INTRODUCTION AND BACKGROUND

  1.  Lloyds TSB Group welcomes the opportunity to comment on the European Commission's proposal on consumer credit.

  2.  In June 2003, Lloyds TSB provided comments on the original proposal. We based ourselves on the findings of an impact analysis we had carried out on this proposal in the preceding Winter. We outlined numerous serious concerns with it.

  3.  Since then, Lloyds TSB has maintained a close interest in developments. It has provided input—directly and through its main trade associations—to European Commission officials, MEPs on the parliamentary committees concerned, Permanent Representative Offices and, with respect to the UK Government, the DTI and HMT in London and the UK Permanent Representative Office in Brussels. In particular, Lloyds TSB has contributed regularly to—and supports—the work of the Cross-Industry Group.

  4.  The European Parliament's vote in Plenary, in April 2004, took on board many of our key concerns and suggested significant improvements to the Commission's proposal. Many of its amendments featured skillfully-worked compromises between Rapporteur and colleague MEPs representing a broad spectrum of views and it was, therefore, most worrying to see such important parts of this work discarded in the new "text" the Commission issued during the Autumn. Following the change in Commissioners last Winter, and the severe representations made by the private sector just prior to that time, the Commission did agree to re-consider certain aspects of its proposal, and issue a fresh consolidated official text. Lloyds TSB awaits the new text with interest.

ISSUES OF OUTSTANDING CONCERN FOR LLOYDS TSB

Mortgages

  5.  The most important outstanding issue regarding scope has been the Commission's continued stated intention to retain mortgages in the text of the directive, despite European Parliament's vote in Plenary to remove them. We, therefore, firmly support the UK Government's position on this issue (paragraphs 46-56 of the DTI's CP), which reflects and takes on board the recommendations the trade associations and Lloyds TSB have consistently made over the past two years.

  6.  We have, however, observed a progressive change of position on the part of the Commission, since its new College of Commissioners was appointed. Commission officials have indicated privately that mortgages are now likely to be excluded from the scope of the directive. This was even stated by Dr Staudenmayer, the lead responsible official, to representatives of all European trade associations on 11 March 2005.

  7.  Although there is now a likelihood that mortgages will not be covered by the CCD, we believe that, until such time as this is confirmed in the official revised text, the UK Government should retain the position as it has stated it in its CP. At the same time, we note the Commission's intention, in its recently-published Green Paper on post-FSAP issues, to address mortgages as a separate subject.

APRs for overdrafts

  8.  We agree with the UK Government's support for a "light regime" (paragraph 64 of the DTI's CP) but continue to have a serious concerns on the question of providing an "APR by means of a representative example" for overdrafts.

  9.  As argued when APRs were imposed for credit cards, Lloyds TSB believes it impossible for a "standard" APR to be calculated for overdrafts that would be consistent not only across various current account products within one firm, but also across a variety of account providers in the market place. The variety of usage would mean that any "assumed" standard could not be applicable to most customers and so would add little value to their understanding. To be able to quote APRs, providers would need to make judgements as to definitions and assumptions (eg amount drawn, period of borrowing, amount repaid etc) that would not be aligned to customers' actual overdraft usage.

  10.  The situation becomes far more complicated if one considers "added value accounts" (AVAs), which group different facilities for one single fee. Because providers will take different views as to how to apportion their annual fee to the overdraft element, with consequent effects on their stated APRs, the consumer would face difficulties in comparing the pricing of alternative suppliers. This could mislead 4 million customers of Lloyds TSB.

Examples of how APRs for overdrafts can differ depending on assumptions used:

—  The effect of fees: A monthly interest rate of 1.2 per cent yields approx 16 per cent pa APR: a £15 monthly fee would, if all allocated to an overdraft of £100, increase the APR to in excess of 200 per cent.

—  The effect of interest free "buffers": Our Classic Account (no free overdraft) would have a monthly rate of 1.2 per cent, APR 16 per cent; whereas our Platinum Account (first £250 of overdraft interest free) would have a monthly rate of 0.85 per cent but the APR would be 59 per cent.

—  The effect of utilisation: £100 overdraft utilised for 10 days every month at a monthly rate of 1.2 per cent would pay £4.88 in interest charges (4.9 per cent), but the APR (ignoring any fees) would be 16 per cent.

  11.  Given these complications, Lloyds TSB believes it would be far preferable to allow lenders to express the costs for overdrafts—as indeed they are at present—as the annual interest rate, and complement this information with a "box" stating the related fees payable. The overdraft is a facility highly valued by consumers for its simplicity, flexibility and easy access in times of immediate but temporary need. It would be a pity to destroy these attributes.

Right of withdrawal—possible effects on "immediate delivery" channels

  12.  Lloyds TSB's essential concerns—as a major provider of retail finance on trade premises—are the unintended consequences, that "immediate delivery"[10] may be closed or become more expensive. This would be to the detriment of consumers, who find immediate delivery channels convenient and at times most useful. They would face a less competitive market, and less choice.

Point-of-sale finance: sequence of events in the UK

—  Consumer chooses goods.

—  Retailer arranges finance with credit company.

—  Finance agreement signed by the consumer and by retailer on behalf of the finance company.

—  There is no right of withdrawal if the finance contract has been signed on the dealer's premises.

—  Consumer takes away the goods.

—  Retailer has payment guaranteed by finance company, until—

—  The finance company pays the retailer on the day of settlement.

  13.  Under existing UK rules, a credit contract signed on the supplier's premises may not be cancelled by the consumer. The supplier will provide the goods to the consumer as soon as the credit contract—approved on-line by the credit provider—is signed by the consumer. This is because the supplier, when handing over the goods, is guaranteed payment by the credit company. Payment by credit provider to supplier, however, occurs later according to the agreement binding those two parties.

  14.  If the consumer were allowed to cancel the credit contract before the supplier were paid, the credit company would have a problem paying the dealer under a cancelled contract, because that credit contract would no longer exist. It is true that the consumer would still have the obligation to pay the supplier. However, the supplier would no longer face the "prime" risk of the credit company but risk on the customer, who would be an unknown risk and one which the supplier is in any event not equipped to assess.

  15.  It would in such circumstances be reasonable on the part of the supplier to refuse to deliver until the cancellation period has lapsed. At the very least, markets would need to adjust to the introduction of a right of withdrawal by apportioning the risk of cancellation between retailer, customer and financing company, and this would entail in increase in the costs of the goods, of the finance, or both, and possible delays in availability of goods.

  16.  Moreover, smaller retailers would be more adversely affected than larger retailers.

Duty to advise

  17.  We wholeheartedly support the UK Government's continuing resistance (95-101 of the DTI CP) to the "duty to advise" provisions in the CCD text. Its conclusion, that the consumer would not benefit from these stipulations, echoes points Lloyds TSB has made on successive occasions. We share the views of those who believe that lenders should not have a duty "to advise" the customer which product to opt for, but a duty "to inform" the customer of the salient constituents of the credit facility they are offering. We understand the Commission is at last considering modifying its approach, and look forward to its revised proposition. We do of course support the principle of "transparency".

Maintaining joint and several liability as set out in the UK

  18.  Lloyds TSB recognises that s 75 is a current fact in the UK, and that the UK Government's wish to retain it would not add to the rules UK providers need to comply with.

  19.  However, the UK Government's intentions to achieve "better regulation", which it has consistently and frequently stated of late, both in the UK and in the EU, have given us cause for reflection. In March, the Better Regulation Task Force issued its report to the Prime Minister. Its key recommendation is that the UK Government should reduce the regulatory burden on business by lowering administrative costs, and simplifying existing regulations—removing them if appropriate. It specifies that "EU Directives should be transposed without gold plating".

  20.  In the same month, the Cabinet Office issued its Transposition Guide "How to Implement European Directives Effectively", which states, in section 3.18, that "It is Government policy not to go beyond the minimum requirements of European directives, unless there are exceptional circumstances justified by a cost-benefit analysis and extensive consultation with stakeholders".

  21.  Given these developments, Lloyds TSB believes that the time may now have come to review s 75 in the light of "better regulation".

  22.  That consumers should be able to sue a creditor if that creditor intended them to rely on its reputation when they bought goods on credit, is entirely appropriate. However, in the case of credit cards, there is no endorsement by the card issuer of the quality of the goods or services purchased. The original logic to make certain transactions subject to joint and several liability does not extend to credit cards.

  23.  Indeed, credit cards did not exist in their present form when the CCA was enacted in 1974. Credit cards are now highly popular payment instruments: £113 billion was spent on purchases via credit cards in 2004 (excluding ATM withdrawals)[11]. They are not generally credit instruments, as the following facts indicate:

—  77 per cent of credit card spending is paid off in full the next month; and

—  only 3 per cent of customers always pay off the minimum balance and take extended credit.[12]

  It appears to us, therefore, unfair to treat all mere payments by credit card as if they were "credit", and give them s 75 protection.

  24.  Moreover, the potential scope of s 75 is highly disproportionate. A consumer is potentially able to charge £1 towards a £30,000 purchase to his card, pay it off the next day, and, perhaps 10 years later, when the purchase is shown to be defective, sue the card issuer for say £10,000,000 in consequential damages, which that issuer is unable to recover from the merchant. There is no commercial, economic or consumer protection rationale for such exorbitant compensation. The financial extent of this risk is of genuine concern to UK card issuers, and should be of concern to the DTI. A series of product liability claims from eg the USA could genuinely jeopardise the financial stability of major UK financial institutions, which would not be in the public interest let alone that of the banks.

Impact assessments

  25.  Pursuant to the comments we have offered above, Lloyds TSB recommends that the following issues be subjected to impact assessments:

—  the UK regime for joint and several liability;

—  the proposition in the proposed directive, that APRs should not be required for overdraft facilities; and

—  the potential effect the right of withdrawal provisions in the proposed directive might have on floor-plan financed sales.

23 May 2005

11   Source: APACS Plastic Card Review 2004. Back

12   Source: APACS A Market Review of the Plastic Card Industry in 2003. Back