The U.K. government last week presented the results of its consultation with the country's credit card issuers regarding the regulation of credit cards.
The proposed new regulation was first announced in a White Paper published by the U.K. government in July. The changes announced last week will take effect at the end of this year.
The changes dictate that repayments of principal will first be applied to repay the highest interest rate debt, instead of the lower interest rate debt, which how it is currently.
The minimum payment rate for new accounts will also be increased to cover interest, fees and at least 1% of principal.
The initial proposal to increase the minimum payment requirement for all borrowers has been rejected.
Under the new changes, credit limit increases will not be permitted without borrowers’ consent.
Interest rate increases must also be announced in advance and borrowers will be given the chance to reject them within 60 days. If they do so, their account will be closed and they will be given the chance to repay their outstanding debt within a “reasonable” amount of time.
Barclays Capital analysts said that some of these measures may have a negative impact on portfolio yields in credit card ABS trusts.
“The application of principal repayments to first pay off the most expensive debt will in particular contribute to a gradual reduction in yields,” analysts said. “However, we expect this impact to be only marginal, as some of the measures are already being applied by originators, and as issuers will likely compensate for the loss of revenue through other means, such as the introduction of annual fees on credit card accounts.”
The new regulation does not prevent lenders from repricing their portfolios if borrowers’ credit circumstances change significantly.
The other measures, specifically those related to the transparency of credit card pricing and fees, are likely to have a positive impact as they will impose more responsible borrowing and payment practices among borrowers, which might, in the longer term, have a positive impact on performance, analysts said.