The US Credit Card Accountability, Responsibility and Disclosure (CARD) Act
The US CARD Act – Handle With Care
Paul Rodford, The UK Cards Association
On 22 May 2009, President Obama signed the US Credit Card Accountability, Responsibility and Disclosure (CARD) Act into law. Feedback from the USA so far, as issuers digest the full ramifications of the Act, is that it is certain to reduce the availability of credit card credit, reduce customer choice and put up the price of credit – the unknown being the scale of the impact. US legislators’ opinion of the likely impact on consumers and the wider economy varies, but the impact could easily be being underestimated if it is hoped consumer confidence and consumer spend will lead the economy out of recession. Whilst legislators may not yet be convinced that the availability of credit will, in fact, be reduced, the impression given is that, were this the case, it would not necessarily be seen as a bad thing.
Naturally, UK legislators have been avidly following USA developments and are keen to consider those parts of the Act that, on the face of it, may be relevant to the UK and appear to strengthen or fill gaps in the current UK regime. However, the UK industry believes strongly that the two markets have evolved differently over time and cannot be directly compared – it is not simply a question of importing the most popular sounding provisions into the UK. To these ends, the industry has already been, and will continue to be, in active dialogue with the Government on the CARD Act.
We want to make sure that, on this side of the pond, the big picture gets reviewed alongside the detail, because rushing to introduce the US legislation into the UK without looking carefully at the UK’s situation, will inevitably adversely affect consumers in the UK.
The fact is that the UK is well ahead of the USA in terms of transparency, responsible lending and treating customers fairly whether that has been the result of formal regulation or the rigorous action taken by the industry to present the facts about credit cards and how they work. Anyone familiar with the recent history of the UK credit card industry will know how it has responded positively to escalating political and regulatory interest, beginning with the Treasury Select Committee hearings in 2003/2004; recent revisions of the Consumer Credit Act and the Consumer Credit Directive; regulatory intervention on default fees, Payment Protection Insurance (PPI) and interchange; and more recently, November 2008 Credit Card Summit.
The CARD Act is the clearest sign yet that the USA is catching up – it is the first US legislation to regulate credit cards in a generation. Yes, it addresses one or two issues that we haven’t in the UK, but it also ignores many of the issues that the UK addressed some time ago, and where we have often exceeded stakeholder expectations.
The CARD Act places tight regulation around US card issuers’ practices. The legislation is potentially explosive for the US industry, pursuing an apparently popular consumerist agenda that will dramatically reshape the US market. Despite the speed with which it was developed the Act is, without doubt, a technically complex piece of legislation addressing a broad spectrum of issues including risk-based re-pricing; the allocation of payments; over-limit fees; penalty fees; marketing to students and to the sub-prime market; as well as best practice on statements. US issuers have nine months to comply with the new legislation which, for many, goes to the core of their business model.
Some of the key differences between the two markets that make comparison of the two markets difficult and which would result in different impacts include:
- The underlying legal and self-regulatory regimes are different – for example, the UK has had layer upon layer of formal regulation since 1974, plus we have The Banking Code and the Financial Ombudsman Service
- Some of the features addressed in the CARD Act are not features of the UK market, such as universal default or applying a charge depending on the payment method used to pay a bill
- There are some important philosophical differences.
- Credit card companies in the UK can use default fees only to recover the actual costs they incur whereas in the US, the word ‘penalty’ means what it says, with fees talked about as a deterrent and in terms of their impact on consumer behaviour.
- On risk-based re-pricing the CARD Act allows issuers to re-price an account if the customer is 60 days in arrears whereas principles on risk-based re-pricing agreed in the UK, following November 2008 Credit Card Summit with Government, expressly state that a UK issuer will not re-price in such circumstances. This was a lynchpin of the UK agreement seen as being firmly in the interests of the customer
- The history of intervention is different – in the UK, the European Commission, the Office of Fair Trading and the Competition Commission have all recently exercised their powers - impacting all the major revenue streams for UK card issuers and rendering the business model for a UK issuer fundamentally different to that of a US issuer and;
- There are key differences in the way the industries operates, such as the availability and use of credit reference data; transaction authorisation levels; sanctions for legal non-compliance; and the way APRs are calculated - all of which underpin the CARD Act to some extent
We always need to be wary of crying wolf and as yet we cannot assess the impact of the individual provisions in the CARD Act, never mind their compound impact. The unresolved question is whether the CARD Act will result in unintended or detrimental consequences for consumers, such as the withdrawal of promotional rates (a real possibility given the provisions on payment allocation). Neither do we know who consumers will hold responsible once credit card credit in the US becomes a rarer, more expensive, commodity.
The US Government has effectively embarked on a live experiment with their credit card industry, redesigning the business through regulation. But no-one really knows yet what the impact will be. The prudent thing to do is not to rush and cherry-pick superficially attractive provisions, but to wait and see what happens next. Whatever the outcome, it is unlikely to be pretty from a card issuer’s point-of-view; and in the end most importantly, that affects the attractive deals offered to customers.
The UK Cards Association
22 June 2009