Store Card Report Published

The Competition Commission (CC) has today confirmed its provisional conclusions reached in September 2005 that there is an adverse effect on competition in connection with the supply of consumer credit through store cards and associated insurance in the UK. It is imposing remedies to address specific problems.

CC Deputy Chairman Christopher Clarke, who chaired the inquiry, said: Retailers and store card credit providers are, we have found, effectively insulated from competitive pressures. The consequence is that store cardholders who take up credit and associated insurance pay too much.

Specifically, we estimate that for the period 1999 to 2003, APRs have been some 10 to 20 per cent above what they would have been had they reflected providers' costs across the sector as a whole, including a reasonable return on capital. Thus, average sector APRs have averaged some 26.5 per cent compared with our calculation for cost reflective APRs of some 22 to 24 per cent. (The 'excess' of 10 to 20 per cent reduces slightly if we extend the period to include less comprehensive data for 2004 and 2005.)

We estimate that the detriment in terms of the excess prices paid for credit and insurance on store cards has been at least £55 million a year and possibly significantly more.

The store card market is changing but remains an important source of credit and associated insurance. There are more than 11 million store cardholders with outstanding balances of well over £2 billion. Many store card programmes have APRs clustered around 30 per cent and we have found that there has been little competitive pressure to reduce them. Even though lower APRs have recently been, or are being, introduced for some store card programmes, even by the end of 2006 more than 90 per cent of store card accounts (whether measured by the number of active accounts or by the size of credit balances) are projected to continue to pay APRs of more than 25 per cent.2

To encourage greater competition in this important market and bring pressure to bear on APRs and the terms for insurance, we are imposing a number of remedial measures. Specifically, we are requiring all credit providers:

* where store card APRs are 25 per cent or above, to include a prominent warning on cardholders' monthly statements that cheaper credit may be available elsewhere;

* to display prominently more and better information on all monthly statements, including the APR, the interest payable next month, the level of fees and charges, a wealth warning and insurance details;

* to give cardholders the option of paying the account balance on their monthly statements by direct debit;

* where insurance packages are offered which contain a bundle of payment, price and purchase payment protection, also to offer, as separate items, payment protection alone and a package of price and purchase protection; and

* where insurance packages are offered which contain a bundle of either payment and price protection, or payment and purchase protection, also to offer payment protection as a separate item

Background to the inquiry and to the market

The CC identified some 70 retailers operating store card services-mostly department stores and clothing retailers-mainly provided by six store card issuers: Arg Card Services, Creation Financial Services, General Electric Consumer Finance UK, HSBC Group, Ikano Financial Services and Style Financial Services.

Although the numbers of active store card accounts have been declining (there were 11.4 million such accounts at the end of 2005 compared with 17.5 million at the end of 2002), the CC considers that store cards will continue to be important for some time to come-for retailers as one of their marketing tools and for the providers of store cards as a route to market for their financial products.

The CC found that some 57 per cent of store cardholders who used their card in a particular month took on interest-bearing credit. The remaining 43 per cent settled their balance in full and did not incur interest changes. The CC noted that most of those who generally incurred interest on their accounts also had access to other sources of credit.

The CC's investigation, which is based on data relating to the period from 1999 to 2003, supplemented by relevant information for 2004 and projections for 2005 and 2006, has focused on the functioning of the market as a whole rather than on the conduct of individual companies.

Detailed findings

After careful consideration of the large amount of evidence from retailers, store card providers, government bodies, consumer organizations and trade associations, as well as the data gathered by consumer surveys, the CC has concluded that there are two relevant economic markets: an 'upstream' market, where providers compete for retailers' store card contracts; and a 'downstream' market for the supply of credit and insurance through store cards to retailers' customers. It has confirmed the conclusion in its provisional findings published on 14 September 2005 that the upstream market displays no feature that prevents, restricts or distorts competition and that it is competitive.

In contrast, in the downstream market the CC has found that there is a combination of features which, by insulating store card credit and insurance services, prevent, restrict or distort competition in that market and that there is an adverse effect on competition in that market.

These features are:

(a) providers and retailers structure the store card offer in such a way that many store cardholders take out such cards to obtain the retail benefits they offer rather than the credit available on them;

(b) most retailers offering store cards do not exert competitive pressure on APRs;

(c) most retailers' customers do not exert competitive pressure on store card APRs (either at the take up stage or when they take credit) because their sensitivity to them is low;

(d) most retailers offering store cards do not exert competitive pressure on the level of, or the provider's policy in relation to, the levying of late payment fees;

(e) most retailers' customers do not exert competitive pressure on the level of late payment fees levied on store cards because their sensitivity to them is low;

(f) many providers combine different insurance products into packages (that is, payment protection insurance with one or both of purchase protection insurance and price protection insurance) which they sell in association with store cards;

(g) most retailers offering store cards do not exert competitive pressure on providers to lower their insurance premiums to cardholders, or to offer the components of PPI separately;

(h) most retailers' customers do not exert competitive pressure on premiums for insurance purchased in association with the provision and use of store cards because their sensitivity to the price of such insurance cover is low and they have a poor understanding of the terms of the cover they are purchasing; and

(i) providers do not include sufficient information on their store card statements, leading to a lack of transparency in the provision of store card credit and card-related insurance.

As a result, customers suffer the following detriments:

(a) most store cardholders who take credit pay higher prices for that credit than would be expected in a competitive market;

(b) most store cardholders have less choice in relation to the individual elements of insurance cover sold in association with the provision and use of store cards than would be expected in a competitive market;

(c) some customers who revolve their store card balance will continue to pay for elements of the insurance package (purchase and/or price) that they no longer require or which no longer provide them with cover; and

(d) a lack of transparency in the provision of store card credit and insurance leads to cardholders taking credit or insurance on terms which are not clear to them.

Detailed information on remedies

In the light of the above findings, the CC has decided on the following action to address the adverse effect on competition and the consequent detrimental effects on customers.

Full information on statements

Certain key items of information must be prominently displayed on the front page of store card statements and the font size employed for these details must not be less than the largest font size used for transaction and balance details. These items are as follows:

(a) the current annual percentage rate (APR) applicable to purchases (shown in bold);

(b) an estimate of interest payable next month in the event that the cardholder only makes a minimum payment;

(c) a 'wealth warning' outlining the consequences of only making minimum payments;

(d) the basis of insurance charges shown alongside each insurance charge appearing in the transaction box; and

(e) a reference to the reverse side of the statement for details of how to pay and contact details to amend or check insurance cover.

If providers wish to show a monthly interest rate on the front of a statement in addition to an APR, then we require that this must not be shown in a greater font size than the APR and must not be in bold type.
Other details that must be shown on the statement (but may be displayed on the reverse side either in a summary box format or elsewhere) are as follows:

(a) late payment or default charges and the policy for levying these charges;

(b) the basic assumptions used in calculating the estimate of interest payable next month;

(c) other interest rates, if applicable, for example rates chargeable on cash withdrawals;

(d) a 'how to pay' section and contact details for setting up or amending a direct debit, prominently displayed within the 'how to pay' section; and

(e) contact details for amending or cancelling insurance cover sold with the store card and a brief summary of insurance cover. The said summary must inform customers that they should refer to their policy of insurance for full details of their insurance protection and of any applicable exclusions.

APR warning on store card statements

An APR warning must be prominently displayed on the front page of each monthly statement for store card programmes using a single APR for purchases where the APR is 25 per cent or more. An APR warning is not required where the APR is less than 25 per cent.3

For store card risk-based programmes using multi-tier APRs, the APR warning is required on all statements for tiers where the APR is 25 per cent or more if the average APR for the store card programme as a whole is also 25 per cent or more. An APR warning is not required on a store card programme with multiple APR tiers if the average APR for the store card programme as a whole is less than 25 per cent.

The average APR for a store card programme with multi-tier APRs will be calculated by weighting each APR tier by the aggregate interest-bearing balances within that tier in relation to the total interest-bearing balances for the store card programme. This average must be calculated at regular intervals of no more than three months and undertaken on a consistent basis on each occasion, using the most recent available data on interest-bearing balances.

The required wording of the APR warning is as follows: 'The rate of interest charged on your account may be higher than on other sources of credit available to you. It may be costly for you to leave balances owing on your account after the interest free period.' The warning must be displayed on the front page of the statement above the transaction box in bold lettering and in a font size no smaller than the largest font size used for transaction and balance details.

The APR warning remedy should remain in force for a minimum period of three years from the date of the applicable order implementing this measure. We recommend that at the end of this period, its continuance should be reviewed by the OFT during which time it would remain in force. Following this review, the OFT would advise the CC on whether to remove it or keep it in place for a further period, at the end of which period we recommend that there should be a further review by the OFT.

Provision and prominent display of facility to pay outstanding balances by direct debit

Store card providers must provide an option for all store cardholders to pay the account balance on their cards by direct debit. This option should be displayed in monthly statements.

Customers should also be provided with documentation to set up a direct debit with initial contractual information. This requirement may be satisfied by providing a direct debit mandate either with the initial store card application form or in a welcome pack sent to each new store card customer. However, in the latter case, the card application form must prominently display the question 'Do you want the option of paying amounts owing on your card by direct debit?' which must be ticked 'yes' or 'no' by the customer to ensure that this possibility has been brought to the customer's attention. In this case the application form must also inform the customer that a direct debit mandate will be available in their welcome pack or can be set up by telephone. The 'wealth warning' regarding minimum payments should be provided with direct debit mandates and also communicated to customers when they set up a direct debit by telephone.

Separation of payment protection insurance from the PPI package Where store card providers offer insurance packages containing payment, price and purchase protection, they must also offer, as separate items, (a) payment protection cover alone and (b) a package of price and purchase protection. Where store card providers offer a package of payment and price protection or payment and purchase protection, they must offer payment protection alone as a separate item. There will be no requirement, in those circumstances, to offer either price or purchase protection as separate elements.

Next steps

The CC expects to implement these remedies by way of statutory orders to take effect in about 12 months from now.

The CC's report is available on the CC website:
www.competition-commission.org.uk/
inquiries/current/storecard/index.htm

Notes
1. The reference was made by the Office of Fair Trading (OFT) on 18 March 2004. The CC was required to consider whether there existed features of each relevant market or markets which prevented, restricted or distorted competition in the supply or acquisition of any goods or services in the UK or a part of the UK; if so, it would find an adverse effect on competition and consider whether action should be taken to remedy or prevent the adverse effect or any resulting adverse effect on consumers. The CC was required to publish its final report by 17 March 2006