OFT tells banks to pay out interest

JAMES DOW

HIGH street banks were yesterday told by the Office of Fair Trading to stop pocketing the millions of pounds of customers’ money they earn by not making certain interest payments.

When consumers make standing order, telephone banking and internet payments, money is normally removed from their accounts and held by the bank for two days prior to it arriving in the recipient’s account.

This money can be invested by the bank to earn additional revenue over the two-day period. The OFT said: "We are calling for customers to continue to receive interest on interest bearing accounts until the money is credited to the payee’s account.

"Alternatively, if the customer making the payment is overdrawn or will become overdrawn as a consequence of making the transfer, they should not be charged overdraft interest."

With cheques, funds are available to the receiving bank on the second day following the day of deposit.

The OFT is calling for interest to be paid, where applicable, from this day at the latest.

OFT chairman John Vickers said he was launching a review of the banks’ practice. And he called on the high street lenders to "self-regulate" by publishing clearer information to customers about when they pay interest on money transfers.

The watchdog believes non-payment by the banks is costing consumers some £30 million a year - a trifling amount compared to the mega-profits recently announced by the likes of Royal Bank of Scotland and HBOS.

Vickers has set down his recommendations in a letter to Professor Elaine Kempson, as part of her 2004 review of the UK Banking Code. The Consumers’ Association, meanwhile, said it will go beyond Vickers’ demands in the changes it recommends to Kempson.

"We would say that in this day and age, with all the technology we have, transactions should happen instantaneously," a spokesman said.

The banking industry is already committed to addressing the flaws that have been raised by the Treasury select committee. A "summary box" of charges will be included on credit card literature by March 2004, and this will be incorporated into the Banking Code.

UK credit cards: MPs angry at lack of transparency

A government committee says the credit card industry has done little to improve price transparency.

February 16, 2004 4:29 PM GMT (Datamonitor) - John McFall, chairman of the Treasury Select Committee, has written to the credit card industry body APACS to express his anger over what he sees as the industry's "lack of commitment" in responding to the call to make their rates and charges clearer. However, industry regulators should not risk baffling consumers with unnecessarily detailed information.

The Treasury Select Committee chairman's letter, also sent to the chief executives of several of the UK's largest credit card issuers, reiterated the committee's determination to improve the transparency of the information available to consumers. In his letter, Mr McFall accused the industry of a lack of commitment over measures to improve customer information.

The committee's investigation into the transparency of credit card charges took place over the summer of 2003 and created a number of headlines, one of the most notable being Barclays chief executive Matt Barrett's admission: "I don't borrow on credit cards because it is too expensive".

The committee found that consumers were not being provided with sufficient "clear and understandable" information on rates and charges and it made a number of recommendations, including the introduction of US style summary boxes onto marketing literature and statements. The committee also advocated an update to the Consumer Credit Act to enforce a single method for calculating APRs.

The main focus of concern is the introduction of the 'honesty box'. Basic research confirms that the majority of card issuers are well on the way to fully introducing these into their literature by the agreed March deadline, and some have already achieved this aim. However, the committee has further suggested that summary boxes should include scenario-based examples to help consumers make better-informed decisions.

A clearer APR calculation and a US style summary, or Schumer, box will almost certainly be of benefit to consumers. However, the usefulness of detailed breakdowns of rate calculations and charges applied to specific situations is debatable. These kinds of examples would only be directly applicable to a very few individuals and could therefore cause more confusion for the very consumers they are intended to help. The line between improving transparency and inducing information overload is a very fine one, and the credit card regulators should be wary of unnecessarily interfering with the minutiae of the market.

Consumers 'unaware of APR discrepancies'

Sandra Haurant

Complexities surrounding credit card costs are continuing to flummox consumers, according to research published today.

The research, carried out on behalf of Egg by the Isaac Newton Institute at Cambridge University, showed just how difficult it is to compare credit cards using annual percentage rates (APRs).

Several different methods are used to calculate APRs, and these can result in vastly different costs for borrowers, even when headline rates of interest appear to be the same. Using a straightforward scenario to compare costs, a study found that the Egg card, with an APR of 13.9%, and the Halifax Once card, with an APR of 9.9%, would actually cost a borrower the same amount in interest charges. Meanwhile, a Lloyds TSB Advance card, with an APR of 11.9%, works out more expensive than Egg, despite its APR being 2% lower.

Further research has revealed that consumers remain unaware of these discrepancies. Perhaps unsurprisingly, some 81% assumed that two cards advertising identical interest rates and used in exactly the same way would result in the consumer paying the same amount in interest charges.

Meanwhile, in a "mystery shopper" exercise, researchers discovered that card providers were woefully inadequate at explaining to customers how their interest rates worked.

Researchers were told to enquire about each provider's method of interest calculation and how they applied this to their cards. Almost half (48%) of researchers said the information they received was unclear, while some 46% said that, at the end of the exercise, they felt they understood how the rates were calculated. Worryingly, though, once the responses to researchers' queries had been analysed, it emerged that the information they had received was "incorrect in every case without exception, leaving the mystery shoppers in many cases with a false sense of security and a complete lack of understanding of the potential costs of that particular card".

Mark Nancarrow at Egg said: "Different methods of calculating interest allow providers to subsidise and suppress the upfront APR that they are advertising, creating an illusion that they are offering a better deal than is often the case."

Mr Nancarrow added that the differences in charges and calculations went against the spirit of measures to be implemented following the Treasury select committee's harsh criticism of the industry. One such measure, to be brought in by March this year, is a summary box to be included in literature, containing simple, easy to understand information about charges and costs.

Liberal Democrat Treasury spokesman Vince Cable said: "How can we make sensible choices about borrowing, if the way we are charged interest is so confusing? Even after the introduction of the new 'summary box' for all credit card promotional material on March 1, consumers will remain vulnerable.

"There is now a heavy responsibility on the government and the Office of Fair Trading to get to grips with this issue by standardising the way interest rates are calculated so that APR can actually be a meaningful method of comparison."

Credit card interest 'confusing'

The array of different methods lenders use to calculate the interest paid on credit cards is confusing for consumers and makes it difficult for them to shop around, an Internet bank said today.

Egg said lenders used 10 different formulas to calculate how much interest consumers owed on outstanding balances, with payments varying from card to card even if they had the same APR.

It is calling on the industry to adopt a single, standard method of calculating interest to make credit cards more transparent.

The group said that while two cards may charge the same interest rate they might, for example, have different interest free periods or accept repayments at different points during the month.

Egg said that based on this it could charge interest of 22.7% on its credit card and still be cheaper than Lloyds TSB's Advance card which has an APR of 11.9%.

It based the calculation on someone making two purchases, one of £300 and one of £150 spread over two monthly statements.

The consumer only repays £100 of the first statement, but pays off the second statement in full on the due date.

Mark Nancarrow, chief operating officer at Egg, said: Different methods of calculating interest allow providers to subsidise and suppress the upfront APR that they are advertising, creating an illusion that they are offering a better deal than is often the case.

Our report exposes a lack of transparency which is contrary to the aims of the current review of consumer credit and does nothing to help create a fairer, more transparent environment for the UK consumer.

Lloyds TSB criticised the group for not comparing like with like.

It said its Advance card was aimed at people who were persistent borrowers and did not clear their balance in full each month. Because of this the card offered a relatively low APR but no interest free period.

Research for Egg found that 81% of consumers thought they would be charged the same amount from two cards with identical interest rates, if they were used in exactly the same way, although this is not the case.

Three-quarters of people thought it was unfair that providers who offered the same rate could actually charge different amounts, and 67% said it would be easier for them to shop around for the best value card if a standard method of calculation was used.

Liberal Democrat Treasury spokesman Vince Cable said: How can we make sensible choices about borrowing, if the way we are charged interest is so confusing?

Even after the introduction of the new summary box for all credit card promotional material on 1st March, consumers will remain vulnerable.

There is now a heavy responsibility on the Government and the Office of Fair Trading to get to grips with this issue by standardising the way interest rates are calculated so that APR can actually be a meaningful method of comparison.

Barclays profits soar to £3.8bn

Credit card customers pay no heed to Barrett

Heather Tomlinson

Barclays, whose chief executive caused uproar by telling MPs that credit cards were "too expensive", yesterday revealed last year's profits ballooned to £3.8bn.

Operating income for the group rose 10% to £12.4bn in 2003, while profits grew 20%. The results were boosted by a reduction in provisions for bad debts, mainly from its corporate banking division, Barclays Capital.

Chief executive and chairman designate Matt Barrett told a group of MPs last October: "I don't borrow on credit cards because it is too expensive."

The Barclaycard business appears to have been unaffected by the remark, reporting operating profits up 17% to £722m and 1.5m new customers. The average Barclaycard customer paid £98 in interest last year and the bank made £68 profit for each cardholder.

Eddy Weatherill, chief executive of the Independent Banking Advisory Service, which works with small businesses, said Barclays was guilty of profiteering. "Customers have yet to learn how to use their feet to make [banks] compete."

Vincent Cable MP, Treasury spokesman for the Liberal Democrats, called on the government to introduce a new regulator to control the banks and for the Office of Fair Trading to be tougher. "We now have about £1 trillion of household debt, which is very worrying for the economy but great news for the banks."

In March banks will have to put an "honesty box" on their promotional literature, in an attempt to make the charges clearer to customers.

When questioned yesterday about his comments to the Treasury select committee, Mr Barrett said: "Life is all about context." The company was merging its customer loans business with Barclaycard "to give customers a range of alternatives", he added.

Mr Barrett also indicated that he had an appetite for acquisitions in mainland Europe, although he declined to comment about the firm's talks with US credit card specialist Providian. Last year the company made several acquisitions, including the Spanish bank Banco Zaragozano.

Mr Barrett was less downbeat yesterday on the problem of high consumer debt, which he had warned was overburdening some people. He said that about 10% of the population would be hit hard by rising interest rates.

"The global economic outlook is much healthier than 12 months ago, with rapid expansion in the United States in the third and fourth quarters leading an international upturn," he said.

"The UK remains in good shape and is becoming more balanced, with moderation in UK consumer spending likely to be more than offset by significantly stronger investment and exports performance, and government spending."

Although the bank met the forecasts of City analysts, its share price fell 4% to 494.75p yesterday. "There was an expectation that they would outperform and beat forecasts," said Noel Reynolds, banking analyst at Commerzbank. "Given that they have come in line, the shares are down. But they are a decent set of results; there is no problem with the performance."

Card companies clash with MPs

Helen Loveless, This Is Money

A COMMONS committee has criticised credit card companies for failing to respond 'adequately' to concerns over the transparency of charges.

It follows the publication in December of last year, of a report by the Treasury Committee into the transparency of credit card charges.

The report made a number of recommendations designed to benefit lenders, including the introduction of summary boxes on credit card statements featuring clear information on rates for card users.

It also called for standardisation of the way interest charges are calculated. Currently there are two ways of calculating annual percentage rates and 10 ways of working out other charges.

But in a letter sent today to Apacs, the trade body for UK banks and building societies, the committee today criticised the lack of progress made by lenders in a number of key areas.

John McFall, MP, chairman of the Treasury Committee said: 'The committee recognises there has been progress on some issues but in other areas we are concerned that the industry‘s response has so far been inadequate.

'I hope there is no question of some in the industry seeking to create obfuscation around these issues, rather than to seek genuine solutions which will benefit consumers and the image of the industry,' he added.

'A lack of commitment is not constructive and a perception that the industry will only do the minimum necessary would not be acceptable to either the committee or consumers.'

Apacs reacted strongly to McFall's complaints. In his reply to the letter, Chris Pearson, chief executive of Apacs, says: 'From where I sit I certainly do not see a lack of commitment or any obfuscation within the industry on the issues raised by the Select Committee.

'On the contrary, the industry has responded with openness in addressing the issues raised and is on track to deliver the Summary box by the end of March this year.'

The Treasury Committee and Apacs are to meet monthly, in a bid to monitor progress made by lenders in ensuring greater transparency and simplicity for credit card users.

Consumers dealt a bad hand with credit cards

By Peter Weekes

It's now de rigueur to carry at least two or three credit cards at all times. So accepting have we become of easy credit that one in three of us doesn't know, or simply doesn't care, how much interest we pay.

The reason is simple, says the head of Virgin Money - the marketing of credit cards is "misleading", "unscrupulous" and "devious". It is a dirty campaign to fool people into taking on more debt than they can ever repay, says managing director Rohan Gamble.

The chairwoman of the Consumer Federation of Australia, Carolyn Bond, agrees. "A lot of credit-card marketing is basically about the bells and whistles like frequent flyer points rather than the interest rates which are not prominently displayed.

"Interest rates are very high and the card issuers generally don't want to highlight that."

Consumer groups have long campaigned for better disclosure of fees and charges, but in the last two weeks they have been joined by two newcomers to the industry, credit union IntechDirect and Virgin Money, both of whom have called for tighter regulation.

Among a range of issues, they want credit-card providers to stop offering unsolicited cards and extension to credit limits. They also want annual percentage rates (APR) which includes all fees to be prominently displayed rather than special honeymoon rates.

Low "honeymoon" rates are used to entice people known as revolvers from competitors. Revolvers are those who pay the minimum amount required each month, giving a windfall to the banks.

For example, a revolver who makes a $500 purchase on the ANZ Frequent Flyer Visa card with a rate of 18.25 per cent, will be paying off the purchase for seven years and 11 months, costing the card holder $445.74 in interest.

Mike Ebstein of MWE Consulting estimates that between 50 and 60 per cent of card holders are revolvers, with the rest paying the full outstanding balance each month.

Along with the property boom, the nation's credit-card binge has given Australia one of the highest debt-to-income ratios in the developed world, and it's getting worse.

In November, we had a credit card bill of $10.8 billion, according to the Reserve Bank of Australia. This compares with $3.6 billion at the same time in 1998.

And as the banks are eagerly extending more credit, they are also now cracking down on defaulters three times as fast as previously.

Bad debtors are now referred to debt collectors after 60 days past the balance date rather than the usual 180 a few months ago, says Christine Christian, the chief executive of D&B Australasia, one of Australia's two debt collection agencies.

She says there is also a noticeable jump in the number of people who ordinarily wouldn't be able to obtain a credit card, but are now in financial trouble after receiving expensive cards from finance companies that target high-risk consumers.

Denis Orrock, the chief executive of InfoChoice, says with more than 230 credit-card variations available, it's not surprising that many do not understand how even basic concepts work. He says people are often trapped into paying interest because they wrongly believe that the purchase was made during the free period.

IntechDirect marketing manager John King says it is encumbered upon providers to educate consumers about the operation of cards and give full and transparent disclosure of fees and charges.

Launching its own card today, IntechDirect has adopted a code of practice that it hopes will lay the basis for an industry-wide code.

Australian Consumers Association's finance policy officer Catherine Wolthuizen says it would welcome the industry adopting a code of practice.

"There is a lot of marketing of credit at present that in our view comes very close to being irresponsible."

Virgin's Gamble wants the Federal Government to adopt the same model as the UK and US where credit card providers must print an honesty box on top of every bill detailing the APR and all charges.

"You would really have to be a professional archaeologist just to unearth all the fees and interest charges attached to some offers, and I think it's quite deliberate. One of the more dubious advertisements promised no annual fees, but when you look into the product they have a monthly fee buried in the fine print that adds up to well over $100 annually. It's unscrupulous."

Consumer groups are particularly worried about people receiving unsolicited offers to extend their credit limit.

Bond says in many cases people who are struggling to make ends meet grab the offer as a lifeline, only to be thrown further into debt.

Chief executive of the Australian Bankers Association, David Bell, says the proposal to use the APR "has been around for years, but evidence suggests such measures can be misleading and therefore potentially disadvantageous to consumers".

He says state and federal laws, already in place, can deal with any provider that breaches consumer protection laws.