This paper sets out the response of the OFT to those
recommendations in the Treasury Committee's (TC) report published
in December 2003 which call for action by OFT or are relevant
TC RECOMMENDATIONS FOR ACTION BY OFT
1. OFT should adopt a far more active approach
to safeguarding the rights of consumers, and deliberately attempt
to broker a voluntary agreement where statutory powers are considered
- The OFT has a very wide remit and limited resources.
We concentrate our resources on actions which will have the most
effect on markets and on preventing potential or actual consumer
detriment. Focus such as that provided by the TC is helpful in
identifying such areas of concern.
- The OFT takes a very active approach in the consumer
credit market. We use our enforcement powers where they are the
best tool to address specific problems causing detriment: examples
are the recent actions on Barclaycard's 0% forever promotion,
the transfer of a number of store cards to credit cards and earlier
actions taken on advertising of introductory credit card interest
rates as APR and the advertising of "interest free credit"
in cases where consumers were liable to pay interest. We will
continue to take the lead in the use of injunctive powers under
the Enterprise Act, working with other enforcement partners, notably
trading standards services.
- We also use our powers under the credit licensing
system and have developed, in conjunction with enforcement action,
a policy of providing continuously reviewed guidance to business
on standards of behaviour required. This drives up standards in
the market generally and in specific areas - such as debt management.
- The OFT also provides information for consumers,
carries out studies of markets, provides an important input to
DTI's review of legislation, and seeks judgments through the courts.
- The OFT looks for ways to raise standards without
statutory intervention and to broker agreements with businesses.
This is why OFT has been, and remains, in close contact with APACS
on the summary box proposal. It also underlies the OFT's codes
scheme which seeks to raise standards across business sectors.
2. DTI, OFT and the industry should work together
to establish a "commonly and legally acceptable" working
basis for calculating APRs, prior to introduction of new Regulations
in October 2004.
- The OFT has worked with DTI
and APACS to seek such an agreed basis. We all agree that consumers
need more clear information than the APR or any single cost figure
can convey, that the Schumer/Summary box is a good approach,
that the differences of legal view on the interpretation of the
Total Charge for Credit (TCC) Regulations e.g. on the 'blended
rate' issue stem from ambiguities in the Regulations, and that
those ambiguities are best addressed through the DTI review, and
not, for example, by OFT enforcement action on this point at least
while the DTI review is in train.
- Our disagreement with APACS is based on genuine
differences of legal interpretation of ambiguous Regulations.
It would not appear that adherents to the APACS view are gaining
undue commercial advantage; in fact they will typically advertise
higher APRs than if they adopted the OFT interpretation.
However, we consider that our interpretation is the right legal
interpretation and the one which provides the more accurate picture
of the cost of credit deals for consumers. Thus, we do not think
it would be right for us to adopt the APACS approach which, anyway,
is not shared by the industry as a whole.
- The OFT is working closely with DTI and others
to ensure that the review of the Regulations tackles all outstanding
issues and problems, and produces a clear and unambiguous set
of assumptions for calculating the APR.
- We welcome APACS Summary box approach, but believe
that this needs to be developed and extended. It should also be
reinforced by changes to the CCA regulations on the form and content
of agreements and pre- and post-contract disclosure. DTI proposals
are that new regulations in those areas will also come into force
in October 2004.
- The OFT continues to work with APACS on how best
to improve transparency and consumer information.
3. Regulators and industry should commission
consumer research to determine how the summary box may be made
better and clearer for consumers. Industry should work with consumer
groups to develop scenarios for consideration for inclusion in
the box. It should appear on monthly statements and minimum font
sizes should be adopted: 18pt for APR, 12pt for all other text.
It must be fully standardised and consistent, and the placing
clear and prominent. It should be implemented by April 2004, and
should be enshrined in the Banking Code.
- As indicated earlier, the OFT
has commissioned research into the information needs of consumers
when they are contemplating, acquiring, and using credit cards.
This research includes how best to use a summary box and what
sort of scenarios consumers would find most helpful. The research
covers a large sample of consumers and so includes the different
types of borrower using cards. The results of this research will
be available soon and will inform our response to DTI's consultation
paper on reform of the regulations.
4. The OFT should be prepared to mandate a
standard method for applying interest if credit card providers
are unwilling to do so.
- Besides the fact that the OFT
has no power to mandate such a standard, in our view standardising
methods of applying interest carries risks in terms of competition,
innovation and consumer choice.
- We do think, however, that industry could usefully
develop a 'standard' for applying interest from which lenders
could deviate as they wish, provided that the method used
and its implications for any interest-free period are clearly
signalled to the consumer, possibly as part of the Summary Box.
- Industry concerns about the potential Competition
Act consequences of any such standard being agreed were covered
by the OFT's evidence to the TC. Mr Vickers said: "I think
there are various ways in which an idea along the lines just mentioned
could be taken forward. We are always open to give informal advice
to parties on competition law questions and if APACS wish to seek
that guidance from us we would be happy to give it." That
remains our position.
5. OFT should monitor the proportion of customers
who obtain advertised favourable rates compared to those ending
up on higher rates due to risk-based pricing, and ensure that
a system is in place to prevent consumers from being misled.
- The OFT has no power routinely
to monitor the rates offered to customers by a credit card company.
We have the power to require the credit card company to provide
us with information on its calculation of the typical APR where
we have grounds to suspect that it is incorrect.
- There is limited guidance in law as to what constitutes
a typical rate, but we have given guidance that in our view of
the current regulations this would be the rate at or below which
the majority of loans (by number) arising from the advert are
offered or expected to be offered. The DTI reform proposal will
raise this level to 66%; we welcome this.
- In practice it would be hugely resource intensive
(and very difficult) to monitor rates applied to individual accounts.
The power to require information where we have grounds for suspicion
allows us to act in those circumstances.
6. Regulators and industry should develop
a strategy for promoting awareness and a sense of ownership amongst
consumers of credit references and the factors that affect their
- We agree. This is best seen
as a part of the wider task of improving consumer education in
credit and debt issues. We will be considering how best to develop
awareness in this way.
7. OFT and DTI should address the regulatory
aspects governing products amounting to 'sharp practice' and 'misleading
promotional material', e.g. Barclaycard's "0% forever"
- The OFT carries out routine
monitoring of a variety of credit advertising including advertising
of credit and store card offers. Where this identifies breaches
of the legislation, those breaches are dealt with in an effective
- In the last 4 months we have considered 14 offers
from a variety of card providers. Eight were found to comply with
the law. Our action has been reported publicly in three cases
(Barclaycard, M&S and GE Capital). A number of other cases
are under investigation.
- We approached several large credit card providers,
under the Unfair Terms in Consumer Contracts Regulations, in December
last year about the clarity of their terms and conditions and
default charges. That work is still in progress.
8. OFT should set down clear guidance for
credit card marketing, laying down the standards of conduct that
consumer credit licence-holders need to demonstrate. These should
be incorporated into the Banking Code or directly enforced by
the OFT. Consumers should be encouraged to complain to OFT regarding
- In the light of enforcement
action, the introduction of new regulations on advertising in
October, and further monitoring of credit card and other credit
advertising, we will actively consider whether guidance on compliance
with the law or in relation to unfair business practices is needed.
- Initial work on compliance with advertising requirements
for advertisements appearing in national newspapers shows that
while most advertisements comply with the law, a significant minority
(20%) contained non-technical breaches of the law. In the light
of this initial work, we will be launching a wider project later
this year, working with the trading standards service, to establish
a fuller picture so that we can effectively address this problem.
9. OFT should investigate the selling practices
of payment protection insurance, how it is priced and whether
the market may benefit from increasing competition.
- We are aware of concerns about
payment protection insurance, which we have considered, in the
specific context of debt consolidation, in the market study which
we are currently conducting. (Report expected to be published
in March.) We have so far decided against investigating this market
more generally, on the basis that there was an opportunity to
address known concerns in the current DTI review of the Consumer
Credit Act and the forthcoming adoption by the FSA of responsibility
for the regulation of general insurance. We will inform the DTI
and FSA of relevant findings of our study, and keep the possibility
of an investigation as proposed by the Committee under review.
10. Steps should be taken towards developing
greater financial understanding and awareness among consumers.
- The OFT is working with the
FSA (whose resources are on quite a different scale from ours)
and its financial capability strategy working group to create
and implement a national consumer education strategy. In addition,
we are developing OFT publicity and campaign work to encourage
a responsible and informed approach to credit and borrowing.
- The OFT's research into credit card information
(see above) will increase our evidence base and help to inform
the process of improving consumer education and awareness.
- The OFT will run a major awareness campaign in
the autumn to equip consumers with information about various forms
of credit to enable them to make effective decisions within this
- There may be recommendations from OFT market
studies in this sector which will recommend specific publicity
campaigns. These will be set in train soon after reports are published,
an example of this could be store cards.
11. TC believes that the White Paper's proposals
to calculate the APR using the "go to" rate for purchases
will provide the clearest basis for consumers to compare cards.
- We remain of the view that
the blended rate approach gives consumers a more accurate picture
of the true cost. We recognise, however, that consistency of approach
is important and will accept the decision in the DTI's amended
ADDITIONAL CALLS FOR ACTION BY DTI, INVOLVING OFT
12. DTI should investigate lenders' claims
that their penalty charges represent a fair recovery of the costs
involved on any breach of contract.
- We already have an investigation
under way. We have written to several major credit card issuers
asking for information about revenue from default charges and
costs. We are now analysing the information.
13. The Government should consider examining
the boundary between the respective responsibilities of the DTI/OFT
and the FSA for consumer credit regulations.
- This is a matter for the Government.
Whatever the position it is important that the regulations imposed
on business and demands made by regulators are consistent between
regimes and do not unnecessarily impose additional cost. Duplication
and inconsistency must be avoided. We work closely with FSA to
ensure that there is a cohesive approach.
14. DTI should explore with industry and consumer
groups the scope for using the monthly statement to educate consumers
about the implications of the debt they are taking on.
- Our view is that the summary
box should be used for monthly statements. As part of our research
into consumer needs we are investigating this.
15. Where a range of products is offered,
consumers should not be offered a more expensive product without
clear written reasons. Card issuers should be required to obtain
a positive acceptance from the consumer before issuing the card.
Exclusions that apply to cards, such as minimum ages or annual
incomes, should be clearly advertised in the marketing literature.
- The law does not require a
lender to give an explanation of its lending decisions. Although,
as a matter of good practice and courtesy, lenders might be expected
to explain to consumers why they have offered a more expensive
product from a range, it would be disproportionate to require
such a statement.
- The consumer should be in the driving seat in
taking out a credit card loan. Credit cards should not be sent
to a consumer on an unsolicited basis - this may be a criminal
offence - and where a consumer has applied for a card they should
not be issued a card until they have signed a credit agreement
which sets out all the relevant terms including the APR (not just
a range of range of APRs).
- The Consumer Credit (Advertisement) Regulations
(Ads Regs) require that where an offer is restricted to a particular
class or group the advertiser must state that fact identifying
the class or group to which it applies (see Para 10(d) to Schedule
1, Part II, and Para 8 to Schedule 1 Part III). This has not been
fully tested in the courts but in our view this would mean that,
for example, those earning more than £20,000 or those above
21 are a particular "group" or "class".
16. Credit card cheques should be accompanied
by clear information regarding terms and conditions including
the applicable APR and fees in minimum 12pt text. There should
be a prominent warning that interest on cheques is charged immediately,
and that they offer a lesser degree of protection under the CCA.
Appropriate credit checking should be carried out before cheques
are sent. Unsolicited credit card cheques should be banned.
- Credit card cheques are an
additional facility which some consumers may find useful. We agree
that the terms and conditions which apply to them, especially
if they differ from those for general credit card use, must be
clearly drawn to the attention of the customer. We agree that
it should be clear that they are treated as cash withdrawals and
not card purchases and in particular that section 75 of the Consumer
Credit Act does not apply to them. We do not have the power to
impose a specific text size for the T&Cs. They are however
required to be clear and legible.
- In our view appropriate credit checking is carried
out prior to sending the cheques as this is done at the time the
credit card is applied for and the card holder is required to
remain within the cards limit when issuing the cheques.
- APACS have produced best practice guidelines
for issuing credit card cheques which cover the majority of issues
raised by the TC. They come into force in March of this year and
we propose to monitor compliance with them.
17. Legislative reform should prevent "cosy"
arrangements such as those which exist in some cases between store
card providers and stores to prevent customers from gaining the
full facts about their cards.
- The OFT will shortly complete
its study into the store card market, and we are putting the finishing
touches to our report. We will publish the report as quickly as
- The TC's inquiry has already induced card providers
and stores to make some changes in practices to increase transparency.
The DTI's proposed reforms to the regulatory regime will also
help deal with the problems of lack of transparency that our study
has confirmed. We intend to launch a consumer awareness campaign
in the course of 2004.
ADDITIONAL CALLS FOR ACTION BY INDUSTRY AND OTHERS
POSSIBLY INVOLVING OFT
18. Industry should continue to develop methods
of clear communication on order of payments, including within
the summary box.
- Transparency in this area is
vital. The key information provided to consumers should include
the order in which payments are applied to the account.
19. Industry should adopt the principle that
penalty fees should not exceed the cost to the lender of the relevant
breach of the contract. All lenders should place information on
the amounts raised from penalty fees and the costs involved in
the public domain.
- At present costs are averaged
across the whole population of defaulters. The legal obligation
on suppliers is to charge no more than a 'reasonable pre-estimate'
of loss, and averaging is a permissible approach. Tying charges
more precisely to the incidental costs in each case would therefore
be a significant change. It would produce uncertainty for consumers
about the costs of a default (including minor defaults) widen
the spectrum of charges and produce some very high charges from
some types of default. It would increase the costs of the companies
overall (since they would have to calculate the cost in each case).
These increases may ultimately be passed to consumers in higher
- It is for the industry to respond to the TC on
the balance between aggregate costs incurred as a result of default
and total revenues received from penalty charges. We plan to issue
guidance in 2004/05 on calculating default charges.
20. Issuers should charge lower fees for customers
with low credit limits or low outstanding balances when payments
are received late.
- The counterpart to this proposal
is that charges for customers with 'high' balances would be correspondingly
more even if the costs of dealing with the default is the same.
This is not, therefore, a proposal which we support.
21. Where consumers are encouraged to consolidate
credit card borrowing into a personal loan, industry should make
it their practice to reduce the credit card limit accordingly
to take account of the customer's loan commitment.
- We agree that credit card limits
should be set, and where appropriate adjusted, to reflect all
the knowledge available to the lender about the borrower's circumstances.
22. Lenders should assess a consumer's ability
to repay based on as complete as possible a picture of their current
income and credit commitments, and not just on their payment history.
- We agree, particularly in the
area of non-status borrowers who may be borrowing because they
are in financial difficulty.
23. Issues relating to consumer debt need
to be a specific part of the FSA's strategy of consumer education.
- The OFT, as a member of the
FSA financial capability working party, continues to champion
debt as an urgent and key issue to be addressed. In addition the
OFT will continue to address consumer debt through OFT publicity
campaigns and work by the OFT consumer education team.