Proposals to tackle persistent debt

Lyndsey Burton

In April, the Financial Conduct Authority (FCA) proposed a range of new rules intended to help millions of bank customers escape “persistent debt.” Including measures that would see banks drawing up faster repayment plans or even cancelling longstanding debt altogether. These rules would potentially save as many as 3.3 million people from the unfortunate fate of spending more on interest over an 18-month period than they do on repaying what they actually owe.

Debt and its longer-term variations are big problems in the UK, with the FCA stating that of the 3.3 million people in persistent debt, 1.8 million (or 54.5%) experience it for at least two consecutive 18-month periods.

This equates to a hefty amount of interest, so much so that, for someone who borrowed £1,000 at a standard APR of 18.9%, they’d have to pay an extra £290 to cover the additional costs over the 36-month period. Given that they needed £1,000 in credit in the first place, this extra amount is something many people can ill afford, so it comes as no surprise that the FCA also warned last July that 2 million cardholders are in arrears or have defaulted on their repayments. Worse still, they estimated that as many as 5.1 million accounts will take 10 years or more – or never – to honour their debts.

In light of such figures, it’s not difficult to imagine the human toll of persistent debt. Research carried out by the University of Nottingham in 2012 found people who were in debt were more than twice as likely to have mental health problems. StepChange revealed [PDF] in 2014 that 47% of people have to see their GP as a result of mental health issues caused by debt, while another survey [PDF] found that 74% and 43% were respectively robbed of decent sleep and the ability to concentrate at work. However, while a humanitarian case can certainly be made on this basis for the proposals suggested by the FCA, a more economically oriented case can also be made, one which the financial industry is more likely to heed.

As things stand, the latter have taken the FCA’s consultation paper with an unsurprising amount of caution. The UK Cards Association responded to it by saying that it “requires careful consideration,” and that they “will look closely at the proposals.” While this might sound encouraging, previous suggestions that banks should do more to help people struggling with persistent debt have been mostly ignored, with a warning from the FCA back in November 2015 failing to elicit enough action from lenders to prevent the Authority from repeating essentially the same warning again last week.

Yet while it seems that banks and lenders aren’t going to be moved by the human stories behind persistent debt, they’d do very well to consider the serious risk that rising debt poses to them and the wider financial system.

First of all, in the midst of stagnant incomes, continuing austerity and rising living expenses, credit card and other household debt has been rising, to the point where the Bank of England warned that it’s accelerating at the fastest rate since before the financial crisis. In turn, this has resulted in an increase in the default rate [PDF] on unsecured loans (including credit cards), which the Bank of England stated had “increased significantly in Q3 [2016], bringing the balance to its highest level since 2009 Q2.” And just as credit card defaults increased by almost 10%, personal insolvencies also rose in 2016, by 13%.

In other words, an increasing number of people are failing to repay their debts, something which ultimately means banks and other lenders are losing money by not doing more to help them make repayments. On its own, this fact should be enough to motivate action, yet when the uncertainties of Brexit are added into the mix, along with the possibility that a sudden downturn would severely damage the ability of borrowers to repay credit and loans, the credit card industry should start getting very serious about helping people with persistent debt.

Not only would implementing the FCA’s proposals help them to lower default rates and actually get more of their money back, but it would help the wider economy, enabling people to escape debt spirals and freeing up additional credit that could be pumped back into the financial system.

As such, both the FCA and the UK Cards Association should work very hard in the coming months to come to an agreement on these latest proposals. They have the potential to save many people much hardship, and they would also help save the banks from a default-induced crisis, which would see more people failing to repay their debts in the face of increasingly challenging economic times.

Lyndsey Burton is founder of, a consumer information site covering personal finance and home technology services.

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