Financial Conduct Authority - Help For Those in Persistent 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 eighteen month period. Customers in persistent debt are profitable for credit card firms, who do not routinely intervene to help them.

The FCA estimates that around 3.3 million people are in persistent debt, with over half (1.8 million) for two consecutive periods of eighteen months. Today’s proposals require firms to take steps to help customers repay their balances more quickly and to offer further assistance to those who can’t.

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.”

Under the new rules, firms will have to take a series of steps to help customers in persistent debt. When a customer has been in persistent debt for eighteen months, firms will be required to prompt them to make faster repayments if they can afford to do so. If a customer is still in persistent debt after a further consecutive eighteen month period, firms must take steps, such as proposing a repayment plan, to help them to repay their outstanding balances more quickly. Customers who do not 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.

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, for example by 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.

The FCA expects these measures to lead to savings for customers from lower interest payments as a result of faster repayment. By 2030 we expect that the savings to customers would reach a total of between £3bn and £13bn, 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 £310m and £1.3bn per year, before reducing as fewer customers get into persistent debt over time.

In addition to 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, building 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 is 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.

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.

Examples

• A customer who borrows £3,000 on a credit card with an APR of 19%, and only makes minimum repayments – starting at £74 per month and reducing over time – would typically take 27 years and 7 months to pay it of (assuming no further spending on the card).
• If the customer ­fixed their repayments at £74 per month rather than only making minimum repayments, they would pay it off in 5 years and 2 months.
• If they set their monthly repayment at £108 per month, they would their balance off in 3 years.