Select Committee on Treasury Second Special Report

OFT Response

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 to 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 inadequate.

  • 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 credit score.

  • 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" offering.

  • 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 proportionate manner.
  • 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 misleading marketing.

  • 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 market.
  • 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 regulations.


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 possible.
  • 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.


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 charges overall.
  • 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.

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