Given the huge importance of the credit card industry, the Financial Conduct Authority is right to look at its impact on consumer borrowing.
However, its proposals fall a long way short of fixing what is a broken market for those battling to pay off debt – a problem often exacerbated by sky-high interest charges.
Research by Citizens Advice reveals that nearly six million people had their credit limit increased without their consent last year. Worryingly, almost a third of those showing signs of struggling with cash problems were given a rise in their limit.
Only one in four credit card holders who were given a higher limit actually asked for it.
Customers trying to deal with debts were more likely to receive an increase as those in a better financial position.
And, 32% of credit card holders who were worried they could not repay their debts received an increase, compared to 23% of those who were confident they would be able to repay them.
The average rise in credit card limits was nearly £1,500, although one in ten received increases of £3,000 or more.
The research by Citizens Advice also shows that 48% of those finding their debts to be a heavy burden increased their spending following an unsolicited limit increase, compared to a third overall all. The FCA found that consumers who received a limit increase saw their balance increase by almost £500 at the end of the year.
These alarming findings appear to be shameless and irresponsible attempts by lenders to boost their profits at the expense of financially vulnerable customers.
This recklessness from the banking system is shared by the Government which has done little to deal with the deeply concerning problem of consumer indebtedness and the risk it poses to the wider economy.
There is clearly support for action as 85% of people do not believe that credit card companies should be able to make unsolicited increases to credit card limits.
Yet the FCA confirmed today that it won’t use its powers to end this practice, and has instead reached a voluntary agreement with credit card providers.
As part of this, lenders, will start asking new customers for their consent before raising limits, and give them the option to receive uninvited increases.
However, this approach is heavily reliant on consumers making accurate predictions about the state of their future finances – something that we know is very difficult, especially in the current economic climate.
While millions of existing customers will be given the option to ask their lender to require their consent, they will still receive unsolicited increases by default.
This is simply not good enough. People tend to stick with default options, meaning the problem and the risks will remain unresolved.
The voluntary agreement also includes a promise that borrowers who have been in persistent debt for over 12 months will stop getting unsolicited limit increases.
Although this is a welcome step, in practice it will only apply to a small number of people (those who are paying more in interest and charges than capital) and will exclude people who might be struggling but do not yet meet the definition of persistent debt.
Lenders have a responsibility to provide support to customers to help them clear their debts, rather than exacerbating their debt problems. Consumer credit grew by nearly 10% in the past year and is now at an eye-watering £205bn.
Credit cards account for a more than a third of this – and have been a driver of this worrying rise in debt along with personal contract purchase plans for cars.
Total household debt as a percentage of GDP (including mortgages) is approaching levels seen before the crisis, and has since late 2015 grown from 133% to 140% this year.
Insecurity in the jobs market, soaring inflation and stagnant productivity have meant that most people have not seen a real term wage increase since before the crisis.
Following the Office for Budget Responsibility’s productivity downgrade in November, the Institute for Fiscal Studies estimates that wages will still be below their 2008 level in 2022.
The Government need to do more to ensure that wages start to rise again and benefits for those who are on low pay, disabled or out of work start to rise in line with the cost of living.
Whilst real incomes have fallen, the consumer spending that has fuelled growth has been increasingly funded by unsustainable levels of personal debt, storing up huge risks for the future.
The debt burden increasingly falls on consumers. With little competition in the market and the lack of regulation, banks and credit card companies are more than happy to take advantage.
Action is needed, but disappointingly the FCA’s proposed remedies fall woefully short of what is required. I encourage them to correct this when they publish their final policy statement next month.
Rachel Reeves is the Labour MP for Leeds West and chair of the Business, Energy and Industrial Strategy Committee