Have the FCA gone far enough with persistent credit card debt?
By Peter Tutton, Head of Policy
Yesterday the Financial Conduct Authority (FCA) published the next stage of its on-going Credit Card Market Review. The new consultation paper sets out proposals for remedies to help people in persistent credit card debt and proposals that would require lenders to do more to identify people in financial difficulty earlier.
Credit cards debt remains a big part of the UK household debt problem; it’s the most common type of debt that we see:
· 67% of our client has one or more credit cards
· 44% had more than one
· 15% had four or more
The average credit card debt of our clients is £8,304 — a big chunk of the average £14,251 owed in total.
The millions struggling with credit card debt
The FCA’s previous credit card review papers outlined the scale of the problem, with 2 million people in arrears or default on a credit card, a further 1.6 million repeatedly making minimum payments, and around 5 million who would take more than 10 years to pay off their balance.
So action by the FCA on credit cards is both welcome and necessary.
Incentivising consumers to pay more off their credit cards
The FCA proposals focus on incentivising consumers in persistent debt to pay more and getting credit card firms to engage earlier, when people are starting to struggle. These are two good aims but the detail is quite complex.
The FCA have rejigged their definition of ‘persistent debt’ to describe situations where people have paid more in interest and charges than they’ve paid back in principal borrowing over an 18 month period.
When borrowers meet this trigger point firms will be required to make an escalating series of interventions. At 18 months, firms would be required to inform customers of the benefits of increasing payments, and do this again 10 months later.
Where borrowers still met the persistent debt definition at 36 months firms must propose options for paying down the balance over a three to four year period. Where consumers cannot afford this pay down rate firms may offer wider forbearance. Use of the card will be suspended where borrowers do not engage.
Borrowers could still be repaying credit card debt for over 10 years
The FCA says that these measures could save consumers between £310 million and £1.3 billion a year, which is good news.
However the FCA’s projections suggest that borrowers could still be repaying credit card debt for over 10 years where the intervention takes them just out of the definition of persistent debt. Consumers who can’t pay more could still be repaying credit card debt off over seven years.
The key point here is that credit card borrowing is meant to be short term (with FCA responsible lending rules saying pay down should be over a reasonable period) and priced relatively highly as a result. So itisn’t clear that a remedy package anticipating pay down over 7+ years is really a solution to persistent credit card debt.
Monitoring for signs of financial difficulty
Therefore much will rest of the forbearance firms offer people struggling to pay down. Here the FCA is extending the requirements on firms to monitor for signs of financial difficulty and intervene earlier. However the FCA don’t add further detail or prescribe what firms should do in response, instead relying on existing forbearance rules that aren’t always delivering good outcomes for people struggling with debt.
If the FCA really wants to get on top of persistent credit card debt then they’ll need to think more on the reasons why short term can turn into long term debt. Part of this is about responsible lending at the outset, but perhaps more urgent of consideration are contractual minimum payments that are so very low.
A missed opportunity on unsolicited credit limit increases
We’ve previously called on the FCA to increase the very low minimum payments on credit cards. Credit card products are structured in a way that makes persistent debt likely if not inevitable for some borrowers. The FCA need to get to the heart of the matter and quickly.
Finally we were disappointed that the FCA has not taken the opportunity to ban firms from making unsolicited credit limit increases where borrowers do not actively opt-in to such an offer. Instead there’s a voluntary undertaking from card providers that provides a default opt-in on new cards, but no clear opt-in requirement to existing cards.
This is all a step forward, but a small one that wraps its inadequacy in a faux language of ‘consumer choice’. The FCA has chosen to maintain a bad principle of ‘opt out selling’ that elsewhere it proudly claims to have stamped out.