FCA considers shake-up of credit card market to help consumers struggling with persistent credit card debt

In its consultation paper, the Financial Conduct Authority (FCA) outlined (106-page / 2.12MB PDF) its  desire for credit card providers to player a greater role in helping customers in persistent debt to repay the money they owe faster, including potentially stopping customers using their cards if they fail to engage with them on repayment options.

The proposals are among a package of measures outlined by the FCA to address concerns it identified in an earlier study it carried out into the credit card market, which included concerns about "the scale and persistent nature of some customers’ credit card debt and firms’ lack of incentives to tackle it".

"The overall objective of the package is to reduce the number of customers in problem credit card debt and to put consumers in greater control of their borrowing," the FCA said.

A consumer credit expert said the measures could force some firms to rethink their existing business models.

Under the measures proposed, credit card providers would be required to intervene earlier to identify customers who are at risk of financial difficulty and take steps to help them. They would also be required to make better use data available to them to inform their approach.

The FCA said: "Credit card firms will often have in their possession more data than a customer’s repayment record (for example, their spending patterns, changing repayment behaviour, county court judgements (CCJs), and CRA data) and so we propose that firms must: use the data they hold to assess whether customers are at risk of potential financial difficulties; take appropriate action, and; establish, implement and maintain an adequate policy for dealing with customers showing signs of actual or possible financial difficulties, even though they may not have missed a payment."

Under the proposed new rules, customers who pay more in interest and charges than they do in repayment of credit card debt over an 18 month period will also need to be helped by credit card providers. Those customers, who the FCA said would be classed as being in 'persistent debt', would need to be informed by their credit card provider at the end of that 18 month period that they could reduce their cost of borrowing and time for repaying their debit if they increased their current rate of repayment, and that the firm could might suspend their use of their card if they continue to make low repayments for a further 18 months.

Credit card providers would be required to repeat their warnings between 27 and 28 months if it appeared that customers would continue to be in persistent debt, before taking further action at 36 months.

"If customers are still in persistent debt after a further 18 months, and thus have repaid more in interest and charges than principal for two consecutive 18 month periods, firms must take steps to help them repay their outstanding balances more quickly," the FCA said. "They must write to the customer proposing options for repayment plans, based on repaying their debt over a reasonable period, usually between three and four years. The customer would be made aware that their use of the card will be suspended unless they engage with the firm."

"Where customers inform the firm that they cannot afford any of the proposed payment options to repay the debt within a reasonable period, firms must exercise forbearance to assist the customer to repay the debt more quickly. This may include a reduction in the interest rate being charged," it said. "Where forbearance is shown, we expect it will generally be necessary for the firm to suspend the use of the card. Customers who confirm they can afford to make increased repayments but decline to do so, and customers who do not respond to the firm, would have their use of the card suspended or cancelled. The interventions would continue until the customer has repaid the balance they had at 36 months."

The FCA estimated that the proposed changes to its rules could save consumers up to £13 billion by 2030.

"We consider that the scale of persistent debt identified among existing credit card customers creates a strong argument for swift commencement of the rules after they are made; we would not wish there to be a period of 18 months following the rules being made before the first customers receive notifications from firms," the FCA said.

"As such, we propose that firms will have to comply with the rules three months after they come into force. This means that on this date firms would have to assess which customers have been in persistent debt for the previous 18 months. This period would include the 15 months before the rules came into force. The proposed implementation timetable also means that the first ‘36  month’ interventions will occur 21 months after the rules come into force," it said.

Consumer credit expert Thomas Howard of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's proposals in the consultation paper could have significant ramifications for parts of the credit card market in the UK.

"The FCA's proposals in respect of customers in persistent debt represent a major intervention by the regulator in the credit card market," Howard said. "If the proposals come into force as currently drafted, some credit card providers may need to rethink their business models and adjust them to cope with the potential loss of revenue."

"One potential consequence of the proposals could be the lowering of credit card limits and the curtailment or lowering of 'interest free' offer periods and balance transfers, as credit card companies look to readjust their risk profile. New sub and near prime borrowers are likely to be most affected by any such changes, as they represent a higher credit risk. At present many of the 'interest free' offers on the market are effectively subsidised by customers who run up large balances during the interest free period, and then repay them by making only the minimum payment each month," he said.

"Credit card issuers and providers of outsourced card administration services are likely to need to implement new policies and procedures to identify and engage with customers in persistent debt. They may also need to evaluate, and if necessary strengthen, their existing customer support arrangements to ensure that they are sufficiently resourced to meet the FCA's proposed requirements," Howard said.

"Whilst the proposals are undoubtedly good news for consumers struggling with credit card debt, they will increase the pressure on credit card issuers struggling with the impact of lower interchange fees and intense competition for customers," he said.

The FCA's package of proposals also includes plans to give credit card customers greater control over default increases to their credit limit, as well as further measures to give credit card customers easier access to their credit card usage data to help them compare offers from providers when shopping around.

The FCA's consultation on its proposals is open until 3 July.