Customers stuck in persistent credit card debt could benefit from initial savings of up to £1.3 billion a year if proposals to bring about quicker repayments and to waive interest for those who can't afford to pay are given the green light.
The Financial Conduct Authority (FCA) has today unveiled plans to force credit card companies to help customers who are struggling to shake off the shackles of lingering debt.
Under the FCA's definition, credit card customers are in persistent debt if they have paid more in interest and charges than they have repaid of their borrowing over an 18-month period.
The regulator's proposals, which are outlined in a consultation paper, require credit card firms to take steps to help customers repay their balances more quickly and to offer further assistance to those who can't.
This follows an FCA study of the UK credit card market, which found significant concerns about the scale, extent and nature of problem credit card debt. It's estimated that about 3.3 million people are in persistent debt, with over half (1.8 million) for two consecutive periods of 18 months.
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Proposals may mean some hard-up customers get charges and interest cancelled
Under the new rules, firms will have to take a series of steps to help customers in persistent debt:
- Step one: When a customer has been in persistent debt for 18 months, firms will be required to prompt them to make faster repayments if they can afford to do so.
- Step two: If a customer is still in persistent debt after a further consecutive 18-month period, firms must take steps, such as proposing a repayment plan, to help them repay their outstanding balances more quickly.
- Step three: Customers who don't respond, or who confirm that they can afford to repay faster but decline to do so, would have their ability to use the card suspended.
However, the FCA also proposes that where a customer cannot afford any of the options proposed to repay their balance more quickly, firms must take further steps to assist them to repay the balance in a reasonable period.
These further steps may include reducing, waiving or cancelling any interest or charges. It is expected that firms would normally suspend use of the customer's card during this period.
Long-term savings of up to £13 billion are predicted
Customers in persistent debt are profitable for credit card firms, who don't routinely intervene to help them. But the FCA expects its proposed measures to lead to savings for customers from lower interest payments as a result of faster repayment.
It's been predicted that by 2030 the savings to customers would reach a total of between £3 billion and £13 billion, depending on how firms and customers respond. The FCA expects that the savings would peak in the first few years of the proposed rules being in place, at between £310 million and £1.3 billion a year, before reducing as fewer customers get into persistent debt over time.
FCA also calls on firms to be more proactive in helping struggling customers
On top of the measures on persistent debt, the FCA is also proposing to require earlier intervention by firms in response to signs that customers are in financial difficulty – this would build on an existing rule that requires firms to monitor a customer's repayment record for signs of actual or potential financial difficulties.
Under these new proposals, it's expected that firms would do more to use the extensive amount of data available to them to identify customers in difficulty and take appropriate action.
Meanwhile, the consultation paper also sets out measures voluntarily agreed between the FCA and industry to give customers greater control over increases to their credit limits.
New customers will be given the choice of how increases will be offered, while existing customers will be given a more straightforward means of declining an increase and more choice as to how increases will be offered in future. All customers will be made aware of their existing right to choose not to receive offers of credit limit increases.
What does the FCA say?
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.
"Persistent debt can be very expensive – costing customers on average around £2.50 for every £1 repaid – and can obscure underlying financial problems. Because these customers remain profitable, firms have few incentives to intervene. We want to change this situation so that firms and customers will deal with outstanding debt more quickly, and avoid persistent debt in the first place.
"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."
Respond to the consultation online
The FCA's consultation will close on 3 July 2017. After the consultation period the regulator will consider feedback it has received. Depending on the nature of responses, it expects to publish a policy statement later this year.