Credit card market next in line to face FCA scrutiny

The announcement comes two days after the FCA obtained responsibility for consumer credit on 1 April 2014. In a speech announcing the FCA’s intention to conduct the review, the FCA Chief Executive, Martin Wheatley, stated that the FCA will be enquiring as to whether the surface competition that exists in the sector is reflected more deeply in the value offered by credit card products. In particular, questions will be raised regarding how behavioural economic biases affect the design, pricing and distribution of the products, and the position within the sector of consumers in vulnerable circumstances.

He also noted that there may be a wider industry issue to consider regarding business models, whether lenders price risk correctly to all borrowers and whether the return on assets, by risk segment, implies a contestable and effective competitive market. He stated that these were all questions the FCA has a statutory responsibility to consider as part of its competition objective.

The FCA’s competition remit is founded in the Financial Services Act 2012, which amended the Financial Services and Markets Act 2000 to place a competition objective upon the FCA. The competition objective is one of the FCA’s operational objectives, and is defined as “promoting effective competition in the interests of consumers” in the financial services market. The FCA has stressed that its whole outlook in terms of promoting effective competition is shaped by the impact on consumers, which includes both individuals and businesses.

The main tool for the FCA to examine competition issues as part of its objective to promote effective competition is through the use of market studies. Market studies allow the FCA to examine specific markets within the financial services sector and to recommend policy or regulatory changes, to make rules under its regulatory powers, to issue guidance on particular practices and to put forward proposals for enhanced industry self-regulation. Market studies give the FCA the ability to gather substantial information about a sector.

The competition objective does not grant the FCA any specific competition enforcement powers. This position has, however, been changed by the introduction of the Financial Services (Banking Reform) Act 2013, which appoints the FCA as a concurrent competition regulator with effect from April 2015. Under these new powers the FCA will have the ability to conduct investigations of any alleged infringements of the Competition Act 1998 and impose appropriate penalties, including fines of up to 10% of group turnover. Becoming a concurrent competition regulator will also mean that the FCA will be subject to an obligation to consider whether it would be more appropriate to take enforcement action under competition law before exercising its regulatory powers.

The market study is not to be launched until later in 2014. Companies in the sector are advised to review their practices, and ensure they have effective compliance measures in place, in good time before the study and before the FCA acquires its full concurrent competition powers.