Session 2003-04 No. 12 12 February 2004
TRANSPARENCY OF CREDIT CARD CHARGES:
TREASURY COMMITTEE CHAIRMAN PRESSES CREDIT CARD INDUSTRY TO CONTINUE PROGRESS TOWARDS FAIRNESS AND CLARITY FOR CONSUMERS
The Treasury Select Committee published its report into the Transparency of Credit Card Charges on the 17th December. The Committee made a number of recommendations and has been monitoring progress towards the goal of ensuring more transparency and competitiveness in the market together with fairness for consumers.
The Chairman of the Treasury Select Committee, John McFall MP, has today written to the Chief Executive of the main industry body-the Association for Payment Clearing Services (APACS), which represents all the leading card issuers. The letter has been copied to the chief executives of the leading credit card issuers from whom the Committee took oral evidence (Barclays, HBOS, Lloyds TSB, MBNA, Nationwide and RBS).
The text of the letter is below:
Dear Mr Pearson
As you know, following a substantial programme of oral evidence the Treasury Committee published its Report into the Transparency of Credit Card Charges on the 17th December. This report made a number of recommendations including clearer information for consumers displayed in a Summary Box and on monthly statements (with minimum font sizes); standardisation of methods of calculating APRs; greater transparency and possibly standardisation regarding the way interest charges are calculated; and more information on the revenue raised from transaction and penalty fees.
As discussed at the meeting at the DTI on Wednesday 4th February, the Committee recognises that there has been progress on some of these issues but in other areas we are concerned that the industry’s response so far has been inadequate. It seems that progress in some key areas (which we accept are technically complex) raised by the report, in particular displaying the cost of borrowing scenarios, and more transparency and possible standardisation regarding the way interest charges are calculated, is slow. I hope there is no question of some in the industry seeking to create obfuscation around these issues, rather than to seek genuine solutions which will benefit consumers and the image of the industry.
A lack of commitment is not constructive and a perception that the industry will only do the minimum necessary would not be acceptable to either the Committee or to consumers. We hope the industry will continue to direct its efforts towards working constructively with the Committee and consumer groups to improve matters, rather than merely gathering information to legitimise inaction. With this in mind, I suggest a regular meeting between Committee staff and APACS approximately every month to monitor progress.
The drive for improvement needs to come from the top of the industry. That is why we took evidence from the Chief Executives of the five largest credit card issuers in October. I have copied this letter to them and the other Chief Executives that appeared before the Committee.
In case of any doubt, may I remind you that the Committee very much views the Report as an interim step and we may well wish to return to this issue in June/July for further oral evidence sessions from you and your members if it appears that there has been insufficient progress towards achieving the goal of clear information and fairness for consumers.
John McFall MP
Chairman of the Committee
Note for Editors
The Treasury Committee's report 'The Transparency of Credit Card charges' HC 125 was published on the 17th December 2003 and is available from Stationery Office Bookshops (tel: 0345 58 54 63). The full text is also available on the Internet (www.parliament.uk).
At the time of publication on the 17th December, John McFall MP, Chairman of the Treasury Committee, said:
"Consumers have been badly let down by credit and store card companies. During December, the Christmas period, £13 bn is expected to be spent on credit cards. Consumers are good for the industry, but the favour is not returned.
During our inquiry, we discovered a lack of transparency which leaves consumers in doubt over the way charges are set. Problems include:
- 2 different methods for calculating the APR, making comparisons impossible for the consumer
- up to 10 different ways in which charges are calculated, meaning that users of cards with the same APR can be charged different amounts
- excessive levels of interest rates (as even some bank chief executives suggested)
- lending and marketing practices which can lead users to sleep-walk into financial disaster
- cosy arrangements between store card issuers and retailers which leave customers unable to gain the full facts about their cards.
To date, there have been no significant industry-wide initiatives to remedy the situation. Our inquiry-in the words of one insider-has been a 'wake up call' for the industry. Over the next 6 months, we will be looking to the industry & regulators to:
- introduce the 'Summary Box' to provide key information in a clear way
- bring in a single method for calculating the APR
- work on standardising the way interest charges are calculated
- publish information, presently unavailable, on the way transaction & penalty charges are set
- develop ways of indicating the costs of different cards under different use/ repayment scenarios.
The regulatory regime governing credit cards is from a bygone age and is no longer fit for purpose. The DTI has been busy launching consultations but not acting, and the OFT has been passive. We will be monitoring the actions of the industry, the Government & the regulators over the next 6 months to ensure more transparency and competitiveness in the market. If we are not satisfied we will come back to this issue. Meanwhile, we wish to work with the industry to help bring about a better deal for consumers and to end some of the endemic obscurity surrounding current industry practices."
The Report's conclusions:
£120 bn was spent on credit cards and store cards in the UK in 2002. This figure is growing rapidly each year. £13 bn is expected to be spent using such cards over December, the Christmas period, with £2bn of this carried forward to next year. Consumers now owe around £50 bn in total on credit cards. So it is vital that people know they are being treated fairly and reasonably by card issuers. Yet the costs involved are not always made clear to users in the advertising and marketing; and even where people can see the costs, they cannot easily understand them.
As a result:
- the interest rates applied to cards can be very high (in the case of store cards way above the interest rates set by the Bank of England) because a lack of trans-parency stops competitive pressures working properly to bring rates down, e.g. by stopping people comparing cards easily to see what is the best deal for them;
- users can get hit by charges they are not expecting; and
- the obscurity in the costs-and the marketing methods used-can, for some people, lead to the build up of serious debt problems.
Why has this situation been allowed to arise? [paras 13-17]
Regulators have not kept pace with changes in the card market: the Consumer Credit Act is "from a previous age". The regulatory authorities-Dept of Trade and Industry and Office of Fair Trading-have been "too passive" in safeguarding consumers' rights. The Consumer Credit White Paper (Cm 6040) published on 8 December is a step in the right direction, but "we hope [it] is the start of a period of action by the DTI, rather than just the start of a new round of consultations". The industry, meanwhile, has been insufficiently willing to improve matters of its own volition. Recent months have seen progress, but largely at the prompting of this Committee.
What needs to be done in respect of transparency of credit card charges?
A better and clearer overall presentation of terms and charges: a Summary Box
In the USA, card issuers must show all the main costs associated with a card in a table, known as a 'Schumer Box'. The UK industry has been considering this, but until recently little has emerged. Challenged by this Committee in July to bring firm proposals for a Box to a further hearing in the autumn, the industry now has specific proposals for a 'Summary Box'. All issuers are committed to introducing it by April next year. It will be reviewed in September next year. The Committee calls for:
- the Box to be put on a statutory footing and included in the Banking Code [para 27]
- work to be done on how the costs of different borrowing 'scenarios' could be included in the Box without overloading it [para 31]
- the Box to be on a fully standard and consistent basis across all cards [para 35]
- a minimum size for the typeface used in the Box [para 36]
Better information on monthly statements
The Committee calls for:
- the Summary Box to be included on monthly statements [para 38]
- monthly statements to make clear how long it would take to repay a debt if only the minimum payments were made, and the financial implications of this [para 39]
A single agreed system for calculating the "APR" (Annualised Percentage Rate)
The Committee is "astonished" that the APR, required to be given on marketing material and the main item of comparative information for the user, is being calculated in more than one way; regulatory authorities have not resolved the problem despite knowing about it for some years. The new White Paper provides for new Regulations to resolve the matter by October 2004. The Committee calls for:
- the October 2004 deadline not to be missed and for work to achieve it to be seen as a priority [para 45]
- the DTI, OFT and industry to establish a "commonly and legally acceptable" working basis for calculating the APR to use before that date, so that consumers are no longer confused [para 45]
Clearer methods for calculating interest
At present, a wide variety (the Consumers' Association found 10) of different ways exist for calculating the actual interest charge, quite apart from the interest rate - e.g. in such matters as the date from which interest applies. This means users of two cards with the same APR can, with the same pattern of card use, be charged widely different amounts. Some differences are areas of legitimate competitive advantage between issuers, but many are so obscure to the user that any competitive effect is lost. Where differences and their effects cannot be made clear to the consumer, the Committee calls for:
- some degree of standardisation in charging methods
- talks between DTI and the industry to bring this about [para 52]
Other issues: risk-based pricing, order of payments, transaction charges & penalties
The Committee calls for:
- an end to situations in which the user may not know what interest rate is to be applied to a card until after it has been issued [paras 57/58]
- clear warnings for users wherever part-payments of an amount outstanding are allocated to the lower interest bearing parts of the debt first [para 60]
- full advance disclosure of transaction/penalty fees applicable-it is not sufficient for example to say simply "charges will apply" [para 62]
- DTI study of whether the level of fees charged are a fair reflection of the costs to the issuer; and for fees for those with low credit limits or low balances to be set at a level which does not risk making "debts spiral out of control" [paras 67/69]
What needs to be done to tackle irresponsible lending?
Credit limits, credit checking and credit card cheques
Among other recommendations, the Committee calls for:
- the industry to introduce a system whereby a limit is placed on the amount of any unsolicited increase in credit limits [para 86]
- consumers' ability to repay to be assessed more on their overall income and credit commitments and less on just their payment history [para 90]
- clearer warnings for consumers about the conditions attached to credit card cheques, and a ban on the issuing of unsolicited credit card cheques [para 94]
Better warnings about making only minimum payments
The Committee calls for:
- clearer information, to be included on monthly statements and the Summary Box, about the consequences of making only the minimum level of payments [para 99]
- the industry always to set minimum payments at a level which does not increase the overall debt, and to monitor closely those making only the minimum payment for 6 straight months [para 100]
Marketing practices [paras 102-106]
The Committee concludes that credit card companies' marketing can be "characterized as highly misleading and highly damaging to the interests of the consumer" and that "If targeted indiscriminately marketing material could encourage consumers with existing debt problems to increase their commitments" and thus increase over-indebtedness. Examples of poor practice include the sending of an application form to a named dog and the sending of a card to a person in a rehabilitation clinic who had previously run up a £10,000 credit card debt to pay for his addiction. The Committee calls for:
- OFT to set down clear guidelines on credit marketing [para 105]
- issuers to monitor their procedures closely to ensure there are no abuses [para 106]
What about the store card market? [paras 110-128]
The Committee was surprised by what it found in the store card market, gaining the impression that there is in practice a "cosy relationship" between store card providers and the stores as a result of which card users did not gain the full facts about their cards. Very high interest rates are charged: although this reflects other costs as well as lending costs, the Committee feels that "competition is not working properly". Retailers are letting their customers down in not overseeing the quality of the financial services offered in their name.
At its hearing with Mr John Vickers, the Chairman of the OFT, in September the Committee pressed him hard on these points. A week later, the OFT announced it would be making preliminary inquires about the store card sector. The Committee welcomes these inquiries, and also calls for:
- more progress in improving the transparency of store card terms and charges, and provision of better information on monthly statements [para 115]
The Treasury Committee is a Select Committee of the House of Commons, appointed to examine the expenditure, administration and policy of the Treasury, the Inland Revenue, Customs and Excise and associated public bodies.
Mr John McFall (Chairman), L, Dumbarton
Mr Nigel Beard, L, Bexleyheath and Crayford
Mr Jim Cousins, L, Newcastle upon Tyne Central
Angela Eagle, L, Wallasey
Mr Michael Fallon, C, Sevenoaks, (Sub-committee Chairman)
Norman Lamb, Lib Dem, North Norfolk
John Mann, L, Bassetlaw
Mr George Mudie, L, Leeds East
Mr James Plaskitt, L, Warwick and Leamington
Mr David Ruffley, C, Bury St Edmunds
Mr Robert Walter, C, North Dorset [not a Member of the Committee during the inquiry]