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Consumer Credit Regulation in the UKPublished by: Datamonitor Published: Apr. 7, 2004 - 138 Pages Table of ContentsTABLE 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 AbstractIntroductionThis autumn sees the biggest overhaul of the UK consumer credit regulations, as the changes to the Consumer Credit Act are implemented. Parallel with the domestic reforms is the work being done within the EU on a draft Consumer Credit Directive. This report examines the proposed changes and assesses potential impact they are likely to have on the UK lending industry. Scope In-depth assessment of the potential impact on every stage in the lifecycle of a credit agreement, from customer acquisition to termination of credit A wealth of case studies examining effects on different consumer credit products and examples from other consumer credit markets Data from B2B 2004 Consumer Credit Regulation panel illustrating views of 20 leading UK credit providers In-depth interviews with industry executives and trade associations representatives Report Highlights New regulation, which aims to create a simpler advertising regime for consumer credit products, has been criticized by some lenders as it can result in information overload for consumers and high compliance costs for the industry. However, 63 per cent respondents on the panel thought proposed changes will have a positive effect on their business. 63 per cent of leading unsecured personal loan providers currently charge early settlement fees. The reform to the Rule of 78 will result in falling revenue for these lenders, giving competitive advantage to providers not charging the fees. 53 per cent of respondents on the panel agreed that the changes will result in higher loan rates. Under new law the length of personal bankruptcy is down to one year. England and Wales have witnessed a rise in insolvency cases, which are at their highest since 1993, and many credit providers are worried new rules will make the situation worse. 68 per cent of respondents on the panel said it could have major implications for credit scoring. Reasons to Purchase Prepare your business for the October deadline by evaluating the potential impact of new regulation Enhance your product development strategy by identifying the most competitive products in the future regulatory environment Improve your compliance strategy by identifying the costs relevant to your business Get Full Details About This Report >> |
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