Letter to the Committee from the Chief
Executive, HBOS plc
I am writing to update you on the work that
we have been doing to improve the transparency of credit cards
both within HBOS and across the industry.
DATA SHARING
We recognise that data sharing is an important
issue for the industry and the general public; we believe that
HBOS has a strong track record here, but we are not complacent.
We share full data (both positive and negative) for all Halifax
and Bank of Scotland credit cards and have done since May 1998.
We share this data with all three leading credit bureaus in the
UK and, we believe, were the first large institution to do so.
We are also one of only a small number of banks who supply full
current account data.
Our terms and conditions are deliberately worded
to enable customers to give consent to the sharing of their data
with other banks. This means we are not restricted by the Data
Protection Act in the same way as some of our competitors currently
are. We fully support any action that removes the barriers to
full data sharing by card issuers and are hopeful that there will
be progress on this point. We are lobbying other APACS members
and would like the industry to work with the Information Commissioner
to remove any barriers in the data protection sphere as well.
CREDIT LIMIT
MANAGEMENT
We are committed to taking a holistic approach
to each customers' financial circumstances when awarding an initial
credit limit and, subsequently, when increasing or decreasing
that amount. As a result, the initial credit limit for customers
is set after we have taken a view on the client's overall credit
commitments using industry wide data. Our overall credit limit
strategy is driven by industry wide data too. By early next year,
all subsequent credit limit increases and decreases for both new
and existing HBOS customers will be driven by industry data.
Credit limits on our cards are set low at the
outset of a relationship and only rise when the customer has built
up a good track record, an approach that is naturally consistent
with responsible lending. All customers are written to about limit
increases and are given the option of declining the offer. We
actively reduce credit limits as well. For example, if a customer
has missed one payment within the first six months of the life
of their card then their credit limit will automatically be halved.
We have worked with APACS and other issuers
to draw up best practice guidelines for credit limit increases.
We introduced these changes in April of this year and it is likely
that they will be included in the revised Banking Code to be introduced
in 2005.
COST OF
BORROWING SCENARIOS
Working with Lloyds TSB, Barclaycard and Morgan
Stanley, we have produced a cost of borrowing scenario that will
be included in our marketing literature by next month. I have
enclosed an example for your information but must stress that
this is "work in progress". I will send you a final
version before I attend the committee hearing next month.
The scenario sets out the cost of borrowing
over two years rather than one in order to take account of any
introductory interest free period. At the same time, the example
demonstrates the impact that only making the minimum repayment
has on the term of the loan. We believe that customers will find
this addition useful and hope that other providers will follow
suit.
SUMMARY BOX
As you are aware, all issuers have included
a summary box in credit card literature since February 2004. We
have worked with APACS to draw up guidelines on the use of the
summary box in literature and these will be included in the revised
Banking Code.
HBOS is the only institution to also include
a personalised summary box on the front of all our monthly statements.
This was a feature of our "Clear Card", launched in
November 2003, and was then rolled out to our 8.9 million cardholders
in February 2004. This feature gives our customers a greater understanding
of the cost of their credit card.
We use a vast array of literature in printed
and electronic format, which makes it impractical to adopt uniform
font sizes. We are also constantly reviewing all our literature
with the objective of ensuring that the information is accessible
and legible. We have experimented with point size 12 for our summary
boxes but were not happy with the results—the box spread
over two pages rather than one, for example. Clarity and brevity
are key concerns for customers and a one page summary box therefore
seems more appropriate.
PAYMENT PROTECTION
INSURANCE
As Elaine Kempson reported to the DTI in 2002,
in the vast majority of cases overindebtedness is caused by unforeseen
circumstances such as illness or unemployment. PPI covers customers
against these risks.
As we do not disclose PPI figures to our shareholders,
we will not, unfortunately, be able to supply them to the Committee.
Ongoing training is in place so that all colleagues
selling PPI fully understand the relevant eligibility criteria.
Naturally, a customer "fact find" is a core part of
the application process. To be eligible for cover, a customer
must be living in the UK, be the principal cardholder, be 18 or
over but under 65, in paid work under a contract of employment
or self employment and paying the appropriate class of National
Insurance Contributions. We automatically screen out applicants
who do not meet this criterion.
Customers are provided with the terms and conditions
of the cover as part of the sales process and have a 30 day "cooling
off period" to enable them to fully consider their purchase.
We do not pay colleagues commission based purely on their sale
of PPI; any commission they earn is based on a "basket"
of, typically, 17 products. Salary remains very much the main
component of our total reward package.
As you are aware, from January 2005 general
insurance, including PPI, will be regulated by the FSA. In addition,
the DTI have announced changes to the selling and advertising
of PPI as part of their review of the Consumer Credit Act. These
reforms relate to double signatures as well as advertising and
pre-contract information. We believe that these changes will further
increase the clarity around the sale of PPI and enhance competition
in the market.
INTEREST CALCULATION
METHODS
We agree with the Government's conclusion that
"imposing standardisation in the way that interest is calculated
and applied would not result in overall benefits for consumers."
Working with APACS, the industry has voluntarily
agreed to incorporate a new section within the Summary Box covering
interest calculation. We have also simplified the explanation
which appears in our terms and conditions and now includes a section
on interest calculation within the guide that is sent to all new
cardholders.
DEFAULT FEES
We have provided the Office of Fair Trading
with some figures they requested in connection with default fees.
As a result, and because we have not previously released this
information to shareholders, we will not be able to provide the
data to the committee.
Let me make the following points however. Firstly,
in common with all our other retail banking businesses, interest
income, rather than fees, accounts for most of our credit card
revenues. Secondly, these fees are set at a level which aims to
recoup the costs we incur to ensure that our customers bring their
accounts back into good order as quickly as possible.
CREDIT CARD
CHEQUES
We have adhered to APACS's guidelines for convenience
cheques since November 2003, well ahead of the industry deadline
of March 2004. Accordingly, we assess a customer's ability to
repay before sending them cheques and all the information sent
out is presented clearly and concisely, including the interest
rate.
Over and above these guidelines, we removed
under 25s from our cheque mailing list in October 2003 and believe
we are the only issuer to have done so. All customers can opt
out of receiving these mailings.
I am enclosing an example of the material that
we send out with our credit card cheques.
FINANCIAL LITERACY
I thought it would be useful to conclude by
giving you a flavour of the financial literacy work the Group
is working on, especially through the HBOS Foundation. The Foundation
supports a range of projects, with a particular focus on disadvantaged
groups:
— The Foundation is working with the
childrens charity NCH on "Money Matters", a project
that aims to promote financial awareness to young people in care.
As well as the Group's financial support, HBOS colleagues are
working with NCH to design suitable advisory literature.
— Gingerbread is the leading support
organisation for single parent families in England and Wales.
With the help of a donation from the HBOS Foundation, as well
as our colleague's expertise, the charity is expanding its money
advice programme through self-help groups and a helpline.
— The organisation Refuge is developing
a programme to provide financial advice to women living in refuges
who have, often as a result of domestic violence, become financially
excluded and vulnerable. Funding from the HBOS Foundation will
contribute to providing the assistance needed to deal with any
immediate financial issues affecting these women and to rebuild
their financial management skills.
I hope that this update proves useful and I
look forward to discussing these issues with the committee in
October.
September 2004
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