FCA announces new credit card rules

The Financial Conduct Authority (FCA) has today published its final policy statement on new rules for the credit card market. The FCA estimates the changes will save consumers between £310 million and £1.3 billion a year in lower interest charges.

The new rules come into force on 1 March 2018, but firms have until 1 September 2018 to comply.  The changes will provide more protection for credit card customers in persistent debt or at risk of financial difficulties.

The changes are being introduced following a comprehensive study of the credit card market.  The study analysed the accounts of 34 million credit card customers over a period of five years, and surveyed almost 40,000 consumers.

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 customers 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.”

FCA figures show that customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing. There are a total of 4 million accounts in persistent debt and firms have few incentives to help these customers because they are profitable.

Under the new rules firms will be required to take a series of escalating steps to help customers who are making low repayments over a long period, beginning when the customer has been in persistent debt over 18 months.  After this time firms need to contact customers prompting them to change their repayment and informing them their card may ultimately be suspended if they do not change their repayment pattern.
Once a consumer has been in persistent debt for 36 months, their provider will have to offer them a way to repay their balance in a reasonable period.  If they are unable to repay the firm must show the customer forbearance.  This may include reducing, waiving or cancelling any interest, fees or charges. Firms who do not comply with the new rules could be subject to action by the FCA.

Credit card firms have also agreed to voluntary measures, which will give customers control over increases to their credit limit. Under the measures agreed by credit card firms customers can opt-out from receiving automatic credit limit increases.  Customers in persistent debt for 12 months will not be offered credit limit increases, this should result in around 1.4m accounts per year not receiving such offers.

Responding to the new rules for the credit card market, Richard Koch, Director of Cards at UK Finance, said “Today’s announcement is an important outcome for consumers. Alongside the voluntary measures devised by financial providers, these rules will reduce the cost of borrowing by encouraging individuals to pay back their card balances quicker, where they can afford to do so. We will continue to work with the regulator to ensure the credit card market remains competitive, innovative and responsive to the needs of all its customers.”

Debt charity StepChange Debt has welcomed the FCA’s policy statement today but urges the regulator to keep a close eye on the effectiveness of its new requirements, especially for new borrowers.

The charity believes the steps being taken to address the problem of persistent debt among existing borrowers need to be matched by action to reduce the risk for new borrowers of building up the same problems. New rules will take effect in March and firms must implement them by September – but it could still be years before people currently building up persistent debt see the benefit.

The charity believes that under the FCA’s plans, there is a welcome onus on firms to help customers with persistent credit card debt to take steps to pay more than their minimum requirement. This will enable them to clear their debt in the medium to long-term rather than risk it building up indefinitely. However, the proposals fall short of requiring firms to change the way that they offer credit card borrowing to new borrowers. The risk of building up expensive, long-term debt remains. Among clients of StepChange Debt Charity, two thirds have credit card debt owing an average of around £8,000. Credit card debt accounts for around 40% of all the debt the charity deals with.

Peter Tutton, Head of Policy at StepChange Debt Charity, said “We welcome the FCA’s recognition that solutions are needed for the 3.3 million people trapped in persistent credit card debt. But we remain concerned that the FCA has not yet taken adequate steps for the flow of new borrowers who may be heading towards persistent debt. There is a need to break the cycle of firms allowing customers to build up expensive long-term debt on what is meant to be a short-term borrowing facility. The new rules do not address the continuing risk that firms will allow new profitable customers to rack up expensive debt for a long period – only to inflict unattractive compulsory action on them further down the line. The regulator will need to keep this under scrutiny. The FCA says it plans to review the effectiveness of the new rules in 2022 or 2033 but we would urge earlier intervention if needed.”

Jane Tully, director of external affairs at the Money Advice Trust said “With 4 million accounts in persistent credit card debt the FCA are right to take action in this area. Nearly one in three callers to National Debtline report having a debt relating to credit cards. Although the new rules could have gone further they do outline a number of changes and requirements on firms designed to support people struggling with persistent credit card debt.”

“We understand that it will take some time to assess the effectiveness of the measures as a whole, but it will be crucial that the FCA closely monitors the changes and the industry’s voluntary remedies such as those on credit limit increases, taking early action where necessary. We also look forward to hearing from the FCA on potential behavioural remedies such as increasing minimum repayments to ensure credit card debt is paid down in a more reasonable period.”

Gillian Guy, Chief Executive of Citizens Advice, said “We welcome the announcement by the FCA, confirming new protections for people struggling with problem credit card debt. It shows they recognise the risks lenders are putting on credit card customers by enabling them to run up debt they cannot afford.

“But while these new rules will go some way to address the problems consumers are facing with credit card debt, irresponsible offers of further credit still make it difficult for people to stay on top of their finances. That’s why lenders should not be able to increase the credit limit of any customer without their express permission – not just those who’ve been in persistent debt for a year – in order to help more people avoid getting trapped in a spiral of debt.”

Georgie Frost, consumer advocate at GoCompare, said “At last, the FCA is addressing the issue of automatic credit card limit increases for those in persistent debt, something we know only increases financial problems for those already struggling. But why should all other consumers have to actively inform their card companies that they don’t want their limit to go up? We know from our own research into consumer behaviour that the rate of those consciously opting-out will be lower than if they were asked to consciously opt-in. For most people credit cards are another useful tool to manage their finances and will not be tempted by the extra cash. But for those who are just about keeping their heads above water, the extra money could be seen as a lifeline, but will only delay them from seeking much needed help at an earlier stage. The default should be to not increase credit limits without express permission, for everyone, rather than to assume an increase will be welcomed unless indicated otherwise.”

“Three years is still a long time to be in persistent debt before any meaningful action plan is proposed. How long will it actually be before a customer gets relief, not only financially but psychologically? Problem debt is a significant contributor to mental health issues and it would be good to see help come sooner for people only just managing to keep their account within the terms and conditions.”

“Finally, it remains to be seen how the credit reference industry will react to someone being classified as in ‘persistent debt’ even if they are keeping within their card Ts&Cs. Will credit card issuers report this categorisation to credit reference agencies? Will customers be pushed to default by credit card issuers following FCA rules by encouraging repayment arrangements outside of their standard terms and conditions? If a customer is tagged as being in persistent debt, and that subsequently impacts their credit score, a well-intentioned move by the FCA may well lead to even greater problems for customers as they struggle to get prime rates for other forms of credit such as personal loans and mortgages in the future.”