On 28 July 2016, we blogged that the FCA published its final report on the credit card market study (CCMS). In that market study the FCA found that while the credit card market works well for most consumers, it had significant concerns about the scale and persistence of potentially problematic debt. The FCA set out a proposed package of remedies that sought to address the issues the regulator identified.
The FCA has now published Consultation Paper 17/10: Credit card market study: consultation on persistent debt and earlier intervention remedies (CP17/10) which forms part of the implementation of the package of remedies. In CP17/10 the FCA proposes measures to tackle persistent credit card debt and encourage earlier intervention. In particular, the FCA is setting out proposed new rules about the treatment of customers whose debt persists over 18 to 36 months.
The package of remedies that the FCA proposes is being delivered through a combination of rules and voluntary industry remedies. Progress and compliance with the latter will be overseen by the Lending Standards Board.
In order to deliver the appropriate assistance for customers in persistent debt, the FCA proposes the following:
- a definition of persistent debt that identifies customers paying more in interest and charges than principal over an 18 month period;
- at 18 months – customers in this situation would be made aware that increasing their current rate of repayment would reduce their cost of borrowing and the time taken to repay. They would be informed that continuing low repayments for a further 18 months may mean the firm suspends use of the card and makes a report to a credit reference agency;
- at 27-28 months – if customers’ repayment up to this point indicated they were likely to remain in persistent debt at the 36 month point, firms would be required to repeat the steps required at 18 months;
- 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. 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 customers would be made aware that their use of the card will be suspended unless they engage with the firm;
- at 36 months – 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;
- at 36 months – where forbearance is shown, the FCA expects it will generally be necessary for the firm to suspend the use of the card;
- at 36 months – 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; and
- at 36 months – the interventions would continue until the customer has repaid the balance they had at 36 months.
In relation to earlier intervention, the FCA is proposing to build on an existing rule that requires firms to monitor a customer’s repayment record for signs of actual or potential financial difficulties. Credit card firms will often have in their possession more data than a customer’s repayment record and the FCA proposes that a firm 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.
The FCA also describes in CP17/10 the voluntary remedies the industry will adopt to give customers greater control over their credit limit. These include:
- new customers will be given the choice of how credit limit increases will be applied to their account. They may choose either not to receive a credit limit increase unless they expressly accept it (opt in) or to have a credit limit increase applied on their account automatically unless they decline it (opt out). Customers who do not make a choice will be offered credit limit increases on an opt in basis by default;
- existing customers will be offered a more straightforward means of declining an offer of a credit limit increase, as well as the choice of having any future offers made on an opt in basis;
- all customers will be made aware of their existing right to choose to no longer receive credit limit increase offers; and
- all customers will still be able to ask for a credit limit increase at any point.
The deadline for comments on CP17/10 is 3 July 2017. The FCA intends to publish a Policy Statement with final rules later this year.
Andrew Bailey, FCA Chief Executive, said:
“Credit cards can be a very effective product for consumers, but a significant minority of customers experience real difficulties. We expect our proposals to reduce the number of customers in problem credit card debt, as well as putting customers in greater control of their borrowing.
The measures that we’re proposing today, alongside those already announced, are part of a package of significant improvements for credit card customers based on the comprehensive analysis of the market that we have carried out.”