Select Committee on Treasury Fifth Report


Credit and charge cards

  1. The credit and charge card market is highly contested, with about 1500 cards available in the UK.[44] The majority of credit and charge card advertising prominently displays the APR of the card, with the implication that the lower the APR, the cheaper the card is. However the Committee took evidence that the APR alone does not provide sufficient information for credit and charge card customers to make meaningful comparisons of the cost of credit. A study by the Consumers' Association found that for the same transactions and same APR, interest charges could vary by some 36%, depending upon the interest rate calculation method used by the credit and charge card supplier.[45]
  2. This conclusion was supported by the banks, who agreed that the APR alone is insufficient to enable their customers to work out the cost of credit. There are other features of credit and charge cards, such as the length of the interest-free period, and the length of the period over which interest is paid, which also determine the real cost of credit.[46] Banks admitted that these varying features made it difficult to understand competitors' products.[47] Abbey National plc accepted that interest charge calculations were complex, commenting "it may be that with assiduous research you can pin down every aspect of the calculus...".[48] This admission prompted press comment on the difficulties of working out interest charges, with Dr Robert Hunt, deputy director of Cambridge University's Isaac Newton Institute quoted as saying "Even for a professional mathematician it took some time and I chose a very simple example".[49]
  3. The Committee believes that the lack of transparency in the credit and charge card industry acts against meaningful competition, and is therefore against the consumers' interest. The Committee recommends that credit and charge card companies should publish, with equal prominence, all the variables that make up the actual cost of credit. This should be done in a way which allows consumers to make straightforward comparisons between the costs of credit offered by all credit and charge card products.
  4. Customers require clear information as to the actual cash cost to them of not paying off the credit and charge card in full by the due date, the details of which can usually only be found by a detailed examination of the small print. The Committee recognises that product differentiation can be an important feature of competition and satisfying customers' differing needs, but is concerned that for individuals to understand interest rate calculations requires an unreasonable amount of time and effort. The Committee recommends that every credit and charge card statement shows the "estimated interest charge if only the minimum balance is paid by the due date", as a number do already.
  5. In light of confusion revealed over interest rates and charges on credit and charge cards, the Committee expects to carry out further investigation of this matter.
  6. SME Bank Account Statements

  7. This lack of transparency is not restricted to credit and charge card interest charges, and extends through to interest charges on SME bank accounts. The Competition Commission noted a lack of a breakdown on bank statements of interest payable between authorised and unauthorised overdrafts; this makes it "more difficult for SMEs to monitor their charges, to query the charges levied, to take action to reduce the incidence of unauthorized overdrafts or to investigate the scope for seeking a better deal from an alternative supplier, to the detriment of SMEs".[50]
  8. SMEs have a range of factors to consider when choosing a principal bank, with bank charges being just one of them. The Federation of Small Businesses list the most important factors in the choice of a principal bank as bank charges, quality of Business Managers, location of bank branches, granting of overdraft facilities, and terms and conditions on loans.[51] However, transparency of charges is essential if customers are to be capable of making fully informed decisions. The Committee welcomes the recommendation of the Competition Commission for a behavioural undertaking, by the eight main clearing groups, to include transparency of overdraft charges on bank statements.[52]
  9. Cheque Clearing

  10. In the last report our predecessors highlighted the apparent reluctance of banks to invest in modern technology to speed up cheque clearing, despite the fact that cheques are likely to remain an important part of the financial system.[53] Despite the increased use of debit and credit cards for retail payments, leading to a decline in cheque usage, evidence from Lloyds TSB suggests that by 2009 annual cheque volumes will still be around 1.5 billion.[54] In 2000 the value of cheques cleared in London and Scotland was 1,329 billion,[55] therefore this clearly remains an important part of the financial system. Despite this the Committee sees little evidence that the banks are seriously addressing the speed of cheque clearing. The Committee is disappointed by the lack of clear progress made by the banks in reducing the overall clearing time for cheques.
  11. Improving transparency in bank literature

  12. The transparency in banks' literature was discussed with Abbey National, HBOS and National Australia Bank. The HBOS leaflet promoting the Bank of Scotland's current account was examined.[56] If the minimum monthly level of payments into the account is not met, balances earn a lower interest rate, and incur higher overdraft interest rates than advertised. The different interest rates applied were not disclosed in the leaflet. HBOS agreed to review the leaflet and make any necessary amendments to improve transparency.[57] A similar commitment was made by Abbey National, HBOS and National Australia Bank with regard to their credit card literature.[58]
  13. The Committee welcomes the willingness of Abbey National, HBOS and National Australia Bank to try and improve transparency in their literature, and looks forward to reviewing the revised literature. The Committee hopes that this positive attitude is shared by all banks. The Committee urges all the banks to review their promotional material with a view to achieving genuine transparency.


44   Q231 & Q36 Back

45   . Which? Magazine article "Do you know how much you're really being charged?", November 2001 Back

46   . Q360 & Q238 Back

47   QQ354 - 364 Back

48   . Q359 Back

49   Financial Times, 19th May 2002, Page 3, "Banks say credit card rates are baffling consumers". Dr Robert Hunt has submitted a memorandum on the calculations involved in credit card interest repayments. See Appendix 21 Back

50   . Competition Commission para 2.496 - 2.497 Back

51   Ev 13 Back

52   . Competition Commission Report - paragraph 2.550- (l) Back

53   Treasury Committee: Fifth Report, Session 2000-01: Banking and the Consumer: HC 138, Paragraphs 35 - 36 Back

54   Ev 58, para 10.3. 2.64 billion reduced by 5.8% and then 41% is 1.47 billion Back

55   BBA: Banking Business: An Abstract of Banking Statistics Volume 18 2001, Table 7.02 Back

56   QQ429 - 436 Back

57   Q436 Back

58   Q346 Back

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Prepared 30 July 2002