This blog is aimed at credit card providers but has read across to other consumer credit firms such as debt purchasers, credit reference agencies, debt management companies and providers of free debt advice.
The FCA’s July 2016 Credit Card Market Study highlighted significant concerns over the levels of problematic credit card debt in the UK. Against a backdrop of economic uncertainty, changing spending behaviours and heightened regulatory attention, the credit card industry continues to face challenges.
In this update we consider the impact of the new “Persistent Debt” rules published in PS18/4. The rules came into effect on 1 March 2018, however, firms have until 1 September 2018 to be fully compliant.
How is “Persistent Debt” defined?
Persistent debt in the context of credit cards is classified by the FCA as a situation where, over a period of 18 months, a customer has repaid more in interest, fees and charges than they have repaid of the principal.
The new rules at a glance
- Credit card customers in “Persistent Debt” must now receive communications at intervals of 18, 27 and 36 months.
- At 18 and 27 months, customers should be informed of the benefits of repaying faster and provided with sources of free debt advice.
- After 36 months, firms must inform customers of faster repayment options, provide sources of free debt advice and explain the consequences of failing to engage. Firms should treat customers with forbearance, supporting them to repay the outstanding balance over a reasonable period. Where this is not possible, firms may need to consider cancelling or suspending customer credit cards.
Key considerations for firms
Based on our experience in this market and our work supporting firms with regulatory change, these are the key areas we consider firms should be focussing on.
Management Information (MI)
Firms will need to establish mechanisms for identifying customers in “Persistent Debt”. This will involve understanding repayment patterns and accurately calculating interest versus capital payments.
Where reporting capabilities are not available, firms will need to build, test and verify data. Care should be taken where data will be used to trigger automatic communications. It’s important firms take into account previous shortcomings regarding the issuance of legal and regulatory notices which may have resulted in breaches and the need to remediate. Firms should also consider any conduct MI they will need to monitor to ensure their compliance with the rules has no unintended consequences for customers. This work should be prioritised given the time it can take to design and implement system changes.
Whilst firms must include certain information within their communications, they have the flexibility to tailor the content, language and tone. The style and delivery of communications should strike a balance between urgency and empathy, and engage the firm’s customer demographic. Firms should also consider how customer engagement will be monitored.
Forbearance and Repayment Options
Discussions around repayment options should continue to be flexible, taking into account affordability, customer circumstances and vulnerabilities. There should be clear rationale for the repayment plans communicated in the 36 month letter, and pressure should not be placed on agents to shoehorn customers into predefined plans.
Whilst the FCA has said a reasonable period may be between three to four years, or longer where necessary, caution should be exercised when setting up longer-term plans, as the risk of over-forbearance still exists.
Reporting to Credit Reference Agencies (CRA)
The FCA has not prescribed how firms should report suspended or cancelled credit cards to CRAs. It is important that firms adopt an approach which takes into account the need to report accurately. Reporting to CRAs should not be used as a means to pressurise customers into repaying more quickly.
Quality Assurance and Outcome Testing
Firms will need to revise their policies and procedures to accommodate the new rules. This will involve understanding the customer journey and identifying risks to customer outcomes. Quality assurance and outcome testing functions will need to revise testing methodologies to ensure adherence with policies, procedures and regulatory requirements, and most crucially to ensure customers receive fair outcomes.
Alongside any adaptations firms may be making following the publication of CP17/27: Assessing Creditworthiness in Consumer Credit, firms should determine the extent to which “Persistent Debt” indicators may be incorporated into their criteria for lending, and their creditworthiness and affordability assessments. Firms should understand to what extent this could impact consumer access to credit, and what implications this might have on its future product offering (including product characteristics and diversifications).
These changes will have a commercial impact on interest revenue streams, perhaps forcing some providers out of the market or to diversify their product ranges. While the rules are not overly complex, there are clear operational and strategic challenges firms will need to overcome in order to be compliant by 1 September 2018.