FCA Imposes New Rules Aimed At Protecting People In Debt

Under the new rules that were introduced on Saturday, People who are not able to settle their long-term and persistent debt will now be getting more help from the lenders.

Earlier this year, a series of guidelines were revealed by the Financial Conduct Authority (FCA). Starting on the 1st of September, it will be imposed to further support the vulnerable people who have been trapped in escalating or on-going debt.

The new rules mean that from the 1st of September, anyone who is trapped in ‘persistent debt’ for over 18 months will be given support with repayment plans and even the choice to have their cards cancelled in order to prevent further damage.

In some cases, lenders may even waive the accrued interest, fees and charges if the amount they are paying in these are already more than the actual debt that they repay every month.

Currently, there are approximately 4 million credit cardholders who are persistently in the red. On average, each of them is paying £2.50 in interest and charges for every £1 that they borrow.

The FCA thinks that the new rules will allow customers to save between £310 million and £1.3 billion every year because of lower interest charges.

On the 1st of March 2018, the new rules came into force officially, however, companies were given until the 1st of September 2018 to comply with the changes. The changes will give more protection for credit card customers who are in recurring debt or at risk of financial distress.

The new rules were introduced by the FCA the agency conducted an investigation into 34 million credit card accounts that have identified patterns of debt that required to be better managed.

From the 1st of September, companies will be required to take more steps to help once they classify someone as having been in persistent debt for more than 18 months – this will include advising them regarding debt support services in the process.

According to the new rules, this is what will happen after 18 months that customers only meet the  minimum repayments:

  1. After a customer has been in persistent debt for more than 18 months: The lenders should contact the customers, assist them to change their repayment and inform them that their card may be suspended once they follow the same repayment pattern.
  2. After a customer has been in persistent debt for more than 27 months: The customer should be sent a reminder regarding the information outlined above.
  3. After a customer has been in persistent debt for more than 36 months: The lender should suggest to the customer a reasonable way of repaying their balance. If the customer is not able to pay, the firm must exhibit ‘forbearance’ and may be obliged to reduce, waive or cancel any interest, charges, or fees.

Credit card companies have also agreed to voluntary measures to enable customers to opt-out of getting automatic increases in their credit limit, which usually tempts them into worsening their debt.

Companies have also agreed not to give increases in credit limit to customers who are in persistent debt for 12 months. The FCA believes that it will benefit approximately 1.4 million accounts every year.

The director of strategy and competition of FCA, Christopher Woolard, stated: “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.

He added: “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.”

A research conducted by Equifax, a credit agency, young people are those who are most at risk of not being able to manage their debt.

Approximately 12% of credit card holders with ages between 18 and 24 confirmed that they do not pay off any credit card debt in a normal month. 42% said that it was because they could not afford it.

The most recent credit conditions survey that was conducted by the Bank of England identified a significant rise in default rates on credit card loans in the second quarter of 2018.

The survey discovered that one out of 10 credit card holders pay off between 1% and 10% in a normal month – while 49% are willing to pay off their debts in full.

Equifax’s Lisa Hardstaff disclosed: “Whilst nearly half of all credit card holders pay off their monthly balance in full, according to our research, that still leaves a large proportion carrying over a debt to the next month.”

She added: “And if this debt then rolls over month to month, the interest accumulates turning what is essentially ‘good debt’ into unmanageable ‘bad debt’, putting individuals at risk of financial difficulties.”

She concluded: “The FCA guidelines are a positive step for consumers, providing a lifeline for those who find themselves simply unable to manage long-term debt. Whilst change in circumstances can often lead to debt that initially is thought to be manageable to become unmanageable, it’s also worth keeping a very clear note of credit card expenditure to ensure that the payments made can be afforded.”