The FCA has published a further consultation paper as part of its Credit Card Market Study (CCMS) on the 3rd March 2017.
The consultation sets out proposals for new rules and guidance to address persistent debt, requiring firms to assess whether customers are at risk of developing financial difficulties and intervene appropriately. The paper also sets out details of an industry voluntary agreement to give customers more control over credit limit increases.
It will also include an onus on firms to improve processes designed to encourage customers to repay their debt and avoid persistent debt. Where customers are not able to pay their debt in a reasonable period, firms are required to offer forbearance options.
The proposed rule on early intervention would see credit card firms required to use the data available to them to identify customers at risk of financial difficulties and take appropriate steps. This builds on the existing rule that applies to all lenders, which requires firms to monitor a customer’s repayment record for a sign of actual or potential financial difficulty.
Key points from CP17 / 10
A customer will be in persistent debt if interest and charges are greater than the repayment of their actual borrowing over an 18 month period. This is a different definition to that used by the FCA in their final Credit Card Market Study report in 2016.
Under the proposals, firms will have to take a series of steps to help customers in persistent debt:
At 18 months – Customers must be made aware that increasing their rate of repayment will reduce their cost of borrowing and that continued low payments for another 18 months could lead to a suspension of the card which would be reported to the credit reference agencies
At 27-28 months – If the customer’s repayment behaviour indicates that the persistent debt situation could continue for another 18 months, firms would need to repeat the steps taken at 18 months
At 36 months – If a customer is 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 the balance more quickly. They must write to customers proposing repayment plan options based on paying the amount over a reasonable period (eg, 3-4 years). Customers will also be advised that their card may be suspended if they do not engage with the lender.
If a customer says they cannot afford any of the proposed payment options, firms must assist the customer to repay – which may include reducing the interest rate charged. The FCA expects that the firms may also need to suspend use of the card.
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 interventions would continue until the customer has repaid the balance they had at 36 months.
This approach is intended to ‘rebalance incentives’ on firms and customers. The FCA expects that firms will want to encourage customers to repay more quickly to avoid the costs of the 36 month intervention, and that customers will want to retain the use of their card where possible.
Based on the data it has collated, the FCA believes there are around 2.2million accounts in persistent debt for two consecutive 18 month periods at any given time. By 2030, the FCA expects that the savings to customers would reach a total of between £3bn and £13bn. The savings are likely to 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 experience persistent debt over time.
The FCA intends to build on the current regulatory requirement for firms to monitor a customer’s repayment record for signs of actual or potential difficulties. Early intervention in these scenarios could decrease the number of customers falling into persistent debt. Firms must:
- Use the data they hold (e.g. spending patterns, changing payment behaviour and Credit Reference Agency data) to assess whether customers are at risk of potential difficulties
- Take appropriate action
- 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
Credit Limit increases
A number of voluntary remedies will be adopted by credit card firms to allow customers more control over their credit limits.
New customers – will all 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.
All customers will still be able to ask for a credit limit increase at any point.
In addition, credit card firms have undertaken to make changes to how they offer unsolicited credit limit increases (UCLIs) to customers who are making systematic minimum repayments. After eight months of making minimum repayments customers will not receive a credit limit increase unless they expressly opt in (and the other requirements, including in relation to the credit worthiness assessment, are met). After 14 months of minimum repayment, customers will no longer receive UCLI offers.
In addition, where customers have high credit limit utilisation over an extended period, firms will not be permitted to increase the limit of a customer without the customer’s express agreement. The detail of these metrics will be subject to further discussion between the FCA and industry.
Regulatory next steps
The FCA has requested industry input on the proposals by the 3rd July. Once the regulator has considered the feedback they will publish a policy statement.
Considerations for firms
Firms will need to review their policies and procedures to ensure that they are in line with industry expectations and to ensure they are identifying customers who may be in struggling with their repayments.
The industry has committed to implement the full credit limit increases remedy within 12 months across the largest firms, representing circa 85-90% of accounts. This will rise to 100% by 15 months. In relation to restrictions on offers of credit limit increases, the industry has committed to incorporating new requirements across 70-80% of products within six months, with full coverage coming within the year. Some firms may also be able to implement the opt-in requirements earlier.
Another challenge for credit card firms will be their activities relating to earlier intervention, and firms can benefit from assessing their current approach and whether it is likely to fall short of these standards.
With the above in mind, firms will need to consider what system changes they require to be able to monitor their customers effectively. Alongside this, they must ensure the criteria under which they identify customers as experiencing difficulty are consistent and applied.