UK: OFT Declares Credit Card Default Charges Unfair
The UK's Office of Fair Trading (OFT) has concluded that credit card default charges in the UK "have generally been set at a significantly higher level than is legally fair." The OFT estimates that this has led to unlawful penalty charges by card issuers on UK consumers in excess of £300 million a year.
The OFT now expects all credit card issuers to recalculate their default charges in line with the principles set out in a statement published today and to take urgent action where needed to reduce the level of credit card default fees. The industry has until 31 May to respond to the statement. These principles also apply to default charges in other consumer contracts such as those for bank overdrafts, store cards and mortgages.A paper on the OFT's position (PDF) is available online as is a consumer guide (PDF).Where credit card default charges are set at more than £12, the OFT will presume that they are unfair, and is likely to challenge the charge unless there are limited, exceptional business factors in play. A default charge is not fair simply because it is below £12. Setting a threshold for intervention is a pragmatic pro-consumer action that is designed to give the industry the opportunity to change its practice without litigation. It is supported by detailed guidance to the industry as to how to reduce the likelihood of public enforcement.
A default charge should only be used to recover certain limited administrative costs. These may include postage and stationery costs and staff costs and also a proportionate share of the costs of maintaining premises and IT systems necessary to deal with defaults (see note 3). Exceptional business factors which may affect the level of a fair charge may include policies to prevent casual defaults as operated by issuers such as Egg.
Only a court can finally decide whether a charge is unfair or not. The OFT has today set out a statement of its view of the law. This has not generally been accepted by most of the eight credit card issuers.
John Fingleton, OFT Chief Executive, said: 'Our statement of principles provides practical guidance to banks which increases their incentives to compete vigorously while protecting consumers from being charged unfair amounts. 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.'
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