The financial regulatory authorities appear to be getting concerned once again about a possible ‘debt bubble’, and the effect this could have on the economy as a whole.
The Bank of England’s Financial Policy Committee (FPC) is charged with identifying systemic risks that could affect the financial system. It was formed in response to the credit crunch of around a decade ago, when an unsustainable credit boom came crashing down in spectacular fashion, and the UK was plunged into recession.
The FPC issued a statement from its meeting on March 22 2017, and item 4 on this statement shows that the Committee is worried by recent trends. The statement reads:
“UK household indebtedness remains high by historical standards and has begun to rise relative to incomes. Consumer credit has been growing particularly rapidly. This could principally represent a risk to lenders if accompanied by weaker underwriting standards. The FPC judges that these standards should be monitored closely.”
The statement notes that the Prudential Regulation Authority (PRA), which regulates the prudential standards of banks and other large financial institutions, is conducting its own review of firms’ lending criteria, and the FPC says that it will conduct its own assessment of the PRA’s findings once these have been published.
UK household debt rose sharply in 2016 to reach a record high. As of the end of the year, the average UK household owed £12,887 (excluding mortgage debt). This is an increase of £1,117 per household compared to 12 months ago, representing a rise of around 9.5% – the highest annual increase since 1997.
Total UK household debt has reached £349 billion, well above the £290 million figure seen in 2008 at the height of the banking crisis. This £349 billion figure represents 27.4% of total household income, which is the highest share for eight years.
The Financial Conduct Authority (FCA) estimates that 3.3 million people in the UK are in what it describes as ‘persistent debt’. It believes that a person has a persistent debt problem if, over an 18-month period, they pay more in interest and charges than they pay towards repaying their debt. The regulator adds that 1.8 million people have had persistent debt for two consecutive 18-month periods.
The FCA has therefore launched a consultation on proposed new rules for how credit card firms handle customers in persistent debt.
Under the regulator’s proposals, firms would first be required to prompt any customer with a persistent debt problem to make larger repayments, provided the firm believes the customer could afford to do so. If a customer remains in persistent debt after a second consecutive 18-month period, firms could be compelled to propose a repayment plan for these customers.
If a customer fails to engage with their firm’s efforts to help them, or declines to make faster repayments when they could have done so, firms will be required to suspend the customer’s use of the card.
The FCA also proposes that where customers are experiencing extreme debt problems, the credit card firm should consider reducing, waiving or cancelling interest or charges due.
The proposals also contain measures requiring firms to monitor customers’ repayment records, and thus to identify customers in difficulty and take appropriate action to assist them at an early stage.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.