Industry responds to FCA's proposal on persistent credit card debt

By Benjamin Salisbury

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The Financial Conduct Authority (FCA) published a proposal on 3 April 2017 to "tackle persistent credit card debt and encourage earlier intervention". In other words, the proposal asks credit card issuers to help customers who have paid more in interest and charges than they have toward the principal sum they owe over an 18-month period.

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FAQs on FCA proposal for helping consumers with persistent credit card debt

The FCA is suggesting new rules for credit card companies to help those with "persistent debt". Here's what you need to know.

Here's what industry experts think of the proposal so far.

Summary of the FCA's proposal
The proposal follows on from the conclusions of the FCA's market study in July 2016, which identified concerns about the "scale and persistence of potentially problematic debt".

Under the proposal, lenders must be more proactive in helping customers repay credit card debt. If a customer has been in "persistent debt" for 18 months or longer, credit card lenders must contact them about repaying the debt quicker. If the customer remains in persistent debt for a further 18 months, lenders must take proactive steps, such as suggesting a repayment plan.

If consumers don't respond, their credit card account could be suspended. If they can't afford to repay, the credit card lender may have to take further steps, such as waiving, cancelling or reducing interest and other charges for a period.

Response to proposal mostly positive
Overall, the credit card industry has broadly welcomed the proposal.

"We welcome the FCA's considered proposals and support their view that the overall package is robust, and that the combined effect will address the concerns it has found," Richard Koch, head of policy at the UK Cards Association, said in a statement.

"We are pleased the FCA has recognised the industry is well-placed to offer solutions that can be practically implemented," Koch said. "The agreement on unsolicited credit limit increases provides customers with the ability to make an informed choice around how they prefer their limit to be managed, providing them with greater control, while ensuring that where a customer is at risk of unaffordable borrowing exclusion rules will apply."

Lloyds Banking Group responded positively toward the proposal as well.

"The FCA's consultation paper is welcome progress for the credit card industry," a spokesperson for Lloyds Banking Group said in an emailed response to questions. "We have already successfully implemented a number of the suggested remedies, including SMS service alerts to better inform customers who are coming to the end of a promotional period or nearing their credit limit.

"We are committed to responsible lending and will not lend to customers who we believe will get into financial difficulty as a result."

Not everyone on board
However, StepChange debt charity is concerned that customers who fall just outside of the 18-month period will remain in trouble.

The FCA's projections suggest borrowers could still be repaying credit card debt for more than 10 years, with the proposal taking them just outside the definition of "persistent debt", Peter Tutton, head of policy at StepChange, said in an emailed response to questions.

"Consumers who can't pay more could still be repaying credit card debt over seven years," Tutton said. "Credit card borrowing is meant to be short-term and is priced relatively highly as a result."

Tutton also thinks the FCA should have focused on changes to "contractual minimum payments that are so very low".

StepChange also feels the proposals don't go far enough and are only linked to new credit cards.

"Credit card debts remain the biggest single category of problem debt for our clients, with average debts of over £8,000," Mike O'Connor, chief executive of StepChange, said in an emailed response to questions.

"The proposals do not address the fundamental question of how credit cards trap people in persistent debt," O'Connor said.  "The FCA should have sent a clear message to firms that credit should be bought and not sold by banning all unsolicited credit limit increases. New protections have only been introduced for new credit cards when they should exist for all accounts."

Some are also worried that the proposals could have far-reaching consequences for credit scores, though the devil will be in the details.

"Measures designed to encourage people to tackle persistent debt are likely to benefit their credit scores in the medium- to long-term," James Jones, head of consumer affairs at Experian, said in an emailed response to questions.

"Although the precise details have yet to emerge, it is possible that some of the interventions cited could be directly visible on people's reports," Jones said. "For example, an alternative repayment arrangement could also have implications for creditworthiness calculations.

"If the regulator imposes rules to tighten lending criteria then this could have widespread implications for everyone."

FCA taking all responses into consideration
The FCA is consulting on the new proposals until 3 July 2017.

"The FCA will take into account the responses we receive before making a decision on the final detail of new rules," an FCA spokesman said in an emailed response to questions.

"We intend to put in place new rules later in the year," the spokesman said. "We propose that the rules will come into effect three months after they are made."

And if the proposals become rules, they will be binding for card issuers, the spokesman said.

The FCA acknowledges that "the credit card industry, including the UK Cards Association, have put in place voluntary measures" already to help customers who have problematic credit card debts.

However, the FCA said that it could introduce further measures if it decides the industry is not doing enough.

"We will review whether the underlying policy concerns we had before are addressed," the FCA spokesperson said. "If they are not, we may consider rules in the future."

Published: 18 April 2017