U.K. Fee-Slayer

Thursday, April 05, 2007

Most Americans have never heard of the Office of Fair Trading (OFT), the United Kingdom government agency with the power to regulate credit card banks. The agency is roughly analogous to the U.S. Office of the Comptroller of the Currency. However, it appears that the OFT is truly interested in protecting consumer rights.

A year ago the OFT ruled that the penalty fees being charged by credit card companies were “unlawful,” because the amount of late and over limit fees were out of proportion to the bank’s actual costs. Penalty fees in the U.K. had reached £25 (about $50 dollars) per infraction.

Consequently, the OFT demanded that penalty fees be capped at £12, a stunning reversal. Even more impressive, U.K. cardholders were permitted to retroactively reclaim any penalty fees above £12 they had paid for the last 6 years. Subsequently, many banks have settled with individuals who demanded refunds, rather than fight them in court. This has been a significant victory for U.K. consumers.

But credit card fees seem to function much like a balloon. Squeeze the balloon on one side, and another part of the balloon expands. The OFT hoped to deflate the balloon, but has noticed fees popping up in other places.

In the wake of the £12 cap, some of the new fees have included inactivity fees of £35 for people who don’t use their cards often, monthly fees of £2, fees for using the card, and treating purchases of gift cards as cash advances so banks can charge more interest. Another way banks have compensated for the lost penalty fee income is by steadily increasing purchase APRs. Consumers perceive the small increases as annoying but manageable—but the overall effect is that banks have been able to fully recover lost penalty fee profits. One very disturbing report from March 2007 suggests that banks may even be doing better since the OFT’s ruling: according to research by uSwitch.com, a price comparison site, interest rate increases have led to £673 million in additional revenue for credit card companies, while they lost only £300 million from “unlawful” fees.

The OFT is completing a thorough study about what the actions that trigger penalty fees actually cost credit card companies. Their report is due later this month. We hope the Office of the Comptroller of the Currency takes a close look at the findings.

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