Last month, new FCA rules were introduced to change the way credit card companies deal with customers who are struggling to repay their debts. These rules are so uncontroversial that press commentators have barely written about them since they came into force. This is a shame, because I believe that these changes could mark the start of a major new approach to consumer debt – if we take the time to understand why they really matter.
The new FCA rules
From 1 March, credit card companies will be expected to offer help to cardholders who aren’t making sufficient repayments after 18 months of debt. If the debtor is still not reducing their debt after 27 months, they’ll be expected to get in contact again with advice and support. Finally, after 36 months, the cardholders must be offered reduced interest rates or charges.
These rules will be mandatory from 1 September and will hopefully help some of the 4 million credit card holders stuck with persistent debt. But I believe they can do even more.
The real issue they address
It seems to me that most credit card companies earn far more from increasing credit limits than they write off in bad debt. From a purely financial point of view, this encourages them to offer more and more debt to consumers – rather than helping them eliminate the debt they already have.
This approach is problematic for both sides. Debtors feel like they don’t have to worry, because there's a new source of money just around the corner. This is a fallacy that only serves to increase their debt costs, creating a spiral of borrowing. At the same time, the arm's-length approach of the credit providers makes it difficult to identify those who are struggling and those who are simply not paying. This means it’s harder to collect unpaid debt effectively and fairly.
It is my hope the new FCA rules will force providers of consumer credit to face individual customer circumstances, rather than simply following the figures. Because that would eliminate this unhealthy approach to debt.
Tracking broader impacts
Forcing credit card companies to engage with customers in this way also shows us that the FCA has finally realised that genuine, constructive engagement with debtors is key to real change. And although these new rules specifically address credit card companies, I think it’s important that we acknowledge that the same issue applies to others in the consumer debt industry too.
With that in mind, the FCA’s realisation should be viewed as a warning to other credit providers that complacency in encouraging debt can’t continue. And, if attitudes do not change, I believe further rules and regulations should be considered across the industry.
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