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 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.