In response to the OFT’s statement of principles on the calculation of
credit card default charges, credit card issuers have agreed to reduce
their default charges – the majority by almost half.
In April, the OFT stated that credit card default charges had been
generally set at a significantly higher level than was considered fair
and set a GBP12 threshold for OFT intervention unless there were
exceptional business factors. Many card issuers have stated that they do
not agree with the OFT’s view of the law and that they believe that
their default charges were fair but, in view of the reduction in charges
across the market, the OFT is satisfied that no further intervention is
warranted in this area at this time and that this change has brought
about substantial benefits for consumers.
The April statement also indicated that the OFT considers that the broad
principles in relation to default charges are likely to be relevant to
other standard agreements with consumers such as those for bank current
accounts. The responses received from the banking industry have
generally challenged this belief but the OFT remains of the view that
the broad principles do read across to the retail banking area and has
decided to undertake further work on the application of these principles
to bank current accounts. In the course of this work the OFT will liaise
closely with the Financial Services Authority (FSA) and hold discussions
with the British Bankers’ Association (BBA) to ensure that distinctive
features of retail banking and the circumstances in which default
charges are applied are identified and taken into account. The OFT has
also been made aware of concerns about the personal current account
market in Northern Ireland by the General Consumer Council (GCC) and
will consider its report as part of this exercise. This fact-finding
exercise is expected to take between three to six months, at which stage
the OFT will consider whether a further detailed investigation of the
fairness of individual bank default charges is needed.
John Fingleton, Chief Executive of the OFT said:
‘The reduction of default charges on credit cards is great news for
consumers. By taking an innovative approach to this issue, the OFT has
brought about a significant change in one area of the financial services
sector. We are now extending that work to inform ourselves about account
default charges. We welcome the willingness of organisations such as the
BBA to work with us in looking at the application of the principles we
set out in the April to this area.’
1. More information on the OFT’s statement of principles in relation to
credit card default charges can be found on press release 68/06.
2. The OFT will be working closely with the FSA and the BBA during the
course of this study.
3. A fair credit card default charge should not exceed a reasonable
estimate of certain limited administrative costs which the credit card
issuer reasonably expects to incur as a result of default.
4. The OFT is not proposing that credit card default charges should be
equivalent to the threshold, and a court will certainly not consider
that such a charge is fair just because it is below the threshold. Where
there are exceptional business factors, so that the presumption that a
credit card default charge over GBP12 is unfair is not applicable, this
does not necessarily mean that the current level of the charge is
consistent with the OFT’s interpretation of the requirements of unfair
contract terms legislation. But for example, where a card issuer has a
policy of requiring customers to pay minimum monthly repayments by
direct debits, such as that operated by Egg, and offers credit cards
only to customers that satisfy a relatively high scoring requirement it
may be able to set a fair default charge at a level above the threshold.
5. Whilst the principles applicable to credit card default charges are
applicable to bank account default charges, the threshold figure of GBP12
is not. The OFT will not consider whether a further detailed
investigation of the fairness or level of individual bank default
charges is needed, or what solution might be required, until the end of
this fact finding exercise.
6. The OFT has published a short guide for consumers and consumer advice
agencies setting out the principles on which credit card default charges
should be calculated.