The Financial Conduct Authority (FCA) has written to credit card firms to highlight the findings of its multi-firm review of fees and charges in prime and sub-prime credit card products and firms. It shared the findings of its review with participant firms and a number of changes have been made to how customers are charged fees. This includes the removing and capping of fees and renewed communication to prevent some fees from being triggered in the first place.

The FCA says it has focused on reducing the risk of harm that flows from customers being in debt that they cannot afford to repay. Some key areas of work have included:

  • Targeted supervisory work to mitigate the risks from poor culture and practice in firms and to ensure that firms only lend to customers who can afford it.
  • Implementation of rules and guidance for credit card firms to ensure that they address the situation of customers that have been trapped in persistent credit card debt they cannot afford to repay.

The FCA has also highlighted fees and charges across a number of consumer credit sectors. The data and analysis from this piece of work raised concerns about the application of credit card fees to customers whose management of their account indicated that they might be in financial difficulty.

The review considered whether firms were appropriately identifying indicators of potential financial difficulty. For example, whether multiple missed or late payments were a sign that a customer was struggling, and where multiple fees were applied, was this being recognised by firms. The FCA found that in many cases firms were continuing to apply fees in such instances potentially making the customer’s position worse.

The FCA also found that in some cases, firms were charging such customers multiple fees in a single billing cycle. For example, customers who had insufficient funds to cover a direct debit payment would trigger a returned payment fee. If they then missed their minimum payment they could incur a late payment fee, which could result in a customer going over their credit limit and being charged an over limit fee. The FCA identified that for customers with lower credit limits, the fees and charges represented a higher proportion of the outstanding debt.

Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said “It is unacceptable for firms to ignore signs of customers struggling financially and continue to charge them fees for missed payments which they likely can’t afford.”

“Our research showed that a large number of customers were often missing payments but continuing to be charged fees.  In some cases, customers ended up being charged multiple fees as a result of each missed payment.  This may suggest that firms are not adequately identifying and dealing appropriately with signs of actual or possible financial difficulties.

‘We have fed back our findings to the firms in our sample. As a result, a number of changes have been made to the charging strategies of firms and this has led to consumer savings of over £80 million.”

The FCA is encouraging firms to consider the impact their policies and procedures in relation to fees and charges have on fair customer outcomes. For example, asking:

  • What firms regard as signs of actual or possible financial difficulties? Are (multiple) fees and charges considered as one of those signs?
  • Whether firms use system flags for customers who are repeatedly incurring fees on their account?
  • What range of actions firms take upon identifying a sign of actual or potential financial difficulty?

In response to the review, Eric Leenders, Managing Director of Personal Finance at UK Finance said “Customers showing signs of financial difficulty need appropriate support and UK Finance members take their obligations towards these customers very seriously. Firms already identify and support those in financial difficulty and we would always encourage any customer who is struggling with repayments to speak with their lender straight away.

“Since September 2018 firms have further enhanced their focus in this area, following the new FCA rules on earlier intervention. Firms have also implemented renewed communications strategies to help prevent fees being triggered in the first place.”

“Of the firms it reviewed, the FCA notes that significant changes have already been made to how fees are charged, capped and removed to deliver better outcomes for consumers.

“UK Finance and its members will work with the regulator on how best to identify and support those customers in financial difficulty and respond to their situation appropriately.”

StepChange Debt Charity is pleased to see the FCA’s letter to firms on credit card fees and charges, and the regulator’s concern about whether firms are doing enough to consider whether multiple, repeated fees and charges could be an indication of financial difficulties. Credit card debt is the most common type of consumer credit debt seen among the charity’s clients – in the first half of last year, over two-thirds of new clients had credit card debt with an average of £7,603 of credit card borrowing outstanding at the time they sought advice.

StepChange welcomes the regulator’s prompt that “Firms should consider whether their policies and procedures in relation to fees and charges result in fair consumer outcomes”, and its encouragement for firms to consider questions such as “What does your firm regard as signs of actual or possible financial difficulties? Are (multiple) fees and charges considered as one of those signs? Does your firm flag on its systems those customers who are repeatedly incurring fees on their account? What are the range of actions your firm takes when identifying a sign of actual or potential financial difficulty?”

Peter Tutton, Head of Policy at StepChange Debt Charity, said “It’s clear that reducing harm in the credit card market remains a work in progress. We’re still concerned that despite recent regulatory intervention, credit card customers can still build up a significant potential debt problem before the interventions to address persistent credit card debt kick in. Early warning signs such as regularly incurring fees and charges should be a wake-up call to the possibility of financial distress. We hope that card providers will renew their efforts to spot early signs of financial difficulty, and if firms don’t address this the regulator shouldn’t be reticent about taking further action.”

StepChange Debt Charity has specific information available for people who have received information from their card provider about their persistent credit card debt. The charity is also undertaking new client research this year about experiences of credit card debt, especially in the sub-prime card market, and hopes to publish a report on the findings in the summer.