New credit card rules lift pres­sure on banks

As ma­jor changes by the FCA aim to tackle per­sis­tent card debt, James Con­ning­ton ex­am­ines the im­pact on rat­ings, switch­ing, and the wider mar­ket

The Daily Telegraph - Business - - Front Page - By Ben Martin

THE City watch­dog has ramped up the pres­sure on banks and credit card firms with a crack­down on card debts that could re­sult in in­ter­est be­ing scrapped for strug­gling bor­row­ers.

The Fi­nan­cial Con­duct Au­thor­ity (FCA) has un­veiled a host of pro­pos­als that would force firms to help con­sumers labour­ing un­der long-term credit card debts, in­clud­ing can­celling in­ter­est or other charges for cus­tomers who are un­able to clear their bal­ances through a re­pay­ment plan.

It comes amid mount­ing con­cern about the rise of so-called “per­sis­tent” card debts, with the reg­u­la­tor es­ti­mat­ing that there are ap­prox­i­mately 3.3m peo­ple who pay more in in­ter­est and charges than they re­pay of their bor­row­ing over 18 months.

“Be­cause these cus­tomers re­main prof­itable, firms have few in­cen­tives to in­ter­vene,” said An­drew Bai­ley, the chief ex­ec­u­tive of the FCA. The reg­u­la­tor es­ti­mates its pro­posed mea­sures could save bor­row­ers be­tween £3bn and £13bn by 2030, de­pend­ing on how busi­nesses and cus­tomers re­spond.

An­a­lysts said the watch­dog’s plans threat­ened banks in­clud­ing Bar­clays, which is the UK’s lead­ing credit card busi­ness with a 26pc mar­ket share through its Bar­clay­card di­vi­sion, as well as Lloyds Bank­ing Group, which is seek­ing to boost its share to 25pc by ac­quir­ing MBNA from Bank of Amer­ica for £1.9bn.

Lloyds struck the deal in De­cem­ber but is wait­ing for the com­pe­ti­tion reg­u­la­tor’s ap­proval. Smaller firm Prov­i­dent Fi­nan­cial, the doorstep lender that has pushed into credit cards through its Van­quis di­vi­sion, could also be vul­ner­a­ble to the FCA’s mea­sures be­cause it tar­gets sub-prime bor­row­ers.

“Ob­vi­ously any caps on in­ter­est rate charges would also cap the prof­its that the banks are mak­ing off their credit card busi­nesses,” said Cenkos an­a­lyst Sandy Chen

Un­der the reg­u­la­tor’s plans, which have now been put out for con­sul­ta­tion, credit firms will be forced to prompt cus­tomers to make

CREDIT card firms will have to give more help to cus­tomers stuck in se­vere debt, un­der new pro­pos­als from the City watch­dog.

The rules from the Fi­nan­cial Con­duct Au­thor­ity (FCA) will mean providers have to help cus­tomers out of debt, rather than con­tin­u­ing to profit from them.

Around 3.3m peo­ple in the UK are in “per­sis­tent debt” – de­fined as pay­ing more in in­ter­est and charges than ac­tual re­pay­ment of the loan over an 18-month pe­riod.

The pro­pos­als could lead to ma­jor changes in the way that providers han­dle credit card debts. Here is all you need to know.

Q What are the pro­posed rules and who do they ap­ply to? A If a cus­tomer has been in per­sis­tent debt for 18 months, credit card providers will be re­quired to prompt them to make larger re­pay­ments, and ex­plain that this will re­duce the cost of the debt over time.

If the cus­tomer re­mains in per­sis­tent debt for a fur­ther 18 months – so three years in to­tal – the provider must take ad­di­tional steps.

This could in­volve agree­ing a re­pay­ment plan with the cus­tomer to help them re­pay the debt within a “rea­son­able pe­riod” – which the FCA says is three or four years.

Cus­tomers who do not re­spond to such a re­quest, or refuse to pay back the debt more quickly when they are ca­pa­ble of do­ing so, would then have their card sus­pended.

If a cus­tomer can­not af­ford any of the options to re­pay the debt, the provider would have to take fur­ther ac­tion to help the cus­tomer. This could in­clude re­duc­ing or waiv­ing in­ter­est and charges, which would likely in­clude sus­pend­ing the card too.

It is un­der­stood that it will be up to providers as to how they im­ple­ment the pro­pos­als, as long as the end out­come is help­ing the cus­tomer to re­pay within a rea­son­able time frame.

Q Will any of the mea­sures af­fect my credit rat­ing? A This will de­pend on the ex­act im­ple­men­ta­tion of the rules by in­di­vid­ual providers.

Providers may choose to re­port to a credit ref­er­ence agency when a cus­tomer is moved to an al­tered re­pay­ment plan or has card ac­cess sus­pended.

The de­gree to which any mea­sures will af­fect a credit re­port will de­pend on how providers re­port them and the scor­ing ap­plied by the agen­cies.

James Jones, of credit ref­er­ence agency Ex­pe­rian, ex­plained that be­ing placed on a re­pay­ment plan could be marked on a credit re­port with a “spe­cial in­struc­tion flag” de­tail­ing the length of the plan. “The fact that you are tak­ing steps to pay a debt off could play in your favour,” he said.

He added that having in­ter­est or charges waived, or having a card can­celled, shouldn’t af­fect a credit score.

Q Can’t I just switch to a 0pc bal­ance trans­fer card? A Mov­ing credit card debts that are prov­ing dif­fi­cult to pay down on to a 0pc bal­ance trans­fer deal else­where is of­ten the most ef­fi­cient way to stop the debt from spi­ralling out of con­trol.

Having a card sus­pended with one provider will not au­to­mat­i­cally pre­clude a cus­tomer from get­ting a card else­where.

This will de­pend on pass­ing a credit check and other lend­ing cri­te­ria, as usual. How­ever, if a card sus­pen­sion or an­other step taken has been re­ported to a credit ref­er­ence agency, this will likely make it more dif­fi­cult to get a new card else­where.

Q Is any­thing else chang­ing in the credit card mar­ket? A The FCA’s pro­posed rules are part of a wider pack­age of changes it is sug­gest­ing after an in-depth study of the credit mar­ket – the fi­nal find­ings of which were re­leased last year.

Other pro­posed changes in­clude re­quir­ing providers to flag cus­tomers at risk of fi­nan­cial dif­fi­culty ear­lier on, no­ti­fy­ing cus­tomers when a pro­mo­tional of­fer comes to an end, and clearer stan­dards for price comparison web­sites.

The City watch­dog has also pro­posed giv­ing cus­tomers greater con­trol over credit limit in­creases, mean­ing they would have to au­tho­rise any rises in the lim­its.

Q When will the changes be brought in? A Credit card in­dus­try trade body the UK Cards As­so­ci­a­tion has agreed three new mea­sures al­ready that will come into force next year.

From April cus­tomers will be no­ti­fied when a pro­mo­tion is ex­pir­ing and will have more con­trol over their pay­ment date, while from July cus­tomers will be no­ti­fied when they are close to their credit lim­its.

The pro­posed rules on per­sis­tent debt are in the con­sul­ta­tion stage, mean­ing there is no set im­ple­men­ta­tion date at this stage.

The ex­act tim­ings will de­pend on the con­sul­ta­tion out­come, but it could hap­pen as soon as the end of this year.

Q Are there any con­cerns about the new rules? A Tom Lyon, of uSwitch, said the pro­pos­als are “goods news” for strug­gling credit card users, but that there is a dan­ger credit card providers will pre­ma­turely cut off cus­tomers’ ac­cess to credit to meet the rules.

“Many peo­ple are re­liant on their credit cards to make ends meet and for these con­sumers lim­it­ing their credit could throw them into even more dif­fi­cult sit­u­a­tions,” he said. Q How will the rules be en­forced? A The FCA has the power to in­ter­vene when a firm does not ad­here to its rules, is­su­ing fines or re­quir­ing com­pen­sa­tion.

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