Consumer credit and the FCA: credit card fees and charges – an update for firms

This letter and its underlying review is a result of the FCA’s work in this area, beginning in 2017, which assessed consumer credit fees across a number of sectors. The data at that time raised concerns within the FCA as their findings suggested firm’s application of multiple fees and the consumers subjected to them often led to fees tripling because of a single late payment. The FCA also undertook follow up work in 2017/2018 to gain a deeper understanding of fees and charges relating to credit cards and the impact it has on consumers.

In the press release accompanying the letter, Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations of the FCA stated “it is unacceptable for firms to ignore signs of customers struggling financially and continue to charge them fees for missed payments they likely can’t afford”, with the reminders to firms echoing its continued commitment to delivering against their objectives of securing consumer protection, promoting effective competition, as well as protecting and enhancing the integrity of the UK financial system.

The review informing the letter had a primary focus on returned payment fees, over-limit fees and late fees, with the goal being to better understand their causes and applications and the types of consumers utilising them. It found that consumers were being charged fees on multiple occasions, with some having multiple fees imposed in a single billing cycle. This led the FCA to conclude that firms are unable to adequately identify or deal with signs of customers in actual or potential financial difficulty.

The review’s findings were grouped as: missed payments causing a late fee being imposed, consecutive over-limit fees, returned payments causing returned payment, late and over-limit fees, and authorised transactions triggering over-limit fees.

Missed payment causing late fee

The review found a significant number of customers missed payments, incurring late fees, with many triggering such charges more than 4 times in a 12-month period. Customers of firms that did not operate fee caps could incur 8 to 12 fees in a 12-month period (either consecutively or non-consecutively and depending on whether intermittent payments were made). The FCA has significant concerns as to the fairness of this. The adoption of a range of measures could mitigate against consumer harm in this area. This could include liaising with a customer to ensure that appropriate payment timetables are established to avoid missed payments, or adopting measures to assist the customer with budgeting around regular payments, avoiding late fees.

Consecutive over-limit fees

The data showed that a significant number of customers' accounts across most firms triggered over-limit fees in consecutive cycles. Many accounts triggered these fees 3 or more times within a 12-month period. Again, the FCA has expressed concern that firms are failing to recognise multiple fees as a sign of financial difficulty or these fees being a cause. Firms could implement grace periods whereby customers would have a period of time where over the limit fees were not imposed. This, alongside with notifying the customer that such grace period had been invoked, gives the customer time to rectify the issue without the imposition of fees.

Payment returned causing returned payment, late and over-limit fee

The FCA found that the number of customers triggering a returned payment, late and over-limit fee was not insignificant. However, charging multiple fees in a single billing cycle was not as prevalent across firms as for other events. The FCA notes that most firms it consulted had already taken steps to prevent this event from happening in the future.

Authorised transactions triggering over-limit fees

The FCA found a large number of customers triggered over-limit fees as a result of an authorised transaction pushing the customer over their agreed credit limit. The decision to authorise a transaction is made by the firm. Many customers were charged this fee on multiple occasions across a 12-month period, which the FCA suggests could be an indicator of possible financial difficulties. In future, firms may choose not to authorise such payment, potentially achieved by implementing technological solutions to assist those in persistent debt. This could include the adoption of pre-emptive notifications via text or email, advising customers of their balance or lack of funds to service planned payments. In the absence of changes, this could potentially incur a late fee. Given this, firms would need to ensure measures are adopted across all scenarios where fees could be imposed, to avoid unfair customer outcomes.

Persistent Debt

In February 2018, the FCA published new rules on credit card debt, aimed at protecting consumers in persistent debt and helping them pay off their debt sooner. Although the rules came into force on 1 March 2018, firms did not have to comply with them until 1 September 2018, but since then the market has already reported that the length of introductory 0% interest deals on credit cards is dwindling in response to the new regulatory environment. The FCA has stated that it will review how effective the new rules are once they have been fully implemented by firms and in operation for long enough to assess consumer outcomes. While there is an expectation that this would be in 2022 or 2023, in light of the FCA’s concern of firms’ failures to recognise customers in financial difficulty and the application of forbearance, it would be unsurprising if the changes take place prior to this.

What next for firms?

The letter states that there is a range of opportunities for firms to improve consumer outcomes, and the FCA has seen a number of firms included in their sample review their fee structures, with the changes resulting in customer savings totalling £80 million. These include, amongst others, reviewing and capping fees, as well as the refresh of communications to avoid fees being triggered.

Firms are reminded of their obligations under CONC 7, and will need to assess whether their policies and procedures in relation to fees and charges consistent in the delivery of fair consumer outcomes. Further, more firms will need to regularly assess compliance with CONC 7, reviewing their systems and controls adopted in relation to arrears, default and recovery. The FCA gave examples of questions firms should pose to themselves when considering this, such as:

• What does your firm regard as signs of actual or possible financial difficulties? Are (multiple) fees and charges considered as one of those signs?
• Does your firm flag on its systems those customers who are repeatedly incurring fees on their account?
• What are the range of actions your firm takes when identifying a sign of actual or potential financial difficulty and are you satisfied they meet the requirements of CONC 7.3.4R?

The FCA also prompted firms to consider the rules in CONC 6.7.3AR around “appropriate action”, reminding firms that they must monitor credit card customers’ repayment records and take steps where there are signs of actual or possible financial difficulties. Appropriate action examples are included in CONC 6.7.3BG (2) (a), such as firms considering suspending, reducing, waiving or cancelling interest, fees or charges.

In order to continue to provide credit in accordance with the rules prescribed by the FCA, firms must remain alive to continued changes in this area, with their policies and procedures having the protection of consumers at its core.