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Royal Bank of Scotland’s chief executive has warned of the risks of
interest-free credit cards as regulators intensify their clampdown on
the sector.

Speaking at the FT’s Banking Standards conference in London on
Thursday, Ross McEwan said credit cards with zero per cent interest
rates threaten to trap customers in a cycle of debt.

He said that because of the interest-free offer, which can last up to
43 months in some cases, borrowers delay paying down their debt.

“Call me old fashioned, but I want customers to pay us back,” Mr McEwan said.

The other issue is that customers often do not realise some of the
hidden fees attached to these deals, buried in the terms and
conditions. He told the FT that this leaves them with “no way of
knowing what the figure is at the end of the day.”

Aside from a sharp jump in the annual percentage rate at the end of
the interest free period, many cards charge an upfront fee.

RBS has pulled out of so-called teaser rates on credit cards, savings
and insurance products over the past few years. However, RBS’ credit
card balances have fallen about a third since the end of 2013.

Mr McEwan’s comments come after the Financial Conduct Authority
proposed earlier this month that credit card interest and fees should
be waived for customers with severe debt.

The Bank of England also revealed recently that the Prudential
Regulation Authority will launch a review
into banks’ lending
standards in relation to consumer credit following the soaring growth
of the sector.

The BoE flagged that last year banks had £19bn of impairments on
credit cards, compared to £12bn on mortgages.

Concerns are mounting over rising consumer indebtedness and borrowers’
vulnerability to a potential economic downturn.

But a number of UK banks are charging into the consumer credit sector
and riskier forms of lending in search of higher yields as interest
rates remain anchored at a record low.

Virgin Money reported this week that its credit card balances have surged
to £2.7bn. The Newcastle-based lender said that although credit card
balances have climbed, it is maintaining its “strong focus on asset
quality” and “strict and consistent application of underwriting
standards”.

Lloyds Banking Group struck a deal to acquire UK credit cards business
MBNA from Bank of America at the end of last year.

Following its first quarter earnings on Thursday, Lloyds’ management
sought to allay concerns over the expanding consumer credit market
noting that a lot of the debt relates to student loans and car
finance.

Photo: Library Image

Copyright The Financial Times Limited 2017. All rights reserved.
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