November 27, 2008 2:00 am

Credit card issuers face probe threat

The credit card industry was handed a two-week deadline by the government yesterday to agree a code curbing its imposition of interest rate increases or face a referral to the Office of Fair Trading.

The ultimatum came after the issuers had been hauled in for a meeting with Peter Mandelson, the business secretary, and Gareth Thomas, the consumer affairs minister. The talks, scheduled to last two hours, dragged on for almost twice as long as the government demanded stronger undertakings from the industry.

In a joint statement with the industry, the Department for Business, Enterprise and Regulatory Reform, said the card companies had agreed to come back in a fortnight with a "statement of fair principles for risk based repricing" - the practice of increasing rates for groups of borrowers because of a perceived in-creased risk they will default.

The industry agreed to suspend its pursuit of bad debts for up to two months, where it had received formal notice that a customer was in serious discussions with a debt advice agency to agree a repayment plan.

The two-week deadline came after the government made clear it wanted substantive concessions from the industry.

Ministers fear the card issuers could exacerbate the impact of the downturn by increasing the financial pressures on borrowers. Gordon Brown, prime minister, warned yesterday that the government would "take whatever action is necessary" to ensure there were "proper measures to regulate the industry when people are being charged exorbitant rates".

Lord Mandelson said he would "have no hesitation" in referring the industry to the OFT, should the companies not "step into line and start treating people in a fair, responsible, consistent way". He cited as an example of "bad behaviour" card issuers raising interest rates, with no warning or alternative offered to borrowers.

The perception of unfairness has been exacerbated by the issuers' recent tendency to increase their rates as the bank base rate falls.

Credit card providers have increased the interest rate charged on purchases by as much as 5 percentage points since last summer, according to Moneyfacts.co.uk.

Some card providers have also been clawing back rev-enue by charging more for cash withdrawals and foreign usage and have put up balance transfer fees.

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