PS18 / 4 - credit card market study: persistent debt and earlier intervention feedback to CP17 / 43 and near final rules
On 27th February 2018, the Financial Conduct Authority (FCA) released its final policy statement on the new rules for the credit card market.
The FCA produced a comprehensive study of the credit card market by analysing over 34 million credit card customer accounts, over a period of five years. As a result, the new rules were introduced to provide more protection for credit card customers in persistent debt or at risk of financial difficulties. The FCA made its original proposals in April 2017 and estimates the changes will save consumers between £310 million and £1.3 billion a year.
Christopher Woolard, Executive Director of Strategy and Competition said:
“These new rules will significantly reduce the numbers of customers with problem credit card debt. Credit cards offer customers flexibility to manage their finances and repayments, but with this there is a risk customer can build up and hold debt over a long period of time – without making much headway on the outstanding balance.”
“Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly, are given help.”
The rules will require firms to take a series of escalating steps to help customers that make low repayments over an extended period. The key points of the policy statement are:
- Customers that have been in persistent debt for over 18 months - lenders must contact customers and prompt them to change their repayments. They must also notify the customer that their credit card may be suspended if they follow the same repayment pattern. They must also refer to debt advice available.
- Customers that have been in persistent debt for over 27 months – lenders must ensure that customers are sent a reminder of the information above.
- Customers that have been in persistent debt for over 36 months - lenders must offer customers a reasonable way to repay their balance. If customers are unable to pay, firms must show 'forbearance' and may have to reduce, waive or cancel any interest, fees or charges.
- The content of communications – firms have been given flexibility to tailor the content, language and tone of the communications to customers that meet the definition of persistent debt.
- Credit cards can be suspended and reported to Credit Reference Agencies (CRA) - the FCA has taken a balanced and flexible approach that allows lenders and CRAs to determine how suspension should be reflected on the customer credit files. The rules will now require firms to explain to the customer what the potential consequences of continuing to make low repayments are and steps that firms might take with any possible impact on credit files.
- Repayment period – the FCA considers that a reasonable period should be no more than 3 – 4 years, for customers to be able to repay outstanding balances.
Regulatory next steps
The new rules take effect on 1st March 2018. However, the FCA has extended the transitional period so that firms have until 1st September 2018 to comply. The FCA also considers that this may enable some firms to adopt a phased approach to implementation.
Consideration for firms
Firms will need to conduct a review of their existing policies and procedures to identify what work is required to ensure compliance with the new rules by 1st September 2018. Firms will need to start preparing and identifying how many customers are currently in persistent debt, and how long they have been in this position.
Another impact to consider is communication with clients. The FCA has given firms more flexibility as to how they keep their customers informed. The increased flexibility will require firms to review and ensure that any communications are clear, fair and not misleading. Information must be provided at the necessary times to ensure customers are informed. Firms have just over six months to implement the new rules to actively monitor customers by ensuring they are contacted at the 18-month intervention stage and appropriate interventions are put in place.