While credit cards work well for most people, the scale of problematic credit card debt continues to be a concern for the FCA. In particular, the regulator is focusing in on customers trapped in a cycle of persistent debt – those who pay more in interest, fees and charges on their credit card or store card over an 18 month period than they do towards reducing the balance.
Following the FCA’s study of the UK credit card market, we saw new rules come into force on 1 March 2018 requiring firms to take steps to help these customers, prompting them to make faster repayments if they can afford to do so.
But two years down the line, and many customers in persistent debt now hitting the 36-month mark, the regulator continues to review firms’ approaches with particular focus on ensuring fair treatment.
There’s no room for complacency here. Fail to take action to support the new rules and the FCA will be hot on your heels. But if that’s not enough, helping your customers to break the cycle of persistent debt can boost customer loyalty and drive value for your business.
Could you be doing more to help your persistent debt customers? Here are our top tips for improving your approach.
The importance of early intervention
It’s not just important to manage those customers who are already showing signs of difficulty, early intervention is key to prevention. Considering the propensity for persistent debt at application stage, and monitoring the signs that customers may be in financial difficulty should already be part and parcel of your early intervention strategy and compliance monitoring arrangements.
Education and communication are king in an early intervention strategy. You should be informing your customers on the pitfalls of consistently making minimum payments versus an increased monthly sum. What’s more, a strong communication and response strategy, where the style and content of your letters hit the right tone, can help you engage customers early on and manage expectations, potentially helping to curb a spiralling debt problem.
Are your systems & controls robust enough?
Consider the mechanisms you have in place for identifying the most at risk customers. You might need to review the relevance of policies and procedures, and the availability and effectiveness of MI and reporting. After all, modelling data on perceived and actual customer outcomes will help your firm anticipate and manage change more effectively while mitigating any associated risk.
Forbearance: what exactly does the FCA mean?
We hear a lot about forbearance and due consideration from the regulator. Ultimately, whatever options you make available to your customers, it’s important that repayment remains affordable. And where financial difficulty has been identified, then offering customers free independent debt advice is crucial.
It’s also at this point in the process where we commonly start seeing signs of customer vulnerability. Any indication of vulnerability should be managed in line with the current vulnerable customer strategy.
Culture, Culture, Culture
As with many regulatory requirements, you are nowhere unless you have the right culture. Keeping your customers front and centre, and driving the right behaviours from your staff, will ultimately deliver the right customer outcomes. As a result, you’ll see better customer engagement – often the key to avoiding a persistent debt situation in the first place.
Reviewing and revising the suitability of products and services will also go a long way to helping you manage the impact of the rule changes. Start by looking at your approach to automatic credit limit increases, financial promotions, rewards and incentives, remuneration and performance management.
We’re here to help
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