APPENDIX 1
GOVERNMENT RESPONSE TO THE SECOND REPORT
OF THE TREASURY COMMITTEE, SESSION 2004-05 (HC 274)
1. INTRODUCTION:
1.1 This is the Government's third formal response
to the Committee in the course of its ongoing investigation into
the credit card market.
1.2 In two responses, in February and June 2004,
to the Committee's first report of December 2003, the Government
welcomed the Committee's continuing focus on the need to improve
transparency in the credit card market and highlighted the measures
that had been identified in the December 2003 White Paper "Fair,
Clear and Competitive: the Consumer Credit Market in the 21st
Century" for advancing the transparency agenda.
1.3 Since then, the Government has been active
in pushing forward that process of reform—working with business,
consumer groups, regulators and others to achieve a substantial
package of reforms.
1.4 The White Paper itself acknowledged the importance
of ensuring that consumers are empowered by providing them with
a transparent marketplace. To that end, regulations have been
made during the last year that simplify the rules governing the
advertising of consumer credit; standardise the calculation of
the APR; make the form and content of credit agreements clearer;
introduce a fairer method for calculating the costs of early settlement
of loans; and for the facilitation of online credit agreements.
1.5 In December last year a new Consumer Credit
Bill was introduced into Parliament to strengthen the consumer
credit licensing regime to enable more effective enforcement of
standards of conduct; to enable borrowers to challenge unfair
credit transactions rather than only those that are extortionate;
and to provide for a system of alternative dispute resolution.
This has completed its Commons stages.
Progress since the Committee's 2003 Report
Recommendation 2: We welcome the recent actions
taken by both the DTI and the OFT in the area of credit and store
cards charges and marketing and trust that this reflects the higher
level of priority required for these issues that we called for
in our earlier report.
1.6 The Government welcomes the Committee's acknowledgement
of the efforts that have been made in this area. Reform of the
consumer credit market was a manifesto commitment in 2001, and
has been taken forward by the Department of Trade and Industry
under a thorough and wide-ranging review since July 2001. That
review has been characterised by unprecedented levels of consultation
with all of the key stakeholder groups—representing the
credit industry, consumer groups and enforcement authorities—and
culminated in the publication of the December 2003 White Paper.
1.7 The White Paper set out the most significant
package of reforms to the consumer credit regime since the Consumer
Credit Act itself was enacted over thirty years ago. The Government's
focus over the last year has been on bringing these reforms into
effect. A comprehensive package of measures that increase and
improve the information available to consumers are already on
the statute book:
The Consumer Credit (Advertisements) Regulations
2004—which came into force on 31st
October last year—introduce a new, simplified approach to
the advertising of consumer credit. They establish the APR as
the prime comparator; and prevent advertisers from hiding key
information in the small print by requiring key information about
the costs of credit to be displayed together and with equal prominence.
The Consumer Credit Act (Electronic Communications)
Order 2004—which came into effect
on 31st December 2004—amends the Consumer Credit
Act and legislation made under the Act to remove impediments to
the conclusion of credit agreements by electronic means—e.g.
over the internet.
The Consumer Credit (Disclosure of Information)
Regulations 2004 and the Consumer Credit
(Agreements) (Amendment) Regulations 2004—which take
effect of 31st May 2005—introduce new requirements
on lenders to provide consumers with clear, upfront information
about the costs and other key terms of the product before they
sign up. This must be in a form that the consumer can take away
and study. In addition, HM Treasury brought into force The
Financial Services (Distance Marketing) Regulations 2004 on
31st October 2004. These Regulations—which implement
the EU Directive on the Distance Marketing of Consumer Financial
Services—require all contracts for financial services that
are made at a distance, including for consumer credit, to give
the consumer a 14 day right of withdrawal.
The Consumer Credit (Early Settlement) Regulations
2004—which also come into force
on 31st May—abolish the old Rule of 78 that is
used to calculate the settlement fee for borrowers who wish to
settle their loans early. The Regulations substitute a new, fairer
actuarial method of calculation.
2. TRANSPARENCY
IN CHARGING:
The summary box
2.1 As stated above, the Government has introduced
its own measures to improve the quality of information that is
available to consumers before they commit themselves to a credit
agreement. New regulations requiring lenders to provide potential
borrowers with pre-contract information come into force on 31st
May 2005. They will mean that potential borrowers will be presented
- in a form that they can take away and study, and in a form that
replicates the structure of the agreement itself - all of the
key terms of the agreement. Not only will consumers have the opportunity
to consider the benefits of the agreement on offer; but the common
format will also make it much easier for them to compare the relative
merits of competing products.
2.2 Within the credit card sector, these provisions
will be augmented by the Summary Box. The Government has worked
closely with the credit card providers to encourage the development
of the Summary Box, which we welcome as an important aid to consumer
understanding. Ministers have repeatedly said that they welcome
any initiative that has the effect of increasing the quality and
quantity of information available to consumers and that helps
them to make informed choices. To that end, the Government will
continue to work closely with the credit industry to develop and
refine these initiatives.
Annual Percentage Rates (APRs)
Recommendation 9: We welcome the move to a single
method of calculating the APR for credit card advertisements.
However, we regret that this change could not be aligned with
that in credit agreements and note that this difference could
result in a source of confusion for consumers until May 2005.
We would welcome an explanation as to why it was thought necessary
to delay implementation of the requirements for a single method
of calculating the APR in credit agreements.
2.3 The Committee will be aware that, during
the course of its first hearings on the credit card market, substantial
pressure was placed on the Government to bring forward a new,
unified approach to the APR at the earliest opportunity. The Committee
was also keen to see the proposed new approach to the regulation
of credit advertising brought into force as soon as possible.
As a consequence, the implementation date for what became the
Consumer Credit (Advertisements) Regulations was brought forward
to 31st October 2004.
2.4 The acceleration of this implementation timetable
prompted lenders to express concern about their ability to meet
both that deadline and an early date for the introduction of the
new regulations governing the form and content of credit agreements.
After consulting stakeholders on the implementation timetable,
it was agreed that the date on which the agreements regulations
came into force should be set at 31st May 2005.
2.5 The principal point made by lenders in arguing
for a later implementation date for the new rules on agreements
was that the necessary changes to their computer systems could
not be made by the earlier, October, implementation date. In addition
there would be a substantial effort and cost involved in re-drafting,
re-printing and re-stocking all of their agreements in the shorter
timescale. Had the Government insisted that the new APR rules
had been applied to agreements as well as to advertisements from
31st October 2004, we would have imposed exactly those
administrative burdens that the later implementation date had
been designed to avoid.
Interest calculation method
Recommendation 10: We note that even many industry
leaders largely conceded that the variety of interest calculation
methods presently in use can be unfair for the consumer. The consumer
may often be unaware that the differences exist and unable to
understand the effects the differences can have. As one issuer
has noted, an "illusion" can be created that a deal
is better than it really is.
Recommendation 11: Lack of clarity about interest
calculation methods and their effects continues to be a major
problem for consumers… We recommend that the industry, working
with the consumer bodies, give further consideration to whether
some elements of standardisation of charging methods could be
introduced and bring forward proposals to achieve it. This could
be through the establishment of one or two well publicised (and
therefore more widely understood) standards, from which individual
issuers would be free to diverge so long as clear indications
were given of the effect on consumers.
2.6 In our formal response to the Committee in
February last year, we argued that the key to consumer empowerment
in this area was ensuring that borrowers were given clear information,
before they commit themselves, about how the interest charges
under an agreement would be calculated.
2.7 The new transparency regime that we introduced
last year fulfils this function. In particular, the new rules
requiring consumers to be given pre-contract information and on
the form and content of credit agreements will require clear explanations
of how and when interest charges are calculated and applied under
the contract.
2.8 The Regulations come into force on 31st
May this year. The Government believes that, in promoting this
important information about the costs of credit from the small
print to a prominent position in the agreement, they will help
consumers to select the product that best suits their needs before
they commit themselves.
2.9 Beyond this, the Government has consistently
said that it has reservations about whether requiring standardisation
in the way that interest is calculated and applied would actually
be beneficial to consumers.
2.10 While the Government shares the Committee's
concerns about consumers not knowing how interest is applied to
their loan account, and acknowledges that this can have an impact
on the amount of interest that they pay, we are also concerned
that standardisation would restrict or even eliminate consumer
choice.
2.11 Not all borrowers want to use credit in
the same way, and they benefit from being able to choose a product
that complements the way that they organise their finances. A
standardised approach that suits one consumer might prove an expensive
or inconvenient option for another. For example, some credit card
users will want a lower APR, but will be prepared to pay interest
from the date of a purchase; some will prefer a slightly higher
APR, but will only want to pay interest on the amount left outstanding
if they do not settle the whole balance. As long as these aspects
of the product are clearly highlighted—as the new transparency
provisions will require—we believe that it is better to
gives consumers a choice of different products. Standardisation
would bring certainty, but it would come at the expense of flexibility,
innovation and, ultimately, competitiveness and consumer choice.
Risk-based pricing
Recommendation 12: With the increased use of risk-based
pricing, under which the consumer may not know the interest rate
until after applying for the card, more and more consumers will
have to shop around by making multiple applications. But the very
act of shopping around can sometimes damage a customer's credit
rating. This could result in the consumer paying a higher rate,
which would cost them more. We recommend that the industry immediately
implement their ability to undertake 'enquiry searches' so that
shopping around does not damage a consumer's credit rating.
2.12 The regulations made by the Government last
year to create transparency in the credit marketplace, have the
objective of enabling consumers to shop around more. We are aware
that many lenders who operate risk-based pricing already have
the capability to conduct a credit search without leaving a footprint,
but that the issue can be in identifying those consumers that
simply want a quote and those who are applying for credit. We
support the Committee's recommendation that the industry should
ensure where possible that undertaking 'enquiry searches' does
not damage a consumer's credit rating.
Recommendation 13: We welcome moves by the DTI
to ensure that the 'typical' APR (or less) will now be available
to 66% of borrowers.
Recommendation 14: We recommend that the OFT develops
guidance to deal with the practice of 'implicit' risk-based pricing.
This should clarify whether the requirement that the 'typical'
APR (or less) be available to 66% of borrowers applies to products
using implicit risk-based pricing. When a customer is turned down
for the product originally applied for and is offered a more expensive
credit card, they should be provided with clear written reasons
as to why. The industry should review its practices to ensure
that this is the case.
2.13 The Government has been encouraged by the
widespread level of support that it has received from all sides—including
both the credit industry and consumer groups—for the introduction
of its new rules on the quoting of a typical APR in credit advertisements.
The 66 percent rule, which came into force with the new Consumer
Credit (Advertisements) Regulations on 31st October
last year, is designed to ensure that consumers who respond to
an advertisement can do so with a degree of confidence that the
rate quoted will be representative of the rates that are actually
offered.
2.14 The Government recognises that the application
of the 66 percent rule is particularly important where credit
providers are lending on the basis of risk-based pricing. We are
working with the Office of Fair Trading to ensure that lenders
apply the rule consistently and in compliance with the legal requirements.
We understand that the OFT is in the process of updating its Frequently
Asked Questions on the advertisements regulations and that these
include guidance on how the 66 percent rule should be applied
to such products.
Balance transfer fees
Recommendation 15: Charging handling fees on balance
transfers is a legitimate business practice, but such fees erode
some of the value to the consumer of balance transfer offers.
The industry should revise the summary box guidance to ensure
that the level of these charges is clearly communicated to the
consumer. The OFT should revise its guidance on advertisements
to ensure that firms outline the size of the fee in any promotion
containing the introductory interest rate.
2.15 New regulations governing the advertising
of consumer credit (which came into force on 31st October
last year) and the form and content of credit agreements (which
take effect from 31st May this year) require lenders
to set out clearly key financial information about their products,
including any fees and charges that might apply.
Default charges
Recommendation 16: Credit card issuers continue
to maintain that their penalty charges represent a fair recovery
of the costs involved, but it is impossible to know—because
companies have been unwilling to place in the public domain the
information needed to create confidence that these charges are
reasonable. We therefore strongly welcome the investigation by
the OFT and await the result with interest.
2.16 The Government also awaits the outcome of
the ongoing OFT investigation into the levels of penalty and default
charges. We will respond to the outcome of that investigation
at that time.
3. DATA SHARING
AND RESPONSIBLE LENDING:
Data sharing
Recommendation 17: The lack of full data sharing
in the credit card industry has significantly contributed to problems
of over-commitment by hampering responsible lending. As industry
representatives themselves acknowledged, there is significant
scope for the system of data sharing to be improved and the industry
must make progress in this direction.
3.1 The Government strongly supports the principle
of data sharing where it is proportionate to the benefits received
in terms of minimizing overindebtedness.
Recommendation 18: We recommend that all banks
should share the maximum permitted data on credit card accounts.
We welcome the explicit support from all APACS members for this
course of action and hope it will be accomplished promptly. However,
there will continue to be room for improvement, particularly regarding
the sharing of behavioural data to identify those consumers who
may be over-committed and making the minimum payment across several
cards, sometimes by using cash withdrawals from other cards.
3.2 While the Government supports the sharing
of data where it is predictive of overindebtedness, it is important
to ensure that the use of behavioural data is carefully considered
to avoid damaging the credit rating of consumers on the basis
of a short-term behavioural change, for example withdrawing cash
from a credit card whilst on holiday. We understand that industry
will look at the metrics noted by the Committee when revising
their decision systems.
Recommendation 19: There are problems relating
to the sharing of data on 'historic' accounts where customer consent
was not obtained at the time the account was opened. There are
differences of opinion between the industry and the Information
Commissioner regarding the extent of the problem. We believe the
industry should immediately carry out a pilot study to assess
the response rate to letters seeking customer consent. If response
rates remain low, then we believe there is a case for an exemption
from the common law duty of confidence for the sharing of positive
information on credit card accounts. The industry, relevant government
departments and the Information Commissioner need to work together
to resolve the legal barriers to sharing historic data.
3.3 The Government does not share the Committee's
view that there is a case for an exemption
from the common law duty of confidence for the widespread sharing
of data on historic accounts.
Enabling lenders to share data on historic accounts would require
legislation. Such new legislation requiring the widespread disclosure
of data would also need to be ECHR compliant and therefore any
measure would have to be proportionate. The Government is therefore
working with industry to produce a business case to support the
change. This includes quantifying the impact of opening the data
on these accounts on overindebtedness, and examining what specific
aspects of the data would bring the greatest benefits.
Recommendation 20: Improved data sharing needs
to be accompanied by strong and robust safeguards to prevent predatory
lending. We note evidence from card issuers that these safeguards
are in place; it would be appropriate for the DTI to review the
adequacy of these arrangements.
3.4 The Government agrees with the Committee's
view that the issues of predatory lending and greater data sharing
should be treated as a whole and not separately. The DTI will
therefore consider what safeguards are in place to prevent predatory
lending, and whether these are appropriate.
Data sharing: customers in financial difficulties
Recommendation 21: When a consumer is in financial
difficulties, an early referral to independent debt counselling
can be beneficial in preventing the situation becoming worse.
Individual banks may be monitoring their own exposure to the consumer,
but many people now have several credit cards spread across a
large number of lenders so there is a need for a more integrated
approach across the industry to identify those customers in financial
difficulty and to offer them appropriate advice. We recommend
that the industry work towards establishing a set of industry
trigger points, so that people with debt commitments can be referred
to debt counselling.
3.5 The Government shares the Committee's view
that it is highly beneficial that where a consumer gets into financial
difficulties, they are able to access appropriate advice quickly
in order to prevent any further deterioration in their situation.
We would welcome work by the credit industry to identify trigger
points, identifying when a consumer is in financial difficulty,
in order that they can be referred to debt counselling.
3.6 Related to this is the issue of ensuring
that there is adequate provision of free debt advice. We welcome
the fact that a large part of the credit industry has increased
its funding of free debt advice services and placed this funding
on a sustainable, three-year basis. We strongly encourage the
industry to ensure that these services continue to be funded adequately.
ANNUAL CONSOLIDATED DEBT STATEMENT
Recommendation 22: We welcome the measures in
the Consumer Credit Bill requiring an annual statement for each
individual credit agreement. We note the provisions in this area
of the US Fair and Accurate Credit Transactions Act and will be
looking at them further.
3.7 The Government wants to ensure that consumers
are aware of the current state of their credit obligations. Informed
consumers can make better choices about credit, encourage better
business performance and improve competition in the consumer credit
market. The Bill provides that, in respect of all credit accounts
that continue for more than one year, the lender will be required
to provide the consumer with a statement of the activity on the
account at least once a year. The Consumer Credit Act already
provides that consumers should receive regular statements about
running account credit agreements, such as credit card accounts,
and the Bill will provide for the inclusion of additional information
in these statements, such as minimum repayment warnings.
3.8 The statement will be required to include
specified information about the account and, once the Bill becomes
law, the Department will consult on the range of information to
be included in the statements. In addition to this, the Bill provides
that lenders should provide consumers with information about amounts
in arrears and also fees and charges imposed as a consequence
of default, so as to ensure that consumers are aware of any credit
problems at an early stage.
Credit card cheques
Recommendation 23: We welcome the inclusion in
the Banking Code of guidelines covering the marketing of credit
card cheques, although there is undoubtedly room for improvement
in how the information regarding the interest rates and terms
and conditions are communicated to the consumer. Credit card cheques
continue to be issued unsolicited, a practice which we believe
should cease. If consumers wish to avail themselves of credit
card cheques, they should opt in to the system.
Recommendation 24: The industry should also introduce
new measures to combat the fraudulent use of credit card cheques.
The ending of unsolicited issuing will be very helpful in this
regard.
3.9 Concerns about the unsolicited issuing of
credit card cheques were raised during the passage of the Consumer
Credit Bill through Parliament. A number of Members of Parliament
wanted a statutory provision that would require consumers to state
that they were willing to receive credit card cheques before those
cheques could be issued.
3.10 The Minister for Consumers, Gerry Sutcliffe
MP, indicated his sympathy with these arguments. He made clear
that the Government did not consider it to be appropriate for
information about credit card cheques to be restricted to the
small print of the agreement. He believed that consumers should
be clearly informed at the time that they make the agreement that
they may be sent credit card cheques, and made aware of what using
those cheques would mean for them.
3.11 To that end, the Minister committed the
Government to using existing powers under the Consumer Credit
Act to bring forward secondary legislation that would require
consumers to be told clearly when an agreement is made that they
may be sent credit card cheques and to be informed of all the
charges and interest rates associated with the use of such cheques.
3.12 The Government will consult on proposals
to implement this commitment in due course.
Credit limit increases
Recommendation 25: We welcome the inclusion of
guidelines covering credit limit increases in the Banking Code.
However, we believe that implementing a system restricting the
number of unsolicited increases in credit limits would be beneficial
in preventing some cases of financial difficulty. We do not believe
that this would place excessive restraints on the industry as
companies would continue to be free to raise credit limits should
customers contact them to request an increase. We also note that
some lenders already operate such a system and, to ensure responsible
lending, this should become common practice across the industry.
3.13 The Government agrees with the Committee
that the guidelines covering credit limit increases in the Banking
Code are welcome. We look forward to seeing the industry's response
to the Committee's recommendation to restrict unsolicited increases
in credit limits.
Customers with mental health problems
Recommendation 26: As a matter of urgency we urge
the banks to seek to work further with the money advice associations
to agree guidance on dealing with people who have diagnosed mental
health problems that impair their ability to handle money, and
to publish draft guidance for the Banking Code by the end of the
year.
3.14 The Government strongly supports the recommendation
that banks work closely with money advice providers to develop
guidance to ensure people who have diagnosed mental health problems
are supported.
Access to basic bank accounts
Recommendation 27: Basic bank accounts are a useful
way for people in debt to manage their commitments and attempt
to resolve their problems. Banks should ensure that their credit
checking procedure does not deny access to basic bank accounts
for those in financial difficulty.
3.15 Basic bank accounts can be a useful way
for people in debt to manage their commitments and attempt to
resolve their problems. HM Treasury continue to work closely with
the banking industry, to ensure that consumers are able to
access basic bank accounts as part of the Government strategy
to tackle financial exclusion (see 'Promoting
financial inclusion'—HM Treasury, December 2004).
The banks and Government have agreed to work together towards
the goal of halving the number of adults in households without
a bank account, and of making significant progress in that direction
within two years.
Payment Protection Insurance
Recommendation 28: We recommend that once the
transfer of responsibilities for insurance regulation to the FSA
has been completed the FSA should begin an investigation into
the selling of Payment Protection Insurance. This should include
the safeguards in place to prevent the miss-selling of PPI to
customers who would not be able to benefit from it due to exclusions,
how more competition could be introduced into the market, and
how the provision of information to consumers could be improved
to allow better informed choices about whether to take out PPI
and about which policy is appropriate for individual circumstances.
3.16 The Financial Services Authority started
regulation of the mediation of general insurance contracts in
January. As part of their initial work to monitor the industry
they are committed to delivering a thematic project to look at
PPI.
3.17 New rules governing the provision of pre-contract
information and the form and content of credit agreements come
into force on 31st May 2005. These will require lenders
to set out clearly the costs and other terms of both the credit
on offer and of any associated products, such as payment protection
insurance.
3.18 For the first time, the new agreements regulations
will require a borrower who is taking out PPI to make an additional
signature on the agreement confirming that he or she agrees to
the terms of the insurance policy.
Department of Trade and Industry
March 2005
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