LONDON (Reuters) – Britain’s Financial Conduct Authority ordered banks on Tuesday to take steps to help people with persistent credit card debt to keep up with repayments.
The FCA’s new rules will, however, will still allow banks to ultimately suspend a credit card if a customer fails to make any progress in repaying debts.
The changes are based on an FCA market study of 34 million credit card customers over a period of five years.
They come into force next month and will save consumers 310 million to 1.3 billion pounds a year in lower interest charges, the FCA said. The sector has until September to comply.
The aim is to stop people using credit card debt as an expensive long-term loan that is not repaid.
”Under the new rules firms will be required to take a series of escalating steps to help customers who are making low repayments over a long period, beginning when the customer has been in persistent debt over 18 months,” the FCA said.
The rules will significantly reduce the numbers of customers with problematic card debt, said Christopher Woolard, the FCA’s executive director of strategy and competition.
“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,” he said.
Richard Koch, director of cards at UK Finance, a banking lobby, said that alongside voluntary measures devised by industry, the rules will help people to pay back their card balances quicker, where they can afford to do so.
StepChange, a charity that advises people in debt, said it could still be years before people currently building up persistent debt see the benefit of the rules.
“The proposals fall short of requiring firms to change the way that they offer credit card borrowing to new borrowers. The risk of building up expensive, long term debt remains,” StepChange said.
The FCA said that figures show that customers in persistent debt pay on average around 2.5 pounds in interest and charges for every pound they repay of their borrowing.
There are 4 million accounts in persistent debt in Britain and firms have few incentives to help these customers because such debt is profitable, the watchdog said.
Under the FCA directive, if after several prompts to customers to change their repayments, a bank should show forbearance such as reducing, waiving or cancelling any interest, fees or charges.
A card may ultimately be suspended, the FCA said.
Customers can also opt out from receiving automatic credit limit increases on their cards.
The watchdog said that customers in persistent debt for 12 months will not be offered credit limit increases, and this should result in around 1.4 million accounts per year not receiving such offers.
According to the FCA, 30 million consumers have a credit card in Britain, or 60 percent of the population, and its study found that in 2014 some 5.6 million people were potentially in problematic debt – meaning in arrears, had defaulted, or held a balance above 90 percent of their credit limit for over a year.
Reporting by Huw Jones; Editing by Mark Heinrich