The City watchdog says its efforts to help people in persistent debt will see lenders adhering to a new set of standards.
Credit card firms are to face a new set of rules aimed at helping those in, or at risk of being in, persistent debt – though they will not have to comply until September. The Financial Conduct Authority (FCA) estimated borrowers could collectively save up to £1.3bn a year in lower interest charges under the changes but admitted the figure could be much lower. Its measures are a response to concerns about high levels of unsecured debt in the UK, which topped levels last year not seen since the financial crisis, with credit cards being a chief concern. The FCA said there was currently little incentive for providers to tackle persistent debt as four million accounts were currently paying, on average, around £2.50 in interest and charges for every £1 they repaid of their borrowing.
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Under the changes – which come into force on 1 March but give firms until 1 September to comply because of changes to their systems – lenders will be required to take a series of escalating steps to help customers who are making low repayments over a long period. The FCA said the process would begin when a customer has been in persistent debt for over 18 months. “After this time firms need to contact customers prompting them to change their repayment and informing them their card may ultimately be suspended if they do not change their repayment pattern. “Once a consumer has been in persistent debt for 36 months, their provider will have to offer them a way to repay their balance in a reasonable period. “If they are unable to repay the firm must show the customer forbearance (which) may include reducing, waiving or cancelling any interest, fees or charges.” The watchdog said the sector had also agreed to some additional voluntary measures which would include giving customers the opportunity to opt out of increases to their credit limit.
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It added that those in persistent debt for 12 months could not be offered any increases – a move currently affecting 1.2 million people. Consumer groups broadly welcomed the changes but expressed concerns about banks exploiting new customers. The FCA’s director of strategy and competition, Christopher Woolard, said:
These new rules will significantly reduce the numbers of customers with problem credit card debt.
“Credit cards offer customers flexibility to manage their finances and repayments, but with this there is a risk customers can build up and hold debt over a long period of time – without making much headway on the outstanding balance. “Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly, are given help.” Richard Koch, director of cards at the industry body UK Finance, said: “Today’s announcement is an important outcome for consumers. “Alongside voluntary measures devised by financial providers, these measures will reduce the cost of borrowing by encouraging individuals to pay back their card balances more quickly, where they can afford to do so. “We will continue to work with the regulator to ensure the credit card market remains competitive, innovative and responsive to the needs of all its customers.”