Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40 - 53)

WEDNESDAY 1 MAY 2002

MS MICHELLE CHILDS, MS LOUISE HANSON AND MR MIKE NAYLOR

  40. Let me draw you a bit further. Your own submission to us says at paragraph 26[4], "Credit card companies are making extra profits at consumers' expense." That is your position, is it not?

  (Mr Naylor) Yes, undoubtedly.

  41. How does the consumer start to fight back about this, or what assistance do they need to try to get these rates down to a more realistic rate?
  (Mr Naylor) They need to be given clear information about exactly how much they are being charged and what the alternatives are for them. It is very easy for people to switch cards. We found that 97 per cent of people found it very easy. They need to be given that information about what is available.

  Mr Plaskitt: I am sorry, if it is that easy and lots of people are switching, why is it still the case that we have 60 per cent of people out there with the big banks and they are still charging excessive rates of interest. Why has that not been beaten down?

Mr Beard

  42. Is it because people pay off their cards before interest is due so that the interest rate is not a competitive factor?
  (Mr Naylor) There is quite a large proportion of people who do that, around two thirds, but then the rest of those people—there is around £30 billion outstanding at any time on credit cards. That is one element of the amount of money that is on them, the people who have credit cards. Quite a large portion of people do that, but the remaining people do have a large balance on their cards.

Mr Plaskitt

  43. As an Association, do you think anything else needs to be done by Government, Regulator, FSA, whoever it may be, to put even more pressure on the credit card companies to end this extortion?
  (Ms Childs) There are a combination of factors. Basically, the way that they can get away with this is an element of confusion marketing. There is not enough clarity for many consumers about APRs and what they are, and therefore, and I think this is the point that you were making, when you are actually looking at trying to transfer, it can be quite difficult to compare one card with another. I think that more needs to be done to make it clear about what the APRs are. In the adverts that are being put forward, we would like the FSA and also the Banking Code to look the promotional rates that are being put forward to see whether those adverts are actually fair and accurate, given the upfront promotion of lower rates.

  44. I take it from that, finally, that as an Association, you are not at the moment at all satisfied with the regime surrounding credit cards and their rates of interest?
  (Ms Childs) It is fair to say that more could be done for consumers to use their own power. At the moment, we do not think that enough is being done to help them be able to switch to people who could give them a better deal.

  45. You are basically leaving it with the consumer to do this?
  (Ms Childs) No, what I have said before is that I think there are specific things which we would want the FSA and the Banking Code to cover in order to make the information clear and transparent, so enabling people to take advantage of some of these other cards that are out there. In terms of whether there are other barriers that are stopping people from moving, we do not have the ability to go into all of the data that the credit card companies have to see if there are other competition or structural issues which are preventing switching to some of these other good deals. That would be something that the FSA would have to investigate to see whether there is—you seem to be implying that there is some other reason for people not being able to move and to take advantage, and for that to be found out it would have to require an investigation that we cannot carry out.

  Mr Plaskitt: I am not saying that. What I am saying is moving is not the answer, because there is lots of moving going on, but there are still these extortionate interest rates, and moving is not the answer.

Mr Tyrie

  46. Following up what James has said, you are saying that there is a third of people out there who are paying these rates, with two thirds paying them off every month, so it is not so important for them, but they clearly do not know about—I should not use this as an advertisement operation here, but you named a couple of banks that provide credit cards at single digit figures, perhaps at half the general rate—but people do not know about it. Why is that? Can you not get your message across?
  (Ms Hanson) This is another thing that comes back to the recommendations in the DeAnne Julius Committee. The Customer Annual Summary Statement was a suggestion that consumers should be sent an annual statement of charges applied to the various products that they own. We very much welcome that. We felt that if consumers did receive this, along with very easily understandable comparator tables, say, that the FSA is using, if those were linked, then consumers would be reminded that they should be thinking about how much they are being charged and what price they are paying for these products. It would also, if they have access to comparator tables, help them understand that there are much better deals out there, so I think there is, as Mike said, much more to be done at the individual statement level. But you could also argue that something like the Customer Annual Summary Statement could be a spur to action as well, because it could well highlight the very high rates that people are paying as against some of the better deals that are definitely on offer.

  Mr Tyrie: All right. I will just have one last go. I am moving towards James's view that switching may not be the answer, but I just want to get to the bottom of this. There are banks out there supplying products that are super-competitive, much more competitive than the average in the market, and yet they are not cleaning up. Why not?

  Chairman: Pass!

Mr Tyrie

  47. We have to get to the bottom of that question, otherwise it seems to me we are not going to solve the problem.
  (Mr Naylor) There are some specific things that could be done through the Banking Code in terms of clear information on people's statements, quite simple things, for example, showing the base rates so that people can compare automatically against the annual rate that they are being charged; information about fees, explaining the way that these cards are charging them interest and exactly how much they are costing them. Quite a big part of it is that the big banks do spend quite a lot of money advertising their products, selling across other products that their customers are holding. If it is an issue about information, I think it can be addressed through the information they receive through the Banking Code, to some degree, on their statements.

Mr Fallon

  48. What proportion of consumers do you think understand APR, roughly?
  (Ms Childs) You are getting to the heart of one of the problems in financial services and in our country generally there are low levels of financial literacy, so I think there are issues of a lack of understanding of APR. Even the terminology is difficult, so there are difficulties for people in working out what the best deal is, even though some of those deals are out there. I think there is a role for better comparative information to be out there which makes it clearer for people to make that comparison.

  49. But you do not have a figure, whether it is 70 per cent or 40 cent?
  (Ms Childs) No.

  50. One final question. It is a question I asked a year ago, maybe not to you but to the banks, and you referred to it—this delay in credit cards and issuing statements, whereby a statement could be issued maybe a few days after the statement date, and then issued, as you said, by second class post: has this problem got worse? Have you any evidence on it?
  (Mr Naylor) Yes, we looked at this again. We initially looked at it in December 1999, and we published a report in November 2001. Again, we asked people to track their bank statements. We found that statements were typically taking between four and six days to arrive. We asked the card companies, and they were still sending them out sometimes three to four days after the statement date, and still using second class post, yes.

  51. Do you have that evidence, and could we have it, because we will be seeing the banks as part of this inquiry and we would want to pursue that.
  (Mr Naylor) Yes, definitely.

Dr Palmer

  52. My colleague asked about APR. Are you concerned about the use of APR in the mortgage industry, because when I was recently buying a house, I was struck by the fact that different definitions were being used by different companies. I have a PhD in Mathematics and I still could not work it out. Some were doing it on the basis of the period of the special offer, and some were doing it to the end -
  (Ms Hanson) The APR is an incredibly difficult calculation and I think people are currently struggling with how they might be able to make it more uniform and more understandable because obviously it covers all the charges that apply.
  (Mr Naylor) The total cost of credit. There have been issues recently with credit cards and their move to stop companies quoting six monthly introductory rates as APRs because it was not representative of the cost over the year. I think one of the problems is that there has not been an alternative put forward that could replace it. With APR, it does give you a starting point to compare, although two credit cards with the same APRs may charge slightly differently, but it does give you a starting point. I think there are issues to do with how it is used and how it is used in advertising and expressed.

Chairman

  53. Thank you very much. Before we finish, could I just mention the issue of financial inclusion. Many people feel that access to basic financial services is a prerequisite for individuals to participate in in modern society. Have you done much work on that issue in this particular field?
  (Ms Childs) We have not. What we have sought to do is to balance our resources, so we have worked very closely with NACAB who have done some work particularly in relation to indebtedness, which is a growing issue. There are two issues, there is financial inclusion in getting people to have an account, but there is also a growing issue of the amount of credit and people who are then in financial difficulties. In relation to access to basic accounts, as I say, we have also been in discussion with the FSA Consumer Panel and they have carried out research, which is what we mentioned to you earlier, and I would commend that research to you. In relation to indebtedness, this is a growing issue. The FSA Panel's research also showed how quickly credit and other issues were pushed onto people, and I would recommend to the Committee that they talk both to the panel and to NACAB about this issue, because I think it is one that is very much linked to financial exclusion.

  Chairman: Can I thank you for your submission, and also for your evidence today. It will be very helpful to us in our banking inquiry, particularly when the big four banks meet us in a couple of weeks' time. I apologise for the inadequate acoustics in this place. Maybe some day it will get better.





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