Transparency is the current buzzword in the industry but however much the regulators and the Government talk about it, there seems to be precious little of it around.
The new consumer credit regulations, designed to protect borrowers from unscrupulous lenders, is a typical example of the Government pussyfooting around.
The high-street banks, which are the major issuers of credit cards, seem to have intimidated the Government and got away with murder. The optimistic message from consumer minister Gerry Sutcliffe, who announced the ref-orms, was: “This is all about transparency, enabling and empowering consumers to make informed choices.”
So far as credit card holders are concerned, the most important change is that there will be a standard way of calculating the annual percentage charges on credit cards. Announcing the new rules, the DTI claims that this will allow consumers to make direct comparisons on rates. But will it?
The DTI has stopped short of legislation which would require credit card companies not only to use the same standardised calculation of APRs but also a standard method of applying interest charges to credit balances. It is this latter factor which allows the credit card companies to deliberately confuse customers. It is incomprehensible why the new legislation does not deal with this problem.
After all, there is no love lost between MPs and the credit card companies. The Treasury select committee gave the credit card bosses a real roasting over the incomprehensible way in which interest charges are pres-ented. Why has the Government not grabbed the bull by the horns and really reformed the legislation?
All that has been standardised is the assumptions made by the credit card issuer when calculating the APR for advertising purposes. The assumptions are that the cardholder has a credit limit of £1,500 and that all the credit is used on the first day. In addition, it is assumed that the cardholder will repay the debt over a period of one year in 12 equal instalments at the standard interest rate applying to purchases on the card.
This will not alter the fact that two cards advertising identical APRs can, and often do, have very different methods of applying interest char-ges. The full extent to which credit card companies deliberately confuse customers was highlighted recently by Egg.
It revealed that four out of five of us wrongly assume that two cards quoting the same APR will cost the same if used in an identical fashion. This is not the case and is still not the case even after the reforms.
In one simple scenario, Egg's credit card could charge 22.7 per cent interest and still be cheaper than Lloyds TSB's Advance card, which claims to charge only 11.9 per cent. If this is not confusing for the consumer, then what is?
Egg maintains that using its current method of applying interest charges, the Lloyds TSB Advance card would have to cut its APR to 7.4 per cent before it was as cheap as the Egg card which charges 13.9 per cent APR.
The new rules will do nothing to stop this deliberate obfuscation. Why has the Government not been tougher?
The feeble answer given by the DTI is that standardising the way in which interest is applied would be anti-competitive. This is nonsense. If two cards advertising the same APR really were making the same interest charge for the same transactions, then they would have to compete on service.
Moreover, consumers could then make meaningful comparisons because the quoted APRs really would mean that the same interest would be charged for the same transactions.
At the moment, most consumers have no idea how interest charges are actually applied. When one Halifax customer wrote to complain about overcharging, it took Halifax more than two pages of A4 to explain how they calculated and applied interest to credit balances. Is this transparency?
For a Government which wants to regulate almost anything that moves, it is little short of a disaster that in one area where regulation could be of real benefit to consu-mers, the Government has totally failed to make the necessary changes.