Memorandum submitted by The Association
for Payment Clearing Systems (APACS)
TRANSPARENCY OF
CREDIT CARD
CHARGES
I am writing in response to your letter to six
bank Chief Executives of 19 July 2004 to provide an industry overview
of the issues you raise. Naturally, the individual Chief Executives
to whom you have written will also be responding to your letter
separately.
I have responded to your points in the order
you raised them.
1 and 2 Recommendations in the committee's
report
Over the last 12 months, as you know, we have
worked closely with the Treasury Committee, the Department of
Trade and Industry (DTI), the Office of Fair Trading (OFT) and
European regulators on a wide range of transparency and competitiveness
issues.
Where we believed we could improve transparency
and competitiveness, we have acted. Where we believed change would
be against the interests of our customers, we have sought to explain
why. Significant improvements have been made in the following
areas:
— all issuers now include in their
product marketing the Summary Box, which gives consumers a simple
and easy-to-understand comparator between credit card products;
— all credit card statements are to
include a warning against making only minimum repayments over
the long term, targeting the small minority of cardholders (about
3%) who do this on a regular basis;
— new industry guidelines have been
introduced governing the marketing and use of credit card cheques
and the application of credit limit increases; and
— and the industry is working with
the credit reference agencies and regulators to improve the quality
of information shared between lenders (within the constraints
allowed by law) and hence, the quality of lending decision-making.
We have put together best practice guidelines
for the first three points (attached) and have recommended their
inclusion in the next version of The Banking Code, effective from
March 2005. The Banking Code is independently enforced and monitored
and is therefore an appropriate vehicle for these guidelines.
3(a) Summary box
The industry first proposed the introduction
of the Summary Box to the DTI in May 2002—now a long time
ago—for consideration as part of the Consumer Credit Act
review. It has now been launched on marketing material; all members
have been complying fully with the agreed guidelines since April
2004.
The primary objective of the Summary Box is
to provide the consumer with a consistent and succinct summary
of the key features of the credit card under consideration, allowing
them to understand the product fully and to compare different
ones more easily. The industry has aimed to draw a balance between
providing sufficient information to be meaningful without overloading
the table. This includes consideration of the quantity of information
balanced against the appropriate font size.
On the basis of feedback from customers and
the need to comply with the revised Consumer Credit Act, the original
Summary Box has been enhanced with new guidelines that will be
incorporated in the next revision of The Banking Code.
3(b) Scenarios
The industry's main concern with illustrative
scenarios is that there is no such thing as a "typical"
credit card customer—at least not in the way that such scenarios
envisage. Indeed, more than half of credit card users avoid any
interest or charges by paying off their balance in full each month,
accounting for more than three quarters of spending. Many in the
industry remain unconvinced that scenarios can be configured so
as to provide meaningful information to consumers given the different
usage and expenditure patterns of card users.
For example, a repayment scenario for a customer
who regularly carries a balance of £3,000 and pays off in
full is very different to one for a customer who carries a more
modest balance in the hundreds of pounds range and pays off around
20% each month. Such scenarios also require an unlikely assumption
that the cardholder never uses their card again. The very flexibility
that credit cards deliver—which allows consumers to choose
how and when they repay their spending and borrowing—renders
universal illustrative scenarios problematic. Adopting a limited
number of scenarios would inevitably lead to products being designed
to perform well under the scenarios used, impacting adversely
on consumer choice.
Nevertheless, a small number of our Members
are trialling illustrative examples in their marketing material,
with some using a common approach. However, it is acknowledged
that this does not solve all the difficulties above, nor is necessarily
applicable universally to all products. We will study whether
or not this assists comparison and the extent to which consumers'
understanding of the financial implications arising from their
pattern of card use is enhanced.
3(c) Monthly statements
The Summary Box now makes available to customers
in a clear and intelligible format the essential information at
the point where they decide upon their choice of products. This
enables accurate comparisons to be made by consumers between products
in the market place.
The monthly statement performs a different function,
providing up-to-date information on the customer's own account
in the clearest possible format facilitating decisions about their
future management of that account. The information commonly provided
includes an account summary, details on the transactions made,
payment advice, minimum payment levels (now with a "health
warning"), the credit limit, an estimated interest figure,
fraud prevention information etc. Whilst some issuers provide
such information in box form, the format and content will generally
differ between issuers according to the nature of the product
on offer, the nature of their customer base and, in most cases,
the findings of their own internal market research.
The industry is, however, seeking to conduct
additional research to assess customer needs in time for the next
review of The Banking Code which will be in 2006.
3(d) Interest calculation methods
Single APR Calculation
The credit card industry has been closely and
constructively engaged with the DTI during the process of drafting
new secondary legislation on APRs, and also with the OFT who will
be enforcing the new legislation. This seeks to standardize the
way APRs are calculated and regulate the way they are advertised
to consumers. As an industry we see these as positive steps towards
greater transparency and competitiveness given the current situation
that benefits no one. This change will bring clear benefits.
Standardisation of Interest Calculation Methodology
The industry is not convinced by the case for
standardisation of the way interest is applied. A single standard
method for calculating interest on an account would hugely reduce
the flexibility of industry to provide products tailored to consumer
needs in what is a highly segmented and intensely competitive
market.
We feel that such moves would not be to the
benefit of the consumer. The UK credit card industry is one of
the most competitive in the world and the diversity of choice
that springs from this is to the clear benefit of the consumer.
As the Government noted in their supplemental
response to the Treasury Committee's report "Transparency
of Credit Card Charges":
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.
As it is, the differences in interest calculation
methodologies actually amount to different card issuers waiving
interest to a greater or lesser degree rather than charging cardholders
the maximum interest that logic would suggest ie from the day
on which a transaction is made until the day by which payment
is received.
Therefore, one of the significant improvements
being made to the Summary Box is that, in future, it will feature
information on the period over which interest is charged, improving
transparency and providing a means of comparison. In conjunction
with the estimated interest figure (effectively the maximum interest
that might be incurred by the cardholder, and a figure which is
shown on all statements) the implications of the interest calculation
method will be clearly described and expressed in pounds and pence
terms.
Finally, we believe it is advisable that we
evaluate the effectiveness of the new Summary Box in communicating
card-related information before further change is considered.
3(e) Transaction/penalty fees
This is a commercial issue for individual card
issuers, many of whom are currently in dialogue with the OFT on
this issue, and on which APACS is not in a position to comment.
However, it is worth pointing out that such charges are fully
transparent, being a key feature of the Summary Box and appearing
on monthly statements.
3(f) Restrictions on unsolicited increases
in credit limits
APACS has submitted best practice guidelines
on increasing credit limits on credit cards for inclusion in The
Banking Code. These cover assessment of a customer's ability to
repay, checks on a customer's suitability to receive an increase,
communication with cardholders, regulation of emergency increases
and clarity of information to consumers as well as opt-outs, refusals
of increases and reductions in credit limits too.
The industry does not believe that a pre-specified
one-size-fits-all number of increases per year would assist consumers.
It is not the number of increases but how these are operated in
the interest of consumers that is paramount. Constraint on the
way in which credit limit increases are currently managed would
undermine proven processes which are a central pillar of responsible
lending and could lead to higher credit limits being set at the
outset of agreements, unnecessarily increasing risk to both lenders
and borrowers.
3(g) Credit card cheques
The industry has developed best practice guidelines
on the issuance of credit card cheques for input to the review
of The Banking Code. The guidelines cover those credit-worthiness
checks that should be made before credit card cheques are sent
out to cardholders and, from the point of view of transparency,
the information that should accompany them including the purpose
and key features, how they are treated, the applicable interest
rate and accrual time and the duration of any promotional rates.
These have been in place since April 2004, with further improvements
relating to cardholder opt-out from receiving such cheques coming
into force from this October.
3(h) Payment protection insurance
Individual issuers will provide a response to
you on this matter.
4 and 5 Credit data sharing
Finally, you also raise a significant and complex
issue in the form of data sharing and its impact upon lending
decisions. In particular, we were encouraged by your willingness
to write to the Information Commissioner concerning impediments
to data sharing.
Lending is by nature a business of managing
risk. The risk in lending is reduced by both lenders and borrowers
taking a responsible attitude and by being honest and clear with
each other. The fact that the overwhelming majority of credit
agreements are trouble free, and that those where problems do
arise are typically the result of unforeseen life events (such
as unemployment, divorce etc) reflects well on both the industry
and its customers.
Widespread data sharing has been in place for
many years, albeit at varying levels in different institutions.
Nevertheless, the industry acknowledges that it could potentially
improve the quality of its lending decisions through wider sharing
of data known to be predictive. Consequently APACS members have
agreed a new set of data sharing principles (attached), including
for the first time explicit support from all APACS members for
the sharing of full data on credit card accounts (within the constraints
imposed by law). We estimate that this will increase the number
of credit card accounts on which full data is shared by at least
six million, accounting for around 11% of the market.
However, information cannot be shared on at
least nine million more credit card accounts accounting for around
16% of the market (although this is likely to be an under-estimate)
for legal reasons, particularly accounts where customer consent
to share data does not exist. The power to enable lenders to share
this data rests with the Information Commissioner who, in the
absence of customer consent, may be able to grant an exemption
to lenders or initiate a change in the legal framework. Your offer
of assistance in removing this impediment is very welcome.
Further, to put things in perspective, we estimate
that the credit card industry rejects more than one third of the
applications that it receives. In 2003 this would represent at
least 3.4 million applications where credit was not granted. It
is simply not in any lender's interest to add to the debt burden
of an individual who is over-committed, nor to lend money that
cannot or will not be repaid.
Also, Government, being a key player in any
individual's financial position, potentially has a key role to
play where it has important information that would enable better
informed lending decisions. Information on outstanding debt to
Government (eg student loans; council tax arrears; income tax
arrears) is currently not shared with the credit industry. Nor
is information that borrowers often report unreliably to lenders
but is known to Government (such as income). It is the industry's
view that sharing such information would deliver huge benefits.
With many years of lending experience to draw
upon, the industry understands very well those factors that are
predictive of an applicant's ability to repay. However, lending
can never be an exact science—no amount of information will
prevent some consumers from over-borrowing. The challenge to lenders
is to continue to improve their ability to identify those at risk
while maintaining the current flexibility for those who borrow
responsibly and, whilst already having made significant progress,
we will continue to explore the possibility of further improvements.
CONCLUSION
I feel sure that you will agree that over the
last 12 months the industry has made significant advances in increasing
transparency, which will be further supplemented through the revision
to the Consumer Credit Act and the forthcoming new version of
The Banking Code. You can rest assured that the momentum towards
a progressive agenda remains strong, with the industry committed
to reviewing the success of what has been done so far and identifying
where else progress can be made.
24 September 2004
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