Supplementary Government Response
1. INTRODUCTION:
1.1 The Government provided a detailed response
to the Committee's Report on 27th February 2004. However,
that response identified a number of issues raised by the Committee
where policy was still being finalised as part of ongoing work
under the aegis of the White Paper "Fair, Clear and Competitive
- the Consumer Credit Market for the 21st Century"
published on 8th December last year. It promised to
update the Committee once these matters had been settled.
1.2 Consultation on the White Paper package concluded
on 15th March 2004. In the light of responses received,
and after further discussions with stakeholders, the Government
have now finalised their proposals on the transparency issues
highlighted by the Committee. Statutory Instruments have been
published introducing new rules on the advertising of consumer
credit; the provision of pre-contract information; the form and
content of credit agreements; and the early settlement of loans.
1.3 In the light of these developments, we are
now able to provide the Committee with the following updates to
our response.
Regulatory environment
European regulation
1.4 There have been a series of developments
on proposals for a new EU Consumer Credit Directive. The European
Parliament (EP) rapporteur Joachim Wuermling (EPP-ED, Germany)
tried to get an outright rejection of the Commission proposal
by the EP. However, he was not successful and the EP adopted its
First Reading position on 20 April 2004. The DTI undertook extensive
lobbying of UK MEPs in the EP, and strongly supports many of the
amendments adopted by the EP at First Reading.
1.5 The European Commission is currently revising
the proposal to take on board elements of the EP position. They
expect to complete the revision by mid-June 2004. Negotiations
in the Council Working Group will then begin in earnest.
1.6 We are continuing to lobby in Europe to ensure
comprehensive legislation that links closely with our ongoing
domestic reform programme.
2. TRANSPARENCY: INCREASING CLARITY IN CREDIT
CARD CHARGES:
Summary Boxes, pre-contract information and
the form of agreements
2.1 The Government commissioned MORI to conduct
research into the proposed new formats for pre-contract information
and agreements based on illustrative examples prepared by actual
lenders based on the draft regulations published for consultation.
2.2 Although the results of the research (which
are available on the DTI website at www.dti.gov.uk/ccp/topics1/consumer_finance.htm#review)
were encouraging, consumers
generally thought that they would not be inclined to read such
documents in great detail. However, where consumers were asked
in focus groups to look at the documents in detail, their reaction
was that the new forms were fairly easy to read and to understand;
that the layout made it easier to identify key points; and that
the changes had been undertaken with the needs of consumers in
mind. Detailed interviews suggested that only minor changes were
required to the format, and that it was very easy to identify
the key points.
2.3 We have taken account of these findings in
finalising the legislation on pre-contract information and the
form and content of agreements.
Information on monthly statements
2.4 We propose to introduce provisions in our
proposed Consumer Credit Bill that will require statements to
include a minimum repayment warning. We understand that the industry,
through APACS (the Association of Payment Clearing Services),
has agreed voluntarily to put a warning on statements by the end
of 2004. The APACS wording states:
"Only ever making the minimum repayment will
significantly increase the time taken to clear your balance and
cost you more."
It is expected that this will be made a requirement
under the revised Banking Code.
2.5 We have concluded that such generic warnings
are sufficient to alert consumers to the dangers of only making
minimum repayments. While we did consider the use of illustrative
scenarios on statements, we have now decided not to pursue this
option any further, until we can evaluate the effectiveness of
generic warnings.
2.6 We see difficulties with the use of such
illustrations, and feel that they are likely to prove unrepresentative
for the vast majority of consumers, most of whom pay off their
debt in one go each month. By contrast, those who habitually
pay only the minimum constitute a very small minority - APACS
estimate 3%; recent OFT research suggests that those who tend
to pay only the minimum amount to 8%. Illustrations will also
be unable to take account of the impact of further future spending
on balances.
2.7 If they are not giving a clear and useful
message, the inclusion of such illustrations risks contributing
to information overload for most consumers and detracting from
other messages.
Interest calculation method
2.8 Following our discussions in this area, we
have concluded that consumers would benefit from clear information
about how the interest charges on credit card accounts are calculated.
The Consumer Credit (Disclosure of Information) Regulations 2004
and the Consumer Credit (Agreements)(Amendment) Regulations 2004
therefore require both the pre-contract information and credit
agreements to include, in a similar way to the new credit card
Summary Box initiative, an explanation of how and when interest
charges are calculated and applied under the contract.
2.9 It is hoped that this new information about
an important feature of credit cards will and consumers to select
the product that best suits their needs. These details will no
longer be hidden in the small print.
2.10 We have concluded, however, that imposing
standardisation in the way that interest is calculated and applied
would not result in overall benefits for consumers. One consequence
of an absence of standardisation is that consumers are free to
choose a product that complements the way that they organise their
finances. For example, some will want a lower APR, but will be
prepared to pay interest from the date of a purchase; some will
prefer a slightly higher APR, but will only want to pay interest
on the amount left outstanding if they do not settle the whole
balance. As long as these aspects of the product are clearly
highlighted, we think this can assist consumers.
2.11 We are also aware that there have been calls
for a CAT type standard covering, for example, when interest accrues
and what percentage of the original amount it is charged on.
We note that this would be a complex exercise and that it could
have unintended consequences with issuers migrating to that standard
at the expense of flexibility, innovation and, ultimately, competitiveness
and consumer choice.
2.12 We have therefore concluded that a CAT type
standard might not be necessary, so long as the improved transparency
objectives of our new legislation are fulfilled. However, if
we find that the changes have not proved effective, then we will
consider this option further. In the meantime, APACS have told
us that steps are underway to improve the Summary Box initiative
to address the interest methodology issue in September 2004.
Risk-based pricing
2.13 We can confirm that the revised regulations
on pre-contract information and the form and content of credit
agreements do require lenders to provide consumers with their
true rate of interest before a credit agreement is made.
3. OVER-INDEBTEDNESS AND RESPONSIBLE LENDING
Responsible lending
3.1 Work to promote responsible lending in the
credit market is an ongoing task. However, responding to pressure
from both the Government and the Committee, industry have made
a number of positive steps to increase responsibility in their
lending practices.
3.2 The British Bankers Association (BBA), the
Finance and Leasing Association (FLA) and APACS have been working
to introduce changes to address Government and Treasury Select
Committee concerns. In terms of ensuring effective competition
and flexible regulations, the Government is keen to promote the
use of codes of practice across the credit market.
3.3 The Banking Code, governed by the BBA, is
currently being reviewed by Elaine Kempson from the Personal Finance
Research Centre. It is intended that a report will be published
in September 2004, and a new code introduced in March 2005.
3.4 The DTI have had a number of discussions
with the BBA and Elaine Kempson, and have made clear our concerns
to ensure the inclusion of responsible lending in the Banking
Code.
Inadequate credit checking
3.5 In line with our continued work to promote
responsible lending across the credit market we have been in discussions
with stakeholders to assess the progress made in the area of data
sharing and credit checking procedures.
3.6 Changes to the Banking Code will also seek
to implement more structured guidelines for lenders. Proposed
reforms for the benefit of consumers, include ensuring that credit
checking is always undertaken to assess the ability of the consumer
to repay, before any credit limit increases are granted.
3.7 We continue to encourage the credit industry
to ensure that lending decisions are based on the fullest possible
information.
3.8 The credit industry already shares a large
amount of data. It is working to improve the information available,
together with the inclusion of positive data in credit checking
processes. Later this year, industry will begin to share information
on current accounts and other banking data.
3.9 There is currently however, a difficulty
with sharing historic data. In order to remedy this, the industry
have made a reference to the Information Commissioner asking for
a decision allowing them to share this data as well.
Credit card cheques
3.10 The Government have taken on board the continued
concerns of the Committee that reform is required in this area.
We have closely monitored discussions led by APACS over how best
to increase protection and transparency for consumers.
3.11 We now understand that, working in conjunction
with APACS, the following changes are to be introduced in the
Banking Code:
- Issuers will be provided with
best practice guidance to ensure credit card cheques are received
by appropriate customers (including guidance on ensuring special
care is taken for consumers under 25 - many lenders have voluntarily
banned themselves from sending to under 25s);
- That checks will be made checking
the cardholders ability to repay before cheques are sent;
- Information is to be supplied
with credit card cheques when sent;
- A ban on prize draws or inducements
to use credit card cheques.
3.12 We will continue to monitor this specific
issue closely, as we are sure the Committee will also, and keep
under review whether further action is appropriate.
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