Examination of Witnesses (Questions 820
THURSDAY 16 OCTOBER 2003
TSB, ROYAL BANK
AND MBNA EUROPE
Q820 Chairman: Again, we will come
on to it in greater detail. Mr Daniels, you are committed as well
on that. One of the issues that we will be looking at today as
well is the issue of responsible lending and responsible borrowing.
It is very important. I think I noticed in August, Mr Goodwin,
that you sent an offer to a certain Monty Slater in Manchester
to apply for a gold credit card, including the added incentive
of earning Air Miles and a spending limit of £10,000, but
you know as well as I know that Monty will not be taking up that
offer because he is a dog!
Mr Goodwin: Absolutely.
Q821 Chairman: Tell me this, did
he chew your card when you sent it to him? That leads, on a serious
point, to the question: How do you decide whom to send credit
cards to? How good is the quality of prospective credit card holders?
Because it feeds the notion that people are being inundated with
credit cards, and it is nothing but fantastic offers to them.
There would be a hint of the responsibility there.
Mr Goodwin: Absolutely. The Monty
the dog incident is one that all, or we certainly, would rather
had not happened. Monty did not get sent a credit card, however;
he got sent an invitation for one, so he did not get chance to
chew the card. The situation arose because of something that Monty's
owner had done previously, in entering Monty's name as that of
an individual. There were reasons for doing that which it would
be inappropriate for me to go into here, but he had done that
on a mailing list that we purchased. His name was on it and he
was sent an invitation because he had been registered as living
at that particular address. It was very embarrassing, and a great
deal of humour was had, rightly, at our expense, but Monty would
not have got a credit card and he was not sent a credit card.
Q822 Chairman: Okay, but he is quite
happy and content now.
Mr Goodwin: By all accounts.
Q823 Norman Lamb: Our objective is
to increase transparency and, hopefully, thereby to increase competitiveness
and, hopefully, in due course, to drive down prices. A lot of
reliance is being placed on the Schumer box to achieve that objectiveat
least in part. Is there any evidence from the United States that
it has achieved that objective. General Krulak, can you help us
General Krulak: I spoke with several
people back in the United States on that issue specifically. There
is evidence, although anecdotal, that it has in fact improved
competition and it is certainly providing clarity. Again, I must
put it against the backdrop that they do not have terms and conditions
until they actually get the plastic.
Q824 Norman Lamb: You talk about
anecdotal evidence. There have been no studies to identify whether
it has actually had the effect of driving down prices, making
the market more competitive.
General Krulak: I do not believe
that there has been a study that has taken the pricing that is
currently ongoing in the United States and attached that to an
effect from the Schumer box, but obviously it is going to have
Q825 Norman Lamb: Is anyone else
aware of any evidence to support the case that the Schumer box
will help improve competitiveness?
Mr Goodwin: It is my understanding
that there is talk being given to extending it on to other products,
like mobile phone charges and so on, so I guess people would not
be doing that unless there was a feeling that it had improved
things, but I am not aware of any specific study on the subject.
Q826 Norman Lamb: There is also concern
that you could end up with something that increases confusion
rather than increases clarity. We have had a submission from Dr
Robert Hunt of Cambridge University, if I could just read to you
something he says. "One problem with the current design of
the summary box from APACS is that the first row `APR's and other
rates' will for many cards end up containing a considerable number
of different rates. The proposal is that this row should show
the introductory rate and `go to' rate for each of the purchases,
cash advances and balance transfers, and, for cards with risk-based
pricing, each rate should include lower and upper values, possibly
together with a typical value. This means a potential total of
18 different percentage rates in a single entry of the box, a
possibility sure to increase confusion for consumers rather than
reduce it." What are you doing collectively to ensure that
the information that is given to consumers by way of a Schumer
box actually increases clarity rather than just increases confusion?
Mr Goodwin: I think, by design,
the Schumer box helps to reduce confusion because we will be presenting
the information in a standard way. In our case, all of the information,
except the APR in the particular format, is already disclosed
on the back of statements to consumers, but by making it a standardised
format across the industry it does make it easier for customers
to find the evidence and read across. There are some areas where
there will be greater complexity than others. The APR debate,
as you know, still is not resolved, and how it is resolved will
determine how the APR will be disclosed, so it is difficult for
me to sit here and say how we will be pursuing it until we know
how the APR is to be disclosed.
Q827 Norman Lamb: Mr Barrett, you
use risk-based pricing on your credit cards, so your summary box
will contain this range of interest rates.
Mr Barrett: Yes.
Q828 Norman Lamb: Will it do anything
to increase transparency for consumers?
Mr Barrett: It does tell them
the range and it also will include a typical APR.
Q829 Norman Lamb: But it will not
tell them what rates they will be charged.
Mr Barrett: No. We will do that
when we make them the offer for the specific . . .. When they
apply for the card, we will then tell them, "This card has
Q830 Norman Lamb: So they know in
Mr Barrett: Yes.
Q831 Norman Lamb: They will know
Mr Barrett: Yes.
Q832 Norman Lamb: Is that the case
at the moment? It is not, is it?
Mr Barrett: There is not a Schumer
box at the moment.
Q833 Norman Lamb: Right. But at the
moment they only find out the rate after they have made the first
purchases, is that not right?
Mr Barrett: No, they find it when
we send them the card. We tell them the rate that applies to the
card. But now they will know it in advance. They will know the
range and they can compare the range and the typical APR with
competing offers elsewhere. That is why, again, we are supportive
of the Committee's initiative to get a single definition of APRbecause
actually the definition we are using at the moment makes us look
unfavourable, frankly. We would prefer that everyone was showing
it the same way. Increased transparency supports better competition,
there is no question. The more informed the consumer is, the better
the competition will be and, indeed, the more rivalry there will
be in different features, so I cannot argue that the initiative
that you are pressing us for is bad for competition. I think it
is good for it.
Q834 Norman Lamb: If I could go on
to deal with this issue of whether the summary box should include
illustrations of typical scenarios. If we are buying any other
goods in shops, we compare prices. In the supermarkets, we look
at the price of one product and compare it in other supermarkets.
Here we are left with simply being able to compare the methods
of calculating the ultimate price when we do not actually know
the price in pounds and pence of the credit that we are purchasing.
There has been clear support from Lloyds TSB, from Barclaycard
and from Nationwide for the idea of building into this summary
box one or more illustrations to demonstrate the actual cost of
the credit in pounds and pence. Could I just have confirmation
from each of you as to whether you support that concept, because
that would make people see precisely how much they will be paying.
Mr Barrett: Our submission, I
think, says we support it in principle. I think the Devil will
be in the details and therefore I think there is an issue with
it. There are so many combinations and permutations based on the
different features on which people compete for their clients'
businessfor example, the interest rate period, when you
start charging, etceteraso I think it is tricky
to get a standard rate that everyone is using because a lot depends
on which features the customer will ultimately decide they want
to take. It is a little tricky, but in principle I agree with
Q835 Norman Lamb: Will you try to
make it happen?
Mr Barrett: I will. Yes, I will.
General Krulak: I think it is
very difficult to do and I think it will probably lend to more
confusion. The scenarios would have to be many, because card users
use their card in many different ways. The scenarios do not attach
something that is very important, which is the value of the card
to the card bearer. The value of, say, a cash back programme,
how is that located? How is that articulated in this table? The
value of Air Miles, how would that
Q836 Norman Lamb: But you can promote
those in other ways, can you not?
General Krulak: You are reducing
a very critical instrument that has tremendous flexibility into
numbers, and people in
Q837 Norman Lamb: Yes, the price
of the product. That is what you are reducing it to.
General Krulak: But you are not
putting value to that price. I mean, you talk about a list of
data. Can you imagine a list of data if you did multiple scenarios
against the types of benefits that come from the card, whether
it is cash-back, Air Miles, a rewards programme? I am saying we
are obviously going to look at it, but
Q838 Norman Lamb: But all sorts of
other goods we purchase have other attractions to them. Sometimes
Air Miles are offered, sometimes other benefits are offered with
it. Why can you not have something
General Krulak: Yes, and it is
called "value" and value is very difficult to table.
Mr Goodwin: There are all sorts
of products that are for sale as well where you do not know the
ongoing costs at the time of purchase. You make the supermarket
comparison, but I do not think that is in any way valid. You know
the price of a tin of beans when you take it off the shelf, which
is fine because there is certainty as to what the customer is
getting; with a credit card, you do not actually know how the
customer is going to use it. A better analogy, I think, would
be purchasing a car: there are certain pieces of information which
would be relevant and useful at the time of purchasing a car but
what it is going to cost you to own that car over a period of
time depends on how you use it, how you look after itto
name but two. I accept and support the desire for simplicity and
transparency, but these are complex products and, the more you
go down scenarios, the greater the range of ways in which data
can be presented.
Q839 Norman Lamb: Is there not a
danger that you are all hiding behind the complexity of these
cards and the superficial attraction of competition, that you
are all able to come up with different attractions, but ultimately
the consumer does not have the faintest idea how much he is paying?
General Krulak: This concept has
been looked at in detail in the United States and was rejected
because in fact it became more confusingmore confusingbecause
of the value