Select Committee on Treasury Sixth Special Report

Supplementary Government Response


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.


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 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.


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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