The FCA has today taken a further step in developing its understanding of the UK consumer credit market, by publishing the terms of reference for its credit card market study (the Market Study).

The FCA has been developing its understanding of the credit card since taking over responsibility for the regulation of consumer credit, on 1 April 2014. The FCA is keen to ensure that this market, which affects an estimated 30 million consumers in the UK, who together owe around £56.9bn on their credit cards, functions well- for firms as well as consumers.

This competition review was announced by Martin Wheatley on 3 April, 2014 and the FCA has been building its knowledge of the wider consumer credit market since that time.

Building on the research conducted for its benefit by Jigsaw, earlier this year, the FCA will seek to understand;

• the extent to which consumers drive effective competition through shopping around and switching;
• how firms recover their costs across different cardholder groups and the impact of this on the market; and
• the extent of unaffordable credit card debt; in particular whether some consumers are over-borrowing or under-repaying on their balances and whether firms have incentives to provide unaffordable lending that leads to consumer detriment.

One of the key themes which the FCA hopes to understand better, is the interaction of vulnerable consumers with the credit card market and the role of consumer credit lenders in relation to such customers. In particular, the FCA will seek to understand better, the way in which consumers use credit cards as payment mechanisms versus their role as revolving credit.

Importantly, from a competition perspective the FCA has already stated that it does not consider there to be unreasonable barriers to entry in the consumer credit market, though it has also made clear that it is entering the Market Study with questions, rather than conclusions.

The FCA is making increasing use of behavioural economics as a possible mechanism to achieve regulatory outcomes. Martin Wheatley has already questioned the utility of pre-contractual disclosures, which form an integral part of consumer credit law.

The extent to which improved customer outcomes will be driven by the FCA through tools drawn from behavioural science remains to be seen, though one can anticipate that they are likely to form a plank of a future policy response to information gathered during the Market Study.

The credit card market study marks the first major learning exercise by the FCA as the new regulator in this area, and should be used by market participants and others as an opportunity to engage in dialogue with the regulator as it seeks to develop its policy approach in this important and economically significant area.

View Credit card market study: terms of reference, 25 November 2014