Credit card crackdown: Necessary reform or 'nanny-state intervention'?

The Financial Conduct Authority (FCA) is proposing new rules for credit card firms that will force them to give more help to customers stuck in persistent debt. It could mean that some customers get all their interest charges cancelled.

Here's everything you need to know.

What is the FCA proposing?

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Following an investigation of the credit market the FCA has unveiled a raft of new proposals to try and help people who find themselves in persistent debt. These include making credit card companies inform customers when their promotional rate is about to end and warn them if they are approaching their credit limit.

On top of this the FCA wants to make companies help their customers get out of debt.

This would mean if a customer has been in ‘persistent debt’ for 18 months their credit card provider would prompt them to make larger repayments - and explain how that could save them money over time as they would pay less interest.

If the customer is still in debt 18 months after that – so they’ve been in debt for three years on the same credit card – the provider would then have to act again. This could be by setting up a repayment plan with the customer to pay off the debt within a ‘reasonable period’, which the FCA outlines as three to four years.

The card could potentially be suspended during that period to stop the person building up further debt.

If the customer couldn’t afford the repayment plan then potentially their credit card firm could have to reduce or waive interest and charges to help the customer.

What does ‘persistent debt’ mean?

There are currently 3.3 million people in ‘persistent debt’, according to the FCA. This means people who are paying more in interest and charges than they are actually repaying on their loans and credit cards over an 18-month period.

The FCA gives an example of someone with a £3,000 debt on a credit card with an interest rate of 19 per cent APR. If they are paying off as much in interest and charges as capital, it would take them almost 20 years to clear the debt. Over that period they would pay £2,900 in interest.

What do the experts think?

“Concerns that the credit card industry creates, and then milks, over-indebted consumers are not new,” says Nils Pratley in The Guardian.

The FCA’s plans to reform the market will lead to “grumbles about nanny-state intervention,” adds Pratley. “Ignore them. While the plastic works fine or most people, credit card debt has become more like a high-interest personal loan for the 3.3 million in persistent arrears.

“That is not how the product is meant to operate. Unless lenders are forced to accept a few obligations to borrowers, the grubbier end of the credit card industry will look outright exploitative.”

The concern is that the new rules could cost the credit card industry billions. The FCA is planning to force them to reduce the money they make from their most profitable customers. This could lead to a reduction in credit card deals and stricter lending criteria - and that could have a knock-on effect on the economy.

Some fear that if credit card companies reduce their deals and tighten their lending criteria, we could see consumer spending fall dramatically - and that will hit the economy.

“Credit-card fuelled high consumer spending has propelled the UK’s growth since the Brexit vote but, with firms luring borrowers with interest-free deals lasting three years or longer, the huge growth in spending has prompted fears of a new debt crisis,” says Lucy Tobin in The Evening Standard.

Credit cards could waive interest for struggling customers

3 April

Credit card companies have been told to do more to help customers in "persistent debt", including potentially waiving interest and charges in "extreme cases", the BBC reports.

New guidelines have been proposed following an investigation into credit card debt by the Financial Conduct Authority (FCA), carried out over the last 18 months.

According to the regulator, an estimated 3.3 million customers are in "persistent debt" and "have paid more in interest and charges than they have repaid of their borrowing over an 18-month period".

As these customers are by far the most profitable for the credit card firms, the companies have "little incentive to intervene", it adds.

Under the plans, companies will be required to contact customers who have been in debt for 18 months and prompt them to make faster payments when affordable.

If the situations continues for another 18 months, the firms must step up action and propose a formal repayment plan. Following that, they should "consider reducing, waiving or cancelling any interest or charges" if the debt remains unaffordable.

"By 2030 we expect that the savings to customers would reach a total of between £3bn and £13bn," said the FCA.

In a previous report in November 2015, the regulator suggested it might require companies to undertake thorough affordability checks before issuing cards.

Andrew Bailey, FCA chief executive, said: "Credit cards can be a very effective product for consumers but a significant minority of customers experience real difficulties."

"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."

Credit card debt has been growing. Bank lending to individuals, including through credit cards, rose by £4.9bn during February, above the average over the previous six months of £4.8bn, says the Financial Times.

Credit cards could waive interest for struggling customers