The problem has been exacerbated by the steady erosion of standards. In 2012, the average minimum income needed to get a credit card was circa £18,300. This dropped to around £10,300 in 2016 and £8,500 in 2017.
The credit card market is worth around £68bn and is a lucrative source of income for banks. Lloyds Bank plans to buy credit card firm MBNA from Bank of America for £1.9bn. This would increase their share of the UK credit card market from about 15% to 26%, and make them level with Barclaycard, which has 27% of the market. The proposed purchase is being considered by the Competition and Markets Authority.
The Financial Conduct Authority (FCA) has proposed new rules for credit card firms to help an estimated 3.3 million customers who are in “persistent debt”. Rules include firms prompting customers to make faster repayments if they can afford to, proposing a repayment plan and suspending card use. Where options are unaffordable, firms may have to waive, reduce or cancel interest and charges. In addition, firms will need to intervene earlier in response to signs that customers are in financial difficulty.
Kelly Tolhurst MP, supported by the Children’s Society and the StepChange Debt Charity, is proposing a “Breathing Space scheme”. The Treasury Minister responded by saying: “We have been carefully exploring whether we could introduce a Breathing Space scheme…we entirely support …better debt management and lower problem debt.”
How does this affect the short-term secured lending industry in particular? Much of the recent increase in consumer spending has been funded by credit card debt. Any restriction in credit availability will cut back on this, slowing down or even reversing recent progress. Banks will react by cutting back on lending.
Underwriters in the short-term secured lending industry will need to look at customers’ credit card debt more closely, especially where minimum payments are being made. They will need to assess whether future restrictions will result in contraction of the refinance market and thus impact on exit strategies. There is no doubt that the breathing space concept may be extended to the mortgage sector.
As recently quoted in The Times:“Banks may wince at the initial hit to their bottom line from the FCA’s moves, but avoiding regulatory action down the line, and the consequences of dealing with a burst credit card bubble, will probably be seen as a price worth paying”.