Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 340-359)

MR JOHN VARLEY, SIR FRED GOODWIN, MR SHANE FLYNN AND MR MICHAEL GEOGHEGAN

26 OCTOBER 2004

  Q340 Mr Beard: I am just coming to that. It is not the case, is it, it does not reflect? You can have an APR that is bigger than another and you end up paying less interest?

  Sir Fred Goodwin: That can happen.

  Q341 Mr Beard: It can be?

  Sir Fred Goodwin: That can happen.

  Q342 Mr Beard: It can. Also, the Consumers Association have done a calculation against a standard scenario for all your cards and HSBC come out tops with an interest charge in this context of £5.50, Barclaycard the charge is £5.79, despite all of them having the same APR, I must add. Then we get to the Halifax Bank Of Scotland with £7.23 and Mr Flynn you are bottom of the league at £7.96. Now it is not clear in anything that is published that those are going to be the sort of differences if you have a common APR, is it? The Committee found last time that the descriptions of how this interest was calculated were—to use the words—technical and opaque and unlikely to be understood by the average consumer. We called for more transparency and possible standardisation. Indeed Egg, in their publication, Good Rate Hunting, have done a survey and they found "The research revealed a significant lack of awareness of different calculation methods. A staggering 81% of those questioned are under the impression that if two different cards with identical APRs were used in exactly the same manner they would always be charged the same amount of interest . . . 77% feel that it is unfair that two different providers with identical rates can vary the amount of charge in interest based upon how they calculate and apply their interest". What are you doing to clarify this point to the average consumer, not the one who has got a degree in maths?

  Mr Flynn: Maybe I could start the comments. In our summary box, which I think you may have a copy of, we are very clear on how we charge interest, and I accept what Sir Fred says that in certain circumstances one may be more expensive than another. What we want to do is make sure we are being transparent in what we are saying to our customers. If I could just take a moment and read what we have in our summary box, I think it is clear. "We will charge interest on all transactions, fees, other charges and interest starting on the transaction day and ending on the day you pay the bill in full. We work out interest each day so the earlier you make your payment the less interest you will have to pay." I think that is very clear to customers. What we want to make sure that we do is put that out in front of the customers in a place that is very conspicuous. In the summary box on the front of our terms and conditions is what we aim to do and what we are now delivering.

  Q343 Mr Beard: Sir Fred, will you say how you go about conveying this information?

  Sir Fred Goodwin: Yes. We acknowledge the feature that you describe. It relates very simply to the fact that any interest rate is only the interest rate. To understand what the interest cost is going to be you need to understand the period for which you are going to be charged the interest, and that is where the differences that you describe come from. This is quite a complex product, as I think the Committee will be all too painfully aware. Coming up with a single measure which encompasses all aspects of it is not straight forward. In the same way as you could not use the miles per gallon figure of a car to give you the overall ownership costs of the car so an APR cannot tell you the overall cost of credit. You are right, and I think it is the case that many consumers would assume that if the APRs are the same everything else must be the same. That is not the case. There are a variety of different ways of tackling it. The way in which the industry has gone forward is that it has been agreed they will be included in the summary box. If not from this month then very shortly everyone will set out the dates on which interest starts and ends, which is a big step forward and gives the customer—those that are minded to—the opportunity to sit down and look at it. There are other ways of doing it, you could come up with an APR type figure that relates to the period. We have floated ideas like that in the past but they have not been taken up.

  Q344 Mr Beard: Mr Varley?

  Mr Varley: Mr Beard, I would echo very much what Sir Fred has said. We have included in material we have sent you very recently, as you know, the interest calculation methodology in our summary box and it is set out there clearly for customers.

  Q345 Mr Beard: Clearly is the operative word?

  Mr Varley: Indeed it is. The point I was about to make, Mr Beard, is it is obviously a good thing that the industry has moved to a standardised basis of APR methodology. I do not think it would be a good thing if we moved to standardisation in all aspects of credit card provision. I think one of the advantages of the credit card industry is that it has become much more sophisticated, it has offered a lot more choice. There are now 400 cards in the United Kingdom and we have moved a very long way away from the situation of one size fits all of 15 years ago where for many people it was a privilege to have a credit card; that is a good thing. With increased choice, with increased diversity does go some increased complexity, I accept that. If, for example, we sought to standardise interest calculation methods then I think we would remove from the industry one of the points of difference. Each of us on this table is trying to put offers that go well with customers, and to which they respond, and the way in which we handle interest cost, is a source of difference and it is a source of competitive advantage. In our case, for example, customers can have up to 56 days interest free. I would hate to see some standardising approach to that because I think it is one of the reasons why people want to have a Barclaycard. I accept that the calculation methodology should be standardised where possible but I would not be in favour of standardisation of terms and conditions, I think that would hurt consumers.

  Q346 Mr Beard: Mr Geoghegan?

  Mr Geoghegan: Firstly, as you have pointed out, Which? did show us the method one was the best method. We give the same, 56 days. Also we try and make this as transparent as possible so if it is a cash transfer, if it is a purchase or a cash advance they are all at the same rate. That makes it much easier, that is why the calculation comes out as one of the lowest. I think that is the clearest we can be. I do share other people's comments that there should be competition and the number of days' interest if it is differentiated, I believe that does give competitive advantage.

  Q347 Mr Beard: This defence that you have got to protect competition seems to be the common ground between you, and Mr Flynn you put it in your submission to us. Also, John Vickers of the Office of Fair Trading said: "If a product characteristic is invisible to consumers then it cannot be a dimension of competition". That seems to me a fair truism, does it not? Plainly, although you have expressed expectation that people understand, they do not because the evidence is that 80% of them do not understand what is there. I have looked at what is in these draft summary boxes and it is a do-it-yourself kit, you have to put all this together to do the calculation and most people would not be able to do that even if they had all the information. How do you respond to this point that it just cannot be competitive in the sense you are assuming if nobody knows about it?

  Mr Varley: The evidence we would have just from observing how our customers use their credit cards is that the overwhelming majority of them do understand the terms and conditions on which they do business.

  Q348 Mr Beard: How do you know that? Have you done a survey to know that?

  Mr Varley: I suspect it will be true of all of my colleagues here today but in the case of Barclaycard we consult our customers on a regular basis and before we launch new products we will go to 50,000, 100,000, 200,000 customers to test their views on that product. I think we have a fairly good real time diagnosis of what customers think and as I said the empirical evidence in front of me suggests that they do understand. The overwhelming majority of customers who use the card to borrow do so in an orderly way and are able to manage the debt they incur.

  Q349 Mr Beard: You are just refuting the evidence that is there from the Consumers Association and from Egg and from our general appreciation of how people look at things? You just refuted it.

  Mr Varley: I accept the calculations that are done by the Consumers Association, of course I do. I am sure they have been done accurately. I think the point I am making is that the evidence in front of us, as a big provider in this country, is that customers do understand.

  Q350 Mr Beard: If you have got that evidence why have you not produced it for this Committee?

  Mr Varley: I am simply talking about how many customers of ours manage their affairs in a way which is in conformity with their side of the bargain, and the overwhelming majority of them do.

  Q351 Mr Beard: Mr Varley, it is unconvincing. Here we have got concrete evidence of surveys and people looking at these cards and we can see the description of this interest calculation ourselves on the different boxes. The explanation you are giving is entirely unconvincing. Can anyone do better? If you had some sort of standardisation, a few things like the length of the interest free period in the summary box, you all understand the calculation up to a point but then the issue that really affected consumers like the interest free period was there clearly, that would be something they could understand, why can you not home in on that?

  Mr Varley: I have a different point of view from you which is that the sort of standardisation you are referring to I think would be to deny richness and variety to consumers. They have choice as a result of the fact that the competitors around this table offer different propositions, I think that is a good thing for consumers, not a bad thing. I said earlier, I think the fact that we offer consumers up to 56 days of interest free is a good thing for consumers, not a bad thing. I think the fact that we do not charge trailing interest is a good thing, not a bad thing. These are points of difference.

  Q352 Chairman: Mr Varley, I think what we are trying to get to here is the issue of interest calculation method and we have a submission from Professor Robert Hunt of the Issac Newton Institute for Mathematical Sciences because we need to refer to the best and the brightest when we come to talk about these things to you. What he says quite clearly is that is a misnomer and it has led to confusion. It is not the same as APR, we know that, that has been standardised across the industry but instead interest rate calculation means the way in which a credit card provider decides how many days of interest to charge on each purchase. It comes as a surprise to the vast majority of consumers, he is saying, that if they make the same purchase on the same date with two different cards with the same APR and then later pay back the full amounts on the same date these two cards might charge different amounts of interest. It seems completely contrary to fair play, do you not agree?

  Mr Varley: What we have done, as you have heard from my colleagues, is we have introduced . . .

  Chairman: Professor Robert Hunt said that, it is a simple example. If he makes a purchase today with some cards for example Barclaycard, Halifax or MBNA, you would start charging interest straight away whereas other cards, for example, Egg would only start charging interest once the transaction reaches the card account two or three days later. This means I will have to pay an extra two days interest or more on each and every purchase I make with a Barclaycard, for instance, a significant extra cost and consumers do not know that and because it is hidden—as Nigel said and John Vickers is saying—it can be a competitive issue if the consumer does not know it. That is what we are trying to get through to you.

  Q353 Mr Beard: The Office of Fair Trading, for instance, did suggest to the industry that there should be a sort of standard model calculation and then in your summary boxes you each said the degree to which you differed from the model which would be something people might understand. That was reported, not by this Committee but by the Office of Fair Trading. To what extent has that been taken into account in deriving the attitudes you are expressing this morning?

  Sir Fred Goodwin: As the Chairman knows I have a view that is not entirely dissimilar from that. Albeit I do not think that taking a standard scenario and measuring deviations from it is a particularly good way because that could become rather perverse in the outcome.

  Q354 Chairman: We need movement Sir Fred.

  Sir Fred Goodwin: I am coming on to that. I am not a great fan of scenarios as you know, but funnily enough the APR calculation itself does have embedded in it a scenario.

  Q355 Mr Beard: They are not suggesting scenarios.

  Sir Fred Goodwin: There is some irony here as maybe I am about to suggest one, but as we have suggested before there is the possibility of a scenario which would allow you to highlight the interest calculation in a way that customers could understand more easily. I think, that said, I do accept what Mr Varley says. I think some customers are destined not to look at the terms and conditions, and I think that is their choice and a choice they make. Some terms and conditions are harder to understand than others and that is the nature sometimes of the flexibility which the product allows. I think what is proposed at the moment is in fact a big step forward from where the industry has been in that these periods will be put in the summary box in a way, I think, where customers could understand it if they want to. But the information perhaps would not be as easy to understand as if it was put into some sort of scenario. The scenarios are no use unless everyone does them and that is why I bring the DTI's name up again, I think it needs to come from—

  Chairman: I believe Mr Plaskitt is going to be asking you questions on your point.

  Q356 Mr Beard: The HSBC and Barclaycard both—we have seen from the figures I quoted—have got interest calculations that are more favourable to consumers than most other cards. Given that most consumers are unaware of these differences, why do you that? If you do that, why do you not make something of it in the competitive sense, you are a competitive industry?

  Mr Varley: I would say, Mr Beard, that customers are aware and that is one of the reasons why we recruit lots of new customers. I think the fact they can obtain up to 56 days' interest free, the fact that there is no trailing interest if they have a Barclaycard, is a source of difference between us and some of our competitors. Think of it as a recruitment magnet, that is how I would regard it.

  Q357 Mr Beard: You say that people do understand but every bit of evidence that we have at this Committee says that they do not.

  Mr Varley: Mr Beard, as you know from the beginning of November in the summary boxes, we are all including—it would be true of this organisation—simple statements about how interest is calculated. The Chairman was asking for movement, I think there is detectable movement there, that is a big step forward. I think for most customers, what we observe is if they choose to borrow, and in our case only 50% do choose to borrow on the card but if they do choose to borrow they want to know how much they borrowed and what their interest cost is going to be. I think they understand that.

  Q358 Mr Beard: Just summarising this discussion as a final point, the APR looks as though it represents the cost to people of using your card, but it does not. The actual cost is hidden in obscurity in some stories about how interest is calculated which all the evidence is that people do not understand. Taking the wider picture, does the industry not realise that the more you quibble about this basic feature of the cards, the more confidence in you and the retail financial service industry ebbs away. Is it not time you should do something to get at this point, rather than coming here with these renunciations of facts and an attempt to walk away and do the same all over again?

  Sir Fred Goodwin: I do not think anyone is renouncing facts. Ironically, the prominence that the APR gets has been imposed on the industry, the degree to which the APR takes precedence over everything—

  Q359 Mr Beard: I am not talking about the APR.

  Sir Fred Goodwin: We are talking about the relativity of terms and conditions. I am not going renouncing any facts. We acknowledge the phenomenon that is described here and steps have been taken to address it. The fact the APR is given more prominence has been because it has been desired to give it more prominence, so it has been given more prominence and it is specified in legislation the prominence that it gets. There is an agreement here that customers could do with understanding better about this. Equally, it is the case that there is a lot of evidence that those customers that are interested do understand it and those that are not interested do not.


 
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