OFT tackles credit card charges

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.”