Conclusions and recommendations
Progress since the Committee's 2003 Report
1. We
have been pleased to note a positive response from the industry
on a number of points, particularly in relation to improving clarity.
But more still needs to be done. (Paragraph 4)
2. We welcome the
recent actions taken by both the DTI and the OFT in the area of
credit and store cards charges and marketing and trust that this
reflects the higher level of priority required for these issues
that we called for in our earlier report. (Paragraph 9)
The summary box
3. We
welcome the industry's response to the Committee's challenge to
introduce the summary box. We believe this has made it easier
for consumers to compare products, and should continue to drive
competition in the industry. However, it is disappointing that
some issuers have summary boxes that are difficult to read and
contain small, dense print. We welcome the positive attitude of
the industry in seeking to resolve some of these difficulties.
(Paragraph 15)
4. We believe that
the summary box should continue to evolve in line with consumers'
needs and that the industry should move towards simple language
and standardised wording. We welcome the inclusion of the summary
box in the Banking Code. The summary box should also be available
at the contract phase, alongside any credit agreement which consumers
are sent. As Barclays acknowledge, the summary box must not become
part of the small print as this would undermine the objective
of helping consumers to understand the credit card. A minimum
font size for the summary box (as exists in the US) should be
set, to avoid the details merging into the small print. APACS
should systematically monitor the quality of the summary boxes
in use by issuers. (Paragraph 16)
5. We welcome the
actions of some credit card providers, including HBOS, Egg, Nationwide
and Barclays, to begin including the summary box on monthly statements.
This is essential in ensuring that consumers are kept informed
of the key interest rates and charges of their credit cards and
are properly equipped to shop around and determine whether they
could obtain a better deal elsewhere. We do not believe consumers
should have to wait until the middle of 2006 for the summary box
to be introduced on monthly statements in a consistent manner
across all of the industry. We recommend that APACS should immediately
issue industry guidelines and ensure that all card issuers include
the summary box on monthly statements during 2005. (Paragraph
19)
6. Given the positive
consumer reaction to the credit card summary box, the banks should
examine closely whether the principles of the summary box could
be applied to some of their other products such as personal loans,
current accounts and savings accounts. We believe that there is
a strong argument for extending the summary box in this way and
hope to see progress over the course of 2005. (Paragraph 20)
Repayments scenarios and minimum repayments
7. Although it is
an improvement, the APACS warning on making only minimum repayments
does not go far enough. We agree with Barclays that the APACS
warning is an arid statement and that the scenario better explains
the implications involved. We welcome the lead taken by Barclays,
Nationwide, Lloyds TSB and Egg, in introducing clear scenarios
showing the cost of repeatedly making the minimum repayment. There
is a growing recognition in the industry that there is the potential
for increased transparency by the inclusion in the summary box
and on monthly statements of simple and standard scenarios. We
hope the industry will continue to work positively to develop
scenarios that could help consumers choose which card to use and
help them to use it wisely. (Paragraph 26)
8. Whilst warning
customers of the consequences of making only minimum repayments
on monthly statements, it is irresponsible for issuers at the
same time to use other promotional material to encourage consumers
to pay only the minimum. We welcome Capital One's intention to
review their marketing material. (Paragraph 27)
Annual Percentage Rates (APRs)
9. We
welcome the move to a single method of calculating the APR for
credit card advertisements. However, we regret that this change
could not be aligned with that in credit agreements and note that
this difference could result in a source of confusion for consumers
until May 2005. We would welcome an explanation as to why it was
thought necessary to delay implementation of the requirements
for a single method of calculating the APR in credit agreements.
(Paragraph 30)
Interest calculation method
10. We
note that even many industry leaders largely conceded that the
variety of interest calculation methods presently in use can be
unfair for the consumer. The consumer may often be unaware that
the differences exist and unable to understand the effects the
differences can have. As one issuer has noted, an "illusion"
can be created that a deal is better than it really is. (Paragraph
35)
11. Lack of clarity
about interest calculation methods and their effects continues
to be a major problem for consumers. The industry sees a solution
in clearer explanations and descriptions of methods in the summary
box, rather than standardisation of method. They argue that standardising
methods will restrict competitive freedoms, to the detriment of
the consumer. We appreciate the importance of a competitive market
in stimulating innovation and creating more sophisticated products
to serve varying needs. But we remain to be convinced that standardising
methods will restrict competition in this way, since—with
the exception of short interest-free periods—there is little
evidence that the consumer has any awareness or understanding
of the differences involved. As the Chairman of the OFT has previously
told us "if a product characteristic is invisible to consumers
then it cannot be a dimension of competition". We recommend
that the industry, working with the consumer bodies, give further
consideration to whether some elements of standardisation of charging
methods could be introduced and bring forward proposals to achieve
it. This could be through the establishment of one or two well
publicised (and therefore more widely understood) standards, from
which individual issuers would be free to diverge so long as clear
indications were given of the effect on consumers. (Paragraph
42)
Risk-based pricing
12. With
the increased use of risk-based pricing, under which the consumer
may not know the interest rate until after applying for the card,
more and more consumers will have to shop around by making multiple
applications. But the very act of shopping around can sometimes
damage a customer's credit rating. This could result in the consumer
paying a higher rate, which would cost them more. We recommend
that the industry immediately implement their ability to undertake
'enquiry searches' so that shopping around does not damage a consumer's
credit rating. (Paragraph 44)
13. We welcome moves
by the DTI to ensure that the 'typical' APR (or less) will now
be available to 66% of borrowers. (Paragraph 45)
14. We recommend that
the OFT develops guidance to deal with the practice of 'implicit'
risk-based pricing. This should clarify whether the requirement
that the 'typical' APR (or less) be available to 66% of borrowers
applies to products using implicit risk-based pricing. When a
customer is turned down for the product originally applied for
and is offered a more expensive credit card, they should be provided
with clear written reasons as to why. The industry should review
its practices to ensure that this is the case. (Paragraph 46)
Balance transfer fees
15. Charging
handling fees on balance transfers is a legitimate business practice,
but such fees erode some of the value to the consumer of balance
transfer offers. The industry should revise the summary box guidance
to ensure that the level of these charges is clearly communicated
to the consumer. The OFT should revise its guidance on advertisements
to ensure that firms outline the size of the fee in any promotion
containing the introductory interest rate. (Paragraph 47)
Default charges
16. Credit
card issuers continue to maintain that their penalty charges represent
a fair recovery of the costs involved, but it is impossible to
know—because companies have been unwilling to place in the
public domain the information needed to create confidence that
these charges are reasonable. We therefore strongly welcome the
investigation by the OFT and await the result with interest. We
trust that, irrespective of its eventual conclusions about the
charges, the OFT's report will contain sufficient detail on the
way charges are levied to allow judgements to be made as to whether
fees are being used to extract additional revenue from cardholders
(including those in financial difficulty) rather than covering
reasonable costs. It is in the interest of companies themselves
for such information to be publicly available, so that their customers
can see that the charges are reasonable. (Paragraph 51)
Data sharing
17. The
lack of full data sharing in the credit card industry has significantly
contributed to problems of over-commitment by hampering responsible
lending. As industry representatives themselves acknowledged,
there is significant scope for the system of data sharing to be
improved and the industry must make progress in this direction.
(Paragraph 56)
18. We recommend that
all banks should share the maximum permitted data on credit card
accounts. We welcome the explicit support from all APACS members
for this course of action and hope it will be accomplished promptly.
However, there will continue to be room for improvement, particularly
regarding the sharing of behavioural data to identify those consumers
who may be over-committed and making the minimum payment across
several cards, sometimes by using cash withdrawals from other
cards. (Paragraph 58)
19. There are problems
relating to the sharing of data on 'historic' accounts where customer
consent was not obtained at the time the account was opened. There
are differences of opinion between the industry and the Information
Commissioner regarding the extent of the problem. We believe the
industry should immediately carry out a pilot study to assess
the response rate to letters seeking customer consent. If response
rates remain low, then we believe there is a case for an exemption
from the common law duty of confidence for the sharing of positive
information on credit card accounts. The industry, relevant government
departments and the Information Commissioner need to work together
to resolve the legal barriers to sharing historic data. (Paragraph
61)
20. Improved data
sharing needs to be accompanied by strong and robust safeguards
to prevent predatory lending. We note evidence from card issuers
that these safeguards are in place; it would be appropriate for
the DTI to review the adequacy of these arrangements. (Paragraph
62)
Data sharing: customers in financial difficulties
21. When
a consumer is in financial difficulties, an early referral to
independent debt counselling can be beneficial in preventing the
situation becoming worse. Individual banks may be monitoring their
own exposure to the consumer, but many people now have several
credit cards spread across a large number of lenders so there
is a need for a more integrated approach across the industry to
identify those customers in financial difficulty and to offer
them appropriate advice. We recommend that the industry work towards
establishing a set of industry trigger points, so that people
with debt commitments can be referred to debt counselling. (Paragraph
65)
22. We welcome the
measures in the Consumer Credit Bill requiring an annual statement
for each individual credit agreement. We note the provisions in
this area of the US Fair and Accurate Credit Transactions Act
and will be looking at them further. (Paragraph 66)
Credit card cheques
23. We
welcome the inclusion in the Banking Code of guidelines covering
the marketing of credit card cheques, although there is undoubtedly
room for improvement in how the information regarding the interest
rates and terms and conditions are communicated to the consumer.
Credit card cheques continue to be issued unsolicited, a practice
which we believe should cease. If consumers wish to avail themselves
of credit card cheques, they should opt in to the system. (Paragraph
70)
24. The industry should
also introduce new measures to combat the fraudulent use of credit
card cheques. The ending of unsolicited issuing will be very helpful
in this regard. (Paragraph 71)
Credit limit increases
25. We
welcome the inclusion of guidelines covering credit limit increases
in the Banking Code. However, we believe that implementing a system
restricting the number of unsolicited increases in credit limits
would be beneficial in preventing some cases of financial difficulty.
We do not believe that this would place excessive restraints on
the industry as companies would continue to be free to raise credit
limits should customers contact them to request an increase. We
also note that some lenders already operate such a system and,
to ensure responsible lending, this should become common practice
across the industry. (Paragraph 73)
Customers with mental health problems
26. As
a matter of urgency we urge the banks to seek to work further
with the money advice associations to agree guidance on dealing
with people who have diagnosed mental health problems that impair
their ability to handle money, and to publish draft guidance for
the Banking Code by the end of the year. (Paragraph 74)
Access to basic bank accounts
27. Basic
bank accounts are a useful way for people in debt to manage their
commitments and attempt to resolve their problems. Banks should
ensure that their credit checking procedure does not deny access
to basic bank accounts for those in financial difficulty. (Paragraph
75)
Payment Protection Insurance
28. We
recommend that once the transfer of responsibilities for insurance
regulation to the FSA has been completed the FSA should begin
an investigation into the selling of Payment Protection Insurance.
This should include the safeguards in place to prevent the miss-selling
of PPI to customers who would not be able to benefit from it due
to exclusions, how more competition could be introduced into the
market, and how the provision of information to consumers could
be improved to allow better informed choices about whether to
take out PPI and about which policy is appropriate for individual
circumstances. (Paragraph 76)
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