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Credit
card firms resist calls to cut late fees
The country's biggest credit card companies are resisting
demands by the Office of Fair Trading, the consumer watchdog,
that they should cut default fees of up to £25 levied
on customers who fail to pay their bills on time.
Barclaycard, the country's largest and oldest credit card
company with 9M customers, and America's MBNA are believed
to be the most determined in their defence of the default
charge, which City analysts believe could be worth as much
as £1bn a year in income to the card companies. |
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Eight card companies have been told by the OFT that the charge
breaches regulations covering unfair terms in consumer contracts.
They are in the process of making their responses to the OFT
which, in turn, has given the card firms until early next week
to make "suitable undertakings" to address its concerns
that charges are too high to be fair.
It is understood that while some of the companies are resigned
to making deep cuts to the charges, Barclaycard and MBNA are
determined to defend their ability to levy fees on late payers
as well as those who exceed their agreed credit limit or pay
with a cheque that bounces.
Industry sources have told the Guardian that they fear the same
legal case against default fees could be extended by the OFT
into other areas of their business, such as mortgages and overdrafts,
and therefore reduce their ability to levy fees on customers
who pay late.
Even so, some of the card companies are working hard to convince
the OFT that the default fee should survive. The OFT's main
argument is that the charge should be no greater than a court
would rule should be paid if the card lender sued its customer
for breach of contract. The card companies appear to be arguing
that a default charge should not just be based on the administrative
cost of handling a late payer.
At a time when creditworthiness is deteriorating, some of the
card companies are arguing that there is an economic cost involved
as well. This is based on the concept that a default fee acts
as an incentive on card holders to make timely payments. If
default fees were slashed, the card companies argue, the numbers
of delinquent borrowers would rise.
The OFT, which refused to comment yesterday, would need to be
convinced by the argument that there was a wider economic cost
beyond the basic administration to allow default fees not to
be cut substantially. It is thought the companies are trying
to convince the OFT that fees can be charged after six months
of late or non-payment.
The industry has been careful not to reveal how much income
is generated each year from default charges. But a report published
yesterday by Morgan Stanley suggested the figure could be as
high as £1.1bn a year. The analyst assumes that industry
regulators might decide that a £15 default fee is "fair"
- a move that would put about £400m of the card companies'
revenue at risk.
MBNA refused to comment on its discussions with the watchdog,
while Barclaycard would only say: "We believe that the
charges are fair and we believe they reflect our cost."
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