Examination of Witnesses (Questions 100-119)
MR ERIC
DANIELS, MR
JAMES CROSBY
AND MR
FERGUS BROWNLEE
19 OCTOBER 2004
Q100 Mr Beard: It seems to be the choice
of Mr Daniels and Mr Crosby, so it must be your choice too.
Mr Brownlee: We will do it then.
Q101 Mr Beard: Would you like to go back
and consider this and write to us to tell us what your position
is?
Mr Brownlee: Indeed.
Q102 Chairman: Is this a DTI issue rather
than an industry issue?
Mr Brownlee: I believe it is.
Chairman: I am getting nods from people
who do not exist! Thank you.
Mr Beard: We have just been saying that
people use the APR as a basis for comparison between cards, thinking
that if it is higher it is not as good a deal as if it is lower.
But in fact it does not really reflect what they will be paying
in interest, which is what the true competitive comparison is,
is it not? Because the Consumer Association have done an exercise
with a standard scenario which calculates what the interest payments
are. The interest calculation method covers items such as when
lenders start and stop charging for interest for purchases and
payments made. This is a result of the calculation that has been
done with a standard scenario for all of you. The interest amount
is—and this is on the same APR, calculated in the way you
have just been referred to—for HSBC £5.50; for Lloyds
TSB £5.79; for American Express and Cahoot; £7.13, for
Halifax./Bank of Scotland £7.23; and then we go on to £9.54
for some others—all with the same APR. The Committee found
that the descriptions of how this calculation was being done when
we looked at it before were technical and opaque and unlikely
to be understood by the average consumer, and called for more
transparency and possible standardisation. We have not got it,
have we?
Q103 Chairman: I think, from the ordinary
consumer's point of view, the question is why, if I pick two cards
with an APR that is identical, there is a difference between £5.50
and £9.54. How does that happen? That is the question. Could
you explain that in simple language so that we can communicate
that to the public? Mr Crosby, you are an actuary, you try.
Mr Crosby: I think it is a function
of different interest rates and offer periods and effects of charges
being made. I think it shows the value of scenarios.
Q104 Mr Beard: It is, but they are not
clear. The point is that you are now going to publish the APR
as the basis of comparison but the actual money that you are charging
depends on all these other assumptions you are referring to, which
are, as we have just said, opaque and unclear. That is the real
basis of comparison between the cards and people cannot make it.
Mr Crosby: The read across from
an APR to actual interest cost is more consistent as you look
at products which charge a flat rate of interest and allocate
payments against balances in exactly the same way. These seem
to me to be the two key drivers here. If you apply the same scenario
to products which have introductory offers, then you will get
different answers. That is where the scenarios come in.
Q105 Mr Beard: Maybe they do, but the
point I am making, Mr Crosby, is that these various "stoppings
and startings" of when you actually apply the calculation
are not clear to people. They are not as up front and available.
You have the APR now being printed in 18 point type and made to
look as though that is the basis for comparison, but the reality
is that people will be paying different amounts on different cards
because of different forms of calculation of which they are not
made aware.
Mr Daniels: If we have looked
at the summary box, all of the information that is necessary to
compare one card to another is included in the summary box. One
single APR number will not substitute for understanding all the
terms and conditions of the card. For example, if some cards charge
from transaction date and other cards calculate from the date
or receipt, there is s difference there. As long as that is explicit
and transparent and the order of payments, as Mr Crosby suggested,
is transparent, the customer then understands the terms and conditions
and can operate their card. I do not believe that it is possible,
and certainly not very consumer friendly, to try to reduce everything
down to one APR number because that does not reflect the complexity
of the offering.
Q106 Mr Beard: You are suggesting that
people should take all these different bits and do their own calculations
on each card when they come to take a card out, so they can make
a proper competitive comparison. People are not going to do this.
Dr Robert Hunt, an academic in Cambridge, "concluded that
a consumer would need to dedicate significant time and effort
to review the technical and legal jargon before attempting to
work out and compare the true differences in cost between two
seemingly identical cards. His research is a damning indictment
on the complexities of interest charging methods and clearly supports
the argument that standardisation is the only real solution .
. ."
Mr Daniels: Mr Beard, if I may,
one of the really good things that has happened during the past
year has been the adoption of the summary box, which makes the
terms and conditions transparent and clear and I think addresses
the Professor's concerns. On the summary box you have all the
terms and conditions that would be needed for a consumer to make
an informed decision. I applaud the summary box, as I applaud
the transparency. I think the issue has been resolved.
Q107 Mr Beard: The ingredients of the
calculation may be there in the summary box, Mr Daniels, but somebody
then has to put all these things together in a consistent way
to compare cards. You have personally said in your submission,
"Our view remains that standardising the interest calculation
method would stifle innovation and restrict product design. The
Government's supplementary response to the Treasury Committee
also notes that this is a competitive issue." How can it
be a competitive issue if people do not know what the difference
is in the interest they will be paying between cards?
Mr Daniels: Again, I believe the
method of APR calculation is clear, the terms and conditions are
clear. The customer has good information to make an informed comparison.
Q108 Mr Beard: We have, from Egg, for
instance, good indications that over 80% of consumers are unaware
that such differences as I have read out even exist.
Mr Daniels: I would maintain that
that was before the summary box which I think is going to aid
greatly in the transparency and understanding of customers.
Q109 Mr Beard: Do any of you agree with
the view that Egg have expressed that "Different methods
of calculating interest allow providers to subsidise and suppress
the upfront APR that they are advertising, creating an illusion
that they are offering a better deal than is often the case. This
lack of transparency is contrary to the aims of the current review
of consumer credit and does not help create a fairer, more transparent
environment for the United Kingdom consumer." Mr Brownlee,
how do you answer that?
Mr Brownlee: I believe that there
is a dilemma here. There is a balance to be struck between absolute
transparency and clarity to our customers in terms of what is
an enormously complex situation. The complexity of the situation
is driven by, we can say, competitiveness, but it is actually
driven by what the customer wants. There are a huge number of
product offerings out there which are designed and tailored to
suit a very differing set of needs from our consumers. There is
certainly no intention on the part of Capital One in any way to
suppress the reality, the underlying facts around the APR; it
is simply that we need to match what the customers want out there.
For example, we have a product out there which is a 6.9% flat
rate. It has no offers around that of any sort: it is a simple,
flat rate. That is of immense interest to a large number of consumers
out there but not to others. We have huge complexity and, in striking
that balance, I think what we have in the summary box at the moment,
which we fully support and endorse, is a good halfway house on
this. It is a good balance to be struck.
Q110 Mr Beard: The impression I am getting
is that you are using the summary box as a cop out. How many of
you have actually done tests on your customers or on the public
at large to see whether they understand this aspect of the summary
box? Mr Crosby, have you?
Mr Crosby: I cannot confirm that
we have, no.
Q111 Mr Beard: Mr Daniels?
Mr Daniels: I believe that we
have but I cannot confirm that specifically.
Q112 Mr Beard: Have you, Mr Brownlee?
Mr Brownlee: No, we have not in
that aspect.
Q113 Mr Beard: This is now 12 months
since this issue was raised. It is plainly a major issue in the
competitiveness of different cards, it is a major issue in how
much people are actually having to pay for the credit they get
from them. And yet nothing has happened in the meantime. At the
time you were talking about this before, the Office of Fair Trading
suggested a system whereby you had a straightforward calculation
which could be given as standard and then in the summary box you
each said where you differed from the standard calculation. That
would be potentially more understandable than all the details
you have now on which people are expected to do a do-it-yourself
calculation. Why can that not be the basis of the industry's view
of this issue? Why can you not adopt the Office of Fair Trading
suggestion?
Mr Daniels: I believe the cure
may be worse than the malady. The number of exceptions that would
come off of a standard would be so hard to understand and "untransparent"
(if there is such a word) that I am not sure it would be helpful.
Again, I believe that standardisation is not the answer: it would
stifle innovation. I do not think it would be particularly helpful
to consumers. One of the reasons why the cost of consumer credit
has fallen so dramatically is because we live in a competitive
market and we have innovative products that are attempting better
and better to serve the consumer. Transparency, I believe, is
a much better answer, so that a consumer can in fact make an informed
choice. Consumers are making informed choices and that is the
reason why this market is as competitive as it is.
Q114 Mr Beard: Mr Crosby, what is your
attitude to this suggestion from the Office of Fair Trading?
Mr Crosby: Like Mr Daniels, I
think the list of exceptions would be the same as the description
at the moment, and it seems to me that there are two things I
would have in mind here: first, I think it points towards scenarios
because they add richness to the data you just get from APRs,
because a customer can look at a scenario and say, "Yes,
I understand that is how I might use the card, therefore that
is what it might cost." The other point one has to bear in
mind is that a lot of the complexity of this is brought about
by the discount periods. The discount periods that the industry
are offering and competing on are over time generally bringing
down the cost of this credit to consumers and making it more widely
available. That I would regard as a positive for consumers.
Mr Beard: In 12 months we have seen really
no progress on this at all. The issue is just as opaque and lacking
in transparency as it ever was and you collectively, as an industry,
are giving the impression of being addicted to profits by deception.
Q115 Chairman: Could I try to sum this
up before we leave it, because, despite the progress to one APR,
APR is used as a selling point. But what is happening here is
that it is being used as a competitive issue by a number of companies
to make profit where the consumer is in ignorance—and those
are not my words; they are the words of a chief executive of one
of the major organisations who spoke to me very recently. Despite
the advance on APR, that is still the situation for the customer.
Mr Daniels, you will remember the Egg report that came out recently.
It said in that report that, due to the way interest is calculated,
in one simple scenario Egg card could charge 22.7% and still be
cheaper than Lloyds TSB Advance Card which charges 11.9%. Surely
that is a nonsense today, particularly when you use APR as a selling
issue here. That needs clearing up, that needs working on, and
that is what we are asking the industry to do.
Mr Daniels: I am unfamiliar with
that study.
Q116 Chairman: It has been out for six
months. I would have thought your PR people would have got hold
of that and let you see it, particularly when Lloyds is mentioned.
Mr Daniels: I am sure our PR people
have looked at it.
Q117 Chairman: They never sent it to
you before you came to this Committee?
Mr Daniels: In fact, I am almost
positive we have it somewhere in-house. But I personally am unfamiliar
with it and therefore cannot comment. I would find it somewhat—
Q118 Chairman: I think you should write
to us on that. The fact of the matter is we are still kidding
consumers on APR at the moment. Is that correct, Mr Crosby? And
we still have a way to go on that.
Mr Crosby: Yes. I think scenarios
are the way forward. Otherwise, it may interfere with competition.
Q119 Mr Fallon: There is a danger, Mr
Daniels, is there not, that this clamour for simplicity could
end up as a call for standard pricing, which in the end, I think
you said, could reduce choice by actually limiting product innovation
and in fact increasing the cost of credit?
Mr Daniels: I believe that is
the case, yes.
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