Jeff Salway: Plastic debt crisis calls for drastic action

The City watchdog appears to be letting firms off the hook once more. The comprehensive investigation by the Financial Conduct Authority (FCA) into the credit card market raised hopes that it would take decisive action on behalf of consumers. Again, however, the regulator has focused on the right issues only to follow up with a set of meek recommendations that will do little to address them.

Credit cards can encourage bad habits

The findings in both the interim report on the credit card market last year and the final report published last week are alarming enough. Around two million people are in arrears or in default and one in four “high risk” borrowers who took out cards in 2013 were in either serious or severe arrears within a year.

The study also found that around 1.6 million borrowers have been making only the minimum repayments over the same period. With interest charges mounting up it’s no surprise that more than five million accounts will, at current repayment rates and assuming no additional borrowing, take over a decade to clear.

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The profitability of those customers means lenders have little commercial incentive to intervene (and the moral incentive clearly isn’t one they’re familiar with). While the FCA acknowledges as much, its recommendations will do little to change this.

Instead it seems to believe that consumers merely need more information, the trap into which the Competition and Markets Authority (CMA) fell in its report on the current account market in May. After noting that charges were indeed opaque and that it was virtually impossible for customer to understand if they were getting any value from their account, the CMA concluded that banks simply need to give customers “more information” to make it easier to switch.

So it’s all about providing yet more information in an age when people are being bombarded with the stuff, and setting out more actions they should take to get a decent deal. In other words, failures in areas such as the credit card and current account markets are down to consumer behaviour and nothing to do with the firms found at fault in every investigation undertaken.

And so the FCA has gone a long way to confirming suspicions that it has been leaned on by the government to be nicer to the banks.

In its favour, the FCA has proposed a ban on unsolicited credit limit increases, which have become commonplace again after a post-crisis period of responsible lending. Yet firms have otherwise been given the green light to continue with their irresponsible lending practices.

This is 13 years after the Treasury Select Committee warned that “credit limits should not be raised without appropriate internal and external credit checks” and that “lenders must assess a consumer’s ability to repay based on a proper picture of income and commitments and not just their payment history”.

There have been some improvements since 2003, particularly around charges. But there are other persistent problems in the credit card market that can’t be fixed by modest tweaks and voluntary measures. The FCA took tough action against payday lenders a couple of years back and it worked a treat. Its reluctance to take a similar approach with other firms is both clear and unfortunate.