Credit Cards – the FCA's solution to a persistent problem

The problem of persistent credit card debt was highlighted in the FCA's Credit Card Market Study.  Today the FCA has published proposals to tackle what it sees as a major issue in the UK consumer finance sector. Although the proposals may seem attractive from a consumer protection perspective they potentially cause a number of practical issues for both lenders and customers.  This is in addition to the range of proposals already outlined by the FCA following the Market Study.

What is the problem?

The FCA thinks that both credit card issuers and customers need to be incentivised to deal with long-term debt on credit card accounts.  These balances can be profitable for card issuers – but are an expensive option for customers even where they are operating within their credit balance and making the minimum payment.  Although there are warnings to customers in statements about just making minimum payments, the FCA thinks that more should be done.


What is persistent debt?

The FCA is proposing a new definition of "persistent debt".  The measurement is based on the amount of interest, fees and charges paid by the customer over an 18 month period – if this amount exceeds the amount of principal repaid during that period then the customer will have "persistent debt".


What happens when persistent debt is identified?

If there is persistent debt the card issuer will be required to notify the customer and explain the impact.  Customers will be prompted to contact the card issuer to discuss the situation with a pro-active encouragement to increase repayment amounts as long as this doesn't adversely impact their financial situation.  If the pattern of repayment remains the same, this notification must be repeated 9 months later.

After a further 9 months the card issuer will be required to take further proactive action.  The range of options available to the card issuer will vary but where a customer does not respond they will be required to suspend or cancel the use of the card (although the cancellation may be withdrawn if they subsequently agree a repayment plan).  If repayments are sustainable then the guidance states that the outstanding debt should be repaid over a reasonable period – that is 3 to 4 years.  Where it is not sustainable the card issuer must treat the customer with forbearance and due consideration – effectively treating the customer in the same way as they would if the customer is in arrears.  Where this is the case it may be appropriate to waive interest, fees and charges.  As part of their response card issuers will want to look at how sustainable any plan to repay over 3 to 4 years will be and whether there is likely to be a knock–on impact on minimum repayment levels more generally as part of their product design process.


Identifying problems before they arise

The FCA is also proposing to enhance the requirements which apply to credit card issuers so that they identify actual or potential repayment difficulties before they escalate into a serious problem.  Currently all lenders are under an obligation to monitor for potential issues – under the new rules card issuers will have to take action even where a payment has not been missed. Again, the FCA places a strong reliance on forbearance measures where issues are identified.


What next?

The consultation is open until 3 July.  If implemented, these proposals will have a significant impact on revenues – the FCA estimates within a range of £3 billion to £13 billion up to 2030 (with a peak at between £310 million and £1.3 billion per year).  There will also be a number of systems changes required to implement the monitoring requirements and the full range of the remedies.  Combined with the reduction in revenue following the limits in interchange fees, these proposals will represent a further significant challenge to card issuers.


Other changes

The FCA has also set out a range of other proposals which are being agreed with the Credit Card industry.  As well as the agreed changes which will come into force next year covering the end of promotional periods, changes to payment dates and close to credit limit prompts, the industry has agreed to implement changes to give customers greater control over their credit limits.  New customers will be given a choice of opting in or out of credit limit increases and there will be stricter controls over offering unsolicited increases to customers only making minimum repayments.  Card issuers will need to consider whether these changes will require a modifying agreement if the customer is agreeing to a change.

With the FCA's on-going work on creditworthiness and affordability assessments and its proposals on high-cost credit due in the summer, there are clear indications that the FCA is flexing its muscles in the consumer credit sector.

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