Memorandum submitted by The Royal Bank
of Scotland
Thank you for your letter of 19 July about Credit
Card charging and marketing. Since I wrote to you on 26 March,
work within the credit card industry to improve the clarity of
explanatory material for customers has continued. Much that was
covered in our earlier correspondence has been implemented by
RBS, or is in train, though, as I will touch on below, there are
still areas where we have a difference of view on measures that
would genuinely enhance competition and customer choice. I am
pleased that you acknowledged that considerable progress being
made. As I believe our record shows, we remain committed to continuing
improvement. I am also conscious that while the impact of credit
cards has been a subject for parliamentary and media comment,
credit cards account for just 5.5% of consumer debt. I have some
comments on the subject of personal debt later in this letter.
You asked about the quality of print in the
Summary Box. I believe that, wherever printed, prominence and
clarity of the APR is more important than font size in isolation.
We do not believe 18pt is necessary, but our material will comply
with the stipulation in the DTI statutory instrument, and I am
confident that the examples in our literature fully meet the spirit
of transparency which is the key objective.
We have looked at the idea of developing scenarios
to illustrate the cost of borrowing for consumers, but here we
have drawn the conclusion that these would be more likely to confuse
than help. I note that the DTI have also expressed doubts about
the effectiveness of scenarios. The reality is that competition
in the marketplace has created many options for consumers, offering
many variables from which they can decide which product is most
appropriate for them, Given the many and varied ways in which
consumers use the highly flexible credit card products available,
it becomes unhelpful and possibly misleading to attempt to create
a picture of "typical" cardholder behaviour. A "typical"
customer, for whom a generalised scenario might be valuable, does
not exist. The closest we get to a typical customer is one who
pays off their monthly balance in full, without incurring interest
charges. For them, a scenario would be of no relevance. Customers
who do borrow need a well presented and clear credit card statement,
which shows them, month on month, how much they should pay, and
by what date, and the actual rate they would pay on their debt.
For these reasons, we think that to provide
a full Summary Box (especially one containing multiple scenarios)
on monthly statements could overload customers with information,
adding little or no value. I have previously provided examples
of statements of RBS products and believe you consider our monthly
statement information to be well presented and to focus on the
relevant points.
You will remember from my previous correspondence
that we have supported increased transparency in respect of the
calculation and application of interest rates. We agree with the
DTI view that standardisation of the calculation and application
of interest would not result in any benefit for consumers, and
would be more likely to reduce competition. Our approach is therefore
to focus on improved transparency to enable clear comparison as
the means for encouraging competition. Our next version of the
Summary Box will include a description of the methodology we use
to calculate interest.
You also asked about default charges. This issue
is subject to a separate inquiry by the Office of Fair Trading,
with which we are in correspondence.
In April, new guidelines for best practice on
credit limit increases were agreed through APACS. These have been
submitted for inclusion in the Banking Code. In practice, we subject
customers' creditworthiness to review no more than twice a year.
As requested, we enclose copies of examples
of our current credit card cheques. (not printed)
Payment Protection Insurance (PPI), as its name
clearly implies, is designed to help customers in the event of
unforeseen circumstances—like unemployment—that can
cause problems with indebtedness. The product features and benefits
are clearly understood by customers, and we have no evidence from
our comprehensive complaints process to suggest that customers
believe that they are paying for a product they do not need. PPI
is a unique product for which the premium is charged on the balance
on a particular credit card at a particular time. With knowledge
of the outstanding balance, the credit card issuer can calculate
and apply the charge for the insurance, ensuring that customers
do not pay when there is no balance to cover. A standalone PPI
product by a different insurer would not offer the same flexibility.
Alternative options for cardholders include the purchase of other
kinds of insurance (such as critical illness or income protection
insurance) for settling credit card debt.
Before replying specifically on data sharing,
I would like to put the question in the context of some of the
broader factors relating to personal debt. There are two issues:
the level of personal debt, and over-indebtedness. Our view, which
is shared by the Bank of England, the DTI and others, is that
there are no grounds for concern that the higher level of personal
debt could impact economic or financial stability. This is because
the £1 trillion of debt which has been so widely reported
is covered by more than £6 trillion of personal assets, much
of it owned by the same consumers. The Bank of England data also
make it clear that the majority of consumer debt has been used
to accumulate assets rather than to fund consumption, and that
the proportion of households experiencing no difficulty paying
consumer debt has been rising. In the banking industry, improved
credit control techniques have allowed lenders to increase the
supply of credit without adversely affecting credit quality. This
suggests that the rise in personal debt is more a reflection of
growing prosperity due to stable economic conditions in the UK
than of consumer exuberance. In short, many people who have increased
their level of debt have done so because they can afford it, and
have made an informed and calculated choice. The historically
high level of personal debt does not, overall, indicate over-indebtedness.
Not everyone is so fortunate, and no credit
card issuer has an interest in increasing the debt burden to a
level borrowers cannot afford. RBS is very active in providing
support and advice where there are over-indebted customers who
need help. As far as credit cards are concerned, I am sure you
will have seen the figures that APACS have produced: over 50%
of customers pay off their bills in full every month without incurring
interest charges. Of the balance, those who choose regularly to
make minimum payments amount to 3% of customers. But Professor
Kempson's study found that low income households are more likely
to be in arrears with household bills than consumer credit. Ironically,
some of those excluded from borrowing from responsible lenders,
because of their poor credit rating, resort to backstreet lenders
who increase, rather than diminish, their vulnerability. This
strongly suggests that measures to reduce the exposure of indebted
households through credit cards, even if necessary, would not
have a significant impact. Professor Kempson's study has also
offered valuable insight by identifying that a high proportion
of over-indebtedness occurs not in low income households, but
results from unforeseen impacts—unemployment, illness, marriage
breakdown or other personal tragedies—on a more prosperous
lifestyle. Nothing in a customer's credit record can predict this
kind of eventuality.
It is against this background that proposals
for increased data sharing need to be considered. RBS reports
both positive and negative data on all new credit card accounts.
The willingness of customers to allow their data to be shared
is important in this context, but is only one aspect of the factors
that bear on a decision whether or not to lend. As I mentioned
above, only some 5.5% of consumer debt is on credit cards. We
have looked at ways that enhanced data sharing might improve the
quality of lending decisions in the context of personal debt.
To make a comprehensive assessment of an individual's creditworthiness
in the first instance it would be necessary for all forms of indebtedness
to be covered. A database would need to include not just credit
card information, but information about backstreet lenders and
household bills, including utility and phone bills. Consumers
might also have outstanding loans on cars, white goods and mail
order products, to name a few other examples of available consumer
credit. In addition to the indebtedness information, it would
be necessary to record centrally all the other data relating to
the key criteria on the basis of which lending decisions are taken,
including information about individual income and assets. For
such a system to be effective, this information would have to
be available in real time, to all the many and varied suppliers
of credit. Many consumers now source loans from outside the UK,
so that a truly comprehensive picture would also require real
time data to be available from other countries. We would be surprised
if consumers would accept this level of data transparency. And
even if such a system could be put in place technologically—and
the necessary enabling legislation enacted—the lessons we
draw from Professor Kempson's research are that the circumstances
which often trigger problems with indebtedness can occur after
the initial credit decision has been made.
I look forward to seeing you at the hearing
on 26 October, and would ask that you let me know beforehand if
there are additional issues which you intend to raise.
24 September 2004
|
