Balance transfer credit cards and the FCA Consumer Duty

Balance transfer credit cards have been a fixture of the UK banking scene for many years - with 0% periods rising to almost four years at their peak. Although the length of 0% deals has come back slightly since then, it’s still not uncommon to see the longest offer periods coming in at over 30 months.

Balance transfer cards can be useful for customers who are struggling to clear their credit card debt and are paying interest on what they owe. But the business model that underlies balance transfer cards is not altogether positive and may not stand the test of time when the FCA’s new Consumer Duty rules come into play next year.

Although these cards are typically no longer completely free - charging customers a transfer fee of between 1 and 4% - they’re still one of the cheapest ways of borrowing, and significantly cheaper than keeping a balance on a regular credit card APR.

But balance transfer cards only remain good value if you follow a set of critical rules - which not all consumers are aware of.

Most obviously, customers that don’t pay off their debt during the interest-free period will face a dramatically higher rate of interest once the promotional period ends. APR on balance transfer cards can be as high as 59.9%. For most, they will hopefully be in a position to successfully transfer the balance to another 0% deal. But for those whose circumstances have deteriorated, that may not be an option.

Second, if customers fail to make their minimum repayments, they may lose their promotional 0% offer. While some credit card providers signpost this clearly on their websites, others put the information in the terms and conditions, where many customers will not read it, or in the small print on their website.

Third, if customers use their balance transfer credit cards for withdrawing cash or making purchases, they may be charged interest from the moment they make the transaction. This is because customers only get the interest-free period that all credit cards offer if they pay their balance off in full each month. But if there’s a large balance transfer sitting on the card, customers are unlikely to be able to clear the whole balance after making some additional spending.

Clear communication

The Financial Conduct Authority’s (FCA) new Consumer Duty is designed to protect customers from various harms. One of these harms is ‘firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess the product/service’.

In the 80 plus pages of guidance at the back of the paper, the FCA also makes it clear that it expects companies to be able to justify that their business models are not reliant on poor customer outcomes.

This has a clear implication for balance transfer credit cards, since much of the revenue generated by lenders is driven by customers making mistakes or seeing their financial circumstances deteriorate.

Issues of concern relating to communication are:

• Some credit cards offer a range of 0% periods on balance transfers, but do not clarify what promotional period customers will get until after they have made their application. Barclaycard, for example, has an interest-free period of ‘up to 24 months’ on one card, but customers with a worse credit history will receive a shorter promotional period of 12 months. Applicants won’t know exactly which promotional period they will receive until after they have made their application, which will leave a mark on their credit history. Tesco Bank and TSB structure their promotional offers in the same way.

• Some credit cards have a range of fees for balance transfers, but do not clarify exactly which fee customers will have to pay until after they have made their application. Sainsbury’s, for example, has a fee of 2.24% or 3% on its 32 month balance transfer card, but applicants don’t know the precise fee that they will face until after they have made an application, which will leave a mark on their credit history.

• The consequences of not making minimum repayments are not always made clear. Key information about potential loss of the 0% promotional offer is sometimes relegated to the small print on the website or to the terms and conditions.

• The interest rate that will apply after the end of the 0% promotional period is often not made clear. Several providers say only that the interest rate will revert to the ‘standard’ rate after the promotional period, but do not explain clearly what that standard rate is.

Exploiting customers?

The FCA’s consumer duty seeks to address are ‘practices which hinder consumers’ ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities’.

0% balance transfer cards arguably do exploit all three of these , since it is only by customers making bad decisions, such as spending on a balance transfer card, failing to make their minimum repayments, or failing to clear their debt during the promotional interest-free period, that these cards are profitable.

If credit card providers are to prove that they meet the FCA’s requirements for caring for consumers outlined in the Consumer Duty, they will need to address the shortcomings of how 0% balance transfer card offers are presented.

Clearly marked eligibility calculators, which tell customers exactly what interest-free period they will get and what balance transfer fee they will face, are a step in the right direction. They are already used in the sector, for example by Bank of Scotland, Halifax, Lloyds and MBNA, which is a positive development.

Similarly, providers should make every effort to clearly display information on their website about whether customers will lose their promotional 0% rate if they fail to make minimum repayments.

They should also make it clear how interest accrues on spending/cash transactions on 0% balance transfer cards, and the interest rate that will apply after the end of the interest-free period.

By being clearer in their communication with customers on the terms of 0% balance transfer offers, providers will go some way to heading off the criticism that these cards rely on customers making bad decisions. If customers are fully aware of the risks and advantages of the product before they make an application, it can more plausibly be argued that providers are not exploiting their ignorance or behavioural biases.

If you would like to talk to us about improving transparency and how to meet the Consumer Duty challenge, please get in touch at corporare@fairerfinance.com