Card issuers cash in on credit law confusion

Published on Friday 31 July 2009 19:22

CREDIT card providers are increasingly rejecting claims for refunds on large purchases by capitalising on a lack of understanding of consumer rights.

The ability to recover some payments from card issuers when a retailer has failed to provide the product or service paid for is a widely promoted benefit of credit cards. But many people seeking to recover payments find to their cost that they either do not have the right to do so, or that their credit card provider has wrongly applied the rules.

The Financial Ombudsman Service (FOS) is handling a growing number of complaints from credit card users who have assumed that using their card to pay for goods and services means they can recover their money from the card provider in the event of problems with the purchase.

The problems often stem from confusion about the rights outlined in Section 75 of the Consumer Credit Act. Section 75 gives consumers the right to claim against both the credit provider and the retailer to recover card purchases where there is either a misrepresentation or a breach of contract by the retailer. Claims can only be made on credit card purchases between 100 and 30,000 and other plastic, such as debit cards, is not covered.

However, many people mistakenly believe this allows them to cancel payments already made and that credit cards automatically allow payments to be countermanded later, according to Emma Parker, spokesperson for the FOS. "Section 75 can cause confusion both for consumers and financial firms," she told The Scotsman.

"Consumers sometimes tell us that they think that all purchases made using a credit card are covered by Section 75 should things go wrong, but this is not the case – for Section 75 to apply certain conditions have to be met."

The FOS is seeing more cases where card providers have deliberately misled customers over their refund rights, added Parker.

"We have seen examples of firms mistakenly telling consumers that to claim under Section 75, they first need to try and get their money back by taking legal proceedings against the supplier of the goods and services," she noted. "Under Section 75 consumers, have the same right to claim against the provider of credit as the supplier of the goods."

She added that anyone misled into spending money on unnecessary legal action will be entitled to compensation.

In one recent case, the complainant bought a bed for 450 with his credit card. When it still had not been delivered six months later, he discovered the furniture showroom had closed, so he asked his credit card provider if he could reclaim his 450.

The provider claimed that he would first have to get a court judgment in his favour against the company that owned the showroom, so he initiated proceedings through the small claims court. When this stalled, because the complainant was unable to produce all the required information, he went back to the card provider, which again refused his request on the grounds that his legal claim had been unsuccessful.

The complaint was then taken to the FOS, which ruled that under Section 75, the complainant was entitled to a refund from either the card provider or the showroom. The FOS told the card company to repay the 450, plus 350 for the inconvenience it had caused.

The refund waters are muddied further by charge-backs, where card providers can reclaim payments from the retailer's bank on the consumer's behalf. This is not covered in the Consumer Credit Act, but is part of the Visa scheme rules, under which providers can ask a retailer's bank to refund money paid on one of their cards.

Issuers often make an interim refund to the customer's account, but where the charge-back is not successful the payment is sometimes reclaimed, said Parker. "Disappointingly, we have also seen some firms only attempting to charge back a transaction and if the charge-back attempt is unsuccessful, not considering whether the consumer is covered by Section 75."

Total complaints about credit cards have risen considerably since the credit crunch began. In the 2006-7 year, the FOS received 2,731 credit card complaints, leaping to 14,123 the following year.

In the 12 months to the end of March this year, however, the FOS took 18,590 complaints about credit cards, the second highest by product category.

One problem to have emerged in the past couple of years in particular concerns the size of the default charges levied on late or missed credit card repayments.

Tellingly, no credit card provider has so far requested a formal ombudsman decision on the merits of these cases, preferring instead to settle the complaints by meeting their customers' claims. Cases in which providers have hiked interest charges on certain customers' credit cards, claiming that it reflected a move to "risk-based pricing", have also been prominent. After the FOS instigated an investigation into how the rates had been calculated, almost all the providers involved chose once more to settle informally rather than allow the investigation to continue.