Together with the measures introduced on persistent credit card debt and earlier intervention (which take effect on 1 September 2018), this is part of the FCA efforts to limit the use of credit cards for longer-term borrowing, while preserving their flexibility for millions of users.
The research builds on academic studies which have shown consumers’ choice of repayment amount can be disproportionately influenced by the contractual minimum repayment (an effect known as anchoring). This results in some consumers being more likely to make minimum repayments or repayments close to the minimum. This means they can end up paying more in debt service costs and taking longer to repay their credit card debt than they need to. While their debt may not yet be problematic, it is more expensive than it needs to be and there is some risk that it may become problematic in the future, for example, in the event of an income shock.
Key findings from the research have found:
- Manual credit card repayments: Analysis of the credit card market study dataset has shown the majority of credit card repayments are made manually and not by direct debit. The FCA undertook two online hypothetical experiments and found removing the minimum repayment amount from the manual repayment screen (de-anchoring) had a dramatic positive effect, significantly increasing the value of repayments made.
- Repayments by direct debit: used a field trial to test removing the option to pay the minimum repayment amount from the direct debit set up screen. Whilst this measure caused many more people to choose higher direct debit amounts, as intended, surprisingly it didn’t increase overall payment amounts. This was due to two counteracting effects observed – consumers offset their higher direct debit payments with lower subsequent manual payments and some consumers did not set up a direct debit at all.
- Disclosure remedies: Using field trials, tested providing personalised information to customers with graphics showing the time and cost to repay under different scenarios. It was found that providing this information on monthly statements had no effect at all on manual repayments. Targeting this information – to consumers with a direct debit set up to only repay the minimum – caused a small increase in repayment amounts but not a consistent reduction in debt.
Given the effects the FCA observed during testing, they are considering consulting on changing the rules and guidance to mandate the removal of the minimum repayment anchor. Considering a de-anchoring measure has the potential to increase consumers’ credit card repayments where they can afford to do so whilst preserving the flexibility of credit cards, which millions of consumers value.
This is, however, an important and complex area and are committed to working with stakeholders to achieve appropriate outcomes. Therefore, FCA plan to engage with interested stakeholders in the coming months about the research findings, the practicalities of implementing such an intervention and, importantly, whether there are likely to be counteracting effects or unintended consequences of a de-anchoring measure on consumers and/or firms. The results from this stakeholder engagement will inform the FCA’s thinking in this area.
The FCA says it do not propose to mandate an increase to the level of minimum repayments (required under CONC 6.7.5R) at this time. Firms are in the process of implementing the FCA’s persistent debt and earlier intervention measures and some are responding by raising minimum repayment levels. The FCA are keen to preserve flexibility for those who cannot afford higher repayments. The FCA says it will reassess this issue once we have had time to assess the impact of the CCMS package of remedies and the industry and consumer responses to these.