The FCA is right to try to force lenders to assist the millions languishing in persistent debt.
Concerns that the credit card industry creates, and then milks, over-indebted consumers are not new. It was as long ago as 2003 that Matt Barrett, then chief executive of Barclaycard owner Barclays, generated headlines when he told MPs that he had advised his children never to borrow on a credit card “because it’s too expensive”.
His analysis was spot on, of course, which is why it is so alarming that the FCA says 3.3 million people in the UK are in persistent credit card debt, defined as those who are repaying less in principal than they are paying in interest and charges over a period of 18 months. The financial pain can be delayed by teaser rates and zero-interest periods but, when it comes, it can be severe.
The FCA offers the illustration of a customer with a £3,000 debt on a credit card with an annual percentage rate of 19%. If paying as much in interest and charges as in principal, it would take almost 20 years to clear the debt and £2,900 would be paid in interest.
When a financial product is so lucrative for the lender, the market won’t reform itself. Royal Bank Scotland, commendably, has taken a principled stand against teaser rates on credit cards since 2014 – “We will not be in the business of trapping people in debts they cannot afford,” said the chief executive, Ross McEwan – but few other big banks are interested.
In the circumstances, the FCA is right to intervene. It proposes that after 18 months credit card firms must prompt persistent debtors to make faster repayments. After another 18 months, they must suspend the card. And, in certain circumstances, interest and charges would have to be scrapped or reduced for customers unable to make faster repayments.
There will be grumbles about nanny-state intervention. Ignore them. While the plastic works fine for most people, credit card debt has become more like a high-interest personal loan for the 3.3 million in persistent arrears. That is not how the product is meant to operate. Unless lenders are forced to accept a few obligations to borrowers, the grubbier end of the credit card industry will look outright exploitative.
One suspects that Imagination Technologies will become a case study for management consultants about the importance of diversification after its announcement on Monday morning.
The news that Apple, which accounts for roughly half of Imagination’s revenues, plans to stop using Imagination’s technology within 15 months to two years wiped more than 60% off its share price. Analysts at JP Morgan were particularly glum about the situation, brutally describing it as “potentially fatal” for Imagination.
It is easy to sniff at Imagination’s reliance on one customer, and the company’s £63.2m pre-tax loss last year highlights that it may have been more focused on shoring up its finances then developing its technology into new avenues such as the “internet of things”.
But when your biggest customer is the most valuable company in the world it is inevitable that it will be a vital part of your business.
The key for Imagination now is what happens next. A legal battle or some sort of settlement with Apple looks inevitable. Imagination says it would be “extremely challenging” for Apple to develop a graphics processor unit (GPU) without infringing its intellectual property rights.
Going into battle with the biggest company in the world is hardly an appealing prospect, but Imagination has no choice. Graham Ruddick
Fund managers have the power to drive change
Legal & General’s annual corporate governance report reveals that the fund manager voted against 118 pay resolutions and 18 named directors at company meetings in 2016 due to concerns about remuneration.
The report is a refreshing attempt by one of the biggest institutions in the City to explain its actions, approach and ambitions for the future. Remuneration, board diversity and climate change dominate its thinking. On climate change, L&G is pressing ahead with plans to vote against the re-election of chairs whose companies don’t do enough to lower carbon emissions.
Fund managers have the power to drive change at British companies on these issues. Money talks, and if fund managers refuse to invest in companies that don’t change their ways then boards would be forced to change or watch their share price suffer.
L&G is taking this approach with its Future World Fund, which will divest its shares in companies that do not tackle climate change.
This is a welcome start, but if this approach could be widened to all funds and to remuneration and board diversity as well as climate issues then change could be rapid.