The Financial Conduct Authority (FCA) has proposed new rules to help customers who are in persistent credit card debt. This follows the FCA’s study of the UK credit card market, which found significant concerns about the scale extent and nature of problem credit card 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 canceling 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.

Caroline Siarkiewicz, Head of Debt Advice at the Money Advice Service said “Helping consumers remove themselves from persistent and, in some cases, unmanageable levels of debt is vital to improving the financial security of millions across the UK. Research by the Money Advice Service shows that nearly eight million people across the UK are over-indebted and credit card debt is the second most cited reason for people seeking free debt advice funded by the Money Advice Service. With the information they hold on their customers finances, the credit card industry is well placed to identify and support people in or at risk of problem debt.”

Mike O’Connor, Chief Executive of StepChange Debt Charity, said “The FCA needs to ensure that consumers are properly protected and our concern is that these proposals don’t go far enough. Credit card debts remain the biggest single category of problem debt for our clients, with average debts of over £8,000. We welcome moves to tackle persistent debt, but we are concerned that these proposals will not fix the central issue that credit cards, which are supposed to be a short-term form of borrowing, often become long-term and expensive debt.

“The proposals do not address the fundamental question of how credit cards trap people in persistent debt. These measures will still potentially leave people paying back substantial amounts over extended periods of time. Our clients tell us that unsolicited credit card limit increases are linked to deepening debt problems. The Bank of England is looking at lending standards and 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.

“Two key questions remain. How will these proposals help prevent people from falling into persistent debt? And will these interventions do enough to get people out of long-term debt?”