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§ Mr. Barry Gardiner (Brent, North)Even though he is my hon. Friend the Member for Edinburgh, South (Nigel Griffiths), I trust that, as a good son of Hawick, the Minister will not object if I ask him to take a mental journey with me to the other side of Scotland, to where I grew up in Glasgow. Whenever yer mither wantid a pint o'milk, we bairns would be sent doon the street tae Cuthbertson's dairy. The milk would be there in the crates, but there'd be nae wifie tae tak yer thruppenny piece, so ye'd leave it in the honesty box.
It is many a long year since I have seen an honesty box—some would say, "What do you expect when you move down to live among the English?"—but lo and behold, I walked into the Terrace Cafeteria yesterday and found, by the coffee machine, a brand new honesty box. I considered that a tremendous omen for the debate, because I am calling for an honesty box in the credit card industry, albeit one of a slightly different nature.
Last week, the Office of Fair Trading reached a preliminary conclusion that MasterCard was charging an unjustifiable fee to retailers' banks for every transaction processed. The effect of that 1.1 per cent. charge on the value of every transaction is, of course, passed on to consumers in higher prices. The regulator announced that
these fees act like a tax on retail transactions that is paid by all consumers in shops that accept credit cards".Given that there are about £84 billion worth of transactions each year, that amounts to £924 million.Charges and fees in the credit card industry are therefore topical, but I wish to focus the Minister's attention on the other side of the industry—the card companies' relationship not with the retailer but with the consumer. Last year, the deputy director of the Isaac Newton Institute for Mathematical Sciences, Dr. R.E. Hunt, submitted a memorandum to the Treasury Committee's inquiry into interest rates in which he stated:
Despite 'assiduous research', there are still some obscure aspects of the charging regime which it has been impossible to deduce even from the small print.Dr. Hunt is a lecturer at the university of Cambridge department of applied mathematics and theoretical physics, so if that is impossible for him, it is almost certainly as clear as mud to the average consumer. As he says,The need to read the small print significantly increases the difficulty of the calculation. Various vital facts are buried there.In this debate I have one aim. Quite simply I want to make the small print bigger. I want to dig up the hidden charges and make them explicit, so that every consumer can know up front what they are getting when they decide on a particular credit card.About a year ago, the Department of Trade and Industry asked APACS—the Association for Payment Clearing Services—to participate in its consultation process on the workings of the Consumer Credit Act 1974. Its submission, which I am confident that my hon. Friend the Minister will acknowledge, was extremely detailed and helpful. It focused on credit card annual 25WH percentage rates, how they should be presented to the consumer and how they should be calculated. Let me explain the problem. The APR represents the total charge for credit. Indeed, it is defined as such in the Consumer Credit (Total Charge for Credit) Regulations 1980. However, there are different ways of calculating the total charge. The assumed length of repayment, and the impact of such things as annual fees and minimum monthly repayments can be varied, so perverse results occur. In some circumstances, a card that would charge £4,040 to repay just £2,500 has an APR of 14.9 per cent., whereas a card that would charge a more modest £3,127 to repay the same £2,500 has a higher APR of 16.4 per cent.
The consumer tends to imagine that the APR is simply the annualised interest rate applied to the outstanding balance after the credit-free period has elapsed in any month. It is not. The APR is, at best, a one-dimensional view of the cost of credit on any card, and the number of customers for whom it is directly relevant is small. The APR is of no relevance to the 34 per cent. of credit card users who recently claimed in a Mintel study to pay off their balance in full each month. Of far greater relevance to such people is the size of any annual fee or the length of any interest-free period before repayments must be made.
The credit card companies have, over the past few years, begun to introduce other, hidden costs, such as late payment fees, which are usually about £20, one-off fees on foreign transactions, which are usually around 2.75 per cent. per transaction, and fees for going over one's credit limit, which are, again, about £20.
Another hidden cost is the transaction fee and interest chargeable on cash advances. Many issuers charge 2 or 3 per cent. of the transaction on any cash advance, subject to a minimum of £5. On a relatively small cash advance of £50, for example, the transaction fee is a whopping 10 per cent. of the transaction. Indeed, using a credit card to obtain cash is one of the most expensive ways to borrow money. Many issuers charge higher interest rates on cash advances than on purchases, despite already levying a cash advance handling fee, so the eventual cost to consumers who do not pay their balance off in full can be enormous.
Unsurprisingly, such matters are generally not in the promotional material that credit card companies send out. Even those things that may be heavily promoted as benefits of the card can have hidden costs. Many cardholders believe that if a 50-day interest-free period is provided, all new purchases will accrue no interest charges until that 50-day period has elapsed. In fact, that will normally be the case only when there is no unpaid balance left over from the previous bill and the new purchases during the current month are paid in full before the due date. If an unpaid balance is hanging over, the new purchases will attract interest from the date of purchase, and the grace period will not apply. Once again, the small print will catch the consumer out.
Fundamentally, the Minister can approach this consumer problem in two ways. First, he can impose standardisation of product on the industry, which is to say that each credit card company can calculate its key financial indicators in exactly the same way, and offer essentially the same interest on the same intervals, with 26WH the same interest-free periods and the same fees and handling charges. Secondly, he can ensure that there is absolute transparency about the fees and charges that each company levies, and impose standardisation of presentation of costs and benefits, so that the consumer can easily compare one card against the other. If the Minister chooses the first route, he diminishes consumer choice; if he chooses the second route, he increases it and educates.
The honesty box is a way of achieving the second option. It obliges every credit card company to standardise the presentation of all the relevant information about its credit card in a grid format, so that a customer can see, just by looking at the honesty box, how that product compares with another. I would dearly love to claim that the idea is original, but in speaking of the honesty box, I must at least be honest. It was first thought of by Senator Charles Schumer, who led the passage of a Bill to that effect through the US Congress in 1988. The honesty box is part of the United States' Truth in Lending Act, and it requires the disclosure in a tabular box format of all financial information that it considers the consumer will need when evaluating a credit card offer.
In this country, the honesty box has already been adopted by the Nationwide, but although this is welcome, we should remember that the benefits of the honesty box flow from comparability, not from virtuous unilateralism. The benefit of honesty and humility here is that I can claim something much better than originality; I can claim that it works. In the United States, the Schumer box, as it is known, is regarded as an integral element in the drive for greater consumer transparency. It empowers people to make the correct decision about which credit card may be most appropriate to their needs. It does this, not by forcing companies to provide information that is not already available in the small print, but by drawing together all the disclosures spread throughout the text into one readily understandable and easily comparable matrix.
I was delighted to learn that the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Edinburgh, South was to respond to the debate, as I know that he is passionately committed to consumer protection and just as passionately committed to consumer choice. I am confident that he, like me, wants to see not a standardised product but genuine competition with different products offering different benefits at different prices to the consumer. It is essential that we bear it in mind that consumers' needs vary; some may require a credit card that charges a low rate of interest because they choose not to pay off their balance in full each month. For them, other benefits such as cashback or air miles are minor considerations when choosing a card. For those who usually pay all their balance but who travel as part of their work, it may be extremely important to know what penalty charges are incurred for late payment and what handling fees are levied on foreign transactions. Those who always pay in full by direct debit will have little regard for the APR or for late payment penalties; however, they may find it useful to compare cashback or gift incentive schemes.
The honesty box should include all the indicators. A full list would include an introductory interest rate on promotions; balance transfer interest rate; purchase interest rate; cash advance interest rate; cash advance 27WH handling fee; annual card fee; credit limit; minimum repayment; date from which interest commences; interest-free period; order in which payments are applied—that is chronologically or to higher interest-attracting transactions first; a tariff of charges and penalties for breaking conditions of the agreement; insurance on goods purchased, travel insurance and other insurances; cashback; reward schemes; and affinity schemes.
With so many variables, it is scarcely surprising that consumers can make substantial savings on the cost of using their credit card by choosing one that suits their needs. It is equally unsurprising that most consumers cannot find out which card best matches their needs when the information is hidden away in the small print of the 1,300 credit card brands available in the UK. It has been calculated that if all the consumers who pay off their balance in full each month switched to a cashback card, they would save a total of £125 million per annum. Lack of transparency is one of the main hindrances to consumers capturing that benefit.
However, if the honesty box is to be effective, it must cover all methods that companies use to market to consumers. It will not be enough for card companies to place the box solely on their printed promotional material. They must also supply information when they advertise their products on the internet or via multimedia text messaging, and even over the telephone. In short, we need to be comprehensively prescriptive, and prepare for all the emerging media of modern marketing. Consumer choice does not end when the customer has signed their credit card agreement. Card companies must send a revised honesty box each time that they change any of the fees listed. In that way, the consumer will be guaranteed simple financial information on which to base their financial decisions.
I welcome the Department of Trade and Industry review of consumer credit, but the Minister knows as well as I do that that review and any legislation that arises from it is unlikely to manifest itself in the immediate parliamentary future. Equally, I welcome the Government's submission this month to the EU draft consumer credit directive, which stated that
information should be clear and comprehensible, and key information should be presented as a whole".That is exactly what the honesty box ensures. I urge the Minister to do whatever is in his power to implement it now.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths)My hon. Friend the Member for Brent, North (Mr. Gardiner) has done Parliament a great service in raising an important issue that touches on the lives of so many people. Like my hon. Friend and, I believe, all hon. Members, I recognise that consumer credit and debt are important to us all. My hon. Friend has developed considerable expertise in an area that I take equally seriously and that the Government are taking steps to address. He gave us some shocking examples of misrepresentation of facts and lack of clarity. At a time when personal debt is increasing, it is important that the public fully understand what is involved in credit card transactions.
28WH I am grateful to the National Association of Citizens Advice Bureaux for supplying me with its latest figures on indebtedness, which show a dramatic increase in the number of debt inquiries that it handled between 1996–97 and 2001–02, from 789,000 to more than 1 million. My right hon. Friend the Chancellor will take some comfort from the fact that the numbers of tax debt and utilities debt inquiries have dropped, and the number of housing debt inquiries is also down; however, the NACAB inquiry figures show that the number of consumer debt inquiries has increased the most, from 406,000 to 647,000. That is why the debate is so timely.
We need to be especially vigilant about the information available to consumers. Of course I want all consumers to be able to master their finances: I firmly believe that people need to be able to take appropriate decisions about their finances, and to understand the choices that are open to them and the implications of those choices. That lies at the heart of the issue raised by my hon. Friend. We in Government need to be able to create the right regulatory framework to facilitate a competitive market environment and to ensure appropriate consumer protection. Transparency of credit agreements is vital—we must look at the amount of small print in agreements, and identify ways in which lenders can minimise the risks and agreements can be made easier to understand. That is critical to a successful market in credit, in which there is fairness on both sides.
We are taking two key actions. Having set up the taskforce on over-indebtedness—I will come to its workings and findings in a moment—we have also undertaken a review of the provisions of the Consumer Credit Act 1974. The taskforce on over-indebtedness has considered the question of transparency in consumer credit agreements in some detail. It recommended that all lenders should be required to provide certain key financial information to potential borrowers in a clear and understandable format. It has reviewed existing cancellation rights, examined the content and form of credit agreements and considered how small print could best focus on the main rights and responsibilities of consumers, explain the key terms and, most importantly, use plain language.
The working group has been firmly backed by the Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Welwyn Hatfield (Miss Johnson), who is responsible for consumer affairs. She endorsed demands on the part of consumers for sufficient information to enable them to answer the three key questions: how much will it cost me as a consumer, how much will it cost me if it goes wrong—my hon. Friend the Member for Brent, North mentioned the £20 charge, which is not widely known about—and can I afford it? That means that consumers need information about whether or not the loan is secured, whether the interest rate is fixed or variable, the term and total cost of the loan, and the total amount payable.
APRs can be helpful when comparing different credit deals, provided that the level of advice to which my hon. Friend referred is adhered to, but the frequency, number and amount of repayments are also important. Consumers should know whether a deposit is required and whether there are any additional charges, cancellation rights or early settlement terms. The taskforce on over-indebtedness indicated that the information is already required under consumer credit 29WH legislation; the purpose of today's debate is to highlight the failings in the enactment of that legislation in the handling of consumer credit and credit deals. As my hon. Friend said, the key is how the information is presented to consumers. It must be presented in a way that is clear and easy to identify and understand. We are examining the statutory requirements on pre-contract information and the format and content of credit agreements.
My hon. Friend the Under-Secretary is consulting on revised regulations and inviting suggestions on improvements for consumers as part of the current review of the Consumer Credit Act 1974. She is well aware of the need to take action on greater transparency, alerting people to the effects of reducing the minimum payments on credit card balances, and the need for clear guidance to consumers on how credit card cheques work. She spelled out those details in her response to the over-indebtedness taskforce's work. The Act is now almost 30 years old. It was enacted to regulate consumer credit at a time when the market was far smaller and less sophisticated than it is today. We need to update the regulatory regime and ensure that it is relevant to the modern credit environment.
We are determined to implement our 2001 election manifesto commitment to tackle loan sharks—another subject that my hon. Friend the Member for Brent, North is particularly interested in and concerned about on behalf of his constituents and all consumers. The consultation document published by my hon. Friend the Under-Secretary entitled "Tackling loan sharks—and more!" has elicited many helpful responses, and she will publish the response to that consultation next month. I know that my hon. Friend the Member for Brent, North and other hon. Members will take a keen interest in that.
My hon. Friend discussed in some detail the merits of what he called honesty boxes—illustrative tables in credit advertising and literature that set out in a clear, standard format the key rates, charges and benefits. He advocated that they be adopted as an industry standard to allow consumers to make informed and accurate comparisons between the terms and conditions offered by different lenders. I entirely agree with that approach. Consumers must be able to shop around and make clear comparisons between the offers made by different credit card companies.
The Department of Trade and Industry has met the OFT, APACS—the card issuers trade association—and consumer groups to discuss a standard format for advertising interest rates. As my hon. Friend said, it is difficult for consumers to compare different credit card offers. Lenders make different assumptions about usage, so a 6.9 per cent. APR on one credit card is not the same as a 6.9 per cent. APR on another. That was not 30WH Parliament's intention when it ensured that APR information would be made available to the public, and such a situation does not help consumers—indeed, it can lead them to make the wrong decision.
I am pleased to tell hon. Members that agreement has been reached on the need for a standard format. There is enthusiasm for adopting the type of honesty box that my hon. Friend described. As he said, it is already a legal requirement in the United States of America, where it is called the Schumer box, after the senator who championed it. My hon. Friend will be pleased to know that we are also giving active consideration to the merits of taking such an approach to other credit products. In that way, consumers may in time become familiar with the format in which key information is provided.
Our Government are pursuing the most radical overhaul of consumer credit legislation for a generation. It is being presided over by my hon. Friend the Under-Secretary and shows our commitment to ensuring that consumers are informed and protected. The changes are long overdue, and the speed of change in the credit market over the past decade, particularly in relation to credit cards, has highlighted the need for up-to-date, flexible legislation that provides the appropriate levels of consumer protection.
Like hon. Members, we recognise that it is ultimately for individuals to reach decisions about the commitments that they make, and that is as it should be. However, those should be informed decisions, and people must have information that allows them to compare different offers. They must be allowed to see what interest rates will be charged and be able to work out what they will end up paying for credit. Most important, they must be able to compare one company's offer with another's. That is why the Schumer box in the United States has so much to commend it. It is also why the Gardiner box—I hope that it will be known by that name, because my hon. Friend has championed the issue—is such a viable option in this country and it should be given active consideration.
There is no doubt that we have a mature and valued consumer credit market, and we are well ahead of countries such as Germany in terms of the possession of credit cards by individuals. People can therefore make purchases remotely and do not have to carry around large amounts of cash. All hon. Members greatly respect and value the industry, and we welcome its fullest cooperation in ensuring that it adopts the best practices. My hon. Friend the Member for Brent, North has outlined one of them, and he commands widespread support.
§ Sitting suspended until Two o'clock.