The Financial Conduct Authority (FCA) has initiated an inquiry into the retail credit card market after claims were made that the market was only working well for certain customers.
The investigation will look into how credit card firms make their money and whether they profit unfairly from keeping some borrowers in debt for longer.
One of the main concerns of the FCA is that companies make additional profit from customers that over-borrow on their credit cards and either can’t keep up with their repayments or continue to make minimum repayments. Because these borrowers never clear their debt or take a long time to do so, the lender is able to continue to charge them interest for an extended period. The investigation, led by the FCA, will explore whether credit card firms disproportionately target such individuals in order to subsidise other card users that don’t incur any interest or charges.
Other aspects of the investigation will look into the transparency of credit card terms and conditions and the ease with which customers can shop around to find a card that best suits their needs.
What this could mean
The UK credit card market is vast: it currently accounts for 70 per cent of the credit cards used in Europe. Out of 30 million UK cardholders, it is estimated that nine million regularly put their daily spending on cards that offer such rewards as air miles and cashback. For these cardholders, such perks could be reduced now that the FCA has raised concerns that vulnerable borrowers are being exploited to fund such deals.
The FCA is also investigating the transparency of credit card terms and conditions, which may result in the information surrounding them being made clearer and more accessible by providers. This could also have an effect on price comparison sites, which were flagged up by the FCA as not being transparent on how they display and compare different credit card offers. The practice of offering customers a higher credit limit than they originally applied for is also under the spotlight.
The future of credit cards
The FCA is set to start its investigation in January with the outcomes expected towards the end of next year. Once the findings are released they could have widespread repercussions for the credit card market and how it operates in relation to its customers.
Looking towards the future, the FCA’s investigation could force the credit card market to become more streamlined. Credit card firms may have to become more transparent in how they market their products. Whilst some consumers might benefit, it’s possible some will lose out – but the outcome may well be a credit card market that is fairer and more transparent for all.
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