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Following success on credit card default charges - OFT turns attention to bank current accounts

130/06    7 September 2006

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 £12 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.'

NOTES

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 £12 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 £12 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.

Download Calculating fair default charges in credit card contracts (pdf 203 kb).
Download guide for consumers (pdf 64 kb).

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