Credit card persistent debt – the continuing conundrum

The FCA has published the feedback on its proposals relating to persistent credit card debt and is now consulting on the changes made in response to the feedback. Take a look at our summary of the FCA's proposals in our previous blog post on persistent debt. Key aspects of the FCA's proposals will remain the same including the definition of persistent debt and the timing of the interventions. There are, however, a few welcome changes, but there are still some points lenders will need to watch out for. Firms have until 25 January 2018 to respond to the revised proposals.

Key changes

The FCA has clarified that lenders will not have to use prescribed wording on persistent debt communications. Instead, lenders will be able to adapt the FCA's suggested wording to the language and tone of their communications and take into account the most appropriate way of contacting their customers. In addition, the FCA intends to remove the requirement for lenders to warn customers that card suspension may be reported to CRAs. Lenders should include a general reminder of the potential implications of continuing with low repayments. These changes should make it easier for lenders to fit the required persistent debt communications around their existing communications.

Some respondents were concerned that customers would not be able to repay persistent debt balances in the proposed 3-4 years. The FCA response indicates that it still believes that 3-4 year is reasonable for most customers and that offering longer periods would only extend the persistent debt problems. However, the FCA agrees that, in exceptional circumstances, where a 3-4 year payment period could cause further financial difficulty, a slightly longer period could be considered. This would only be possible if the longer period did not result in any additional cost to the customer. The FCA suggests that, if a longer period is required, this is likely to indicate that some form of forbearance is required.

Finally, the FCA has given lenders a little longer to work on the changes by extending the implementation period from three months to six months.

 

Watch out: remaining issues!

Varying the card terms

Several respondents were concerned about how the repayment proposals could be implemented under their existing terms and the requirements of the Consumer Credit Act. Although the FCA was satisfied that some lenders' existing terms would accommodate the changes, it noted that some would have to vary their terms (generally by relying on their existing variation clauses). Lenders with appropriate variation clauses could consider introducing an additional reason which could be used to change the minimum repayment amount. However, lenders should consider whether they need to go down the modifying agreement route to avoid the risk of being left with an improperly executed agreement.

 

The repayment options – achieving the right outcomes

Lenders will need to consider fairness issues when customers are given repayment options at month 36. The onus will be on customers to assess which option offered by the lender they should select. Although the FCA might offer further guidance in the future on how to set out repayment options, for now the guidance on the types of repayment mechanisms is limited. The FCA expects lenders to determine the appropriate action based on:

  • what the customer confirms they can afford;
  • the options the lender is able to offer;
  • the lender's business model; and
  • the nature of any forbearance.

This means that there is a risk that customers with similar financial profiles could select different repayment options and be treated differently. Lenders will need to consider whether they should put in place objective criteria for assessing the financial position of customers. The criteria will also be helpful for customers who say they are unable to repay more quickly or who do not respond to any communications. Although the FCA expects there to be "some differing treatment" where forbearance is offered, lenders should ensure their systems result in fair outcomes.

 

Still concerned about credit limits?

The FCA's early intervention proposals (from the April consultation) included the industry's voluntary remedies in relation to increasing credit limits. Since those proposals, the industry has further agreed that customers that meet the definition of persistent debt for a period of 12 months will not be offered credit limit increases. About 1.4 million accounts per year will no longer be eligible for credit limit increases due to this change. The FCA has also suggested that, at the 36 month intervention point, lenders may wish to consider conducting affordability checks to test whether customers should have their credit limit reduced. The FCA did not prescribe it as a required action although this would seem to be a natural step where a new loan is put in place to repay the persistent debt balance.

 

Next steps – and a busy 2018

As the FCA has published a revised cost benefit analysis, it is seeking further views on the amended proposals; however, respondents should raise only new points. The consultation closes on 25 January 2018.

The FCA also provided a reminder of its on-going consumer credit work:

  • The FCA is still looking at behavioural remedies in relation to under-payment and may propose rule changes on how repayment options are presented to consumers.
  • It is looking at 0% credit card deals and surveying practices in this area because of concerns about the availability of the headline rates to consumers.
  • The creditworthiness consultation closed in October and responses are being considered.
  • A further high-cost credit consultation is expected in spring 2018.
  • And finally, the FCA has promised an interim report on its review of CCA retained provisions in 2018 – ahead of the current deadline for completing the report of 1 April 2019.
It looks like 2018 will have a distinct credit focus!

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