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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