APPENDIX 2
RESPONSE BY THE OFFICE OF FAIR TRADING
Letter to the Chairman of the Committee
Many thanks for sending a copy of your Committee's
report on credit card charges and marketing which was published
on Friday. The comments in the report on the progress made by
the OFT, among others, are welcome. As you know, we attach great
importance to ensuring that consumers benefit from a market for
credit which is truly competitive, transparent and fair.
We are well advanced in our work on credit card default
charges and have now narrowed down our consideration to a small
number of key issues. As I have indicated before, it is not possible
because of legal restrictions to say more of substance in advance
of the conclusion of our enquiries, but I can assure you that
we are progressing this with all possible speed and will make
public our position as soon as we can.
My main purpose in writing now is to deal specifically
with two matters raised in your report on which we have acted
and are continuing to act. These are:
· The
application of the 66% requirement for typical APRs; and
· Handling
fees levied for balance transfers.
On the first of these points paragraph 46 of your
Committee's report calls upon the OFT to issue guidance to make
clear that the 66% requirement for typical APRs applies where
there is risk-based pricing for card products. Such guidance has
already been issued by the OFT and was included in the guidance
document which we published on 15 October. Paragraph 6.2 states:
"The definition of 'typical APR' relates to
agreements arising from the advertisement. It is necessary therefore
to start by calculating an 'advert APR' for each agreement expected
to be entered into as a result of the advertisement. This is done
by applying the assumptions in Sch 1 and the TCC Regs.
Having calculated an 'advert APR' for each individual
agreement, a typical APR can be derived using the 66% rule in
Reg 1(2). 'From' and 'to' rates can be determined on a similar
basis."
Thus the rate for the typical APR relates to all
agreements that result from the advertisement and not just those
agreements that relate to the specific product advertised. Other
products offered at different rates on response to an advertisement
would, accordingly, have to be factored into the typical APR.
We will investigate any matter where there is evidence
that our guidance is not being followed and the typical APR does
not meet the 66% rule. Such evidence will, of course, have to
relate to advertisements which were published after the Regulations
came into effect on 31 October last year. We will also, more generally,
be reviewing the advertising of credit card issuers in order to
ensure compliance.
On the second point, in paragraph 47 of your Committee's
report you call for our guidance to be revised to ensure that
handling charges for balance transfer fees are made clear to consumers.
This matter was covered in our October guidance under the general
issue of the displaying of interest rates in advertisements. Our
guidance said:
"if an interest rate is shown this must not
be liable to mislead consumers contrary to s46."
We have however been keeping our guidance under review
and we intend to update it shortly. One of those updates will
explicitly cover the matter raised at paragraph 47 of your Committee's
report.
I hope that this is helpful and look forward to further
progress on transparency issues as a result of the combined efforts
of your Committee, the industry, the Government and the OFT.
Sir John Vickers
Chairman
Office of Fair Trading
7 February 2005
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