DTI accused of failing to act on card charges

By Grainne Gilmore

THE Department of Trade and Industry has come under fire for letting credit card companies off the hook over card charges.

Under new proposals announced yesterday by the DTI, lenders will not be required to use a standard formula when calculating interest charges. This would have allowed customers to compare charges on different cards.At present, lenders are free to calculate interest charges on credit cards in any way they choose, and according to the Consumers’ Association they employ about ten different methods.

As a result, the actual charges paid on cards showing the same annual percentage rate (APR) could differ by as much as 76 per cent.

The Commons Treasury Select Committee, which is investigating credit card charges, believes that two or three methods of calculation would be satisfactory.

However, in a move criticised by the Consumers’ Association, the DTI has opted not to standardise the calculation method when the rules on APRs are changed in October.

Mike Naylor, of Which?, the magazine published by the Consumers’ Association, said: “It will be virtually impossible for even the most sophisticated consumers to compare cards.”

Under the DTI’s proposals, information about the method of calculation would be given in a summary box, the new table of costs and charges intended to inform customers about the price of borrowing on a card.

But John McFall, chairman of the Treasury Select Committee, said this was not enough.

“Further work needs to be done,” he said. “If there is a box where the information is meaningless . . . customers will still be left completely in the dark.”

The DTI argued that standardising interest charges could inhibit competition between lenders.

However, this brought a critical response from Nigel Beard, another member of the committee. “How can there be competition when it is not clear what the calculation is?” he said.

“I am surprised that the department has been sucked into this silliness.”

A spokeswoman for the DTI said: “With improved transparency, consumers will be able to select the right product for the way they use credit.”

Card issuers braced for assault

LINDSEY ROGERSON
PERSONAL FINANCE EDITOR

THE UK’s credit and store card providers are bracing themselves for a fresh onslaught from a powerful group of MPs this week.

The Treasury select committee will tomorrow publish an update of its special report into the transparency of card charges.

Considering the grillings to which the committee has already subjected industry bosses during the course of its inquiry into the practices of the UK’s card industry, the arrival of the special report will doubtless be causing some trepidation in the boardrooms of issuing banks.

That is not least because the committee chairman, Dumbarton MP, John McFall has said he will be inviting the credit card chiefs back before his committee in the next few months.

It was during an earlier round of hearings that the Barclays chief executive, Matt Barrett, was forced to admit that he would not borrow on a credit card and had warned his own children against doing so as it was too expensive.

In the months since Barrett’s appalling gaffe, Barclaycard has also been rebuked by the Advertising Standards Authority for misleading its customers.

In the face of all the ensuing negative publicity in the last month, Barclaycard, the UK’s largest credit-card provider, has launched a card offering consumers the longest period of interest-free spending available to date in the UK - 13 months until August 2005.

Indeed, long before the government had even published its proposals for the first reform of the UK’s credit laws in 30 years, the Treasury committee had already forced the credit card industry into adopting a simple, standardised format for presenting all card charges.

The introduction of a summary box has made it easier for consumers to compare the interest charged on new purchases, balance transfers and cash withdrawals.

It has also made it easier for customers and potential customers to see what other charges a provider has, such as £30 for going off the limit and £25 for a late payment.

However, despite this step forward, consumer groups remain critical of card providers’ refusal to adopt a standardised method for calculating APR. This means that two cards charging the same APR on the same level of balance could end up charging quite different amounts of interest because of the different way they calculate that interest.

The committee has also taken card providers, who have collectively increased their consumer advertising spending by 38 per cent in the last three years, to task for the widespread practice of mailing credit card cheques to card customers who have not requested them.

The cheques, if used, typically carry a much higher interest rate than a customer’s normal card APR rate.

McFall has warned card bosses that he will keep investigating the industry until he is satisfied it is being transparent in its dealings with consumers.

Virgin welcomes Labor credit card policy

A Labor plan to make it easier for credit card customers to know what fees and charges they are facing has been endorsed by financial services company Virgin Money.

As part of its banking policy, a federal Labor government would require credit card issuers to produce a summary box on customer statements including all relevant fees and charges.

Virgin Money, which began issuing credit cards in Australia last year, said the policy would make the industry more accountable.

"It's great news for consumers that the ALP is now putting credit card marketing practices firmly under the spotlight," managing director Rohan Gamble said in a statement.

"As relative newcomers to the industry, we're deeply surprised by the lack of industry regulation and how easy it is for unscrupulous card providers to trick people into expensive borrowing.

"In particular, we strongly believe that Australia should follow the lead of the US and the UK in forcing card providers to disclose key fees and interest charges up front in honesty boxes."

Consumer Credit Regulation Arrives in UK

With the long-awaited overhaul of the UK’s consumer credit laws is fast approaching its October 31st deadline, a new report from market analyst Datamonitor warns that one effect could be higher cost of credit and greater difficulty in obtaining credit for those consumers with adverse credit histories.

Tight implementation schedule, lack of adequate preparation, fears of increased bureaucracy and cost of compliance present a major worry for the credit industry, and could even end up driving smaller specialist lenders out of business all together, leaving room for more unscrupulous providers. 'Consumers with adverse credit histories could potentially be faced with higher cost of credit and less protection. It is also likely that mainstream providers will attempt to compensate for lost revenue streams and additional expenses in relation to compliance efforts and pass some of the costs to their clients', says Oksana Selezeneva, Financial Analyst at Datamonitor and author of the report.

The consumer credit market in the UK is one of the most developed in the world and its current regulatory structure is widely regarded as outdated. The rising levels of personal debt present the greatest worry for the Government. Borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans at the end of 2003 had risen to £4,426 per adult in the UK. While Datamonitor’s panel research finds that the majority of credit providers are optimistic about the effect of new regulations on the industry, many are worried about the tight schedule, the cost of the implementation, and the lack of adequate preparation. Only 5% of respondents admitted they were totally prepared for the forthcoming changes.

Another concern for credit providers is the compliance costs. The government has infamously commented that credit providers’ compliance costs would be in the region of £1m – a figure that was judged to be far too low by many lenders. Almost 6 in 10 do not consider the government’s estimation of compliance costs to be valid, and expect the total cost to be significantly higher. In addition to costs, fears about excessive bureaucracy are widespread among smaller credit providers. The increased paperwork requirement could have a detrimental impact on niche industries such as home collected credit.

The Consumer Credit White Paper, published in December 2003, introduced the concept of responsible lending. For example, the government has urged credit card issuers to carry out appropriate internal and external credit checks before raising credit limits and to recognize that in some cases a higher limit may be inappropriate. 'Automatic raising of credit limits is unlikely to have a major impact on the level of overindebtedness in the UK. It is in the interest of credit providers not to stimulate bad debt and they are unlikely to offer it to customer whose previous repayment pattern indicates any level of personal indebtedness', comments Selezvena. 'Obviously, it is up to the industry to ensure that they maintain their rigorous checks in order to make sure that they remain responsible in their lending practices'.

More transparency in credit advertisements is one of the priorities in the review of the Consumer Credit Act. Among the proposals set out in the White Paper are the requirements to use plain and intelligible language and make sure that the APR figure is at least twice the size of the rest of advertisement. This regulation should have a minimal impact on the costs of larger lenders because they have considerable in-house resources. Already, the majority of players in the credit card industry have adopted the proposal of a ‘summary box’, designed to present important information in a clear and concise format. However, Datamonitor warns that the cost implications for smaller credit providers could be considerable, as they will have to seek advice from a limited number of external experts.

Almost two-third of leading unsecured personal loan providers currently charge early settlement fees. The new regulation will cap the amount of interest a lender can charge to one month(some providers currently charge two months interest), which will result in falling revenue for these lenders while giving competitive advantage to providers not charging the fees. Over half of respondents on the panel agreed that the changes will result in higher loan rates to compensate for the lost income.

In addition, new rules will require lenders to provide examples of early settlements scenarios before the signing of the contact. While this may work for large companies with sophisticated computer systems, it will result in an enormous increase in workload for smaller lenders and sole traders. 'Some of them may even go out of business, leaving their customers with little choice but to seek credit from less reputable providers' comments Selezneva.

The existing Consumer Credit Act allows customer redress only if a credit agreement is deemed ‘extortionate’. The proposed changes will widen the concept of ‘extortionate credit’ to encompass ‘unfair credit transactions’, enabling consumers to challenge lenders more readily. However, this could result in the rising cost of credit for consumers. In Datamonitor’s view, this would particularly affect non-standard providers lending to individuals with adverse credit histories. Such providers will face a greater number of challenges simply due to the riskier nature of their customers and will consequently increase their prices to cover the costs. Higher prices can, in turn, make these lenders more vulnerable to claims of ‘unfair’ credit provision, creating a kind of a ‘vicious circle’for sub-prime providers.