As this week’s Bank of England figures show, credit card balances continuing to surge, the Trust’s policy manager Meg van Rooyen reviews the Financial Conduct Authority’s new proposals on persistent debt and early intervention.
The latest lending figures from the Bank of England, out this week, show credit card balances are continuing to grow by half a billion pounds each month. With consumer credit across the board surging by 10 per cent a year, here at the Trust we continue to be concerned that many households are leaving themselves exposed to financial difficulty if their circumstances change.
Persistent credit card debt is a key feature of the UK’s household debt problem, with the FCA finding 1.6 million people repeatedly paying only the minimum payments on their credit cards.
In April 2017, the Financial Conduct Authority (FCA) made a series of proposals to address the issue of persistent credit card debt, as part of its overall package of remedies from its credit card market study.
What is the wider remedy package?
The voluntary industry led package of remedies is coming into operation from 2018. We hope these measures will help to change consumer behaviour in relation to how they manage their credit card balances. These cover:
- promotion expiry, notifying customers when a promotional deal is about to end so they can consider their options, including shopping around from April 2018;
- payment date changes, informing customers that they can change the date their payment is due, helping them to manage their finances from April 2018; and
- borrowing prompts, a digital notification to inform customers when their balance is getting close to their credit limit, helping them to avoid over limit charges from July 2018.
The FCA is also carrying out behavioural trials with firms to test the effect of different ways of presenting repayment options to encourage people to repay more if they can.
What is the FCA proposing on persistent debt?
While credit card companies are generally very good at intervening when customers miss a payment, including referring them to free debt advice, there is a need to provide earlier support to borrowers ‘bumping along the bottom’ paying just the bare minimum each month.
As a result, the FCA wants to see lenders using the data available to them to assess whether customers are at risk of potential financial difficulties, and to take appropriate action.
The FCA defines ‘persistent debt’ as customers paying more in interest and charges than the principal over an 18 month period. It proposes that firms must take specific steps after 18 and 36 months to help people pay back the balance more quickly. These include warnings to consumers that the use of their card could be suspended, and making a report to a credit reference agency. Firms must propose repayment plan options “based on repaying their debt over a reasonable period, usually between three and four years.”
We have been sharing our thoughts on these proposals with the FCA. Here’s a quick tour of a few of our concerns (you can read the full response here).
Early engagement is key. The messaging around credit cards as a suitable product for borrowers needs to be fundamentally reconsidered. Lenders have to consider who the product is suitable for and to be more directive about their expectations in the messaging to potential card users. We are concerned that the early intervention measures proposed may be too late in the process. Card users may well be surprised to find after 18 months of use that they are to be penalised for what they believed was appropriate use of their card.
The lender must have a strong incentive to minimise the risk of lending irresponsibly or offering too high a credit limit. The emphasis should be on lenders to help their customers into a managed repayment process at the 36 month point, not to go through a default process. This means a change in the product price and structure to become a longer-term contract.
We are particularly concerned about the effects on consumers where as a result of this scheme, they have their terms and conditions changed part way through the contract. People stand to suddenly lose their credit card flexibility when they believed themselves to be complying with contractual terms and conditions to use the card as they wished.
The FCA needs to make sure their requirements on firms are robust in relation to messaging on increasing credit card payments. We do not want to see an outcome where consumers may misinterpret communications on increasing credit card payments, and, as a result prioritise their non-priority credit debts over their priority debts such as rent and council tax.
The regulator needs to be alive to potential unintended consequences such as consumers prioritising the payment of a cheaper credit card at a higher instalment payment over a more expensive card, or increasing payments in one area that undermine other payment arrangements. In such cases, consumers would be better off seeking holistic debt advice instead.
We are not convinced that the forbearance measures are drawn up tightly enough. These need to set out in a prescribed form the circumstances under which firms can suspend access to a card, and register the account with credit reference agencies as suspended or defaulted. We would also welcome greater prescription as to whether interest and charges should be frozen or limited automatically as part of the new higher payments.
What could the FCA do next?
The FCA needs to examine if the product design for credit cards is functioning correctly, particularly when you consider the ratio between what is affordable to repay over a “reasonable period” and the credit limit offered. We would particularly like to see more work done in the area of multiple credit card use, and particularly how multiple cards affect the cycle of debt. We have also long argued that consumers should have the ability to ‘opt in’ to an increase in their credit limits. The FCA could also explore whether there should be an increase in the minimum payment threshold on credit cards following the outcome of the behavioural nudge trials.
In these uncertain economic times, with credit card balances continuing to rise, now is an ideal time for the FCA to take further action to address the problem of persistent debt, and we look forward to seeing the end result. You can read our thoughts in full in our consultation response here.