FCA to extend credit card and loan payment freeze measures – industry reaction

The Financial Conduct Authority (FCA) has announced proposals to extend the payment freeze of consumer credit products for people whose finances have been negatively impacted by Covid-19.

The proposals outline the support firms would be expected to provide credit card and other revolving credit (store card and catalogue credit) and personal loan customers coming to an end of a payment freeze, as well as those who are yet to request one.

For customers yet to request a payment freeze or an arranged interest-free overdraft of up to £500, the time to apply for one would be extended until 31st October 2020.

For those who have already taken up support and are still experiencing temporary payment difficulties due to coronavirus, firms would continue to offer support with options including a further payment deferral or reducing payments to an amount the customer can afford for a further three months.

The proposals include:

• At the end of a payment freeze, firms should contact their customers to find out if they can resume payments – and if so, agree a plan on how the missed payments could be repaid. If customers can afford to return to regular repayment it is in their best interest to do so.
• Anyone who continues to need help gets help – for customers still facing temporary payment difficulties as a result of coronavirus, firms should provide them with support by reducing payments on their credit card and personal loans to a level they can afford for 3 months.
• Support for overdraft customers – allowing customers who are negatively impacted by coronavirus and who already have an arranged overdraft on their main personal current account, to request up to £500 interest-free for a further 3 months, and providing further support in the form of lower interest rates on borrowing above the interest-free buffer and repayment plans for those who would benefit from them.
• Extending the time the scheme is available to people who may be impacted at a later date – customers that have not yet had a payment freeze or an arranged interest-free overdraft of up to £500 and experience temporary financial difficulty, due to coronavirus, would be able to request one up until 31 October 2020.
• Where a customer needs further temporary support to bridge the crisis, any payment freezes or partial payment freezes offered under this guidance should not have a negative impact on credit files. However, consumers should remember that credit files aren’t the only source of information which lenders can use to assess creditworthiness.

When implementing this guidance, firms should be particularly aware of the needs of their vulnerable customers and should consider how they engage with them. Firms should also help customers understand the types of debt help and money guidance that are available and encourage them to access the resources that can help them.

In April, the FCA set a temporary general expectation across the market that firms should ensure all overdraft customers are no worse off on price when compared to the prices they were charged before the recent overdraft rule changes came into force (those changes benefitted most customers). The FCA does not propose to extend this temporary measure across the whole market. However, overdraft customers who are financially impacted by coronavirus will continue to be able to request a reduced interest rate on any additional borrowing in excess of £500. The FCA will continue to monitor overdraft pricing.

This guidance only applies to credit cards and other retail revolving credit, such as store cards and catalogue credit, personal loans and overdrafts. It does not apply to other consumer credit products, such as motor finance, high-cost short-term credit, rent-to-own, pawnbroking and buy-now pay-later, which are covered by separate guidance which will be updated soon.

Christopher Woolard, Interim Chief Executive at the FCA, said “We have been working closely with other authorities, lenders and debt charities to support consumers in the current emergency. The proposals we’ve announced today would provide an expected minimum level of financial support for consumers who remain in, or enter, temporary financial difficulty due to coronavirus. Where consumers can afford to make payments, it is in their best long-term interest to do so, but for those who need help, it will be there.”

Responding to the announcement Richard Lane, Director of Policy and External Affairs at StepChange, said “The extension of payment holidays for credit cards, overdrafts and other forms of consumer credit will come as a huge relief for the many thousands of households struggling to keep up with credit repayments during this pandemic. But unless further long-term support measures are put in place, this relief will be short-lived. Our own research has found that 4.2 million people have borrowed to make ends meet since lockdown began, storing up a tsunami of £6bn of debt that is set to worsen if left unchecked.”

“With many households wondering how they will catch up with deferred payments, the FCA must not let payment holidays end with a cliff edge to debt. Withdrawing help from those who need more time to recover risks exposing them to avoidable long-term financial difficulty.”

“With people also falling behind on rent, council tax and fuel bills, the Government needs to build up dedicated hardship funds for those forced into debt thanks to Covid-19. In the long-term, more viable alternatives to high cost credit must be made available to prevent those on the lowest incomes falling into a debt spiral.”

Eric Leenders, UK Finance Managing Director, Personal Finance, said “The banking and finance industry has a clear plan to help the country through these tough times and is committed to providing ongoing support to those customers who need it. The FCA draft guidance follows extensive collaboration between the industry and regulator and provides welcome clarity on the potential next steps available to consumer credit customers.”

“The industry will be responding to these draft proposals and looks forward to the regulatory guidance being finalised swiftly to ensure both borrowers and lenders can plan ahead to ensure customers can have some peace of mind regarding the consequences of Covid 19 on their money.”

Stephen Haddrill, Director General of the Finance & Leasing Association said “Helping customers through this difficult period remains a priority for lenders, but with more parts of the economy reopening, lenders also have a responsibility to transition customers back to regular payments where possible. The FCA’s advice to customers to consider carefully if a further payment deferral is really the best option is important.”

“The cost of forbearance is already at unprecedented levels.  The FLA has sought urgent assistance from Government to enable lenders to continue to provide affordable lending to consumers and businesses through the crisis and during the recovery. The FCA, the Treasury and the Bank of England must ensure their approach to forbearance and support for lenders are developed together.”

Joanna Elson OBE, Chief Executive of the Money Advice Trust, said “The FCA is right to give more time for people who are struggling to make credit card and loan payments as a result of Covid-19, and the extension of interest-free overdrafts for a further three months is also welcome.”

“The financial shock to households that the outbreak has caused is like nothing we have seen before, and we expect debt problems to increase significantly in the months ahead.  We are pleased that these measures apply not only to customers who have already taken up support but those who will, unfortunately, become affected in the coming months.”

“While these measures clearly cannot last forever, many people are going to need support beyond even this extended period – and we need to make sure that these customers get the support and advice they need as their finances recover from the outbreak.”

Alastair Douglas, CEO of TotallyMoney, said “TotallyMoney welcomes the extended support for those who might be in financial difficulty as a result of coronavirus.”

“Those worried about needing a payment holiday at a later date will be pleased to hear they can apply until the 31st of October. However, it’s important to understand that interest will still be added during a holiday, so choosing to reduce payments, rather than stop altogether, could be a better option.”

“For example, on the average household credit card balance of £2,595, the interest accrued at the average rate of 20.77% APR over a six month period will be £256.79*

“For those already on a payment holiday, now is the time to assess whether you can restart your payments, or if you need to apply for the extension. Whichever option you choose, it’s important to discuss your situation with your lender, to find the best solution for you. There are different options available depending on your circumstances”.

“Having the choice to extend a payment holiday is an attractive option for many. But, as with the initial payment holiday, interest is still added, which makes the overall debt and repayments more expensive. If you can, it’s best to start making repayments.”

“Amid the coronavirus crisis, customers on a payment holiday should check their free credit score and report regularly to see if their payment holiday has been recorded properly. If it shows a missed payment, they should raise this with the lender to make sure it doesn’t happen again next month.

John Crossley, Director of Money at comparethemarket.com, said “The FCA’s proposal to extend interest-free overdrafts is to be welcomed and will benefit those struggling financially as a result of the pandemic. Our Financial Confidence Tracker shows that over a fifth of UK households are worried about being able to pay their bills over the coming weeks as the economic impact of coronavirus continues to bite. These measures should help provide some relief.”

“We support the regulator’s view that credit card providers should continue to adopt a pragmatic and flexible approach to understanding a customer’s ability to make payments on a case-by-case basis. The fact that the FCA has stated payment freezes should have no impact on consumer credit ratings will help ease some pressure from those who are understandably concerned about their household finances.”

Claudia Nicholls, Money Spokesperson at MoneySuperMarket, said “The further measures of support announced this morning by the FCA for consumer credit customers are welcome. But it’s important to stress that all these measures are temporary and don’t solve the longer term challenges faced by many borrowers.”