OFT may reduce late payment fees for credit cards

The Office of Fair Trading is believed to be considering limiting the size of the fee that the country's credit card companies can charge late payers in a move that could cost the industry £400m in lost revenue.

The competition watchdog first told the credit card companies in July that they needed to cut the "excessive" default fee levied not only on customers who pay late but on those who send cheques that bounce or who breach their agreed limit.

The charge is about £25 each time. The OFT is thought to be preparing to tell the banks that it plans to cap the charge at about £15. According to the investment bank Morgan Stanley, this would put £400m of the companies' revenue at risk.

The industry has fought to keep a default fee, which Morgan Stanley calculates brings in combined revenues of more than £1bn. Britain's eight major credit card companies have argued since July that the fee is paid by very few customers and is not unfair as the OFT contends.

The watchdog's decision, which has been awaited since the autumn, is believed to be close, although the OFT may wait until the banks have completed reporting their profits for 2005 before making its views public. The new figures might also give the watchdog one last set of data on which to base its conclusions.

Banks begin reporting this week - starting with Barclays tomorrow - and are together expected to make profits of more than £30bn. Barclays' results will be scrutinised for the pain being felt by its card arm Barclaycard, which admitted at the half-year stage that profits were being hit by customers failing to pay bills on time.

The competition watchdog's view that the charge made by credit card companies is too high is based on its view that the charge should be no greater than a court would impose if the lender sued its customer for breach of contract. When the OFT told credit card companies in July that it believed the charges breached regulations covering unfair terms in consumer contracts it admitted that lenders did not agree with the provisional finding.

The OFT has refused to discuss its investigation. A spokeswoman said: "We haven't put a timescale on it. This is bound by conditions of confidentiality."

The major credit companies refused to comment either. Some are thought to have made it clear to the OFT that they will take legal action if the watchdog rules out default fees altogether. They are also concerned that the OFT will find a way to transfer its argument about credit card default fees to mortgages and overdrafts in a move that would further reduce revenues.

If it is the case that the OFT has decided that the credit card companies can keep levying default charges, it may disappoint consumer bodies that had been hoping that the card companies would be forced to cut the cost entirely.