FOOL'S EYE VIEW
Banks Get A Slap

By Jane Mack (TMFJane)
July 30, 2002

Oh dear. The banks have been clobbered again for the way they deal with consumers. Quelle surprise!

This time the criticism comes in a report published today by the Treasury Select Committee who say banks and credit card companies are still not doing enough to help consumers get to grips with their finances.

The report was a follow-up to two others that have been published in the last 18 months - one about consumer banking and the other about banking for small businesses. The idea was to examine the ability of consumers and small business to get access to finance, the transparency of charges and how easy it is to switch accounts.

For consumers, the committe concluded that banks and card companies should make it easier for people to work out the cost of credit, they should be publicising the existence of cheaper basic bank accounts more and while they commend banks who show initiative by going into schools to educate children about financial matters they, ahem, suggest that they shouldn't use it as an opportunity to turn them into customers.

The committee points out that although the majority of credit and charge card advertising prominently displays the Annual percentage Rate (APR) of the card – a requirement introduced 25 years ago to enable consumers to make comparisons – the implication that the lower the APR, the cheaper the card doesn't quite tally with the way calculations are really made. For example, a study by the Consumers' Association found that for the same transactions and same APR, interest charges could vary by some 36%, depending upon the interest rate calculation method used by the credit and charge card supplier. So the APR alone "does not provide sufficient information for credit and charge card customers to make meaningful comparisons of the cost of credit".

To be honest, I've always found the concept of APR very simple to understand but, not being a maths supremo, I've never really looked at how the calculations can be made. It might explain why many banks now often use the term Annual Equivalent Rate (AER) in their adverts since it includes an element of compounding which is probably more realistic considering that balances on credit cards tend to fluctuate throughout the year.

At any rate, the committee is recommending that credit and charge card companies should publish all the variables that make up the actual cost of credit in a way which allows consumers to make straightforward comparisons between the costs. As a result they recommend that every credit and charge card statement shows the "estimated interest charge if only the minimum balance is paid by the due date".

On the question of transparency, perhaps we should pity the Bank of Scotland for being picked on about the lack of clarity in their literature. The committee looked at a leaflet promoting their current account and weren't impressed. If you have a BoS current account then listen to this: if you don't make the minimum monthly level of payments into the account, then balances earn a lower interest rate and incur higher overdraft rates. Guess, what? These differing interest rates aren't disclosed in the leaflet. Ooops! As it happens, a couple of other banks were criticised for their credit card literature and all of them have agreed to revise their leaflets. And just to make sure that they do as they promise, the committee report states that it 'looks forward to reviewing the revised literature'.

Another concern is that people still seem to think that it's difficult to switch bank accounts. They pointed to a Which? Members survey published in October 2001 which found that of those who had considered switching, 55% didn't do it. Now, I can relate to this because I went as far as I could possibly go without actually switching from the bank I've been with for 25 years. We've got so many direct debits set up for our household account that I simply couldn't imagine that it could possibly all go smoothly. But the Consumer Association found that 73% of people who actually switched actually found it a very easy process (To my mind that means 27% didn't – which is why I didn't take the final step when it came down to it. I reckoned I was bound to be one of the unlucky ones!)

Finally, the cheque clearing system also comes in for a bit of flak in the report. Why does it still take so long for a cheque to clear? Unfortunately the committee makes no recommendations but simply says it is 'disappointed' by the apparent reluctance of banks to work on ways of speeding up the system. In this day and age of immediate electronic transactions, you'd have thought the committee could have given banks a more definitive kick up the backside to persuade them to get moving on this.

Still, maybe the banks will listen this time.

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