From the FinCoNet consultation paper
Impact of Sales Incentives on the Sale of Consumer Credit Products
Promotional Incentives to Consumers
42. The Report researched incentives offered to consumers to encourage them to borrow.
The most popular type of promotional incentive to consumers was found to be
discounts offered in certain shops using specific credit cards, with cash back, payment
free periods, incentives for continued use of a credit card over the year, 0%
introductory rates and waivers of entry or other fees also being common. Promotional
offers of these types can influence the consumer in their decision to purchase a credit
product and make them more likely to judge the risks as low and the benefits as high.
Promotional incentives which are targeted at consumers can be beneficial for
consumers but only if, at the time that the incentive is being promoted, the consumer
has a need for credit and can afford to repay it.
43. The Report also found that many promotional incentives may appear to offer an
attractive ‘free’ benefit to the consumer when in fact it is outweighed by the cost of the
credit. An example cited in the Report concerns travel points or other loyalty
arrangements, where the promotional offering is complex and to be gained later. Here,
there is scope for the consumer to overestimate the value to them of the promotional
offering and/or for the financial institution to ensure that any perceived saving by the
borrower is clawed back over time through how the incentive is calculated.
44. The Report concluded that there is a need for governance arrangements when products
are offered to consumers on the back of incentives such as free gifts, bonus reward
points etc. Where the promotional incentive offered to the consumer is significantly
outweighed by the cost of the credit, the introduction of a disclosure requirement, or
the restriction of such practices should be considered.
45. Based on these findings, FinCoNet proposes the following Guidance on the Benefit of
Promotional Incentives to Consumers:
I. Guidance on Promotional Incentives to Consumers
Supervisors’ oversight should include consideration of the benefit of promotional
incentives offered to consumers versus the cost of the credit product.
This oversight should consider:
- whether the benefit is significantly outweighed by the cost of the credit;
- whether specific disclosures or warnings are required for misleading incentives; and
- when to prohibit or restrict this practice on the grounds that the apparent benefit of
the promotional incentive is in fact illusory.