August 29, 2013 / 11:38 AM / 4 years ago

RPT-Fitch: CPP mis-selling unlikely to impact UK credit card ABS

Aug 29 (Reuters) - (The following statement was released by the rating agency)

The mis-selling of identity theft and fraud protection to UK credit card borrowers, as outlined by the Financial Conduct Authority (FCA) last week, is unlikely to be detrimental to UK credit card trusts, Fitch Ratings says.

Payment protection insurance (PPI) mis-selling occurred on a much larger scale but compensation payments have not affected trust performance. Card providers appear to be taking concerted and organised steps to resolve the issue, unlike the more piecemeal response to PPI mis-selling. The connection between mis-selling theft and fraud insurance and credit cards may not be clear cut, as the mis-sold protection may apply to other cards a customer has, such as debit cards.

The FCA said last week that seven million borrowers who may be entitled to compensation, if they were "given misleading or unclear information" about the benefits of protection bought from card issuers or from Card Protection Plan Ltd (CPP), will receive letters in due course. CPP and 13 banks and other credit card issuers have agreed to set up a compensation scheme under which up to GBP1.3bn could be paid out from spring 2014. Cardholders will then have a period of seven months to submit their claims, so the issue could be settled by end-2014.

This would be a much smaller cost than the estimated GBP15bn of PPI mis-selling compensation. In the latter case, there has been no impact on UK credit card trusts and we do not anticipate any as long as banks continue to make compensation payments, which they have done from their own balance sheets, without any impact on trust cash flows.

We do not anticipate any change in borrower behaviour. As with PPI, there might be a risk of customers opting to set off outstanding balances on credit cards against repayment entitlements if the card provider defaulted. But even then, any impact on transaction performance would depend on factors such as whether claims exceeded the amounts allocated to the risk, or whether levels of transferor interest were sufficient to absorb set-off losses.

A majority of customers need to vote in favour of the compensation scheme, and High Court approval given, before claims can be submitted.

We are monitoring the situation closely and may comment further as more detail emerges.

Another mis-selling episode supports the view of our UK bank analysts that conduct risk remains high for the sector. We expect UK banks will continue to strengthen systems, controls and governance to minimise such risks.

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