Consumer Credit Regulation in the UK

TABLE OF CONTENTS
CHAPTER 1 EXECUTIVE SUMMARY 3
Introduction 3
Customer Acquisition 4
Direct mail marketing 4
Point of sale marketing 4
Advertising of consumer credit products 5
Summary boxes for plastic cards 5
Calculation of APRs and risk-based pricing 5
Pre-contractual and contract information requirements 6
Facilitating online agreements 6
Provision of Credit 6
Post-contractual information requirements 7
Greater transparency in credit card charges 7
Greater responsibility in lending practices employed by plastic card providers 7
Termination of Agreements 8
Early settlement fees 8
Widening of ‘extortionate credit’ concept 9
Personal insolvency provision 9
Conclusion 10
CHAPTER 2 INTRODUCTION 21
Scope of the report 22
Legislative initiatives covered in the report 22
Consumer credit products covered in this report 23
How to use this report 24
Who is the target reader? 27
Research methodology 27
CHAPTER 3 CUSTOMER ACQUISITION 28
Introduction 28
Responsible lending - marketing and advertising practices 29
Direct mail plastic card marketing has come under fire 30
Marketing of plastic cards by sales representatives 32
Transparency of advertising and promotional content 33
New proposals are designed to make the content of consumer credit advertisements more transparent 34
The concept of a summary box is designed to bring greater transparency to the credit and store card markets 39
Calculation of APRs and the practice of risk-based pricing 44
Transparency in form and content of credit agreements 52
Pre-contractual and contract information requirements 52
Proposed changes will make it possible to conclude a credit agreement online 58
CHAPTER 4 PROVISION OF CREDIT 62
Introduction 62
Greater transparency in the provision of post-contractual information 62
In the Government’s view inadequate provision of post-contractual information contributes to overindebtedness 63
Greater transparency in the charges levied by credit card issuers 65
The credit card industry is being urged to bring standardization to methods of calculating interest charges 66
The order in which payments are applied by credit card providers should be made more apparent to consumers 69
The level of default charges levied by credit card issuers is considered non-transparent and inflexible by the Government 70
More responsibility in lending practices employed by credit card issuers 74
Automatically raising limits on credit card accounts should not be done without thorough credit checks 74
Minimum repayments required by credit card issuers are considered to be too low by the Government 76
The practice of mailing unsolicited credit card checks has come under sharp criticism 78
The practice of switching customers between store and credit cards has attracted criticism from the OFT 79
Conversion of credit cards to unsecured personal loans stands to gain wider acceptance in the industry 81
CHAPTER 5 TERMINATION OF AGREEMENTS 84
Introduction 84
Early settlement fees 84
Lenders derive substantial revenue from early settlement charges 85
Proposed changes will abolish the Rule of 78 in favor of a ‘fairer’ actuarial method 87
Widening of the ‘extortionate credit provision’ concept 95
Current rules allow customer redress only if a credit agreement is deemed ‘extortionate’ 96
The Government has also proposed an alternative dispute resolution (ADR) mechanism 100
Personal insolvency provision 102
New rules will cut the length of bankruptcy to one year 103
CHAPTER 6 CONCLUSION 109
Introduction 109
On the whole, credit providers seem to be positive about forthcoming reforms 109
The level of awareness of forthcoming regulation is relatively high among credit providers 109
Many credit providers also think forthcoming reforms could have a positive effect on their business and the industry 111
But a number of external aspects present a major worry for credit providers 113
Timely compliance with the new CCA presents the greatest challenge for credit providers 113
Many credit providers are concerned about the lack of adequate preparation 115
The cost of compliance with the new regulation presents another concern 116
In addition to the costs, fears about excessive bureaucracy are widespread among smaller credit providers 120
There is considerable uncertainty regarding the implementation of the European Consumer Credit Directive 120
CHAPTER 7 APPENDIX 123
Supplementary data 123
Tables not included in the main body of the report 123
Examples of the new early settlement regime 129
Research methodology 131
Datamonitor’s B2B 2004 Consumer Credit Regulation panel 131
Further information 132
Relevant links 132
Relevant briefings and reports 135
Datamonitor Financial Services Consulting 135
The retail banking team 137
How to contact experts in your industry 138


LIST OF TABLES
Table 1: Consumer credit products the provision of which will be affected by new regulatory requirements discussed in this report 24
Table 2: The areas of consumer credit practices and relevant regulatory provisions examined in this report 26
Table 3: Default charges levied by the credit card issuers, March-2004 71
Table 4: The majority of the leading unsecured personal loan providers charge 2 months redemption penalty, Dec-2003 86
Table 5: Timeline of implementation for regulatory measures outlined in the Consumer Credit White Paper 114
Table 6: The FLA’s estimations for transitional and compliance costs of the new Consumer Credit provisions for their members, 2004 118
Table 7: The FLA’s estimations of transitional and compliance costs of the new Consumer Credit provisions, spilt by small, medium and large credit providers, 2004 119
Table 8: Total advertising and direct mail expenditure spent on promoting plastic cards, 2001-2003 123
Table 9: ‘Will the changes to advertising regulations to improve transparency be positive or negative for your business, industry as a whole and consumers?’ 124
Table 10: ‘Will the standardization of APR calculation be positive or negative for business, industry as a whole and consumers?’ 124
Table 11: ‘Will the changes to online agreements regulations be positive or negative for your business, the industry as a whole and consumers?’ 125
Table 12: ‘What effect, if any, will the changes to the Rule of 78 concerning early settlement fees have on your business?’ 125
Table 13: Estimated unsecured personal loan gross advances by competitor for leading UK loan providers, Jun-2003 126
Table 14: Personal bankruptcies in England and Wales, 1992-2003 127
Table 15: “Could you please rank the following regulatory developments in terms of the extent to which they will affect your business?” 127
Table 16: “Could you please rank the following regulatory developments in terms of the extent to which they will affect your business?” 128
Table 17: ‘Do you agree with the Government’s estimation that complying with the new CCA will cost the lending industry in the region of one million?’ 128
Table 18: ‘If not, in your opinion will the cost be….?’ 129


LIST OF FIGURES
Figure 1: The majority of lenders agree that the new provisions will push the number of bankruptcies up and have implications for credit scoring and debt management, 2004 10
Figure 2: The recent growth in advertising spend on plastic cards has come largely from the growth in direct mail marketing, 2001-2003 30
Figure 3: According to Datamonitor’s B2B panel, the majority of lenders expect new advertising regulations to have a positive effect on their business, the industry and consumers, 2004 38
Figure 4: An example of a summary box, offered by Nationwide BS for its classic credit card, 2004 43
Figure 5: The majority of respondents agree that standardization of APR calculation will have a largely positive effect on their business, the industry overall and consumers, 2004 51
Figure 6: The majority of respondents view facilitation of online credit agreements as a highly positive development for their business, the industry and consumers, 2004 60
Figure 7: The majority of leading credit card issuers employ two different methods of charging interest on their cards, Feb-2004 67
Figure 8: An extract from the terms and conditions for Halifax Classic Card, 2004 68
Figure 9: An extract from the terms and conditions for Egg Card, 2004 68
Figure 10: Promotional material from the Barclaycard’s website advertising its credit card-to-loan offer, 2004. 82
Figure 11: 53 per cent of respondents think the new early settlement provisions will push the price of loans upwards, 2004 90
Figure 12: Four large providers account for nearly 30 per cent of the unsecured personal loan market in terms of new business, Jun-03 94
Figure 13: The number of personal bankruptcies in England and Wales was at its highest last year since 1993, 1992-2003 104
Figure 14: The majority of lenders agree that the new provisions will push the number of bankruptcies up and have implications for credit scoring and debt management, 2004 106
Figure 15: The Consumer Credit Act and investigation into overindebtedness are two legislations lenders are aware of the most, 2004 110
Figure 16: A third of respondents thought that the Consumer Credit Act review and Consumer Credit Directive would have a major positive impact on their businesses, 2004 111
Figure 17: But fewer respondents thought new regulatory developments will have a major positive impact on the industry as a whole, 2004 112
Figure 18: The majority of respondents admitted they were not totally ready for the changes but considered themselves as prepared as they can be at the current stage, 2004 116
Figure 19: The majority of respondents are skeptical about the Government’s estimation of the compliance costs of the new CCA, 2004 117