Update: The ICO's response to the FCA's Consultation on persistent debt and earlier interven
The ICO, last week, published their response to the FCA’s credit card market study: Consultation on persistent debt and earlier intervention remedies. This consultation comes in the wake of the final findings of the FCA’s earlier credit card market study, completed in 2016. As a result of ‘significant concerns’ about the ‘scale and persistence of potentially problematic debt’, this 2017 consultation also forms part of the FCA’s implementation of a package of remedies to address the issues identified.
Essentially, the FCA are looking at ways to ensure that firms identify those at risk of financial difficulties at an early stage, and take appropriate steps to offer help, including forbearance where customers cannot afford increased repayments. They hope that this will reduce the number of customers in problem credit card debt, and put consumers in greater control of their borrowing.
The 2016 FCA Study
The 2016 study found that competition in the sector was working well for most consumers, but highlighted significant numbers of consumers affected by persistent debt. The FCA offer some examples – they found that around 7% of credit card customers carried a debt greater than 90% of their credit limit for at least 12 months. It also found that those with high balances or those making minimum repayments did so for a number of years – whilst credit cards are suited to short-term borrowing, they can be an expensive way of borrowing large amounts over an extended period.
The FCA’s concerns following the findings of the 2016 paper are that current rules and guidance do not adequately address potential harm to credit card customers; given the open ended nature of credit card accounts, they are different to fixed-sum loans, and carry greater risks for customer and firm. This consultation considers two main themes – persistent debt and early intervention, alongside other related issues and concerns.
Whilst a particular concern is transparency around promotional offers, the UK Cards Association have already voluntarily agreed that firms should inform customers that their promotional offer is coming to an end, notify customers when they are close to their credit limits to help avoid penalty charges, and allow customers to request a ‘later than’ payment date to give greater control and help avoid penalty charges. The two former remedies are expected to be in place by April 2018 with the latter by July 2018.
The consultation introduces a new definition of persistent debt - ‘Customers paying more in interest and charge than principal over an 18 month period’, where principal is the amount of credit drawn down by a customer under the credit agreement, and not including interest, fees or charges. Accounts in persistent debt under the FCA’s proposed definition are typically paying approximately £2.50 in interest and charges for every pound of their balance they repay.
For persistent debt, the FCA have considered the 2016 study, which found that firms have few incentives to address issues arising from a customer’s decision to repay slowly, often incurring significant costs – as they are profitable. In order to ensure that firms do routinely address this behaviour, the FCA propose a range of remedies:
At 18 months, customers would be made aware that increasing their current rate of repayment would reduce their cost of borrowing and the time taken to repay. They would be informed that continuing low repayments for a further 18 months may mean the firm suspends use of the card and makes a report to a credit reference agency (CRA).
At 27-28 months, if customers’ repayments up to this point indicated that they were likely to remain in persistent debt at the 36 month point, firms would be required to repeat the steps required at 18 months.
At 36 months, if customers are still in persistent debt and have thus repaid more in interest and charges than principal for two consecutive 18 month periods, firms must take steps to help them repay their outstanding balances more quickly. They must write to the customer proposing options for repayment plans, based on repaying their debt over a reasonable period, usually between three and four years. The customer would be made aware that their use of the card will be suspended unless they engage with the firm.
Where customers inform the firm that they cannot afford any of the proposed payment options to repay the debt within a reasonable period, firms must exercise forbearance to assist the customer to repay the debt more quickly. This may include a reduction in the interest rate being charged. Where forbearance is shown, the FCA expect it will generally be necessary for the firm to suspend the use of the card.
Interventions would continue until the customer has repaid the balance they had at 36 months.
The nature of forbearance that may be offered as above is not prescribed, but the FCA comment that it should have the aim of assisting the customer to repay the balance in a reasonable period, and may include reducing, waiving or cancelling the interest or charges.
The FCA state that their intention is to rebalance incentives on firms and customers – that firms will want to encourage customers to repay more quickly to avoid the costs of the 36 month intervention, and that customers will want to retain the use of their card, where possible.
Due to the nature of persistent debt, the FCA suggest in this consultation that the rollout would take place relatively quickly – with firms being expected to comply with the new rules three months after they come into force.
In addition, the FCA propose to build on an existing rule that requires firms to monitor a customer’s repayment record for signs of actual or potential financial difficulties before repayments are missed. Current guidance (CONC 6.7.2R) requires monitoring of a record for signs they may be struggling to repay, and take action where there are signs of potential financial difficulties, with CONC 6.7.3G setting out that this should generally take the form of notifying the customer of the risks of escalating debt, additional interest or charges and providing contact details for not-for-profit debt advice bodies. Under the proposed new rules, where a customer was assessed to be at risk, firms must then take appropriate action, and establish, implement and maintain an adequate policy for dealing with customers showing signs of actual or possible financial difficulties – even though they may not have missed a payment. Of the voluntary remedies proposed, these include giving customers control over credit limit increases.
The FCA are currently carrying out behavioural trials as part of planned work to consider whether there is a case for intervening in relation to minimum repayments, either by ‘nudging’ customers to repay faster, or requiring it. At the moment though, the FCA are unable to say whether they will propose any changes to the rule on minimum repayments – intervention on this rule, therefore, is not due in the near future.
Chapters 2 and 3 of the Consultation Paper set out the proposed changes in more detail.
ICO Commissioner's Response
The ICO Commissioner’s response is restricted to those areas that fall within her regulatory remit and extend to only five pages. However, the response highlights a few potential concerns with the proposals as they stand, mostly relating to transparency and compliance with regulations relating to disclosure to third parties (in this case, potentially CRAs) and the use of an individual’s data to monitor their account in line with the proposals for early intervention.
Specifically, the ICO suggest that if individuals would not normally expect their data to be monitored in this way, they should be notified prior to the monitoring beginning, and data gathered at 18, 27 and 36 months should be set out to the individual along with reasons for gathering the data and how the information will be used in future.
In addition, the ICO state that customers that are in persistent debt but are meeting the contractual terms of their credit agreements should not have their data handled in a way that would be detrimental to them. There are also concerns that information reported to CRAs would not lead to fair outcomes to credit card users.
They also offer the suggestion that communications or contact that promotes a service or aim could constitute marketing, and the lender will therefore need to ensure that they comply with legal requirements when delivering messages that could be construed as marketing. This could have a knock-on effect when GDPR comes into force in 2018; the ICO suggest that the industry may wish to develop a common set of communications in order to ensure a consistent and compliant approach.
Please Contact Us if you have any further questions about the FCA's Consultation or the ICO's response.