Memorandum submitted by Capital One
1. In response to your letter of 16 September,
I enclose a short paper responding to your specific questions
ahead of the Treasury Select Committee hearing on 19 October.
For ease of reference, I have inserted your question headings
in short form ahead of Capital One's responses.
2. Capital One has played a full part in
working with our industry bodies, APACS and the BBA, in responding
positively to the Committee's initial recommendations. For example,
Capital One has:
— implemented the Summary Box into
our marketing literature;
— agreed the minimum payment "financial
health warning" to be placed on statements;
— subscribed to the Banking Code, having
overcome the technical barriers which had prevented us from doing
so;
— fully engaged in the processes to
achieve increased data-sharing across the industry to inform lending
decisions.
3. Capital One has always innovated in the
UK's highly competitive credit card marketplace. Our ethos continues
to be to challenge the status quo of the market by:
— Providing an inclusive approach to
finance. The traditional approach has been to restrict access
to credit to a large proportion of society. By working with our
customers to provide high value products that meet and continuously
adapt to their needs, we have been able to meet this need by providing
mainstream financial services across the full credit spectrum
including to those excluded from mainstream banking. (Approximately
3 million people do not have a basic bank account according to
the Cruickshank Report, even more do not have access to other
financial products such as credit cards.) We believe it is better
to include rather than exclude customers, who may otherwise have
to resort to other, possibly unregulated, sources of credit.
— Reducing the cost of credit. By challenging
the market norms and offering some of the most competitive rates
in the UK credit card market, including, currently, the UK's lowest
long-term flat rate card, Capital One has been one of the leaders
in bringing down the average cost of credit to UK consumers in
the last decade.
— Helping customers understand our
products. It is in both our customers' interests and ours that
they understand and use our products wisely. To help with this,
we provide our customers with simple, easy to read, education
materials on how to stay within their budget and reduce the overall
cost of using their card in the form of a Welcome Guide and other
communications. A copy of our current pack is included with this
letter.
— Tailoring our products to our customers'
ability to manage debt. Capital One has in the last six months
initiated additional work to help customers avoid financial difficulties
as a result of over-borrowing. This has included reviewing our
lending policies to ensure they take even more account of potential
indebtedness; reviewing operational policies for indebted customers;
and increasing work to identify indicators of potential indebtedness
for existing customers and actions to avert such occurrences.
4. In conclusion, I am pleased that you
recognise that credit card issuers have made progress in increasing
transparency. Please be assured Capital One will continue to engage
fully with the industry bodies, regulators and other card issuers
to continue the work in this area.
Fergus Brownlee
Executive Vice President, Europe
RESPONSES TO
YOUR QUESTIONS:
(a) Summary Box:
5. We believe our Summary Box is clear and
legible. Font size is only one design variable which contributes
to legibility. Placement, overall layout and use of white space
are other important factors.
6. Our aim is to give the customer sufficient
information to make an informed choice. We seek and act upon regular
feedback from customers on how to improve our literature.
7. In addition to the Summary Box, new cardholders
receive a Welcome Pack that includes their customer agreement,
information about interest charges and how to avoid default fees.
Customers are given a free phone telephone number so they can
call our service representatives to get further information about
their account at any time.
8. We are committed to ensure that any improvements
we make to our Summary Box are compliant with the Banking Code
and other voluntary industry standards.
(b) Scenarios:
9. Creating an artificial "scenario"
based on a "standard" credit card customer could be
misleading and would not serve the purpose of clarifying an individual's
likely cost of credit.
10. We believe that the information contained
in the Summary Box provides customers with the opportunity to
compare different products.
11. Furthermore, to ensure that customers
understand the basis on which charges are made in respect of their
use of their credit card, and so they can make informed choices
about how they use their card, we provide educational materials
as part of our Welcome Guide which is sent to all new customers.
(c) Monthly statements:
12. The Summary Box gives consumers key
financial details of a card at the time they are deciding whether
or not to apply for it. Its purpose is to enable the consumer
to make an informed selection, we believe that the inclusion of
the Summary Box into marketing correspondence is entirely appropriate.
13. In contrast, monthly statements provide
information on a customer's account once they have selected and
activated their card. It is designed to help them make decisions
about how to manage their financial affairs going forward. Examples
of such information include details on the monthly interest rate,
transactions they have made, any late or over-limit fees incurred,
payment advice and credit limit and credit availability. Monthly
statements have undergone extensive consumer testing and have
been shown to communicate this information clearly. Such information
is a more reliable indicator of the price an individual customer
is paying for using their card than the information in the Summary
Box.
14. Therefore, the Summary Box and the monthly
statement are two separate tools. We believe that, today, consumers
receive appropriate information at the time when it is most useful
to them.
(d) Interest calculation methods:
15. Capital One has joined with other members
of the credit card industry to engage with the DTI and OFT regarding
the interpretation of the new legislation on APRs.
16. The challenge is to get the right balance
between setting industry standards for the purpose of improved
customer communications and fostering competition and innovation.
17. The outcome of this dialogue is still
to be seen. We believe however, that providing consumers with
the right information at the right time so that they can make
informed choices both in selecting and using their credit card
is in the interest of consumers and lenders alike.
(e) Transaction/penalty fees:
18. Capital One has disclosed full information
on this to the OFT, so that they may satisfy themselves that our
fees are set at a level below our relevant costs. We await the
OFT's final response on this subject.
(f) Restrictions on unsolicited increases
in credit limits:
19. As a member of APACS, the BBA and a
subscriber to the Banking Code, we endorse fully the best practice
guidelines on increasing credit limits that APACS has prepared
for inclusion in the Banking Code.
20. At Capital One, we follow a stringent
credit scoring technique to determine credit limits that fit the
requirements of our customers. Pre-specified limits on credit
line increases would restrict our ability to increase the limit
of customers who have demonstrated their ability to handle credit
responsibly and have built up their credit rating.
21. We believe that allowing banks the autonomy
to follow their own policies for extending lines of credit stimulates
innovation. Therefore, we are opposed to restrictions because
it would not be in our customers' best interests, nor would it
be consistent with fostering a healthy, competitive business environment.
(g) Credit card cheques:
22. We subscribe fully to the Banking Code
and we believe we are in line with the best practice guidelines
that the industry as a whole has put forward regarding issuing
credit card cheques as part of the Banking Code review.
23. Section 75 of the Consumer Credit Act
applies only to purchases made with a retailer who is part of
the Network scheme (eg Visa or MasterCard) to which the customer's
card relates. It therefore does not apply to credit card cheques.
24. However, Capital One has always taken
the view that our customers would be best served if we treated
transactions made with credit card cheques in the same way as
if section 75 applied to the transaction.
25. We therefore look at each case on its
merits and if a situation occurs where we would normally cover
a customer under section 75 we will also cover them if they use
a credit card cheque. This is done as part of Capital One's commitment
to treating our customer fairly.
26. Copies of our credit card cheque marketing
materials are enclosed.[2]
(h) Payment Protection Insurance (PPI):
27. PPI is offered to customers on our account
application forms on an "opt-in" basis—ie only
those customers who choose to tick the box for PPI will be given
the product. Summary details of the policy (including "exclusions")
are clearly flagged to the customer at the application stage.
Furthermore, only "eligible" customers will be given
PPI—this excludes individuals over the age of 64 and individuals
who are neither employed nor self-employed. Any ineligible customers
who request PPI will not receive nor be charged for the product.
28. In the case of telephone sales, PPI
will only be offered to individuals who, based on the information
in their card application, we believe to be eligible for PPI.
Additionally, individuals who state that they are employed are
asked to confirm that they have been in continuous employment
in the UK for the previous six months. If they cannot confirm
this, we will not offer the product. Eligible customers are informed
that full policy details will be sent to them in writing, including
all exclusions, and major exclusions are read out to customers
on the call. Customers have the option to cancel, without obligation,
within a reasonable time after receipt of written policy details
and at any time after that.
29. The Credit Card market is highly competitive
and the consumer's ability to switch products is easy and commonplace.
Consumers who are dissatisfied with the cost of their PPI can
cancel it or can switch at anytime to an alternative card issuer
who might offer more satisfactory pricing.
30. Finally, we believe that the market
is competitive today and that the level of competition in the
future will be a function of consumer interest in the product
and the freedom of banks and others to innovate to meet consumer
need.
(i) Credit data sharing:
31. Capital One supports fully the Committee's
objective of increasing lenders' access to customer credit information
because it will improve their ability to offer consumers the right
credit product, at the right time and at the right price. We supply
full credit data (not just default data) to Experian and Equifax
and, subject to resolution of some technical issues, will be supplying
data to Call Credit from October. We embrace fully the need to
share data across the industry and, having co-operated fully with
the APACS working party, we will be supplying the maximum data
possible under the current industry agreements, starting this
month.
October 2004
2 not printed. Back
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