Risk-based step-changes in interest rates on credit-cards and store-cards
last updated February 2010
A wider-implications issue may be identified through the regular liaison arrangements between the ombudsman service, the FSA and the OFT. In the course of those arrangements, the ombudsman service raised issues associated with a series of credit-card and store-card cases, where: consumers complained about a step-change in the interest rate charged (for example, from 19% to 29%) which had been applied to pre-existing debt; and the card providers said that the interest rate has been increased in order to reflect a reassessment of the risk presented by the consumers concerned.
There are indications that the practice has become widespread. Given current market conditions, and despite the principles which the industry proposes to apply from 1 January 2009 in respect of future increases in the interest rate, there seems every prospect that the number of such cases may escalate quite quickly. Additionally, the principles adopted in deciding these cases are likely to have significant implications for both card-providers and card-holders. So, the ombudsman service has written formally to the OFT [PDF format opens in new window] to enquire whether the OFT: is planning to take any regulatory action in this area (likely to resolve the cases the ombudsman service is considering); or wishes to provide any information for the ombudsman service to take into account in deciding individual cases.
In some cases, there is an issue whether the rate increase was truly as a result of reassessing the risk of the customer. In some other cases, there is an issue whether the card contract included a term that allowed such a change. And, in some other cases, there is an issue whether the term on which the card provider relied complied with the Unfair Terms in Consumer Contracts Regulations. The OFT indicated that it was reviewing the position [PDF format opens in new window].
Meanwhile, as the consumers involved in these cases were often in straitened financial circumstances, the ombudsman service proceeded with the cases it had received.
The card-providers concerned settled the cases in favour of the consumers. Most of the card providers settled early, when the ombudsmen service requested their evidence. A few settled later, when the ombudsman service expressed provisional views on whether the evidence established that the changes were truly as a result of reassessing the risk of the customer.
The ombudsman service wrote to the OFT to explain the cases received (in respect of which the wider-implications process was invoked) were being satisfactorily resolved. In light of the ongoing satisfactory resolution of complaints and the introduction of the principles agreed at the credit card summit, the OFT has no immediate plans to take enforcement or other regulatory action in this area.
However, it is committed to monitoring the industry’s success in applying the principles taking account of all relevant evidence including, for example, complaints data from the ombudsman and the outcome of the BIS consultation on credit and store cards, which includes an analysis of this issue.