Persistent debt (when a consumer pays more in interest, fees and charges, than off their balance) is a regulatory focus in the UK. While issuers have already started the actions prescribed by the FCA's persistent debt regulations, there is still a sizeable amount of work to complete and opportunities to be identified.
In the months leading up to the introduction of the FCA’s persistent debt regulations in September 2018, UK card issuers concentrated on the strategic, policy, technical and infrastructure changes required to comply on time. This meant they were ready to identify and send a communication (letter) to consumers who over the last 18 months had been in persistent debt. The communication was aimed at informing the consumer they met this definition, explaining the benefits of faster payment, how to obtain debt advice and what would happen at 36 months if the situation was not rectified. They also began excluding customers from proactive card limit increases if they were 12 or more months in persistent debt.
This, however, was just the first stage of what was required.
In the first quarter of 2019, UK issuers have been focusing on compliance with the 27 months prescribed action. A reminder must be sent to consumers likely to still be in persistent debt at month 36, reiterating the message at 18 months. These reminders should start to be sent in April/May 2019. The majority are targeting those who are still in persistent debt or sending the reminder to all those who received the 18 month communication. There are some exceptions, including consumers who subsequently qualify for forbearance treatment, if they cannot afford to pay extra.
2020 - New Actions at 36 MonthsThe 36-month stage will start in January 2020, and issuers will need to determine what actions are available to them. At this time the issuer must set out the options for faster repayment, reference debt advice options and explain the consequences of not engaging. As directed by the FCA, relationships will be terminated with consumers if they do not engage with the issuer or confirm that higher repayments are achievable. Should the customer refuse to make such payments then they will need to be actioned. This will require strategic changes in collections (if that is where these customers are to be managed) to deal specifically with this subpopulation.
Issuers have the option to close accounts they have placed in forbearance if customers cannot afford to pay extra or if the additional payments are not enough to take them out of persistent debt. However, it is uncertain whether they will take this step, as it would remove what may be a vital line of credit. The aim will be to keep the number of account closures to a minimum.
After 36 MonthsWhat will issuers do after the 36-month point, especially if the relationship is maintained? Suspended accounts are likely to be the remit of collections, although a different approach and set of treatments will be required. Strategic approaches will most likely differ if the customer reached any stage of persistent debt in a set time, resulting in complex segmentation across multiple decisions.
This year, we expect that issuers will expand their exclusion of customers from treatment outside of proactive increases, providing consistency in treatment. They could, for example:
- Decline customer requests for card limit increases if the customer is at least x months in persistent debt
- Prevent consumers spending above their agreed credit limit if at least x months in persistent debt
- Design an approach in collections for consumers in persistent debt