Should Credit Card Companies Be Permitted to Fail During Economic Downturns?: An Analysis Amidst the 2020 Recession

In the wake of the 2020 economic downturn, the debate surrounding the performance and behavior of credit card companies has intensified. Critics argue that these institutions should be held accountable for maintaining reasonable interest rates and not profiting from the high-interest charges during times of financial distress. This article delves into the complex issues surrounding credit card companies, their obligations during economic recessions, and the potential consequences of allowing them to fail.

Regulation and Economic Responsibilities

It is crucial to examine the responsibilities of banks and lending companies during economic downturns, especially when the central bank like the Bank of England is urging for more lenient lending practices. While some clearing banks have scrapped monthly charges for overdrafts, it is concerning that interest charges remain stubbornly high at 35.9 APR. This eyebrow-raising figure significantly exceeds the Bank of England Base Rate, which has been cut to an historic low of 0.5%.

According to the lenders, these changes are supposedly "instruction from the Bank of England." However, this claim has not been substantiated through official notifications in the press, professional journals, or broad media. As a seasoned Credit Manager with over three decades of experience, I am particularly troubled by the fact that such decisions could be detrimental to individuals who are already on a knife-edge due to unforeseen circumstances.

Financial Difficulties and Professional Defaulters

While it is undeniable that there are individuals who engage in so-called "professional defaulting," unwilling to pay any portion of their loan, these cases are the exception rather than the rule. The vast majority of people find themselves in dire straits due to factors beyond their control, such as job losses, reduced income, and unexpected medical expenses.

The legal process for notifying and terminating agreements with delinquent borrowers is well-documented and stringent. For instance, under the Consumer Credit Act 1974, Section 87i allows for a swift termination of agreements if no response is made after the first notice. However, executing these orders through court proceedings and obtaining summary judgments requires a significant time investment.

Furthermore, if fraud is suspected, the process can further delay the recovery of debts. Bailiffs can be instructed within 7 days following the summary judgment, but this is subject to special applications to a Court Judge or Registrar. These legal procedures, while effective, do not address the immediate financial hardships faced by many individuals in the short term.

Economic Impact and Social Responsibility

During major economic downturns, it is argued that credit card companies have a moral and social responsibility to adjust their rates and charges, especially when they are being bailed out by government interventions. This argument revolves around the idea that companies should not profit from the misfortunes of others, particularly during times when people are compelled to tighten their belts and reign in unnecessary spending.

Allowing credit card companies to continue with high-interest charges during such periods could exacerbate financial stress and contribute to the broader economic instability. Therefore, it is imperative that regulatory bodies push for greater transparency and fairness in the lending industry to protect vulnerable populations.

Conclusion

The debate over whether credit card companies should be permitted to fail during economic downturns is complex and multifaceted. While some argue that these institutions carry the burden of their own decisions, others maintain that their hardships are shared with the broader market. It is essential for regulatory bodies to ensure that credit policies are adaptable and equitable, especially when facing unprecedented economic challenges.