The consumer watchdog estimates that across the
industry default charges have been set at a significantly higher
level than is legally fair, amounting to an extra £300 million a
year for issuers.
It warned eight credit card companies in July last year that
their charges, usually around £20 to £25 per default, were
excessive. The regulator has now issued a statement on its
position, which it expects the industry to follow.
This sets out the regulator’s belief that current default
charges are in breach of consumer laws on grounds of unfairness
where “they have the object of raising more in revenue than is
reasonably expected to be necessary to recover certain limited
administrative costs incurred by the credit card issuer.”
It therefore requires issuers to set their default charges only
to cover these certain limited administrative costs, such as
postage, stationery costs and staff costs.
It warns that while only a court is empowered to decide if
particular charges are unlawful, where credit card default charges
are set at more than £12, the OFT will assume that they are unfair
and could challenge the charge unless limited, exceptional business
factors are in play.
But a default charge will not be regarded as fair, simply
because it is below £12, says the regulator.
It warns that the principles apply not only to default charges
in credit card contracts but also to those in other consumer
contracts – including those for bank overdrafts, store cards and
mortgages.
The OFT now expects all credit card issuers to recalculate their
default charges in line with the principles set out in the
statement, and to take urgent action where needed to reduce the
level of credit card default fees. It has given the industry until
31st May to respond.
“Our statement of principles provides practical guidance to
banks which increases their incentives to compete vigorously while
protecting consumers from being charged unfair amounts,” said John
Fingleton, OFT Chief Executive. “Our threshold approach is a spur
to changes in market practice. We expect credit card issuers to
adjust their default fee levels quickly. We have not ruled out
future legal action if the market does not respond positively.”
The industry is unhappy with the announcement. According to Paul
Smee, Chief Executive of payments association APACS:
“The OFT has today given its interpretation
of the law. It has based its conclusions on information from just
eight card companies; the rest of the market and APACS were not
asked to participate. Therefore every individual card company will
now have to consider whether it agrees with the OFT’s
interpretation and whether the way in which its own charges are
calculated is in line with the OFT’s approach. This will not be
straightforward and the individual companies have been given until
31st May to undertake this.
Ian Mullen, Chief Executive of the British Banking Association
added:
"We are very disappointed and surprised to
see that the OFT mentions bank overdrafts in their press release on
credit card default fees. Even though the OFT have been consulting
with the credit card industry for over two years on credit card
default fees, there has been no consultation with the industry on
bank overdrafts. We do not accept that the principles the OFT is
applying to credit card default charges apply to bank
overdrafts."
But consumer groups were very pleased. Emma Bandey, personal
finance campaigner, Which?, said:
"We are delighted that the OFT has finally
officially acknowledged what Which? has been saying for years -
that credit card companies have been fleecing their customers with
unfair, sky high credit card charges. The OFT has also now given a
shot across the bows to banks to ensure their charges are fair
too.”
