The changes, which followed a comprehensive study of the market, provide more protection for credit card customers in persistent debt or at risk of financial difficulties.
The study analysed the accounts of 34 million credit card customers for five years and surveyed almost 40,000 consumers.
In particular, the analysis found that in 2014 around 5.6 million people were potentially in problematic debt.
This includes two million people who were either in arrears or had defaulted, a further two million who had held a balance above 90 per cent of their credit limit for at least one year, and a further 1.6 million people who were only making the minimum repayments.
Taking back control
Under these new rules credit card firms are required to take a series of escalating steps to help customers who are making low repayments over a long period, beginning when the customer has been in persistent debt over 18 months.
After this time, firms need to contact customers prompting them to change their repayment and informing them their card may ultimately be suspended if they do not change their repayment pattern.
This means banks are required, if they had not done so already, to contact clients with persistent debt.
Persistent debt is defined as when, over a period of 18 months, a customer pays more in interest, fees and charges than they have repaid off the principal.
It is important to note that credit card firms who do not comply with the new rules could be subject to action by the FCA.
Credit card firms have also agreed to voluntary measures, which will give customers control over increases to their credit limit.
And customers in persistent debt for 12 months will not be offered credit limit increases which should result in around 1.4m accounts per year not receiving such offers.
Where advisers can help
For mortgage advisers, there is an opportunity to assist these types of clients.
These changes could be a real problem for people who are unable to come to an arrangement with their credit card lender and this may trigger increased demand for help with debts.
There is also the risk that any ‘arrangement’ entered into, may affect their credit rating and cause problems with obtaining future mortgages.
Mortgage advisers could assist by looking at remortgage or second charge options for the client. Structuring the unsecured debt over a fixed period on a capital and interest basis may be a suitable way to ensure the debts are guaranteed to be repaid if all the payments are met.
Of course, careful consideration should be given when thinking about converting an unsecured debt into a secured debt as the borrower’s home could be at risk if payments are not made.
However, a significant benefit is that the cost of the interest will be lower, potentially making payments more affordable and money that would have been spent on a higher interest rate can be used to repay the debt instead.
It’s also a good opportunity for advisers to review their client’s protection plans so that payments can continue to be met even if something happens to their circumstances.
As these types of clients are likely to either have already had or start to see more communication from their credit card providers, now is a good time for advisers to market the way in which they can assist.