THURSDAY 16 OCTOBER 2003

BARCLAYS BANK, BARCLAYCARD, HALIFAX BANK OF SCOTLAND, LLOYDS TSB, ROYAL BANK OF SCOTLAND 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 objective—at least in part. Is there any evidence from the United States that it has achieved that objective. General Krulak, can you help us on that?

  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 some impact.

  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 this particular—

  Q830  Norman Lamb: So they know in advance.

  Mr Barrett: Yes.

  Q831  Norman Lamb: They will know in advance.

  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 APR—because 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' business—for example, the interest rate period, when you start charging, etcetera—so 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 the initiative.

  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 it—to 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 confusing—more confusing—because of the value—