MPs step up demand for credit card reform

It is supposed to protect consumers against unfair business practices, but the Office of Fair Trading was accused this week of acting like "apologists" for the the credit industry and of failing to crack down on credit and store card issuers who "duped" customers.

In an unprecedented and scathing attack, MPs on the influential Treasury select committee lambasted the watchdog for "sitting back and doing nothing" while consumers - especially those most likely to be crippled by debt - were "exploited" by hidden charges and excessive rates of interest.

The showdown occurred at the latest in a series of hearings investigating the transparency of credit and store card charges. Card bosses were accused of "fleecing" consumers when they faced the committee's wrath last month. But, following Tuesday's attack on the OFT, the pressure is now on for an overhaul of how interest rates are set, on the sales practices of card issuers and on the content of small print.

After a two-hour grilling by MPs, John Vickers, director general of the OFT, gave in to persistent demands for an investigation of anti-competitive practices.

However MPs were angered when it later emerged that the OFT's plans would not include an investigation. Instead of the formal investigation called for by MPs -which in law permits the OFT to penalise offenders - the best the OFT could come up with was what it termed an "informal study" with no accompanying powers to reprimand.

At one stage, MPs accused store card operators of running a "cosy cartel" because (with very few exceptions) the cards have an average interest rate of around 27%, with some as high as 33%. Store cards are also under the microscope because a single company, G E Consumer Finance, supplies over 50% of the market including House of Fraser and Debenhams.

If the MPs' pressure translates into reforms of the industry, there could be significant benefits for ordinary consumers, and in particular, for anyone trying to cope with large credit card debts.

The list of issues of concern is a long one, but it is worth highlighting some of the key complaints. First, there are interest rates. Consumer groups and MPs say rates are too high when company profits are strong and the base rate is at a record low.

The situation is made worse they say the fact that rates have failed to come down in line with Bank of England base rate cuts.

Add to this that those people deemed to be higher risk (usually those already in debt) tend to be charged higher than the "typical" rate quoted by credit and store card issuers, plus the fact that there is no single method for calculating annual percentage rates (APRs), and you have a recipe for consumer confusion.

Cardholders are not given clear information on bills or when they sign up, the consumer lobby and MPs argue. And the dizzying array of "in troductory offers" merely complicates matters further. For example, if the "average" first year APR quoted is calculated with a six month 0% introductory offer included, the APR can appear artificially low.

Another charge levied at the industry is that consumers are not given clear information about penalty charges. Some card suppliers have been accused of misleading cardholders by offering slightly lower APRs, but clawing money back through excessively high charges for things like late payment - often by as much as £20 a time.

And then there are the mystifying series of ways individual cards apply interest - none of which is spelled out anywhere but in the small print. For example, some cards, including the big players such as Barclaycard, charge more interest for cash withdrawals than for purchases.

And, just in case this wasn't confusing enough, with store cards, if you don't pay by direct debit, the APR is almost always hiked up by two or three percent.

And the list goes on. Just a few weeks ago after a committee hearing looking exclusively at store cards, Jobs & Money went to five department stores and what we found backed up the critics. In each case the shop assistant refused to let us take a copy of the credit agreement home, even though in law, the store card issuers are obliged to give customers this information.

Credit card issuers, store card operators and industry bodies such as the Association of Payment and Clearing Services (APACS), are now in the process of drafting their proposed changes to how they do business. They are due to report back to the committee next month.

Most appear keen on the idea of "consumer boxes" on bills that would clearly display key information about rates of interest and other charges.

Whether the industry reaches a satisfactory agreement on the other issues remains to be seen. A forthcoming white paper to amend the Consumer Credit Act, scheduled to become law next year, may contain things that force their hand. And if the OFT suddenly finds its teeth, it too could prove to be an impetus for change.

Jokers in the pack

Card | APR by direct debit | APR by all other methods

Comet* 29.9%31.9%

High and Mighty* 28.7%30.7%

Kwik Fit* 28.7%30.7%

Laura Ashley* 28.7%30.7%

Monsoon* 28.7%30.7%

Owen Owen* 28.7%30.7%

Russell & Bromley* 28.7%30.7%

Country Casuals* 28.7%30.7%

Arcadia* 28.0%29.9%

Dorothy Perkins 28.0%29.9%

Etam 28.0%29.9%

Debenhams* 28% 29.9%

Bhs* 26% 29%

Evans, New Look & River Island* 28.0%29.9%

Allders 26.8%29.8%

House of Fraser* 27.5%29.3%

Mothercare* 26.0%29.0%

*Run by G E Consumer Finance.

Source: Moneyfacts and G E Consumer Finance.

All rates subject to change without notice