Borrowers with overdrafts, personal loans and credit cards will receive tailored support from their provider under new guidance confirmed by the City regulator.
The Financial Conduct Authority (FCA) said firms should avoid a “one-size-fits-all” approach when helping customers whose finances have been impacted by coronavirus to get back on track.
Measures confirmed on Wednesday will also help users of store cards, catalogue credit, motor finance, buy-now-pay-later and rent-to-own products and customers of pawnbroking firms.
They will apply to people who have already had support from their lender as well as those facing new financial difficulties after current guidance ends on October 31.
Many people have already had a £500 interest-free overdraft buffer and had the interest they pay kept lower than their bank would otherwise charge.
Several banks had previously announced new overdraft rates of around 40% before the coronavirus pandemic struck – so some people struggling to get out of the red could see their costs jump.
Under the FCA’s new guidance, the regulator expects firms to provide tailored support which reflects customers’ own circumstances.
They should prevent customers’ balances from escalating once they have put in place a repayment arrangement by suspending, reducing, waiving or cancelling any interest, fees or charges necessary to make that happen, according to the new guidance.
Firms should also work with customers approaching the end of a payment holiday to provide support before they miss payments, it said.
And firms should be flexible and employ a full range of shorter and longer-term options to support their customers and minimise stress and anxiety experienced by customers in financial difficulty, the regulator said.
It added that customers should not be pressured into repaying debts in an unreasonably short period of time.
Repayment arrangements should also take into account a customer’s wider financial situation, including their other debts.
Christopher Woolard, interim chief executive at the FCA, said: “For those who can restart payments, it is in their best interests to do so.
“However, for those who are still facing payment difficulty, or are newly in difficulty, as a result of coronavirus, we expect firms to offer a tailored package of support taking into account the ongoing situation and local or national responses to the crisis. There should be no ‘one-size-fits-all’ approach taken by firms to help consumers get back on track.”
The FCA will monitor how firms apply the guidance.
Where consumers require this new further support from firms, this will be reflected on credit files to reduce the risk of unaffordable lending, the FCA said.
The announcement was made as a survey from comparethemarket.com found more than a third of people have relied on their overdraft during the lockdown – and nearly a fifth of this group remain stuck in the red.
Some 35% of people have turned to their overdraft at some point since the coronavirus crisis started, comparethemarket.com found. Within this group, 17% are still stuck in it.
Furloughed workers are particularly likely to have relied on their overdraft, with nearly half (46%) having used it since the lockdown started. Just over a quarter (26%) are still using it.
Across all overdraft users, the typical amount they went into the red by was £515 – suggesting many people have made the most of the £500 interest-free buffers offered by banks during the crisis.
Middle-aged people were particularly likely to have sunk further into the red. The average 45 to 54-year-old overdraft user went overdrawn by £597.
The research among more than 2,000 people also found that on average, they feel it will take seven months for their finances to return to “normal”.
John Crossley, head of money at comparethemarket.com, said: “There are alternatives (to overdrafts) that may turn out to be more cost-effective. Some credit card providers have a cheaper interest payment compared to an overdraft fee, while some still offer 0% APR (annual percentage rate) or 0% balance transfer deals.
“However, as providers are tightening eligibility criteria, there is no denying it is much harder to find these – so it’s worth looking around to see what is available to you and using eligibility checkers.
“People should also be mindful that 0% APR deals tend to be time-limited, and after a fixed period – typically 12 or 18 months – revert to higher interest rates.”