Lenders will have to do more for customers struggling with severe credit card debt, including in some cases waiving interest or other charges altogether, under new rules proposed by the UK’s financial watchdog.
The Financial Conduct Authority says that about 3.3m people in Britain are stuck in what it calls “persistent debt” — where their minimal repayments are being outweighed by interest and charges — and are not being helped enough by credit card companies for whom they generate the most profits.
Under proposals published on Monday, the FCA said that when a customer has been in persistent debt for 18 months, credit card companies should be forced to prompt them to make faster repayments.
If a customer remains in persistent debt for a further 18 months, the lender must propose a repayment plan, the regulator said, with the customer having their card suspended if they decline to pay faster.
The FCA also said that credit card companies should take additional steps, such as reducing or scrapping interest or charges, for customers who are unable to make faster repayments.
The regulator also proposed giving customers greater control over how their credit limits are increased, including making it easier to decline credit limit rises.
“Credit cards can be a very effective product for consumers, but a significant minority of customers experience real difficulties,” said Andrew Bailey, chief executive of the FCA. “We expect our proposals to reduce the number of customers in problem credit card debt, as well as putting customers in greater control of their borrowing.”
Richard Koch, head of policy at the UK Cards Association industry group, welcomed the FCA’s proposals on Monday, saying: “While the FCA’s original report found that the credit card market works well for most people, we are not complacent and the industry remains committed to helping the minority of cardholders who do not use a credit card in a way which is in their best interest.”
But StepChange, a debt charity, said the proposals did not go far enough given that people could still take years to repay debt.
“There’s a ‘job half done’ element to it,” said Peter Tutton, head of policy. “It’s not clear that it will prevent people from getting into persistent debt problems.”
Consumer spending has powered UK economic growth since the UK voted to leave the EU last June, but regulators have grown increasingly concerned about a surge in credit card lending. It grew at an annual rate of 9.3 per cent in February, up from 8.6 per cent in January, according to the most recent Bank of England statistics published last week.
In its preliminary report on the credit card market last July, the FCA attacked card providers for squeezing long-term profits from consumers who make monthly minimum repayments for years instead of clearing their debts.
Last week, the Bank of England’s Prudential Regulation Authority said it would launch its own review of banks’ consumer credit lending practices.
The supervisory body is analysing banks’ underwriting and risk assessment standards, following soaring growth in the credit card sector in particular.
Consumer credit is the largest single risk on a bank’s balance sheet. Last year, banks had £19bn of impairments on credit cards, compared with £12bn on mortgages.
Amid persistently low interest rates, banks and credit card companies have competed aggressively for borrowers in recent years, with many offering so-called “teaser” zero interest rate deals that often shoot up to high annual percentage rates after a few years.
Some banks have attempted to protect consumers from such hidden fees. Royal Bank of Scotland dropped teaser rates on credit cards in 2014, with chief executive Ross McEwan branding it as “abhorrent” that new customers are offered preferential deals.
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