Consumer Credit Bill

We concur with the spirit of Amendment No. 18 proposed by the noble Lord, Lord Razzall, but it is not necessarily immediately related to Amendment No. 20. The purpose of Amendment No. 20 is to require the Secretary of State to make regulations defining the meaning of APR—the annual percentage rate—which is supposed to inform the debtor of the rate of interest that he is paying on a loan or credit card account. The problem is more acute for credit card debts than for simple loans and hire purchase agreements, because in the latter cases there is often a fixed amount of interest added to the loan and then the total is divided by the number of months over which the debt is due to be repaid. Even that supposedly simple situation can become confused when the creditor has the right to vary the rate of interest throughout the period of the loan or when the lender adopts the practice, which some do, of calculating the amount of capital outstanding at, say, the beginning of a year and then adding a year’s interest to it. I am not suggesting for one moment that any of the various practices are in any way reprehensible or wrong. It is simply that they are inconsistent with each other or, rather, that they are confusing and make it impossible for a lay person who is not an accountant or an actuary to work out precisely the rate of interest that he is being asked to pay. The situation is even more difficult than that because different creditors have different ways of calculating their APR. It is even the case that creditors may use different rates of APR in the same advertisements or a series of advertisements advertising different financial products. The Consumers’ Association, in its magazine Which?, has described the variables that may be employed in calculating APR, which include from the date of a purchase; from the date that the debit is posted; when the statement is issued; when the payment is made; or allowing for new purchases during a promotional interest-free period. It has been put to me that providing for a standard method of calculating APR is anti-competitive, but we contest that. What is uncompetitive is a situation where the customer cannot compare one with another and cannot know where one lender is in reality charging more or less than that other. The laudable element of encouraging competition comes in when all the suppliers of credit talk the same language—that is, where the APR of X per cent for credit card A is exactly the same as that of credit card B—and the debtor can see which lender is charging more or less than another. It is a regrettable fact that most members of the public could not tell you what APR means if you were to ask them. I also regret to say that from my own modest, empirical observations—to the shame of our educational system—large numbers of the public do not even understand what percentages are or how they work. But most people will know that 10 per cent is less than 12 per cent. The purpose of this amendment is to ensure absolute clarity. It does not seek to impose any specific rate of interest on the industry. It can charge whatever it likes or whatever the market will stand. All that it will be required to do is to calculate and advertise rates in a uniform way with others in the same field. I have no doubt that in fixing the method of calculating the APR, the Secretary of State will consult to the fullest possible extent with industry and either come up with a consensus or, more likely, find a consistent formula acceptable to a substantial portion of them. We thought very carefully about the sanction for a failure of a creditor to apply the correct method of calculating APR as sanctioned by the Secretary of State. The simple sanction would be that the agreement would be deemed to be an unfair agreement within the meaning of Section 19. That in turn will bring into play Section 20, which gives the court the opportunity to modify the terms of the agreement. If the court decided that in a specific case the misstatement of the APR was inadvertent or immaterial, it could take that into account in making any order. However, a creditor that persistently misstated the APR could be subjected to sanctions by the OFT. This is not an amendment against competition in the industry. On the contrary, it will heighten it by making it more open and transparent. But, above all, the amendment would makes things, especially what debtors are paying by way of interest, more understandable. That cannot be a bad thing.