www.pwc.co.uk/fsrr April 2017 Stand out for the right reasons Financial Services Risk and Regulation Hot topic FCA Reshuffles Credit Card Rules Highlights The FCA s proposals require firms to take steps to help customers repay their balances more quickly and to offer assistance to those who can t. On 3 April 2017, the FCA published for consultation a series of proposals aimed at assisting customers experiencing persistent credit card debt. The rules are significant and constitute wide-ranging package of measures designed to address issues identified during the FCA s recent credit card market study (CCMS). In overview, the proposals set out in the consultation include: persistent debt rules and measures to assist customers that over a consistent period, have repaid more in interest and charges than they have repaid of the principal amount early intervention measures to spot and, if possible, stop potential financial difficulties credit limit controls to give customers greater control over their credit limits. Each of these proposals are considered in further detail below. The FCA will publish final rules in a policy statement following its consultation period. Firms are then required to comply with the remedy to address customers in persistent debt three months after the rules come into force. Background to the measures The FCA concluded its CCMS in July 2016. While the FCA found that competition was working well for consumers overall, it also found that the scale, extent and persistence of credit card debt was a cause for concern: FCA research found that: 2 million people carried a debt greater than 90% of their credit limit for at least 12 months, 1.6 million people were repeatedly making minimum payments on their credit card debt and there were nearly 5.1 million accounts active in January 2015 (9%) that could potentially take more than ten years for their balances to be paid off. Responding to these concerns the FCA has developed a package of remedies which include measures to reduce the number of customers in problem credit card debt and to put customers in greater control of their borrowing. Although there are already measures in place, including the FCA s own rules set out in the Consumer Credit Sourcebook (CONC), the proposed rules, along with new industry commitments, are intended to provide a robust framework for the way credit card products are offered and managed.
What is persistent debt? The FCA defines persistent debt as: the circumstance where, over a period of 18 months a customer pays more in interest and charges than they have repaid of the principal. The FCA estimates that around 3.3 million people are in persistent debt, with over half (1.8 million) in persistent debt for two consecutive periods of eighteen months. Persistent debt measures To address these issues the FCA proposes to impose a staged intervention process on firms. There are various processes to undertake in each of these stages and where issues persist, this could result in the suspension or cancellation of the card; ultimately, the debt could be written off. The proposed process is set out in the table below: Stage Checkpoint Customer action Lender action 1 18 months Customer balance in excess of 200 Customer paying more in interest and charges than they have repaid of the principal amount (over past 18 months) or Customer not paying 2 27 months As above and customer expected to remain in persistent debt for a further 18 months 3 36 months As above and customer expected to remain in persistent debt for a further 18 months Contact customer encouraging them to pay more if possible Encourage customer to engage with lender Warn of potential suspension of card Signpost to NFP debt advice agencies Continue to monitor account Contact customer encouraging them to pay more if possible Continue to monitor account Offer three or four year repayment plan to customer Advise of card suspension if customer does not engage with lender Signpost to NFP debt advice agencies 4a Beyond 36 months 4b Beyond 36 months Customer engages but cannot afford the repayment plan Customer does not respond to approaches by lender to engage Lender employs forbearance measures (over and above usual forbearance required under CONC) Suspend use of card Suspend use of card Where a customer engages with a lender and agrees to a repayment plan and adheres to the plan, it will be a decision for the firm if the customer s card remains suspended or cancelled. It is likely that firms will need to consider the affordability rules and requirements in the process of any reinstatement of the customer s line of credit.
Application of persistent debt rules The FCA does not expect its persistent debt rules to be applied where the balance of the customer s account is less than 200 or where a customer s account is already subject to equivalent or more favourable treatment. For example, if the lender identified at an earlier stage than the 18 th month checkpoint that the customer was experiencing financial difficulties and had already implemented forbearance measures to assist the customer then the persistent debt rules would not necessarily need to be applied. But application of these proposals poses a number of challenges for firms, for example firms will need to: consider the impact of implementing these measures, including whether it will be necessary to issue modifying agreements, implement robust monitoring procedures both during the intervention period and once forbearance has been applied, if necessary, overlay existing processes with the new rules. The FCA makes it clear that firms will still be expected to apply existing rules on forbearance set out in CONC 7.3.4R ( a firm must treat customers in default or in arrears difficulties with forbearance and due consideration ) and take appropriate action at an earlier stage if appropriate. While the FCA does not intend to prescribe the form that forbearance should take, it does indicate that it could include measures such as reducing, waiving/cancelling interest or charges. Early intervention Under the FCA s proposals, credit card firms will be expected to identify earlier customers who may be struggling to repay their debt or who are at risk of financial difficulty and take appropriate action before payments are missed or the customer falls into persistent debt. CONC 6.7.2R already requires firms to monitor a customer s repayment record for signs that they may be struggling to repay and take action where there are signs of actual or potential financial difficulties. Such action may include notifying the customer of: the risks of escalating debt, that they may incur additional interest or charges, and that they may experience greater financial difficulties. The firm should also provide contact details for not for profit debt advice bodies (CONC 6.7.3G). Over and above this, the FCA is proposing new high level requirements in CONC specific to credit cards to require firms to take early intervention. The early intervention rules Firms would be required to monitor a customer s repayment record and any other relevant information that they hold about the customer s financial circumstances such as data about accounts held by the customer where the credit limit is exceeded, data indicating the level of cash withdrawals and money transfers (drawdowns), CRA or other product data such as overdrafts and personal loans which combined, may give an indication of actual or impending financial difficulty, and where necessary take appropriate action. The FCA will not specify rules or guidance with regard to using drawdown data and it acknowledges that not all firms will have access to CRA or other product data, but firms must consider how they will use the data available to them. In implementing these rules, firms will also need to be mindful of their obligations under the General Data Protection Regulations. The FCA requires firms to have a policy around early intervention which will allow the FCA to supervise firms implementation of the rules. What does actual financial difficulty look like? Citing CONC 1.3.1G, the FCA says that signs of actual or possible financial difficulties include where there is a significant risk of one or more of the following occurring: consecutively failing to meet minimum repayments in relation to a credit card or store card, adverse accurate entries on a credit file, which are not in dispute, outstanding CCJs for non payment of debt, inability to meet repayments out of disposable income or at all, consecutively failing to meet repayments when due, agreement to a debt management plan or other debt solution, evidence of discussions with a firm (including a not for profit debt advice body) with a view to entering into a debt management plan or other debt solution or to seeking debt counselling. Where these behaviours are identified, the FCA expects firms to go further than the guidance set out in CONC 6.7.3G and consider taking one or more of the following actions: consider suspending, reducing, waiving or cancelling any further interest or charges, accept token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock, notify the customer of the risk of escalating debt, additional interest or charges and of potential financial difficulties, provide the contact details for not for profit debt advice bodies and encourage the customer to contact one of them. This latter element goes further than the similar provision for non credit cards. Credit limit increases The FCA wants to ensure that customers do not borrow more than they need to. Working with industry, the FCA has agreed a voluntary industry package. The aim of the package, currently in force, is to give customers greater control over their credit limits and restrict offers of credit
limit increases where there is a risk of unaffordable borrowing. Under the terms of the package: new customers will be given the choice of how credit limit increases are applied to their account and increases will only be offered on an opt-in basis, existing customers will have clear steps to declining the offer of an increase and all customers will have the option not to receive further increase offers, offers of credit limit increases will also be restricted where behaviour may indicate that the customer is at risk of unaffordable borrowing, and customers with a high credit limit utilisation over an extended period will need to give express consent to have their limit increased. The industry agreement is expected to operate in line with CONC 6.2.1R, under which firms are required to undertake an assessment of the customer s creditworthiness and consider the impact of the increase on the customer s financial circumstances. Other industry initiatives Following the CCMS final report, the industry agreed to implement information measures to encourage greater switching activity to help competition but also to help customers avoid increased interest payments when promotional offers end which could lead to credit card debt. Measures introduced included: promotion expiry, notifying customers when a promotional deal is about to end so they can consider their options, including shopping around, payment date changes, informing customers that they can change the date their payment is due, helping them to manage their finances, borrowing prompts, a digital notification to inform customers when their balance is getting close to their credit limit, helping them to avoid over limit charges. These measures will be implemented during 2018. What does this mean for firms? The FCA s proposals are extensive and wide-ranging and are likely to result in a number of system, policy and process changes. Although the proposals are in the consultation phase, firms should be beginning to plan how they will implement the aims of the proposals. Firms to do list: review current forbearance processes against CONC requirements implement an early intervention policy consider the effect of the proposals on existing contracts will modifying contracts be required? implement procedures for persistent debt monitoring prepare relevant systems and communications: promotional rate expiry: April 2018 payment date changes: April 2018 close to credit limit prompt: July 2018 Contacts John Coley, Director E: john.k.coley@pwc.com Tel: +44 20 7213 8075 Megan Charles, Manager E: megan.p.charles@pwc.com Tel: +44 20 7804 0904 Iain Hawthorn, Manager E: iain.g.hawthorn@pwc.com Tel: +44 20 7213 4574
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