FCA introduces new rules to protect those in credit card debt

21 March 2018   By Angela Moran

From March 1st the new rules came into force in an attempt to help consumers who are in persistent debt.

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Credit: Piotr Swat/Shutterstock.com

The changes are being brought in following an extensive FCA study into the credit card market, which analysed the accounts of 34,000 credit card holders over five years and surveyed nearly 40,000 customers.

The watchdog found that around three million customers (or around four million accounts) with significant and persistent debt pay on average £2.50 in charges and interest for every £1 that they borrow, meaning that it is extremely unlikely that they will ever repay the capital.

The fact that credit card companies have done very little to help these customers get out of debt comes as no surprise, seeing as they significantly contribute to credit card company profits.

Firms will be given until September 1st to comply with the new rules because of the required changes to their systems.

What are the new rules?

Although the FCA acknowledges that the flexible nature of credit cards can be positive, allowing consumers to bring spending forward and stagger repayments over an affordable period of time, it is this flexibility that allows people to build unsustainable amounts of debt that they cannot repay.

Therefore, to tackle the problem the FCA now requires credit card companies to take escalating steps to help consumers in persistent debt, starting when a customer has been in this kind of debt for 18 months. This means that a customer has paid more in total in fees and charges over an 18-month period than they have paid towards the original capital borrowed.

At 18 months firms must contact customers in this position with a prompt to change their repayment schedule, reminding them of the benefits of faster repayment. They must also include a warning that their card may be suspended if they don't change how they repay their debt.

At 27 months a reminder of this information will be sent out to customers again if they have not taken any action to amend their repayments.

Once consumers have been in persistent debt for 36 months, credit card companies must offer them a way to repay their outstanding balance in a reasonable amount of time.

Importantly, if the customer is truly unable to repay the capital, the credit card company must not apply punitive measures. Rather, they must help the customer by either reducing, waiving or cancelling any applicable interest, fees or charges that are preventing the customer from repaying their debt. Companies must also refer customers to not-for-profit debt solutions in all communications.

Furthermore, under voluntary measures announced by the FCA at the same time as these new rules, if customers have been in persistent debt for 12 months then credit card companies have agreed that they will not send out offers to increase their credit limits. It's estimated that this measure should stop 1.4 million accounts from receiving offers to increase their debt limits.

The FCA claims that the new rules will save consumers between £310 million and £1.6 billion per year, which is money from interest and fees that credit card firms will no longer be receiving. In fact, by 2030 the FCA thinks that total savings for consumers will amount to somewhere between £3 billion and £13 billion.

Persistent debt an ongoing problem

Commenting on the announcement, Christopher Woolard, Director of Strategy and Competition at the FCA, said: "These new rules will significantly reduce the numbers of customers with problem credit card debt...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."

The move to help those in persistent debt has been cautiously welcomed by debt charities, but concerns still remain that the rules don't go far enough.

StepChange has welcomed the onus being on credit card firms to break the cycle for struggling customers, but has expressed concern that the rules will only help those who are already facing difficulties repaying their borrowing. There is no provision to prevent new customers from getting themselves into the same position, and as such the problem of persistent debt will be ongoing.

Peter Tutton, Head of Policy at StepChange, said: "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."

Help with debt

StepChange has written a guide on how to budget to get debt free, which is available here.

We've also got more information on how to deal with debt, debt repayment options and where the best places are to get help with debt.

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