.

Key Findings

Overall competition findings

Consumers are noted to value the flexibility offered by credit cards. They were also seen to be relatively engaged in credit card switching, but do not always choose the best product for their circumstances due to the difficulty in comparing products (this was specifically related to the fact that different product features were given prominence when it came to firms’ offers and promotions).

It was found, however, that competition is focused mainly on these promotional offers and rewards and, subsequently, this means the long-term benefits of competitive interest rates, fees and charges have less of an influence on consumers’ decisions to take up new products.

Cross-subsidisation was noted as not materially affecting competition or restricting entry or expansion in the market.

Higher-risk consumers

In 2014:

  • 2 million credit card customers were in arrears or defaulted
  • In addition, 2 million customers had persistent debt
  • 1.6 million customers were regularly making the minimum payment
  • 650,000 cardholders had been in persistent debt for at least three consecutive years
  • 750,000 cardholders had been making minimum payments for at least three consecutive years

The key group the FCA is concerned about given these figures are those who have been in problem credit card debt for many years. They also cite the “rapid descent into debt difficulties” for some higher-risk consumers who have recently taken up products.

In terms of market competition and the options available within the higher-risk segment, consumers have a more limited choice of products and providers, with only four firms covering this sector of the market. 25% of accounts opened by consumers in the high-risk segment in 2013 were in serious arrears by 2014.

Given this, the FCA will examine the suitability of affordability assessments separately via its wider enforcement work. Many of the actions and assurance activities firms will be considering will fall into this area.

Proposed remedies

The FCA is currently investigating a variety of remedies for the industry that may be applied through voluntary agreements, further consultation, potential rule changes and, if necessary, through its enforcement work. Specific recommendations being considered include:

  • Clearer standards for price comparison websites (PCWs) to ensure they help customers make informed decisions. It should be noted that these will not reflect those currently being applied to the high-cost, short-term credit sector. The Competition and Markets Authority (CMA) will perform an investigation of the PCW market, which will begin later in 2016/17
  • Prompts before the end of promotional periods so as to make consumers aware of any interest rate they may now incur or prompt them to consider whether the card still meets their needs
  • Promoting and facilitating the use of quotation searches in order to give consumers a clear indication of their eligibility prior to application for the purposes of fair comparison
  • Helping consumers better control their use of credit – for example, by sending a digital communication to those who reach certain thresholds of their available credit (80% and 95%, for example)
  • Opt-in credit limit increases to give consumers more control. Industry and consumer groups are in some disagreement over whether this will actually allow consumers to exert more control, and the FCA will consult on this later in 2016
  • Under-repayment – it’s likely that behavioural trials will be performed to discern how customers can be guided towards better decisions around monthly repayments. Trials will be completed in 2017, after which further remedies may be considered
  • Increasing minimum repayments – the FCA will investigate the effectiveness of ‘nudging’ (communicating with consumers and encouraging them to pay off their balance when they can afford to) before considering whether to increase minimum repayment levels. These trials will be undertaken in 2017
  • Earlier forbearance and persistent debt – the FCA wants to see more consistent standards across the industry when it comes to assisting customers in arrears or at risk of repayment difficulties. Later in 2016, the FCA will consult on whether firms could (and should) identify early signs of debt problems and intervene accordingly.

Regulatory Next Steps

The findings of the market study will feed into new rules and guidance, and the appropriate solutions to any issues will be consulted on later in the year.

The FCA will engage with the industry and consumer groups when assessing and refining the package of remedies.

Considerations for firms

Firms servicing the higher-risk sector of the market are likely to be the most affected by the market study. Some beneficial activities for them at this time include:

  • Performing customer outcomes testing and deep dives to get closer to the issues – especially relating to ‘revolvers’ and those with persistent debt – in the customer base
  • Thinking about the impact rules changes may have on firms’ training and competency programmes, especially those elements that relate to front line staff and dealing with vulnerable customers
  • Thinking about the suitability of affordability assessments. Although competition in the market is working well, the FCA is at pains to note that affordability assessments in the higher-risk areas of the market appear to be below par. The FCA is looking at the effectiveness of affordability assessments separately via its wider enforcement work, and the findings of this will likely pique the interest of those firms with a larger percentage of higher risk-customers

With plenty of regulatory work planned to supplement the market study and dive deeper into the issues, (including the trialling of new approaches), firms will need to keep a keen eye on further developments in this area.

Matt drage

Matthew Drage

Director of Advisory Services