04/01
30 January 2001
CAT STANDARDS FOR CREDIT CARDS
New minimum benchmark standards will help credit card and basic bank account holders to shop around for the best deal on offer and ensure that they are not hit by hidden charges, Economic Secretary Melanie Johnson announced today.
These will ensure, among other benefits, that CAT credit card holders are told in clear, simple terms :
- the annual percentage rate (APR) interest rate they will be charged
- how much of their total debt interest is charged on when they make partial payments
- when interest is charged from
- the order in which debt components, including interest, cash advances, new purchases and balance transfers, are paid off.
The detailed draft CAT standards for credit cards and basic bank accounts are attached.
Welcoming publication of a Treasury consultation document seeking views on the wider use of CAT standards, Miss Johnson said :
"CAT standards for mortgages and ISAs have already shown that they can help get a better deal for consumers. We want to build on that success to offer these benefits to users of other financial services products.
"There is evidence that the way in which information is presented means that consumers do not always understand fully the commitment they are entering into when taking out a credit card. "Even though such cards are a well established feature of the credit market, the introduction of new products with differing detailed terms and conditions can be confusing if these are not set out in clear, simple, easy to understand terms.
"The new CAT standards, setting out what each offers for the Comparability, Access and Terms of qualifying credit cards will help consumers to get the best deal available in the increasingly competitive market which is developing.
"This is an important step in extending the CAT benchmarking principle. We would welcome views not only on the right conditions to apply to CAT standards for these products, but also on which other products could also be suitable for the CAT standard benchmarking approach."
CAT standards are minimum benchmark standards that represent good value products among the range on offer to consumers. CAT products will not necessarily be the best product available, or the most suitable for all customers. But they will provide a clear standard against which other products can be compared to help consumers make an informed choice among the products available to them.
CAT benchmarks are a flexible concept that can be adapted to various financial products: ISA and mortgage CAT standards set out charges, access and terms; recently proposed long term care insurance CAT standards set out cover, access and terms. For the proposed credit card and basic bank account standards, CAT would stand for comparability, access and terms.
The consultation invites views on which other financial products, including some insurance products, could be suitable for benchmarking in principle, and which approach could apply to them.
The consultation follows Don Cruickshank’s recommendation in his report ‘Competition in UK Banking’ that the Government should introduce benchmarks for a wide range of personal consumer products. The report suggested that these further benchmarks should focus on product comparability and not specify maximum prices, although a price cap is included in ISA and mortgage CAT standards.
The consultation invites further views on whether the credit card CAT standard should link interest rates to the bank base rate, either by setting a maximum differential between them or by ensuring interest rates follow base rates down within a certain period, or both.
NOTES FOR EDITORS
The consultation document ‘Standards For Retail Financial Products’ is available on this site. Printed copies are available from by calling on HM Treasury Public Enquiry Unit 020 7270 4558. Responses should be returned by 30 April.
Don Cruickshank's report 'Competition in UK Banking: A Report to The Chancellor of the Exchequer' was published on 20 March. The report and associated press release are available on the Banking Review website.
The Government's initial response to the report was announced in the Chancellor's Budget Statement on 21 March (Budget press release HMT1).
On 4 August Treasury published ‘Competition in UK Banking, The Cruickshank Report, Government response’, (Treasury press release 98/00). This included a commitment to introduce CAT standards for credit cards and to the consultation process launched today.
Media enquiries should be addressed to Charles Keseru in the Treasury press office on 020 7270 5188.
EXECUTIVE SUMMARY
The consultation paper :
- examines further the case for the wider use of benchmarking minimum standards - CAT standards - for retail financial services products recommended by Don Cruickshank in his report 'Competition In UK Banking' in March 2000.
- considers the detriments consumers face and options for tackling them, including the role of legislative controls, statutory regulation, and the minimum standards approach to help consumers compare products and to shop around for the best product for them among those available.
- proposes CAT standards for credit cards and basic bank accounts as soon as effective conditions for these can be agreed.
- seeks views on appropriate conditions for CAT basic bank accounts and credit cards, including whether these could include a link between interest charges and bank base rates.
seeks views on which other retail consumer financial products, including some insurance and pension products, could also be benefit from the benchmarking approach.
CAT Standards
Both proposed CAT standards are attached. These are discussed and set out in more detail in the consultation paper and annexes.
Background
In April 1999 Individual Savings Accounts (ISAs) were launched as a new tax-free savings vehicle to encourage the savings habit, particularly among those who were previously less likely to save.
To further encourage savings among those unsure how to get the best deal from the range of ISAs on offer, a new concept was also introduced at the same time: the CAT standard.
This set out minimum standards for Charges, Access and Terms for ISA products that adopted them. In March 2000 the CAT standard principle was extended to domestic residential mortgages as part of the Government drive to get a better deal for home buyers.
The CAT standard approach has shown some success for consumers in these cases. There is evidence that the CAT standard has achieved significant market share and set an effective interest rate floor for ISA savings products, and that it has shown encouraging progress in increasing the proportion of mortgages with no minimum indemnity guarantee on fixed or variable rate mortgages, and with no redemption charge after fixed rate
periods.
The Government has also recently announced that the CAT standard approach will also be used to help buyers of long term care insurance products to get the right product for their needs on the best terms available in a particularly sensitive area of the market.
Although the Government was already building on these initial CAT schemes, also in March 2000, Don Cruickshank recommended extension of the principle to a wider range of financial products in his report 'Competition In UK Banking'. While approving the benchmarking principle to improve
customers' ability to make informed choices, he recommended flexibility in their definition and suggested that the charge component would not be appropriate for all CAT products and that further use of the approach should focus on comparability between products.
Publication of this consultation paper document follows from Don
Cruickshank's main recommendations. It sets out detailed proposals for CAT standards to apply to credit cards and basic bank accounts, and invites views on the wider use of the CAT approach. However, the CAT standard for basic bank accounts retains the charge component, and the paper invites views on whether it should also apply to CAT standard credit cards and other suitable future CAT standards.
The consultation paper also examines the background to the development and use of financial products generally, and in particular the difficulties experienced by consumers in making best use of the options available to them. It draws on a range of research and other data in developing the case for the wider use of the benchmarking approach as well as the lessons available to date from CAT ISAs and mortgages.
The way forward
The consultation paper agrees that benchmarks with upper limits on charges - at least for new or unsophisticated users - can be useful for some financial products, but that for other products encouraging competition by focusing attention on prices for otherwise very similar products may be more appropriate. It concludes that it will clearly be important to distinguish in
which parts of the retail financial services market the two types of benchmark might best operate, and seeks further views on the question. The consultation paper concludes that CAT standards can in principle add value for consumers of financial products in two ways:
- helping consumers recognise products and product characteristics that are worth considering where there is no regulation of the selling process.
- defining basic square deal products where the selling process is regulated, opening up scope for lighter regulation, eg modernizing the current polarisation rules for CAT ISAs and stakeholder pensions.
It suggests that circumstances where the extension of the benchmarking principle may have potential value include where:
- it is hard for consumers to understand what is offered.
- it is hard for consumers to compare apparently similar offers.
- competition is not about quality or value.
- simple, clear and fair offers will give many potential consumers sufficient for their needs.
- people might gain by shopping around to meet their own needs and interests.
We would be grateful for views on all the issues set out in the consultation paper by 30 April.
DRAFT CAT STANDARD FOR CREDIT CARDS
The passages in square brackets are proposals or options on which the consultation specifically seeks comment.
Comparability
- All statements must give the following information clearly:
- the annual percentage rate (APR)
- the APR expressed as base rate plus margin
- on what amount of debt interest is charged when the customer pays only part of the outstanding amount
- from what date interest is applied
- all other charges
- No more than one interest rate for cash advances and one interest rate for purchases (the two rates may be the same)
- [The card interest rates must be within [x] percentage points of the base rate] or
- [The interest rates must track any downward movement in the base rate within [28] days of the base rate change or the cardholder must be sent a letter within [28] days of the base rate change setting out the change in the margin].
- No membership fee
- Payments must be applied to the outstanding debt in the following order:
- interest and handling charges;
- cash advances;
- purchases on previous statements, including balance transfers;
- new purchases on the current statement;
- cash advances made, but not yet on the statement;
- purchases made but not yet on the statement.
Access
- No minimum spending limit
- No requirement to buy linked products (eg repayment protection)
- Credit available on the provider's normal terms
Terms
- Information to be in language which is fair, clear, and not misleading
- Deadline for minimum payment to be at least [25] days from statement date, and no interest charged on new items if the balance is paid in full in this period
- The minimum payment required each month to be no more than £[5] or [5]% of the excess amount (whichever is larger)
Penalties:
- for late or incomplete payment to be no more than the minimum balance or £[20] (whichever is larger)
- for exceeding the credit limit to be no more than £[5]
- customers to be informed of the penalty fees at the outset
- Customers can set their credit limits lower than the provider's choice and customers must be informed of this at the outset and whenever the provider proposes to change the credit limit
- Customer is free to pay any amount above the minimum payment of the outstanding balance each month
- Customer must be able to set up direct debit instructions:
either to make the minimum payment each month
or to clear the entire balance each month
Customers can select their statement date at no cost at the start of the agreement, and can change the statement date at any time, at a charge of no more than £[10] for each change
[6] months notice of change from CAT standard terms
[30] days notice of varying of other terms, if they adversely affect the customer
The customer may end the agreement at any time, providing all payments have been met
- If the card is lost or stolen, once the holder informs the provider, the holder will be responsible for no more than [xx] of losses which result from someone else using the card. If the card is used fraudulently without the cardholder's knowledge the holder will be responsible for no more than [xx] of losses which result from someone else using the card
- The user must be told clearly how exchange rates on purchases and advances in foreign currencies are calculated
- For cash advances, the handling charge to be no more than 1.5%
Issues for consideration
This draft CAT standard is for consultation. Feedback is welcome. In addition to the figures (some suggested, some left blank) in the table on which comments are invited, readers might like to consider the following issues.
- Should the interest rate be capped (as in one of the options suggested in the draft)?
- Should there be a limit on penalty fees (as in the draft) or would it be enough for providers to make it clear what these fees are?
- Are there any other charges the standard should cover, eg charges for duplicate statements?
- In addition to clear information about the APR, should credit card statements display the interest rate in relation to base rate (as in the draft)?
- Should the interest rate track the base rate (with a specified lag) so that it must fall when the base rate does?
- Should the standard cover information given before customers sign up?
- Should the standard cover credit given in foreign currencies? - eg the date when the conversion into sterling takes place?
- Should special rules be allowed for balance transfers?
DRAFT CAT STANDARD FOR BASIC BANK ACCOUNTS
Charges
- No one-off or regular charges for everyday transactions.
- No risk of an overdraft.
Access
- No requirement for initial or regular deposits. (Undischarged bankrupts and under sixteen's may be turned down.)
- Account holders must be able to use the following:
- cash machines;
- cash and cheque deposits;
- automated credit transfer;
- direct debit, standing order, or budget accounts.
Terms
- All advertising and paperwork must be straightforward, fair and clear.
- Account holders must be given regular statements, and at least six months notice if the bank can no longer offer a BBA on CAT standard terms.
- Ability to withdraw all funds (see para 9 of notes).
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