Examination of Witnesses (Questions 400-419)
MR JOHN
VARLEY, SIR
FRED GOODWIN,
MR SHANE
FLYNN AND
MR MICHAEL
GEOGHEGAN
26 OCTOBER 2004
Q400 Chairman: Questionable validity?
No question of your validity, of your accounting practices?
Sir Fred Goodwin: I would have
thought, as a matter of basic fairness, we should wait until the
outcome of that inquiry and I am surprised at Mr Vickers issuing
statements of that nature in the middle of an inquiry.
Q401 Chairman: This is a general statement
he is making to us. The fact is that there is no information coming
from the industry on this situation.
Sir Fred Goodwin: It is all going
to Mr Vickers.
Q402 Chairman: Has anyone taken a test
case in law against you on these default charges? I read in the
paper on Saturday some barrister saying that such charges are
unlikely to be enforced with the courts. Penalty clauses are legally
void unless they reflect a loss the party enforcing them has suffered
and this is hardly cutting edge law. "None of the dozens
of banks who issue UK cards lose out if people follow my advice
not to pay them." We would not suggest that here but we are
just asking for the legal position. Has anybody challenged you
on this?
Mr Flynn: No.
Sir Fred Goodwin: These are not
penalty charges either, which is the point of law I think.
Q403 Chairman: You do not think, even
after the OFT have looked at this, that you could be reducing
the revenues you get from default charges? Could you put that
in the public domain at any time? Could you envisage it?
Sir Fred Goodwin: I think the
important issue is that consumers know what the charges are. These
could not be more transparent than they are at the moment. They
know exactly what the charges are and exactly how they will be
incurred. I do not know that consumers know the cost of a tin
of beans in Tesco but they know what the price of a tin of beans
is and I think that is the relevant fact.
Q404 Chairman: Consumers do not know
how this has come about.
Sir Fred Goodwin: They do not
know how much profit Tesco make on a tin of beans so I do not
understand why—
Q405 Chairman: We have PricewaterhouseCoopers
in their Precious Plastic report saying that they are most
commonly incurred by consumers on lower incomes who usually have
a lower credit limit so there is an opportunity for people on
those incomes to be penalised more than others.
Mr Varley: I would agree with
the remarks of Sir Fred on that. Our data suggests that there
is no close correlation between income and the incidence of fee
paying.
Q406 Chairman: It is an issue for you
to look at. It would help yourselves as organisations if this
information was put in the public domain because then there is
nothing to hide. You have been very open. I take your statements
at face value but I think it is an important issue publicly. Do
you see where I am coming from?
Mr Varley: I do.
Angela Eagle: These charges are meant
to reflect the costs that you all incur in collecting money late
in order to be legal. Why, with all of your different organisations
and different practices, are the charges pretty similar across
the board? If you were cynical, you might think there was a cartel
operating.
Q407 Norman Lamb: Could each of you clarify
this: is it your position that the charges are simply to cover
the costs incurred or are you quite openly saying, "This
is a charge. We make a bit of money on it and we were open about
it so what is the problem?"? Mr Geoghegan, are the charges
simply to cover costs incurred?
Mr Geoghegan: Yes, that is the
intent. We manage those costs and the income works very close
to that.
Mr Varley: In our case, we do
not recover the costs. In other words, the charge is insufficient
to cover the administrative costs.
Sir Fred Goodwin: It is intended
to cover the cost but it is interesting as you look across the
world there are similarities in the levels of cost that are passed
on to people. If you look in the United States and in Europe,
the charges are broadly similar.
Mr Flynn: The charges are to cover
costs, similar to what Mr Varley said.
Q408 Norman Lamb: Do you all disagree
with Price Waterhouse Coopers when they say, "Issuers are
becoming increasingly reliant on over-limit fees as a source of
revenues"? They have just plucked this out of nowhere?
Sir Fred Goodwin: I would disagree.
It has been some time since that was written but as a matter of
fact the proportion of our income that the fees represent is shrinking
rather than growing.
Q409 Norman Lamb: At MBNA you charge
£25 for late payment or exceeding the credit limit or if
a direct debit payment is not made. That compares with Nationwide
on £15. Is it simply that they are more efficient or are
you making money out of it?
Mr Flynn: I do not know what Nationwide's
costs are but as I said earlier the default fee is to cover the
costs incurred by us.
Sir Fred Goodwin: I think you
will also find Nationwide have a fee of £15 that the rest
do not have. I think you need to look at the suite of fees and
charges before you come to conclusions.
Q410 Norman Lamb: Mr Varley, on some
of your cards you are charging £24 for these penalty charges.
You say it is not sufficient to cover the costs. What cost is
incurred if I pay my minimum payment five days late? What costs
do you incur as a result of that? You are getting interest from
me.
Mr Varley: The way I would look
at it is that we should not think of the concept as being unusual.
Q411 Norman Lamb: What costs do we incur
when I make my payment five days late on my Barclaycard? What
costs do you as an organisation incur?
Mr Varley: We have administrative
costs of trying to recover the amount in question.
Q412 Norman Lamb: I have paid it five
days late. What costs do you incur? I have incurred a £24
fee. What costs do you incur?
Mr Varley: We will start our recovery
procedures one day over. In other words, there is an administrative
cost.
Q413 Norman Lamb: There is a computer
generated letter, is there, that goes out?
Mr Varley: You can imagine that
because we are trying to protect shareholders' money and because
we are trying to ensure that—
Q414 Norman Lamb: Could I ask you perhaps
to drop us a note to say precisely what the costs are that are
incurred by your organisation when someone makes a payment five
days late because the £24 has been incurred. [2]
Mr Varley: I understand your point
and I am happy to do that.
Q415 Norman Lamb: Will each of you do
that? I would be very interested to understand more about where
the costs are going when someone simply makes a late payment.
Mr Varley: My only point of reservation
is precisely the conversation we are having with the OFT at the
moment and therefore I hear you. I understand your request. I
just need to look at whether there are any restrictions on me
in giving you that information but, subject to that, I would be
happy to do so.
Sir Fred Goodwin: The costs are
going to pay for all the people we have who pursue debt, collect
debt, speak to customers and chase payments. The way these charges
are arrived at is by taking these total costs and making some
assumptions about the volume that is going to come through to
arrive at the individual charges.
Q416 Norman Lamb: I would just like to
understand more about the costs that you incur, if you could clarify
that.
Sir Fred Goodwin: In shorthand,
it is the buildings full of telephone centres and collection and
recovery costs.
Q417 Norman Lamb: If I am paying five
days late, I am paying for the costs of someone who is being pursued
to court, am I?
Sir Fred Goodwin: Self-evidently,
it is the same charge for everyone. They are not individually
costed to each individual customer. That simply is not feasible.
There are assumptions made about levels of activity during the
course of a year which is why we may or may not recover all of
these costs, depending on the level of activity. If the phone
does not ring, we still have the people sitting there waiting
to answer it.
Q418 Norman Lamb: It is interesting that
the OFT appears to be saying that the use of different accounting
policies and bases for charging, ". . . some of which in
our preliminary analysis are of questionable validity"—in
other words I am being charged for paying five days late. I am
helping to pay for the whole of your recovery operation which
might involve people who never make their payments. Why should
it be incurred by me?
Sir Fred Goodwin: I think there
is questionable validity in the results of the initial findings
in an inquiry which is not yet completely promulgated in public.
Q419 Norman Lamb: Can I ask the three
banks that run current accounts, on the issue of current accounts
and charges for exceeding the overdraft limit: in the case of
Barclays, you charge £25 per day up to £70 in a month.
Your interest rate shoots up to 27.5% if I exceed my overdraft
limit, perhaps by a very small amount. In the case of the Royal
Bank of Scotland, it is £28 plus £30 for each further
paid item up to a maximum of £90. Your interest rate is at
29.8%. I am not sure of yours.
Mr Geoghegan: I think you know.
It is the same as the overdraft rate.
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