Oral evidence

Taken before the Treasury Committee on Tuesday 9 September 2003

Members present:

Mr John McFall, in the Chair
Mr Nigel Beard
Mr Michael Fallon
Norman Lamb
Mr George Mudie
Mr James Plaskitt
Mr David Ruffley

__________

Memoranda submitted by Department of Trade and Industry

and by Office of Fair Trading

Examination of Witnesses

Witnesses: JONATHON REES, Director, Consumer and Competition Policy, and FIONA PRICE, Chair of Task Force on Over-indebtedness, Department of Trade and Industry, JOHN VICKERS, Director General, and CHRISTINE WADE, Director of Consumer Regulation Enforcement Division, Office of Fair Trading, examined.

Q643  Chairman: Good morning. Can I open the session by welcoming you to our evidence on transparency on credit cards, or should I say lack of progress on improving transparency on credit cards? May I ask you to introduce yourselves for the sake of the shorthand writer please?

Ms Wade: Christine Wade, Director of Consumer Regulation Enforcement at the Office of Fair Trading.

Mr Vickers: I am John Vickers, Chairman of the Office of Fair Trading.

Mr Rees: Jonathon Rees, the Director of Consumer and Competition Policy at the Department of Trade and Industry.

Ms Price: Fiona Price, Director of Cross-Market Interventions in the Department of Trade and Industry.

Q644  Chairman: Thank you very much. Can I start with the DTI and look at the first paragraph of the initial report by the DTI's Task Force on Over-indebtedness published in July 2001? That states that there is a responsibility on lenders to provide customers with clear and understandable information. I would like to know what progress has been made since July 2001, and in particular - and this is addressed to both Mr Vickers and Mr Vickers - in the two years since that report was published what improvements would the typical consumer using those credit cards or store cards have noticed as a result of these very worthy deliberations that you have undertaken?

Mr Rees: When we published the first Task Force report in July 2001 we also began the Consumer Credit Review. Ministers announced at the end of July that we would be publishing a White Paper in the autumn, either next month or in November, which will set out our plans to overhaul the consumer credit legislation. It will tackle in a sense a number of key areas, first creating a fairer framework -----

Q645  Chairman: Mr Rees, could I ask you, because I think it is very important, what improvements would the typical consumer have seen as a result of your deliberations in the past two years? You have given us a scenario for the future. What has happened in the last two years and of what benefit would it have been to the consumer?

Mr Rees: Okay. I was trying to update the Committee on the picture.

Q646  Chairman: I understand what you are trying to do but I want you to focus on that particular point.

Mr Rees: I will focus on that point in particular. What we have done in the intervening period is taken powers to improve the ability of the Office of Fair Trading and Trading Standards Department to enforce the law. We did that first under something called the Injunctions Directive which we implemented in 2001 when we introduced "stop-now" orders. We then introduced the Enterprise Act which passed Parliament last year and came into force on June 20 this year. Those "stop-now" powers have given the Office of Fair Trading and Trading Standards Department -----

Q647  Chairman: Can I interrupt you there? Mr Vickers, these great powers that you have been given by the DTI - what would the typical consumer have noticed over the past two years as a result of this influence that you have?

Mr Vickers: Perhaps I could give a practical example. Transparency in this area, as the Committee has highlighted and underlined, is of tremendous importance. The way that credit products in general and credit cards in particular are advertised is central to that. There was a concern which we and others had had for some time about the incorrect and potentially misleading advertisement of the low introductory rates which characterise a number of products, those being advertised as introductory APRs. That is not what an APR does at all. An APR should give the overall cost of the loan, not just the introductory rate. Using the injunctive powers, the "stop-now" powers, which came into force in the summer of 2001, we secured agreement so it was not necessary to take court action; we got the result by agreement with 28 members which cleared up that potentially misleading aspect of advertising. That is a practical example of removing a potentially misleading kind of advertisement. That is not to say that all problems are solved; absolutely not, but I did want to give the Committee that practical example.

Q648  Chairman: I would put it to you that two years later all we have is the conclusion of several working groups and the second report of the Task Force on Over-indebtedness ordering a wide scale review, and I quote from that second report in January 2003 that recommended a "wide ranging review of the statutory requirements on pre-contract information and on the format and content of credit agreements, which should ... be a priority for DTI's current review of the consumer credit act". I would suggest to you that nothing has been achieved in the past two years and we really need to give everyone, including yourselves, a huge kick to get something done.

Mr Rees: I think you are entitled to that opinion. What I would say is that we have carried out a fundamental review of the Consumer Credit Act, that ministers -----

Q649  Chairman: And done nothing practical.

Mr Rees: ----- that ministers have announced that there will be a White Paper in the autumn which will set out our steps for the future. I think it is worth underlining that in the course of this process we have built up a widespread engagement on what actually needs to be changed. Obviously, the Committee is rightly looking at the issues of transparency of credit cards and store cards. There is a much wider range of issues covered by the Consumer Credit Act. Those have now been thoroughly analysed and the Government will set out its recommendations for action in the autumn. I think it is also worth stressing that reviewing this legislation, which has not been fundamentally reviewed since 1974, needs to be done effectively. We have in those two years issued six consultation documents, six research papers, 362 responses; we have engaged in extremely widespread consultation with all of the parties who have an interest. Clearly we would hope that it could have been done quicker.

Q650  Chairman: Exactly. The thing is, Mr Rees, we need action now, do we not?

Mr Rees: I could not agree more.

Q651  Chairman: We will not get that today.

Mr Rees: I think it is also important to realise that there is an important interaction in this area with the European Union.

Q652  Chairman: I understand that. We will come to that later.

Mr Rees: I just wished to illustrate that this is one of the key reasons why the review has taken so long.

Mr Vickers: Chairman, may I add a point on this question of action under the existing law? Previously I gave just one example. I thought it was an important example and central to the concerns of the Committee. There are many other areas of action which we at the OFT have been undertaking in this period in the credit card area and otherwise through enforcement action, licensing action, market studies, information campaigns, guidance and so on. There is plenty of action in this area. I would repeat though that the law as it stands is not as we and others and I am sure this Committee would like it to be, so we have also been feeding into the DTI review of the legislation.

Q653  Chairman: Does the fact that some lenders are able to charge very high rates of interest on credit cards and store cards - and we have found as a committee that it can be eight or nine times what the bank base rate is - indicate a failure of competition in the credit card market?

Mr Vickers: The APR of a loan, put in those terms, is a product of many factors: the cost of funds to the lender, which would be linked to wholesale money market rates, linked to the Bank's base rate, would be one key ingredient. There are questions of credit risk and a whole load of other issues which go into that. What I think are the fundamental ingredients that everybody wants in this market are first of all for competition to be effective between providers, and we also have a Competition Act case in the credit card area which the Committee may be aware of to do with interchange fees. The other key ingredient goes back to information - information of a practical kind -----

Q654  Chairman: So what is the answer to my question, Mr Vickers? I want a simple answer to my question. My simple question was that if they are able to charge very high rates of interest is it indicating a failure of competition in the credit card market?

Mr Vickers: I would say that the spread between the bank's base rate and the average retail rate on credit cards has if anything in recent years somewhat narrowed. It is still, however, a very large spread.

Q655  Chairman: But if someone is charging eight or nine times the basic bank rate do you think that indicates a failure of competition in the credit card market?

Mr Vickers: The answer to that is that it does not necessarily indicate that but the market will be more competitive, competition will work better, the more consumers have relevant, practical information of the kind that they need and of a kind which is not misleading. If there is any evidence of anti-competitive practice in the market, for example, anti-competitive agreements between providers, then we would be very hungry indeed for that kind of information.

Q656  Chairman: Okay, we will put it to you another way, that if we have five million store card or credit card customers paying rates of, say, 30 per cent, do you think that indicates that there is really good competition in the market? Do you think it indicates a failure of knowledge on the part of consumers? Do you think it indicates maybe a lack of transparency overall as to what the consumer is getting at the end of the day?

Mr Vickers: I think the information that consumers have before them when they are shopping around for loans or for credit, the information consumers have when they are deciding whether to borrow or not, the information that consumers have perhaps when they are committed to a loan where things can happen during the course of a loan, all those things need to be improved. We are doing what we can within the existing framework of law.

Q657  Chairman: So you are dealing with it as a lack of transparency and the consumer is not being best served in the market at the moment?

Mr Vickers: I believe transparency can get better.

Q658  Chairman: And the consumer could be better served?

Mr Vickers: Better transparency would be good for the consumer. That would serve the consumer better, I agree.

Q659  Chairman: Good. The consumer organisations that we took evidence from told us that the credit card market cannot be fully competitive unless there is sufficient transparency enabling consumers to exercise informed choice. Mr Rees, does your minister accept that viewpoint?

Mr Rees: Yes. The policy of the Department of Trade and Industry is to promote fair markets and to empower consumers.

Q660  Chairman: And your minister will be doing something very shortly on this?

Mr Rees: Indeed. We all agree that there needs to be more transparency in the market.

Q661  Mr Fallon: Mr Rees, I think you said you had a plan for next month or whatever. Is that a Green Paper or a White Paper?

Mr Rees: There will be a White Paper which ministers have announced will come out in the autumn.

Q662  Mr Fallon: That presumably means that there cannot be legislation in this Queen's Speech and there could not be legislation before the 2004/2005 session. That is right, is it not?

Mr Rees: The White Paper will make clear that there is a whole range of issues. Most of the ones that the Committee is most concerned about, such as form and content, APR, we can do by secondary legislation and we will in fact be producing draft regulations immediately following the White Paper, which is a considerable acceleration over the timetable which we put to the Committee in June.

Q663  Mr Fallon: So the law would change when in these main areas?

Mr Rees: If we produce draft regulations in November the law will have changed by October 2004.

Q664  Mr Fallon: Which is three and a half years after you have started?

Mr Rees: That is correct.

Q665  Mr Fallon: Do you not accept that the longer this lack of transparency goes on the more the industry itself can profit from the fog that surrounds this issue?

Mr Rees: If I could come back, because I think it is critical to understanding the length of the review, most of the legislation in this area is governed by European Community rules. When we launched the Consumer Credit Review in July 2001 it was expected that the Commission would produce a proposal to amend the 1987 directive which governs a lot of the legislation for which we are responsible. In practice that proposal was a year late, which in part explains why the review took longer than we would have wished. We have now engaged in a year's discussion in Europe during which time it has become fairly clear that the proposal is not a good proposal, so we have taken a view, which I think is the right view, not (as we would have hoped) to align the updating of the domestic regime with the updating of the European regime but to go ahead with the updating of the domestic regime in advance of a settlement in Europe. I think that that is the right approach but it does explain why the review has taken longer than you or we would have wished.

Q666  Mr Fallon: What is the answer to my question? Do you accept that the longer there is a lack of transparency the more the credit card industry simply profits from the fog?

Mr Rees: The answer is that we need to update the framework but, certainly in cases of marketing and advertising, there is a great deal that can be done including, as the Committee is trying to encourage, through self-regulation by industry. Both of the Task Force reports also made considerable steps to encouraging improvements in the transparency of the system. The first Task Force report, for instance, led to an agreement by the FLA in their code of practice to stop instant credit, so I do not think it is right to say that nothing has happened in the two years whilst the review has been going on. A lot has happened. That is not to say that a lot more does not need to happen.

Q667  Mr Ruffley: I should like to ask you about the directive on consumer credit and the amendments that Europe put forward in September 2002. In connection with that you submitted a piece to us and I should like to quote one sentence: "We are some way off any agreement on the directive, possibly years". We also had a representation from APACS in connection with the timetable for the amended directive and they say, "However, the expected timetable means that it is likely to be some way off before the principle of the Schumer box becomes embodied in UK law. There is also the risk that it will become superseded by the proposed Consumer Credit Directive". Those are rather worrying observations about the discussions you are having on the amendments to the Consumer Credit Directive. Could you give us a clear description of the timetable and pick up this criticism that it could be years before anything happens?

Mr Rees: I will try and give you a clear description but, as you will understand, European Union negotiations do not follow a set timetable.

Q668  Mr Ruffley: That is the hub of my question. What we want to discover is why this is taking quite a lot of time and the suggestion seems to be that there is a bit of buck passing, that it is really this terribly difficult amendment negotiation. What I need to understand and what this Committee needs to understand is what are the obstacles that are being put up? What is the delay? What kind of time delay are we looking at? What are the specific issues that you are having difficulty with? I give you one example. According to APACS it is the Schumer box. This may be years away.

Mr Rees: Let me start by saying that the UK has the most developed consumer credit market in Europe. We account for about 40 per cent. Therefore, the UK clearly has a considerable interest in the way that the directive comes out. The directive which the Commission produced as a proposal in September 2002 was frankly a very poor draft. It did nothing to open up the single market; it did nothing to improve levels of consumer protection. Since then there has not even been what is called a full first reading in the Council working group. That means that all Member States have had a go at the proposal and said, "Look: this proposal does not really work". For us the key issues are around scope. We clearly want to ensure that it is consistent with the new system of regulation of mortgages that we are introducing next year through the FSA. It is around things like whether or not the protection that people have under section 75 for the use of their credit cards continues. It is around credit unions, it is around data transfer, it is around the licensing system. In other words, there are some pretty fundamental problems that we have with the directive. The position is that the directive has not been discussed in a Council working group under the Italian presidency. The European Parliament, which has about three committees looking at it, of which the Internal Market and Legal Affairs Committee is the lead, is basically saying, "We refuse to give an opinion on this unless the Commission comes up with some pretty fundamental changes". The Commission has said, "Not, we are not going to do that until you give us an opinion", so it has been an institutional stand-off. We can only guess, but our best guess is that this proposal is so fundamentally flawed that it will have to be taken back into dry dock by the Commission to be given a total overhaul and therefore it will not be agreed until 2005/2006 at the earliest with an implementation date of 18 months or two years thereafter, which is why, as I explained to Mr Fallon, we believe that it is right now to go ahead with the domestic review. In relation to the question about the Schumer box, what the directive does is clearly set out certain criteria as to how transparent you can be. It does not provide or not provide for a Schumer box any more than the legislation or the draft rules we will bring forward will necessarily provide for something as clear as a Schumer box. What the form and content will do will be to enable a Schumer box or consumer box/transparency box to be done. The directive is a long way off being agreed. We believe that there is nothing to stop us in the UK making the necessary changes which will enable much greater transparency on form and content. That is what we will do with the draft regulations we produce in November or December.

Q669  Mr Ruffley: Mr Vickers?

Mr Vickers: I wondered if I could add something on the Schumer box, although I can add nothing on the European legislative processes which is not my subject. In response to an earlier question when I spoke about the scope for better information, better transparency, the so-called Schumer box or summary box is exactly the kind of thing which I had in mind as an example, so that instead of one big number and a lot of small print there is a clearer package of information about what is an increasingly complex array of products, not just in the credit card area but that is a prime example. What everybody wants is practical progress on this. As Mr Rees has said, the UK review is happening ahead of European directive reform but it may be possible that things can happen also with initiatives from the industry, and I believe that APACS has made submissions on this very subject.

Q670  Chairman: We have written to APACS and we have been pushing APACS, along with others in the industry, and APACS sent us a communication yesterday which indicated that they will be looking at this issue of a Schumer box and they have agreed to include that. The store cards have also agreed. As a committee what we are perplexed about is that it has taken the focus from a committee such as ourselves to push the industry on this. We do not just want the commitment from the industry; we want a timescale from the industry as well. I think it is a rather sad reflection on things that it has had to take this pressure from us to get to this stage. However, the fact that we have got to this stage we should celebrate in part, but only in part.

Mr Vickers: Exactly. APACS kindly copied us that very letter. We are looking at it from the consumer perspective and we as the OFT want practical progress on this. We would welcome that strongly and if this Committee has given impetus and momentum to that then that is all to the good. What counts is the practical result for the consumer.

Q671  Mr Ruffley: One final question to Mr Rees. What you are saying to us today is that the tortuous negotiations on the directive that are happening at the European stage are no reason for delay so far as the domestic regime of this country is concerned?

Mr Rees: Yes. When we began this process we had hoped that we would be able to run the two horses in parallel, in other words to feed in what we wanted from our review to the European negotiations and vice versa. It is clear that the European negotiations are taking much longer than we would wish. As your Committee shows, the political need to reform our domestic regime is greater so I think that, as we did in 1974, we need to give the European Union a lead.

Q672  Mr Ruffley: So there is nothing that is happening at the European level that will fetter this Government's ability to make changes ahead of time in the way you have described?

Mr Rees: We will need to make sure that the changes we make are consistent with the 1987 directive, and I do not think there is a problem with that. We will then need to make sure that the changes we make are reflected in any amendments to the 1987 directive. Again, my judgment is that we should be able to secure that but it is a negotiation where we are one amongst 25.

Q673  Chairman: We hope to produce a report in October/November but, just for the sake of clarity to yourselves and to the industry, we will be keeping a watching brief on this to ensure that something is done at the end of the day and we will come back to this issue at any time in the future and we will not be satisfied until the changes are implemented. That is a very important message to get across so that we can all work with that in mind and maybe get something done. Before we go on to the Schumer box, six months ago, Mr Rees, the Minister for Competition and Consumer and Markets at the DTI called on lenders not signed up to one or other of the industry codes to do so "immediately". Has anything actually happened since then? Do companies such as American Express and Capital One still operate outside the industry codes?

Mr Rees: The Enterprise Act strengthened the powers that the Office of Fair Trading has to approve codes and gave the Office of Fair Trading the right to ensure that there was a high hurdle set. Since Melanie Johnson made that statement she has met both the FLA and the other lenders to encourage them to join up for a code. My understanding is that the FLA is in discussions with the Office of Fair Trading on seeking code approval. I do not think that more can be said at this stage.

Q674  Chairman: Back to my question: do companies such as American Express and Capital One still operate outside the industry code? Answer, please. Can you help me, Mr Vickers?

Mr Vickers: Mr Rees has referred to the OFT codes regime and in stage one of that we have, I believe, three sponsors of code in the credit area. It is possible, Chairman, that your question refers not to the OFT code regime but to longer-standing codes. I am not certain of the answer to your question but, so far as I know, there are codes to which those providers are not signed up. If that is wrong we will supply you with a note.

Q675  Chairman: Could you add anything to that, Mr Rees?

Mr Rees: No, but we will be happy to look into it.

Q676  Chairman: And you will write back to us?

Mr Rees: We will.

Q677  Chairman: And if they are not signed up you can maybe give us reasons as to why they are not signed up and what is going to be done to ensure they sign up?

Mr Rees: We will tell you what we are doing to encourage them to sign up, yes.

Q678  Chairman: As my colleague is saying here, it is a bit surprising that you do not know. We thought that, coming before this Committee, you would be well briefed and you would know that.

Mr Rees: We obviously did not think of that in advance.

Chairman: Oh, goodness, gracious me. Maybe you will take the Committee more seriously in future.

Q679  Norman Lamb: Can I first of all come back to John Vickers on something you said earlier, Chairman? This was in response to the Chairman's question about action that you have taken under the existing regime. In APACS's submission to us they say that up until mid 2001 there was a single APR being used and it all appears to have gone wrong with the APR directive in February 1998. What happened then was that they published their interpretation of the directive and a single approach to APR under that directive. They then say that it was three months after the law came into force that you, the OFT, published your own interpretation. Do you agree with that? Is that what happened?

Mr Vickers: We received this letter only yesterday afternoon. My initial reaction was one of puzzlement on that point. The question here is about how to calculate an APR, for example, in a setting where there is a lower temporary introductory rate followed by a step-up at some point to a higher rate. It had been a long-standing view, shared with the industry, going back, I believe, to 1990, that the OFT's view on the correct interpretation of what is an ambiguous regulation in this respect was to use what is called a blended rate, so the APR would be a mixture, an average, combining the lower introductory period and the higher period, which I think makes a lot of common sense as well as being the OFT view on the correct legal interpretation. When we took the "stop-now" action, which was not on this point at all; it was on the advertisement incorrectly put as APRs of a lower introductory rate which refreshed attention on this point we made an annexed statement on exactly this point about calculating the APR which restated our view and expressed the hope that this very unsatisfactory ambiguity, which is just there in the regulations at the moment, would be resolved by dialogue with the industry or by the DTI review and that we would refrain from enforcement action on that point. I was therefore a little puzzled by the parts of the APACS letter dealing with not the Schumer box but with the subject of your question.

Q680  Norman Lamb: You are going to be asked further questions about the APR so I will leave that there. I was just confused about your earlier response. If I could go on to the Schumer box, it seems to me that unless there is clarity about calculation of the APR there is no point in having a common Schumer box if different Schumer boxes from different companies publish APRs that mean different things. Do you agree with that and is that the crucial issue, to make sure that the Schumer box actually works to give clarity to the consumer?

Mr Vickers: I would like to make two points in response to that. The first is that whatever is the way forward there needs to be clarity about how to calculate the APR, which is always going to be a central number that needs to be in front of the consumer. It is fundamentally difficult in the area of credit facilities where the APR depends on the extent and pattern of usage by the consumer. It is trying to summarise in one number a loan agreement that could be used in all sorts of different ways. That is genuinely an intrinsic difficulty. Uncertainty and ambiguity are bad all round. They are not good for consumers; neither are they good for a level playing field in terms of competition in the market place, so we are all for resolving if at all possible -----

Q681  Norman Lamb: Do the OFT and the DTI in principle support the concept of a Schumer box provided it gives greater clarity?

Mr Vickers: That goes on to the second point. Consumers need to have prominently before them more than a single number, especially in what is an increasingly complex array of credit products. What the Schumer box approach does - and I speak here of a general approach - is that it provides conveniently and prominently other important characteristics of the loan rather than those being in what is often quite small print. It expands conveniently and accessibly the array of information. We would welcome that; we are very positive about that, and I would like to welcome the aspects of the APACS letter which dealt with that point. That would expand the information but each piece needs to be calculable in a definitive way. That is not where we are on the APR at the moment, so there is a double problem. We do not have a sufficient array of information conveniently before the consumer and we have ambiguities in some respects about aspects of calculation: for example, these loans where the interest rate starts low and then goes up to a higher level.

Q682  Norman Lamb: Mr Rees, you said earlier that regulatory reform would provide for the capacity to have a Schumer box but would not necessarily require it. Is that sufficient? Do you support the concept of a Schumer box and how will you facilitate an arrangement whereby everybody publishes the same information in a comparable way?

Mr Rees: The short answer is yes, we are entirely at one with the Committee on this, that we want to ensure the maximum transparency in the simplest way. This is governed at the moment by what we call the form and content regulations and we will be publishing, once we have got the White Paper out of the way, new draft regulations which will in a sense provide for what in the current legislation are called financial particulars. That will embrace all of the issues that would be in a Schumer box.

Q683  Norman Lamb: But it would not necessarily require individual companies to have a Schumer box?

Mr Rees: That is an issue that we will be happy to consult on. What we think is important is that the legislation should ensure that consumers get the maximum transparency, the right information in the simplest way possible. We could if we wanted to go that further step and say that the regulations will provide for a Schumer or summary box on the lines that we have had from the FLA and APACS. There will be a debate that we will have very openly as to whether it is right that the legislation should set in stone this particular way of proceeding. The great advantage of having framework legislation which sets out the underlying objective, which is one where we are entirely with you, is that it is then much more easy to update through a self-regulatory code system to take account of the changing market. I think that what we have seen with the consumer credit legislation to date is that, setting it up as we did (and rightly so) in 1974, it is impossible to keep pace with developments in the market. That said, we are thoroughly behind the idea of a Schumer box. We were in discussions with the FLA and APACS and others about the concept for very many months and we welcome the steps they have taken.

Q684  Norman Lamb: The danger is that you simply have lists of interest rates for different scenarios - new purchases, borrowing, etc, and that it all ends up being more confusing and less transparent. What about the possibility of setting out what it would cost in given scenarios in pounds for the consumer to borrow a set amount of money? We have put that question to other interested parties. There seems to be broad support for it in principle. What do the OFT and the DTI think about that suggestion?

Mr Rees: The idea of typical rates is a very good one. What I think is key is that the consumer should know as clearly as possible in any particular deal what this means for him. I know the Committee has been concerned about minimum repayments. Again, there is a real question there of making clear to the consumer how long it might take to repay a loan if they are only paying, say, two per cent. What we have done for mortgages is that we have what is called a wealth warning that your house can be under threat and we may well want to consider whether we should be adopting the same approach for unsecured lending. The key is to try and find a way of getting borrowers to understand and read that information. The problem with the existing regulations is that there is so much small print that nobody reads any of it.

Q685  Norman Lamb: Let us have a quick response from John Vickers on the scenario.

Mr Vickers: You mentioned typical rates. It is very important, of course, that they are typical for the customer base that the product is aimed at; otherwise there is another potential source of confusion. I and the OFT do not have a fixed doctrine about what should or should not be in these boxes. Having scenarios is a very interesting approach. Of course, there are often a large number of not unreasonable scenarios, so how one was selected would be an issue that would need to be addressed. Of course, in the box would not only be interest rate information but other information about minimum repayments, length of time it would take to repay, possibly information about what happens if you go into arrears. It is not just about interest rates. It is so that the consumers can size up what the credit product would mean for them. That is what we want to get to. It is not easy because of the multiplicity and variety of products which by itself is not a bad thing but it does make it hard to summarise and encapsulate in a standard way what products mean for consumers who might be wanting to use them in different ways from one another. It is genuinely difficult and I have done no more than point to the trade-offs, but those are some of the issues.

Chairman: The OFT did commit itself in the last appearance to work up some of these scenarios so that they could present them to this Committee in October when the chief executives of the banks come along, so they are in discussions with them on that.

Q686  Mr Plaskitt: Mr Vickers, in an answer you gave to the Chairman earlier on you said, and I quote, "The market works better if consumers have full information". What contributions has the Office of Fair Trading been making to giving consumers full information in this area?

Mr Vickers: One thing that we do - and this is not just in the area of credit cards or indeed credit - is work with others to combat misleading information,.

Q687  Mr Plaskitt: How do you do that in respect of credit cards?

Mr Vickers: Again, the best illustration is the action we took in 2001/2002 on the incorrect and potentially misleading advertisement as APRs of what were no more than introductory rates. Clearly, that was a context where some consumers might quite reasonably have thought that that low rate was some measure of the overall cost of the loan and that was potentially misleading, so we took action against that so that that potentially misleading information was out of the market place. The general point about our enforcement activity is that we are given responsibilities by Parliament to enforce laws in various areas and misleading advertisements of credit products or other products is a classic example.

Q688  Mr Plaskitt: What do you do by way of giving information directly to consumers to help them?

Mr Vickers: I am not sure it is our role to be providers of product information to consumers, but we do a lot in other ways and are planning to do a lot more, and again the Enterprise Act is helpful in terms of our powers.

Q689  Mr Plaskitt: What do you do at the moment?

Mr Vickers: In terms of information to consumers, I touched on some of the campaigns on debt which we run, so in November 2000 and again in November 2001 (that time in conjunction with the Trading Standards Institute) we had quite high profile debt campaigns which got very extensive media coverage. Supporting that we have a series of, we hope, consumer-friendly leaflets about the debt area, how to think through credit issues before you transact and if you are committed what to do if problems arise, and indeed that latter issue will be the theme of the campaign we will be running in November this year, which again we hope will achieve the high profile which those previous campaigns got.

Q690  Mr Plaskitt: I wanted to look at the consumer leaflets that you mentioned. You produce this one, do you not, "What Type of Plastic?"?

Mr Vickers: Yes.

Q691  Mr Plaskitt: This Committee has taken evidence that confirms that you can have two credit card companies (or more than two) offering a card all at the same APR - and I am not going into APRs; we are coming to that; this is the information point - and yet the true cost of the credit varies by 40 per cent over those suppliers. Some people say it varies more than that. Yet I was surprised to see that your leaflet for the consumer says no more than four times in the one leaflet, "Compare the APRs", but the real unfair trading, and you are supposed to be focusing on that, is not in that area; it is in others, is it not? Yet your leaflet focuses upon APR which we know is not a true piece of information in terms of the real cost of the credit.

Mr Vickers: The inference which I believe one should draw from that is not that the APR is a useless piece of information, but rather that the APR alone does not tell the whole story about the relative value of credit products.

Q692  Mr Plaskitt: But it does not say that.

Mr Vickers: Of the numbers that are publicly available the APR I think is a key piece of comparative information but it is not the only piece of important information, which is why we are very supportive of the Schumer box approach discussed earlier. The APR is central but is not the only piece of information. I would also point out that for any given credit product the pattern of its usage can determine the cost of the credit. The kind of example in the various examples that you mentioned can derive from that fact. These are credit facilities, the usage of which can vary greatly from one consumer to another.

Q693  Mr Plaskitt: Those are all very good points but they are not made in your leaflet. This does say, "Look at the APR. That is the key thing". It does not say a lot about warning consumers that the APR is not the whole story. Should that not be what an Office of Fair Trading is doing to help the consumer?

Mr Vickers: I do not have that leaflet in front of me.

Q694  Chairman: It is a matter of language here. In your submission to us, in paragraph 4, you say that the APR has its imperfections but it is the best price comparator currently available. I know strictly speaking that is okay, but APACS sent us a letter this morning and the first paragraph of their letter says, "The APR is a fundamentally flawed mechanism for comparing credit cards", so this language is very important. I know what you are getting at here, but I think it is very important to be up front and say, "Look: the APR can be misleading" because, as the Consumers' Association said, there is a difference of 70 per cent in costs, which means consumers getting fleeced and that is the point that we are on at here. It is language rather than any difference of opinion between us.

Mr Vickers: I would differ with that APACS statement. I would not say that it is fundamentally flawed. I think this is an area where it is fundamentally difficult because, as I said earlier, credit card facility is a facility that can be used in different ways. I think the APR is the best prominent number in town as things stand but, as discussed earlier, we need more prominent numbers available in a standard way. I am very happy to look at the wording of those leaflets, but I cannot do it now because I do not have it.

Q695  Mr Plaskitt: Let us put it this way. Take the case where three or four providers of credit, all at the same APR, are actually landing consumers with costs which vary by somewhere between 40 and 70 per cent. Does that in your terms constitute fair trading?

Mr Vickers: It is very difficult to comment on hypothetical -----

Q696  Mr Plaskitt: They are not hypothetical. We have got the list of the current providers. We can pass it to you at the end of the meeting if you want. It is not hypothetical; it is real. It is what is happening out there now. Does that constitute fair trading?

Mr Vickers: It would clearly be a better world if there were a richer array of information in front of the consumers, but I think if a provider is in good faith adhering to the APR regulations as they stand it would not be not right for me to say that that is unfair trading.

Q697  Mr Plaskitt: It is legal trading but is it fair trading?

Mr Vickers: As we have said, the law is not where one would like to be in this area.

Q698  Mr Plaskitt: But you are Office of Fair Trading, not the Office of Legal Trading.

Mr Vickers: We are the Office of Fair Trading but our authority comes from, and only from, the laws that Parliament has passed and secondary legislation transposing European directives, so we operate - and must operate - within a clear accountable framework of law. That is a constitutional fact.

Q699  Mr Plaskitt: But you are the Office of Fair Trading, not just the Office of Legal Trading, are you not?

Mr Vickers: Absolutely, and that is why we are feeding in, for example, to the DTI review on law reform in this area. We are a very active part of those discussions, but of course that is the Government and Parliament. It is our job to carry out our responsibilities under the law that exists, and of course to engage in these debates on how to make things better.

Q700  Mr Mudie: I think that is a very unsatisfactory answer. We have heard how long it takes to get legislation. That is where you are looking at a market that everybody remarks is so fast-changing, so that is where you as the regulator have to be as fast as the market and cannot wait for legislation. You should be acting as a good regulator at the pace the market is changing and you are not. You sound like an apologist for the credit card people. What have you done, whilst all this legislation has been taking years, to help consumers? That is what the Chairman asked you in the beginning. Just tell us three or four things that you have actually done whilst you have been waiting for this excuse of Consumer Act changes.

Mr Vickers: If I have appeared to anyone as an apologist for the credit card industry then I have -----

Q701  Mr Mudie: You are certainly no defender of the consumer from where I sit.

Mr Vickers: If I have given anyone the impression of being an apologist for the industry then I have been misleading. That would have been not my intention at all and I am surprised if that impression -----

Q702  Chairman: This is the language. It is a bit late; that is what we are saying. Maybe your spirit is okay but the language just does not -----

Mr Vickers: I want to respond to the question. Any body such as the OFT has to work with the tools that it has. Those tools have improved in recent years because of changes in legislation, but there has not been a fundamental legislative reform in the consumer credit area, so our job and the way we should be judged is whether we make best use of the tools we have available to us.

Q703  Mr Mudie: So you are complaining about the tools now?

Mr Vickers: No, I am not.

Q704  Mr Mudie: Tell us what you have done.

Mr Vickers: I have said that the tools have got better.

Q705  Mr Mudie: Let us give you an example. Mr Vickers, as you will not give me four examples let me give you one. GE Capital underpin 50 to 60 per cent of the store card market. When you look at their customers, they are all charging consumers uniform rates, between 28 and 30 per cent. Have you looked at the relationship between GE Capital and these stores? Does it concern you that consumers are being charged 30 per cent for credit? I heard you earlier say to the Chairman that the link between the base rate and their rates is understandable or can be explained. Come on then. Here is a firm, GE Capital. It is incredible. They supplied us with a list. Every one of their customers, the people whose credit cards they service, charges between 28 and 30 per cent to the consumer. Have you looked at where the cost make-up is arrived at? Have you looked at the relationship between GE Capital and these store cards? Have you done any of those things? Are you interested in any of those things?

Mr Vickers: Let me respond to that and then if I may, Chairman, I would like to give some examples in response to the earlier question from Mr Mudie.

Q706  Mr Mudie: Just deal with that last one though because that is up front. There is what seems to be an abuse - 30 per cent when we have a four per cent base rate, and it is all underpinned by one firm.

Mr Vickers: On the question of store cards and the role of GE Capital, of particular concern in that area was evidence which came to light before this Committee on questions concerning, if you like, the sales and marketing methods in relation to those store cards. I think they will be of clear concern to -----

Q707  Mr Mudie: No, no, no. Mr Vickers, that is not the problem. The problem is that they are charging some individual who comes in and uses that card 30 per cent when we have got the lowest interest rates for decades. You sit there and you say that the problem is sales and advertising. Can you defend 30 per cent?

Mr Vickers: But I think it is very much linked to that, because if consumers are in a pressurised situation when they have that kind of offering before them, that is very different from one where the consumer has much less effective choice to walk away from rates of that kind than if they have time to reflect on offerings of that kind. It is also a fact about many store card offerings that -----

Q708  Mr Mudie: With the greatest respect, you are dodging the fundamental thing at the start, which is that these stores are charging 30 per cent for credit uniformly and they all have the same supplier of credit. Never mind the peripheral things. Have you looked at the relationship between GE Capital and these firms and have you looked at why these firms are charging the consumer, whether they know it or not, 30 per cent? That just seems to me something that I would have thought an Office of Fair Trading would have been into like a shot.

Mr Vickers: Uniformity of store card rates - are you referring there across the GE Capital range because there is not uniformity across the store card range?

Q709  Mr Mudie: You do not know, Mr Vickers.

Mr Vickers: I do know.

Chairman: Hold on. Let us get back to some order here. We have been given information in the past that GE Capital have 54 per cent of the store card market and the stores that they provide credit to seem to have a uniformity of interest rates from about 28 per cent to 32 per cent. That has been given to us.

Mr Mudie: Give it to Mr Vickers because he does not seem to be able to get that sort of information. That is disgraceful.

Q710  Chairman: We have got the B&Q, "You can do it" time card at 26.8 per cent; we have got Arcadia at 29.9 per cent; we have got Quikfit at 30.7 per cent and they are topped by Toys'R Us at 32.5 per cent. I meant not to get on to this at this particular time but George has charged us up. The core issue, Mr Vickers, and it is simple language we are wanting to hear, is that in a climate of low inflation and low bank rates, what about 32.5 per cent, particularly when you read, as I read during the recess in The Times, that House of Fraser is saying, "You can save ten per cent on your purchases this Saturday, only this Saturday. Exclusive offer. If you come in and buy your goods, ten per cent off and sign up to a store card"? It is sold in a sense by subterfuge. What happens is that when people go in and they say, "Wait a minute. Can I take this leaflet away?", the answer is no. We have had endless examples of people not being able to take this away. It is being sold to them on the basis that they will get ten per cent off but they do not know it is 30 per cent. This is the issue.

Mr Vickers: We are well aware of that and that is clearly an unsatisfactory situation. Everything goes back to the fundamentals: does the consumer have the ability to make an informed choice in a situation where they are not pressurised, and do they have that choice among competing suppliers? That is what everything goes back to. Nearly everything the OFT does, in fact, not just in the credit area, is geared to those fundamental things. Exactly the kind of sales practice that you mention, "Here is the pen; it is now or never", is certainly an unsatisfactory practice and is by no means unrelated to the question of the rates charged. I understand that GE Capital, because of what the Committee has done in this area, has come back to the Committee with assurances in this area. If that solves that problem that you mention, that is good for the consumer. If it does not solve the problem, then we are alert and -----

Q711  Chairman: No, we are not convinced by the assurances you have given us so far.

Mr Vickers: We are focusing on watching that space.

Mr Plaskitt: The problem with that is that they have been doing that for years. That has been their practice for years and yet in your leaflet, which is for consumers, there is no warning, no alert, about that at all. Instead, in the bit where it says, "Read the form before you sign", it says, "If you do not understand the forms get help from Trading Standards or the Citizens' Advice Bureau". What use is that information? You cannot take the forms away from the shop, so it is no good going to the CAB, is it? Why have you not got a warning in there that says, "If they will not let you take the forms away do not sign them"?

Chairman: Just a last comment from George. We are going on to store cards later on.

Q712  Mr Mudie: It is beyond store cards. It is the relationship between GE Capital and these firms. These firms are uniformly charging between 28 and 30 per cent. Does it not bother you as the regulator that there might be a relationship between GE Capital and these store firms that is engineering a standard rate through these high street stores? Have you not looked at it? Are you intending to look at it or do you not see it as a problem?

Mr Vickers: On the competition point which lies behind that, and we have talked about the sales method point, one needs to look in all our competition legislation work at the market power in the relevant product market of the firms in question. The volume of debt outstanding on store cards is roughly one tenth of what it is on credit cards and the users of store cards have choices available to them. The question is whether there is -----

Q713  Mr Mudie: It does not interest you; that is your answer.

Mr Vickers: No. With respect, that is not my answer.

Mr Mudie: Are you going to do something about it?

Q714  Chairman: Mr Vickers, let us go on to something else. Give us an answer and then we will come back to it.

Mr Vickers: I did not respond to Mr Plaskitt's question on leaflets. With all leaflets one is trying to put as clearly and as succinctly as possible good advice to consumers. We are in a fast-moving market. It may be that we should consider doing leaflets which would address exactly the point that you make but one has to understand in all these campaigns and leaflets that one is trying to encapsulate as succinctly and clearly and accessibly as possible for the consumer the key pieces of advice. That is what we try to do in all our work. Of course we do much fuller documents but those consumer leaflets are meant to be pocket sized and readily accessible and readable. We are always reviewing those and any views the Committee and others have we take into account.

Q715  Mr Beard: If I could return to the easy bit on APRs, can you give us your definition of what an APR is?

Mr Vickers: Suppose I am a consumer signing up for a loan. The APR gives me, expressed as an annual rate, the total charges for credit that that loan entails.

Q716  Mr Beard: The total charges depend on the scenario they have behind them because they include penalties and going over credit and so on.

Mr Vickers: The penalty aspects would not be in that total charge for credit. That would be the total charge for credit if I as the borrower meet my obligations under the loan.

Q717  Mr Beard: But how do you work out this APR when it depends on people going over their credit limit and so on? Do you produce a scenario which is standard for people to take as the basis of it?

Mr Vickers: It is the regulations which say, clearly in some respects, unclearly in others, how the calculation is to be performed. The simplest example is not a credit card but a loan that has specified fixed repayment amounts on fixed repayment dates and that would be fed into the formula and would produce this cost of credit expressed as an annual rate.

Q718  Mr Beard: That is decided by each individual company when they are working out their APR?

Mr Vickers: That is governed by the regulations.

Q719  Mr Beard: But the regulations are quite loose so it gives scope for variety, does it not?

Mr Vickers: I think it would be wrong to say that they are loose in a general way. I think there are particular issues about interest rates which vary during the course of the credit arrangement and in particular where that credit arrangement can be used to the discretion of the consumer where one does need to feed in assumptions, and the regulations tell you how to do that in good part, but they do not prescribe what assumptions should be fed in in all situations, and it is in that context that APACS, for example, wrote to you about. That is a prime example of that.

Q720  Mr Beard: Up until the middle of 2001, as APACS say, we had a single standard for calculating the PR. Then we had the change of regulations, the Consumer Credit Regulations 1999, and APACS members got together to decide a way of calculating APR which was agreed between them.

Mr Vickers: I believe there was a difference of practice within the industry on this point. I would also repeat what I said earlier, that this was not a new issue arising in 2001. This was a long-standing issue on which the OFT had expressed a view as far back as 1990.

Q721  Mr Beard: Let me read what they say: "APACS considered how to interpret the new regulations and the new APR formula and agreed a single approach". The upshot of that was that that was not then agreed by the Office of Fair Trading. Why was it not agreed?

Mr Vickers: It is possible I am wrong on this but I believe that in the industry different providers took different views.

Q722  Mr Beard: They say they agreed a single approach and indeed that is what they told us in their evidence when they came before us.

Mr Vickers: That may be but I believe that different providers had different interpretations and did not always adhere to the APACS interpretation.

Q723  Mr Beard: Are you disputing the fact that the Office of Fair Trading did not accept the approach that they were putting forward?

Mr Vickers: No, I am not disputing that.

Q724  Mr Beard: Can you tell me why you did not accept the approach they were putting forward?

Mr Vickers: Yes. The OFT view on the correct legal interpretation of the regulations in this area, where they are not crystal clear in terms of what is to be done by of assumptions, was a view which the OFT took and put to the industry and had put to the industry many years before. In the context of credit card arrangements where there is a low rate initially and then a step up to a higher rate, let us call it an introductory rate and a go-to rate, that kind of credit offering became much more prevalent around this period of time, so it became a bigger issue even though it was by no means a new issue. The OFT's view on the correct legal interpretation of the regulations in this area would have the consequence that in a credit arrangement of that kind it would be the blended rate, as I described it earlier, so if it was zero per cent interest rate for six months, and then it went, say, to 15 per cent, then, depending on other aspects of the credit arrangement, one would arrive at an APR which would be a bit lower than the 15 per cent to reflect the zero per cent initial six months. To my common sense that seems rather natural and sensible but this is a question about the legal interpretation of the regulations.

Q725  Mr Beard: Again, that is not what the APACS said. They are the professionals in this field, are they not? They said to us, "For example, under the OFT approach an issuer could design a product that results in a cardholder paying more interest but where the APR calculation gives a lower APR". They are saying that this approach you are putting forward is flawed because it is perverse.

Mr Vickers: On that point you have just described as perverse there could be all sorts of loan agreements where, if it is a sufficiently longer agreement so that I have got extra time to pay, that could really happen. If I borrow £1,000 and pay back £100 at the end of one year, that will give a higher APR than if I borrow £1,000 and pay back £200. I do not see how that goes to the central issue here.

Q726  Mr Beard: It says here that this was submitted to the DTI, and they told us here when they came to give evidence that they had talked to you about it two years ago.

Mr Vickers: Yes.

Q727  Mr Beard: And they said that they had heard nothing from you since then. In the real world when people have got a difference like this they get together and negotiate. Why did you not negotiate with them?

Mr Vickers: Those parts of the APACS letter did puzzle me. Let me try to explain what we did. We were taking enforcement action not on the question of APR calculation but rather on this advertisement question discussed earlier. When we concluded that and secured agreement with the 28 providers in question we wrote to industry bodies, including APACS, and indeed made a statement on our website, which is still there on our website today, which explained that there was this difference of opinion on this question of how to calculate APRs. It said that that ambiguity and difference was very undesirable for consumers and for the industry and that we wanted to resolve it by dialogue with the industry if possible, so that is exactly what we set about, and that dialogue has not resulted in the resolution of that issue. Failing that, we would do it by the DTI review, which we hope will embrace and resolve this issue as well as getting -----

Q728  Mr Beard: I am talking about what has gone before. If you could go back to what APACS said, they said they have heard nothing from you in two years. Are you saying there have been negotiations, and if there have not been negotiations can you tell us why not?

Mr Vickers: They have certainly heard from us within two years.

Q729  Mr Beard: That is what they said.

Mr Vickers: There was the public statement on the website which was in February 2002. I had the benefit of seeing that only yesterday evening but if it would help the Committee for us to respond on precisely these points of fact we would be very happy to do that.

Q730  Mr Beard: It would help and we would be grateful for that. Apart from that, the Office of Fair Trading's response was to issue "stop-now" notices on some of the APACS members and not others, so that we have ended up with two different methods of calculating the APR, have we not?

Mr Vickers: If I could try to clarify that, the "stop-now" approaches that we made were on the question of the incorrect and potentially misleading advertisements. They were not on this point about calculation. The "stop-now" action was not directed at APACS; of course not. It was directed at the credit providers whose advertisements were in contravention of the advertisement regulations, so it was those 28 because it was those 28 where we had evidence of contravention of those regulations. That was how we did it. It would have been quite wrong to address it to the entire industry because one should address it to those where one has evidence of contravention.

Q731  Mr Beard: Again, the information we have is that the Office of Fair Trading issued "stop-now" notices to a number of credit card companies, forcing them to switch to the OFT method of calculating APRs. Are you saying that that is wrong?

Mr Vickers: The "stop-now" approaches were on the advertisement question. To repeat, when we announced the resolution of those issues we made the supplementary statement and entered dialogue with the industry on this calculation point. Part of that statement was an explicit refraining from enforcement action on the point of calculation because the regulations are ambiguous. I think there is a consensus that there is an ambiguity. It was industry dialogue and the DTI legislative review process which we thought were the best ways and we continue to think are the best ways of resolving that issue, so again I am a little puzzled by those parts of the APACS letter.

Q732  Mr Beard: Are you saying that there are not now in force two different ways of calculating the APR, one which resulted from your "stop-now" notices and the other which were people doing it a different way and the "stop-now" notice was not issued to them? Are you saying that there are not two different ways of calculating the APR?

Mr Vickers: There are two different ways of calculating the APR but, to repeat, the "stop-now" approaches were not about how to calculate the APR; they were about a misleading advertisement issue.

Q733  Mr Beard: That is not what APACS have told us, so there is a direct conflict of evidence in that sphere.

Mr Vickers: If it would help we would be delighted to write on this point. I use the word "puzzled" because that is my state of mind. It is a lot less than 24 hours ago that I saw this.

Mr Beard: Mr Vickers, the point about this as well, apart from the basic model of having two different APR methods going at the same time, is that you or your office do not seem to have been in touch with these people. Here we have almost a scandal in the industry where they have got this basic parameter intended to differentiate between different products. It is calculated in what amounts to almost arbitrary ways that people cannot make anything of. It is quite misleading and you have sat back and done nothing. For two years, we have got evidence here, you have had these conversations and then they lapsed and nobody has done anything, and now we are getting evidence that there is a direct conflict of evidence on these basic topics which in itself illustrates that there has been very little communication between your office and the body that runs the industry's organisation.

Q734  Chairman: Mr Vickers, I tell you what does surprise us as a Committee. The APACS letter was out last night. You read that letter.

Mr Vickers: Yes.

Q735  Chairman: There are fundamental differences of opinion and yet you can come to this Committee this morning without chapter and verse of your side of the story and you have got to write to us. That is a bit disappointing. That maybe just indicates the lethargy that is about. If I were in your position I would have been looking at that letter and have got on to my staff, and even last night I would have been phoning at midnight, saying, "What the hell is this?". There is a conflict of interest here and yet you are going to write to us.

Mr Vickers: I saw this at about 6.30 yesterday evening. Clearly what we need to do is to detail -----

Chairman: That is 15 hours before the Committee sat.

Q736  Mr Beard: Let me quote a phrase from the letter that stands out: "However, through regulatory intervention, we have ended up in a situation where more than one method [of calculating the APR] is used". That would have stood out; it would have jumped up and bitten you.

Mr Vickers: I can respond to that. It is true that there is more than one method in use. I do not understand why APACS said that that was through regulatory intervention.

Q737  Norman Lamb: Before 2001 there was one method and as a result of this there are now two methods.

Mr Vickers: With respect, I believe that is not the case. The OFT view, as I say, was one going back for some years before that.

Q738  Mr Beard: It is plain that these conflicts of fact need resolving and they are an illustration that there is too little communication between you and the industry or the industry and you. Let me move on. When interest rates are calculated we have evidence from the Consumers Association that with the same APR you can have interests calculations varying by as much as 70 per cent. Do you believe there is a case for making a statutory method of calculating interest on credit cards?

Mr Vickers: Yes. I think there is a case for two things. One is to resolve beyond doubt the ambiguities which exist in the calculation of the APR. The second is to widen the array of conveniently available information to consumers, and that was the conversation we had earlier about the Schumer box.

Q739  Mr Beard: If you have two APRs that are the same and you can end up paying in one case 70 per cent more, the APR is valueless, is it not?

Mr Vickers: I would not say it was valueless because if the loan was much longer in one case than in another then it could certainly be true that the total charge for credit would be greater in the longer loan than in the shorter loan, even though they had the same APR. That is why issues such as the duration of the loan are just the kind of information that is needed for the Schumer box.

Q740  Mr Beard: We as a Committee have been inquiring into this for a number of weeks now and you have staff who are looking at this the whole time and it is their bread and butter. Why has this point not been picked up, because it is basically unfair that people are duped into believing two things are the same when they can be so widely apart? Why have these issues not been taken up? Have you in the past two years taken up with the industry this question of how they calculate interest?

Mr Vickers: Certainly.

Q741  Mr Beard: When?

Mr Vickers: The disagreement between the OFT interpretation of how the regulation should apply in this credit card area on this particular point - and the classic illustration is the interest rate that has the step-up which I referred to earlier - has been an issue going back not just over the last two years but well before. As I mentioned, in February 2002 we also made a public statement, not just in discussion with the industry, about where we were on that question, about our strong desire that it be resolved and about our preference for resolving it by industry dialogue if possible, by DTI review otherwise, and we stated publicly that we would for the time being at least refrain from enforcement action in this area.

Q742  Mr Beard: Would you not agree with me, Mr Vickers, that this is chaotic, when everybody who issues a credit card can choose the way they calculate the interest, it is not published for the public to know, and yet it can have a profound effect on how much interest the public is paying? Why have you not stepped in on this if you have known about it all these years?

Mr Vickers: I would not agree that it is chaotic. The area of dispute that we are discussing, the point in the APACS letter, is about, for example, the step-up rate when one has -----

Q743  Mr Beard: I am not talking about the APACS letter now. I am talking about the method of calculating interest being so variable that in one case where the APR is the same as in another case the interest paid can be 70 per cent more, and that arises because people do the interest calculation in different ways. I am saying is there not a case to standardise that rather than everybody calculating it their own way and the interest, despite the APR being the same, being almost arbitrary in terms of the public's understanding, and moreover these methods of calculation are not published? Why have you not done something about it?

Mr Vickers: Let me refer first to the APACS point and then make a general point. On the APACS issue about the blended rate versus the go-to rate, for example, that issue and the examples there show variations in APR but they are comparatively small variations according to which method of calculation is used. My belief is that the example where two loans with the same APR, but perhaps one is much longer than the other so the total amount of interest that accumulates is much greater in the longer loan, is a completely separate issue from the point about the different ways of doing the ambiguous calculation, so even when the regulations are crystal clear about how the APR calculation is to be done it can certainly be the case that two loans, one much longer than the other but with the same APR, will involve much higher interest being payable over the whole course of the loan in the longer loan than in the shorter loan. That arises for a completely separate reason.

Mr Beard: That is not what I am talking about. I am talking about fundamentally different ways of doing the calculation, not that they are just different terms of the agreement.

Q744  Mr Mudie: But you are again avoiding the answer. In an earlier answer two minutes ago you said that it could be done by agreement, it could be done by the review or it could be done by enforcement. You could not get agreement, you were years away from legislation. Why the hell on the behalf of the consumers did you not use your powers? That is the question. We do not want a tangled answer about the technicalities. Why have you not used your powers?

Mr Vickers: For the following reason. Let us be clear first what we are talking about.

Q745  Mr Mudie: No; we know what we are talking about. Why have you not used your powers?

Mr Vickers: The reason we thought that the most practical and sensible routes were industry dialogue, -----

Q746  Mr Mudie: That failed.

Mr Vickers: ----- and the DTI review were as follows. The regulations are ambiguous on this point. The regulations were not ambiguous on the point of the potentially misleading credit adverts. That is why enforcement action was taken there. On this point, and given the timing of the DTI -----

Q747  Mr Mudie: But they are still years away. Mr Fallon pointed out that it will be two or three years before we get this legislation through.

Mr Rees: With respect, we are not years away. I said to Mr Fallon -----

Q748  Mr Mudie: You are years away.

Mr Rees: With respect, if I could say when we will introduce the draft regulations -----

Q749  Mr Mudie: You can sit there comfortably but there are consumers out there and those years will hurt them.

Mr Rees: Okay, but if you will listen, Mr Mudie, what I said -----

Q750  Mr Mudie: I am listening.

Mr Rees: Okay. What I said to Mr Fallon was that we will publish the draft regulations, which I hope will make this clearer, after we have published the White Paper. We will publish the White Paper in October or the first half of November, so the draft regulations will come out in a form in which people can still comment on them before the end of the year with a view that they come into force next October, so we are not, with respect, years away from introducing the new rules.

Q751  Mr Mudie: You are a year away.

Mr Rees: Yes, that is what I said earlier. We are not years away.

Q752  Mr Beard: Can I come back to this question of calculating interest rates? Would you not agree that as a director of the Office of Fair Trading you should step in when the public are being charged different charges when apparently they are being sold the thing saying it is all the same? Should you not step in?

Mr Vickers: Where we have a basis to take enforcement action we can and do take it.

Q753  Mr Beard: Why could you not in this case? Even if you did not have the legal powers it is as plain as a pikestaff that this is unfair trading if people are being charged different amounts because the calculation method differs. Why could you not have got them together and said, "This is not to the advantage of the consumer or to the industry", and acted as a broker to get them to come together on this?

Mr Vickers: This is exactly the kind of thing we sought to do. Again, let us take the classic example of the credit card arrangement which has a low introductory rate and then goes up to the higher rate. On the basis of the calculation which the OFT believes and has long believed is the correct application of the regulations, an appropriately blended rate would come out. If it goes from zero to 15, it would be a number a bit below 15, depending on the other characteristics of the loan. On the APACS view it would be 15 per cent, so ironically the APACS view would give rise to a higher APR than would the OFT rate in that particular example. Some providers adopt our interpretation, some providers adopt the APACS interpretation.

Q754  Mr Beard: Why could you not negotiate this instead of --- we have seen 11 different methods of calculating.

Mr Vickers: I wish we had been able to negotiate an outcome on this point but that has not proved possible.

Mr Beard: They have told us that they were ready to do it.

Q755  Chairman: APACS have written us a letter. Why is it that you could not have brought the industry together and got something done? Why did we have to depend on our committee doing this and bringing people together? Now that we have brought people together we are looking for a commitment from you to keep working with us so that we end up with it. If APACS tell us that we can move towards a single interest rate and get something done then what we want to ensure is that at the end of the day a result is achieved.

Mr Vickers: We are completely committed to that and that is exactly what we did on the advertisement question.

Mr Rees: It is also worth underlining that we have brought the industry together with the consumer bodies to discuss these issues.

Q756  Chairman: But nothing much has been done. We know you are looking forward to legislation but at the end of the day we are looking for results, so do not annoy us any more by giving us your waffle. Let us get on now.

Mr Rees: We are all looking for results, Chair.

Q757  Chairman: We want action. Now, let us look for an easy time. Mr Vickers, how much of a barrier to transparency is risk-based pricing, where a consumer may not know the interest rate that applies to them until after they have bought the credit card?

Mr Vickers: This is linked to the earlier discussion we had on the question of typical rates, and the first thing that is important in credit advertisement is that those are indeed typical for the customer base that the product is aimed at. In your question you spoke about a customer who does not know the rate that they are going to be charged until after they have signed up. That seems a very unsatisfactory situation.

Q758  Chairman: We have had a submission from Nationwide which says, "While risk-based pricing is a legitimate commercial choice, the transparency issue that arises is that consumers will not know the interest rate that applies to them until after they have bought their card ... as one's credit score reduces the more credit reference bureau checks are made and credit taken out, so no card request is without impact on the consumer". Do you think that is an unsatisfactory situation?

Mr Vickers: The credit score of a consumer, from what one understands, can change through time as their circumstances alter, but I am particularly bothered by the part of that which suggested that the making of credit checks itself affected the credit score. That seems an unsatisfactory situation.

Q759  Chairman: It does. They gave us further evidence, and they mentioned Barclaycard: "So, for instance, Barclaycard are currently advertising their Classic Visa'... from 11.9% APR'. This rate, however, is only available to those who meet certain criteria and applicants only discover what rate they will pay after they have applied." Egg found that "Just 4% ended up with 11.9% - 70 per cent were quoted 17.9% and one in ten customers were told to pay 24.9%".

Mr Vickers: That is a perfect example of the potential problem with typical rates that I have just referred to. In that example, if those are the facts, that is one where the so-called typical rate was not a typical rate. It sounds anything but from the example that you have given.

Q760  Chairman: It sounds wrong to you as well, Mr Rees?

Mr Rees: Indeed, and the regulations will make clear when we publish them that the typical rate has to apply to at least 50 per cent of the cases.

Q761  Chairman: The next question is, does the OFT monitor how many customers are offered the low APRs quoted in adverts by some credit card companies, but I think your answer to that would be no.

Mr Vickers: If evidence comes to us or we find evidence suggesting that so-called typical rates are not typical, then we would certainly have a basis for action. It is not just information from consumers or by Trading Standards which might come in here but also from rival providers. That is another source of information of some of the complaints we receive about credit advertising in general. Another part of your previous question I believe was that the consumer does not find out the rate until after they have applied.

Q762  Chairman: That is correct.

Mr Vickers: Of course, that is different from not finding it out until after they have signed up. On an application then saying, "Your rate will be this rather than that", one understands that when credit checks have been made that is -----

Q763  Chairman: After they have bought the card. They have signed up to the card. The thing is, Mr Vickers, again, we do not want to sound carping to you but Egg sent us their research a couple of months ago, and you turn round and tell us know, "If we get evidence of that ...". It seems that in a random, ad hoc way we are getting this information as a committee and yet you would do something if you found something out about it. The evidence is there. It was freely available.

Mr Vickers: As say, we are hungry for all evidence and go out and seek and find and get all relevant evidence, but any enforcement action has to be evidence based; otherwise it will get absolutely nowhere.

Chairman: Again, it seems that you are behind the ball on that particular one. Let us go on to store cards. We have done it largely.

Q764  Mr Mudie: We have still not got an answer. What do you see as the problem? I was wrong with my figures; I will apologise. I see from the brief that I was suggesting 50 to 60. They suggest 45 to 70 per cent of the store cards are serviced by GE Capital. Is it a matter of concern?

Mr Vickers: Our concerns are about the ability of consumers to make informed, unpressured choice between competing providers. In the credit market store cards are one source of credit. There is a range of other sources of credit available to the consumer. I have not answered an earlier question from Mr Mudie about action. If there is a chance later I would welcome that.

Q765  Mr Fallon: Roughly what proportion of the market would GE Consumer Finance have to have before you were concerned about concentration and a dominant position?

Mr Vickers: The question under competition law, which is where we have responsibilities, is a provider's share of the relevant market, so one must define what is the relevant market, what are the practical alternative products in the eyes of consumers. In order to give an answer to what percentage share of a relevant market defines a dominant position one needs to go through that important empirical exercise.

Q766  Mr Fallon: Roughly what would the share be to establish the relevant market?

Mr Vickers: Of course, it does depend on what the market is. Inevitably it depends on that. There is no escape from that.

Q767  Norman Lamb: What view do you take of the relevant market?

Mr Vickers: I have not done the empirical exercise necessary to do that.

Q768  Norman Lamb: Is there someone at the OFT who does it?

Mr Vickers: Not so far as I am aware but let me say the following. If credit cards were considered to be in the same relevant market as store cards, then the fact that credit cards in terms of outstanding debt are ten times bigger than store cards would immediately give some inferences about the market share in that market if it embraces those two things together.

Mr Fallon: But if the store card market was regarded separately, roughly what share of the market would GE Consumer Finance have to get to before you got concerned?

Q769  Chairman: They maybe have ten million customers.

Mr Vickers: There are two things which would trigger concerns under competition law. I say the following as a general proposition, not specific to that example. Competition law contains two prohibitions. One is against anti-competitive agreements. If there were anti-competitive agreements between those who ought to be competing but who are agreeing not to compete, then that could well be unlawful and attract serious consequences almost irrespective of their shares of a relevant market.

Q770  Mr Mudie: What would a sign of that be though?

Mr Vickers: The other prohibition in competition law is against abuse of a dominant market position. In order to establish abuse of a dominant market position where one by law must act consistently with the EU jurisprudence, since our competition rules mirror the EU rules, one must first investigate the question of dominance. That involves defining the relevant market, looking at market shares, but there is no magic number because it is not only market shares that determine the question of dominance. One needs to look also at questions about the nature of customer behaviour, about entry barriers and so on, so I cannot, consistent with the law, give you a magic number since this is not an area where there are magic numbers.

Q771  Mr Fallon: But there must be a number at which you start looking. You said you look at various things. What is the market share roughly that would start to make you and your officials keep an eye on this sector? Is it 20 per cent, is it 30 per cent, is it 40 per cent?

Mr Vickers: If there is a question about abuse of dominance, typically if a company had half the relevant market or more, that could well trigger initial concerns. There are some cases where there are market shares below that figure but it would be in that area. The cases we have actually taken in the abuse of dominance area have typically involved, under the relatively new UK legislation, considerably higher market shares. On Mr Mudie's point on what is evidence of anti-competitive behaviour, some of our work looking at that question involves looking at agreements that are entirely public and that are notified to us, and indeed the Mastercard agreement where we are looking at the question of the interchange fee is a perfect example of that. Other kinds of anti-competitive behaviour, the secret cartel kind of activity, are of course anything but public and there it is a question of unearthing the relevant information. What is proving very useful on that front is the leniency arrangements that we operate which encourage information providers to come to us with information about cartels. That is a proactive way of seeking to uproot that kind of information.

Q772  Chairman: GE Consumer Finance told us that they have around ten million customers. Forty million adults hold store cards and there is a total of 21.8 million store cards in issue. Our economist has worked out that on these figures GE could have between 45 and 70 per cent of the store card market. One would perhaps assume - and maybe it is wrong to assume - that for companies which are working in a competitive market profit levels would be round about the same in what they are getting from that market. Have you investigated the relative profitability of lenders in the credit card and store card markets?

Mr Vickers: We have not investigated the relative profitability. Our big Competition Act question in the credit card market is the multilateral interchange fee question at the heart of the Mastercard case, a case which has not reached a conclusion, but that is a question in the credit card market which, as I say, is much larger than the store card market, and that is where we have, and continue to have, in train a very detailed and thorough investigation.

Q773  Chairman: Would you consider looking at that and sharing your information with us in terms of the profitability of companies in, say, the store card market?

Mr Vickers: On the store card market, in order for us to suspect that there was a breach of the competition rules we would need either to have evidence of anti-competitive agreements or of abuse of a dominant market position. As I sought to explain to Mr Fallon, that involves us defining the relevant market and which are the competing alternatives.

Q774  Chairman: We have deep concerns as a committee and concerns have been expressed to us by witnesses on the store card market. As a parliamentary committee what we are asking you, and I as Chairman am asking you, is to look into that to try and unearth some empirical evidence so that you can satisfy yourselves on this matter.

Mr Vickers: Let me respond in two ways. First, the concerns are ones that we recognise and share and in particular on these questions about apparently pressurised sales methods which discussions between you and GE Capital may or may not resolve and we will be very alert to that situation. On the question of whether there may have been a breach of competition law, in any sector, if we have reasonable grounds to suspect a breach of either of the prohibitions that I mentioned to you then we would be very ready to launch an investigation. If and when that point is reached, certainly.

Q775  Chairman: What does the "certainly" mean?

Mr Vickers: You asked a question about whether we would launch a competition law investigation.

Q776  Chairman: What I want you to do is to go back to OFT and be alive to this issue for us, so that when we come back you have some empirical evidence for us. You are looking at issues such as profitability?

Mr Vickers: No. I believe we are not just alive from this point but have been alive to this issue and have been particularly interested in this point of sale issue.

Q777  Chairman: To my question about profitability your answer was no, you have not looked at that. In terms of gathering empirical evidence, would you look at that for us so that if we come back to a detailed set of questions you can answer them for us?

Mr Vickers: I am certainly happy to say that we will take a preliminary look at that question. Whether it is feasible and whether it is the best use of the public money which is allocated to us to devote resources to that question as distinct from other issues in the credit market and more generally, I would not wish to commit one way or the other now.

Q778  Chairman: But my question is not based on a lack of evidence. I would think that the question is informed and I would ask you to look at that.

Mr Vickers: We will look at it.

Q779  Norman Lamb: Mr Vickers, given that there is evidence that GE Consumer Finance may have up to 70 per cent of the store card market, is it not important for you now actively to reach a judgment on what is the relevant market, whether the relevant market is the store card market or whether it includes credit cards, because if you determined the view that the relevant market was store cards then there would appear to be a competition issue there which you could take action on. Is that right, if you determined that that was the relevant market?

Mr Vickers: There might be.

Q780  Norman Lamb: So is it not important for you now to give a commitment to carry out an analysis of what is the relevant market, because if you determined that it was the store card market, then there may be an issue of abuse of dominant market position?

Mr Vickers: We will look at that too.

Q781  Chairman: I have made a point here about profit levels in a truly competitive market, but would you expect profit levels to be similar in a truly competitive market between different competitors?

Mr Vickers: Broadly, but subject to important qualifications. In a competitive market, if one firm is much better than another at giving consumers what they want, then that firm will earn considerably more profits than the other firm.

Q782  Chairman: That is if it is a super-duper firm; that is what you are saying?

Mr Vickers: I do not think you need to be super-duper relative to your rivals to make a bit more profit than they, but that, of course, is a desirable aspect of the system. When a market is working well in terms of consumers being able to make informed choices in an unpressurised way among competing providers, then the firms that serve them best will make more profits than the others.

Q783  Chairman: We have already agreed in broad principles that the market is not working too well for consumers at the moment.

Mr Vickers: We have got to be practical about this. In particular, on those point of sale issues which the committee raised and where GE Capital responded, I cannot judge on the information I have now whether it is a satisfactory response or not. That clearly seemed unsatisfactory and not a market working as it should.

Q784  Chairman: Could you outline to us, and Mr Rees as well, the rules covering the provision of advertising material surrounding store cards and credit cards?

Mr Rees: On the point that has come before the Committee before about whether or not you can take away the material, the law is quite clear: you can take away the material. There are indeed slightly different provisions as to whether you then sign it -----

Q785  Chairman: So, unlike the store card companies who said to us originally when they came before us that it is against the provisions of the Consumer Credit Act for the customer to take away the credit agreement, that is total nonsense?

Mr Rees: It is not the legal position.

Q786  Chairman: Good. Lastly on that, we had advertising material from House of Fraser and what we were wondering was why House of Fraser are allowed to get away with only providing a glossy leaflet which makes absolutely no mention of the high interest rate that applies to their store card?

Mr Rees: The rules that govern advertising at the moment are pretty poor and we will therefore be publishing new regulations on them towards the end of the year to simplify them and make them much easier to enforce. The key, as you rightly say, is that when the consumer gets a bit of paper they have got the key information if they are going to sign an agreement on the basis of that bit of paper, and it should include the APR, is our view.

Q787  Norman Lamb: If we can turn to marketing, Citizens Advice indicated seven key practices that they were particularly concerned about - speed and ease of application, prominence given to very high credit limits, prominence given to very low interest rates for cards where the interest rate paid by the consumer is determined by risk (the issue we have been dealing with), inducements to use the card, unsolicited mailshots for credit card cheques (something else that we have looked at), important information in small print; and indiscriminate targeting of direct mailshots. Which of those practices are you most concerned about and what powers exist now to do anything about them?

Mr Vickers: It is not that I want to put them in order. I think that those are all very important areas of concerned. Could I take the example of small print? I want to try partly to respond to the earlier question from Mr Mudie about action. This is in a wider context. Credits and store cards are an extremely important part of the general debt question in the UK. There is £50 billion plus outstanding on those cards but it is in a wider context where consumer credit, never mind the mortgage lending as well, is £165 billion at the moment. To give some examples of action, unfair contract terms is an area where there are regulations where we take action and issue guidance in the spirit of trying to prevent as well as cure and take action after the event. In the credit area we have had two very big cases. One from the late nineties was on the question of so-called dual rate mortgages where a borrower who, for example, went into arrears, would flip onto a much more onerous interest rate. That was held to be an unfair contract term. It is sometimes a small print trap that the consumer had been unaware of and that issue was one that the OFT solved in a very practical way, and that in money terms was a very big issue. The one where we were unsuccessful, although a number of positive things have flown from it, was the case of First National Bank. This was a case about what is called interest after judgment: what is to be the schedule of interest payments when a borrower has been in arrears where a court judgment has been given on what is to happen to the debt. In this contract the term at issue was about a requirement that the contractual interest rate continued to be payable, whatever the court had said. We pursued that successfully in the High Court, successfully in the Court of Appeal, unsuccessfully in the House of Lords as to whether that fell under the unfair contract terms regulations. The judges at all levels regarded the situation as unsatisfactory but it was a point of law about whether the unfair contract terms regulations were the solution. That again is the sort of point which we have been able to feed in to the DTI review and we believe there are other ways of solving that problem. That is not a comprehensive answer to your question but those are two big practical examples of the kind of action we take, not always successfully, as with the House of Lords judgment in the FNB case, though I do think a number of positives have flown from that.

Q788  Norman Lamb: Can I ask Jonathon Rees then whether you consider that existing powers are sufficient to deal with marketing abuses, the sorts of things I have listed there, and whether you intend to take any action in terms of regulation to tighten up the rules to give more powers to regulators in order to clamp down on marketing practices?

Mr Rees: I think the short answer is that it is not self-evident that the existing rules are sufficient, just picking up the point that John Vickers made.

Q789  Norman Lamb: They are insufficient?

Mr Rees: The existing powers are insufficient. The fact is that if you look at extortionate credit provisions, which were put into the 1974 Act, they clearly have not worked as I assume the original drafters of the Act intended. There have only been 30 cases in the last 30 years and only ten of those were successful. One of the things that we will set out in the White Paper is significantly to toughen up the provisions in relation to what is an extortionate or an unfair provision, and I come back to the point that one of the committee members made. The test of fairness will be at the heart of the White Paper approach and that is fairness both in terms of what is being marketed and in terms of how it is being sold.

Q790  Norman Lamb: Extortionate credit is one thing. What about all these other types of marketing? Does it require primary legislation? Is it something you can do by way of regulations?

Mr Rees: Some of it can be done by existing regulations. Some of it has to be tackled by self-regulation. If you take, for example, one of the areas mentioned, credit card cheques, which has been the subject of discussions in the Over-indebtedness Task Force and indeed separately, we have got a clear industry agreement that the information provided to people when they get sent credit card cheques should actually say how you can use them, and if you use them instantly they are not like cash.

Q791  Norman Lamb: Do you agree that many people are totally misled by them?

Mr Rees: Yes, I do. I do not think there is any doubt. In addition to the list that you have cited from Citizens Advice, who are clearly part of our working party, the minister, Melanie Johnson, was particularly concerned about things like payment protection insurance where people were asked to sign up to payment protection insurance without being told that it was useless for their purposes because it was not explained to them. There are lots of practices which the legislation, working with the industry, can get better. Some of it requires legislative change. Some of it I think can be done by self-regulation. To be fair, the industry has already improved its code of practice in a number of different areas.

Mr Vickers: Perhaps I can add some more aspects of action now, partly enforcement action, partly communication, on trying to get the industry to conduct themselves fairly. We feel that a tremendously important area, which is outside the remit of this Committee, is the area of debt management companies where people with debt problems turn to debt management companies; some are fee-paying, some are in the voluntary sector, and the area of debt consolidation, which might be done by people who are in a distressed financial state, it might be done by people who are not in that state at all. Those are enormous areas.

Q792  Norman Lamb: This is profiteering out of people's difficulties?

Mr Vickers: Yes. We think there are some very big questions here and these are enormous areas of credit activity, so we have been very much on that case with debt management, putting out guidance and so on, and we will be following that up with research about did things get worse, did they get better, and reporting on that in the new year. I think there are some extremely important issues in the credit area, of course within the committee's remit, but there are many others which are a bit beyond that remit. They are all linked to the question of debt. Our responsibilities in the consumer credit area, and I could talk also about our licensing work, run across the whole piste. As the OFT, of course, we do a lot of things which are not credit related at all. There is a lot going on in areas related to those which this committee is concerned with as well as things at the heart of the concerns of the committee's remit.

Q793  Chairman: We have received quite a bit of evidence on over-indebtedness but we have not had the opportunity this morning to look at that although it is in our thinking. We have also in principle agreed to hold an inquiry into financial inclusion, but the agenda is so busy that it is quite a while off. These issues are striking a chord with us and we want to talk with you constructively on these issues if and when we get to that inquiry. Could I ask you lastly about marketing? We are all familiar as citizens and consumers when we are away on holiday that when we come back our post box is knee-deep in marketing investments and unsolicited credit card applications. I had two just this morning come through my door. What options do consumers have if they want to avoid receiving unsolicited credit card applications through the post? How can they remove themselves from the lists?

Mr Vickers: I had the experience coming back from holiday not just of some credit card mailing shots but also credit card bills which reflected what I had been doing on holiday.

Q794  Chairman: Do you want some advice?

Mr Vickers: I am very well advised, Chairman. On the mailshots, there is a registration service for receipt of junk mail.

Mr Rees: It is the Mail Preference Service, which also extends to the telephone calls which are also the bane of my life, and also increasingly the internet and doubtless soon the text messages on our phones. You can sign up with all these people to try and avoid getting this information.

Q795  Mr Beard: Could I turn to the penalty charges that are paid on credit cards, which are mainly penalties for not paying the minimum payment by the due date or for going over the credit limit? PricewaterhouseCoopers have reviewed the industry and this is what they have to say: "Issuers are becoming increasingly reliant on ('over-limit') fees as a source of revenues. Few consumers consider these fees when assessing cards and are usually unaware of the costs until they exceed their credit limit. Issuers have recently been increasing these charges. The charges are most commonly incurred by consumers on lower incomes who have exceeded their (usually low) credit limit". We have had evidence from the National Consumer Council of one particular instance that illustrates this, of a borrower on income support with a credit limit of £200 being charged £30 in one month for late payment and exceeding the credit limit, and then in less than six months the amount outstanding had more than doubled, mostly due to the application of these penalty charges. Are you happy with the amount of information people are getting and the presentation to the customers of these sorts of fees? Do these fees for late payment or exceeding credit limits in any way reflect the real cost to the issuer of the customer breaching their contract?

Mr Vickers: I think this is a very important set of issues. Of course, the revenue streams to the card issuer come essentially from three sources. The revenue streams may also be part of the marketing incentives that the credit providers have, responding to the Chairman's point about mailshots, the three streams being, of course, the interest payments on those who do not clear their balances so as to have the interest-free period; secondly, the revenue coming to the issuer from the interchange fee, and the question before us under the Competition Act is related to that set of issues, and, thirdly, other payments such as these penalty payments. Your question focuses on the two key aspects to resolve this issue. One is the clarity of information up front so that the consumer knows what are the consequences of going into arrears, missing payments or whatever. This is the kind of thing the Schumer box approach could develop in different ways but this is surely a candidate for inclusion in that sort of approach. The second set of issues is after the event: are these a penalty or are they legitimate cost recovery by the provider? I mentioned earlier action we have taken involving the unfair contract terms regulations, and indeed across the economy as a whole we have had a number of cases, I believe 200-plus, involving terms in contracts of different kinds, not just in credit, which were demonstrably in excess of the genuine pre-estimate of loss, and we have had those terms adjusted because that seems to be the fundamental principle. We believe that where we have the evidence, where we can gather the evidence to answer whether the payment is above a genuine pre-estimate of loss or not, the unfair contract terms regulations - these are the tools we have now that I am talking about - are a potential way to address this issue. Our ability to get evidence has been improved by the Enterprise Act which came into force on 20 June this year. That is an issue we are alert to. The principle, and it is a classic example in this credit area, is one that applies much more generally and we have had practical experience in other sectors.

Q796  Mr Beard: The Financial Services Authority have indicated that it is thinking of outlawing any penalty fees on mortgages that do not accurately reflect the cost to the lender. Would it not be a good thing to apply the same principle to credit card penalty charges?

Mr Vickers: Yes, and I may have used sightly different language, but what I said was intended to be exactly in line with that and that is also consistent with the unfair terms in consumer contract regulations. That is the tool we see as potentially very useful in this area, not just in credit cards but that would be a good example. It is obviously a question of evidence but we are now in a better position to get that.

Q797  Mr Beard: So you will be looking into this?

Ms Wade: May I come in at that point? Since we have had the Enterprise Act we have been working more closely with the Trading Standards community who obviously are around the whole country and who can act as our ears and eyes in this matter, and we have been able to provide training for them to recognise instances like this to bring the evidence to us and have trained over 2,000 members of the enforcement community, so the Enterprise Act has given us access to more evidence and that makes it easier for us to take enforcement action.

Q798  Mr Beard: Can we take it then, Mr Vickers, that you will be looking into this?

Mr Vickers: Yes, we will be.

Q799  Norman Lamb: Is there not prima facie evidence that Barclaycard needed investigation? I mean, £24 penalty for failure to pay the minimum payment on the due date seems to me to be excessive and not likely to reflect the actual cost to them of what the consumer has done.

Mr Vickers: For any enforcement action we have got to have a solid fact base before we can properly draw conclusions.

Q800  Norman Lamb: The evidence is there. I am sure Barclaycard will confirm the charge to you if you ask them.

Mr Vickers: These cases do not proceed in that way, I can assure you.

Q801  Chairman: We do not want to draw you on that. We just want to draw your attention to it.

Mr Vickers: I completely understand but it is a question of an evidence base for any enforcement action. One hopes that one can resolve these issues by agreement without the need to go through a court process. If we can do that, fine; if we cannot, fine, but it does depend on the facts. I cannot give you an instant response.

Q802  Norman Lamb: Does it require a complaint from a consumer? Is that what you are saying?

Mr Vickers: I think we could pursue these cases in any event.

Mr Beard: Can you not do it on the basis of the meeting today?

Q803  Chairman: Mr Rees, you nodded your head there.

Mr Rees: It is obviously for the OFT, but the question is the evidence of whether or not the payments that you were referring to are disproportionate. I was simply going to say that the new rules that I mentioned earlier to Mr Lamb on extortionate credit will also be relevant in strengthening the enforcers' arms.

Q804  Norman Lamb: But is this not enough evidence for you to take this up with the company?

Mr Rees: No.

Chairman: I think it is unfair to draw you on that. We do not want to draw you on that point.

Q805  Mr Beard: Are you saying, Mr Vickers, that you cannot proceed on this until you have got a complaint? I am asking you why you cannot take today's discussion as the cause for it.

Mr Vickers: We are already alert to this issue.

Q806  Chairman: Could I sum it up by saying you have listened to us?

Mr Vickers: We certainly listen to you. This is not a new issue for us in this context or in general. The unfair contract terms regulations came into force in their first phase in 1995. The dual rate mortgage example I mentioned earlier was concluded in 1998. There are now a number of other big late-nineties cases. Just to conclude on the principle, which is common sense as well, the FSA's view, my sense of the Committee's view, our view, what the unfair contract terms regulations say, all seem on a line, and then it is a question of fact.

Q807  Chairman: The very last question is on order of payments on credit cards. Most credit cards, as you know, treat cash advances in a different way from other spending and many have different rates applying to balance transfer, standard spend in shops and special deals, and they will often apply payments to reduce the cheapest balances, thereby maximising the amount of interest a customer ends up owing. Is there any way to make the sequence in which payments will be applied to outstanding balances, and the effect this will have, more comprehensible to the consumer? Should that information be in a Schumer box?

Mr Vickers: I think this set of issues is opaque to many consumers and that is not a satisfactory situation. Again, clear information is a key part of any solution to this, and I think it is important as well in a number of issues surrounding how the APRs in this area are advertised, but it is also very important that the consumer has a clear idea of what will happen as a consequence of the actions that he or she takes in this area. For example, it would be misleading if a totally unrealistic, obscure pattern of repayments was necessary to get a particular rate on offer. Again, it has got to be clarity and transparency which is at the heart of where the committee has its concerns.

Q808  Chairman: Good. Do you have any final comments, Mr Rees?

Mr Rees: No. I hope that when we produce the White Paper it will move in that direction.

Chairman: Can I thank you very much for your attendance this morning. It was very helpful to us. We will continue this dialogue until we get to what we were talking about - fairness for consumers.