FAQs on FCA, Labour proposals for helping consumers with persistent credit card debt

By Marianne Curphey

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At its recent Party Conference in Brighton, the Labour Party promised to cap interest on credit card debt so that consumers never pay more in interest than the amount they originally borrowed.

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Industry responds to FCA proposal

Here's what industry experts have to say about the FCA's proposal on persistent credit card debt.

The pledge follows comments made by the Financial Conduct Authority (FCA) in April 2017 about the 3.3 million people in the UK who have been struggling to repay credit card debt for more than 18 months.

These borrowers, classed as having "persistent credit card debt", owe, on average, £3,464 per person.

In July 2016, the FCA published its market study, which found that while the market works for most consumers, there was significant cause for concern about the "scale and persistence of potentially problematic debt".

The FCA published an earlier proposal to "tackle persistent credit card debt and encourage earlier intervention". The proposal says credit card firms need to work more closely with people in debt and help them before their debt becomes long-term and problematic.

This suggested rule change from the FCA could result in credit card companies reducing, rescheduling or even cancelling any interest or charges for customers with serious debt, and the FCA estimates that lenders would lose up to £1.3 billion per year as a result.

What is ‘persistent debt'?
The FCA has identified a section of the public who struggle with "persistent debt" - that is, people who have paid more in interest and charges than they have repaid toward the principal over an 18-month period.

"Persistent debt can be very expensive - costing customers on average around £2.50 for every £1 repaid - and can obscure underlying financial problems," Andrew Bailey, FCA chief executive, said in a statement.

"Because these customers remain profitable, firms have few incentives to intervene," Bailey said. "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."

At present, credit card companies are not obliged to do anything to help them clear this debt. Under the new proposal, firms would have to identify and intervene to help their customers.

What are the FCA's proposed rules?
The FCA proposes that credit card companies use the data available to them to identify consumers who are at risk of financial difficulties. This data includes repayment histories, among other statistics that credit card companies already keep on file.

  • When a customer has been in "persistent debt" for 18 months, credit card companies must prompt them to make faster repayments.
  • If the consumer remains in persistent debt for another 18 months, the credit card firms must take further steps, such as proposing a repayment plan to help them repay their outstanding balances more quickly.
  • If consumers do not respond to firms' attempts to help, or if they can afford faster repayment but refuse to do so, the card company could suspend the credit card.
  • If a consumer cannot afford any of the proposed options, the credit card firms must assist them in repaying the balance in a reasonable period. They could, for example, reduce, waive or cancel interest and other fees. However, the customer's ability to use the card would likely be suspended until the account is current.

What is Labour proposing?
Shadow chancellor John McDonnell proposed a "total cost cap" on credit cards of 100% of the original sum borrowed and said that a Labour government would try to tackle "the persistent debt spiral" that traps many families.

This is similar to rules the FCA imposed on the UK payday loans sector in 2015.

McDonnell said he was "calling upon the government to act now to apply the same rules on payday loans to credit card debt".

"No one will ever pay more in interest than their original loan," McDonnell said. "If the Tories refuse to act, I can announce today that the next Labour government will amend the law."

In response, Chief Secretary to the Treasury, Conservative MP Liz Truss, said the FCA is now ensuring credit card companies do more to help customers clear debt, and that new rules to ban rip-off credit card charges would be introduced in January 2018.

Labour's proposal comes after both Rachel Reeves, the Labour chair of the business select committee, and Frank Field, the Labour head of the work and pensions select committee, called for the government to set up an independent public inquiry into the total debt of £200bn currently owed by UK households.

FCA's Bailey said he was particularly concerned about the number of people who need loans to cover basic costs because they work in the gig economy and don't have guaranteed regular hours and require credit to aid with cashflow.

How much money would be saved?
The FCA says by 2030, it expects savings to customers would reach a total of between £3bn and £13bn, depending on how firms and customers respond.

In addition, consumers will have more control over their credit limits.

When would the rules take effect?
With the consultation period closed, the FCA will review feedback and will likely publish a policy statement later in 2017.

Can I do anything now?
For more information, you can visit the FCA website and the FCA's page regarding the consultation on persistent debt and earlier intervention remedies.

If you are struggling with debt you can contact Citizens Advice for help or contact debt charity StepChange.

Source: FCA

See related: Extreme, creative ways to clear debt, 4 wrong ways to pay credit card debt, Old debt? You may be covered by statute of limitations

Updated: 3 October 2017