Travel Money and Card Use
Abroad:
Response to the Consumer Focus super-complaint
December 2011
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© Crown copyright 2011
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CONTENTS
Chapter/Annexe
Page
1 EXECUTIVE SUMMARY
4
2 INTRODUCTION
11
3 THE TRAVEL MONEY MARKET
17
4 TRANSPARENCY OF CHARGES FOR CARD USE ABROAD
33
5 CHARGES FOR CARD PURCHASE OF FOREIGN CURRENCY IN THE UK
48
6 MARKETING OF FOREIGN CURRENCY PURCHASED IN THE UK
57
7 OUTCOMES OF THE SUPER-COMPLAINT
67
ANNEXES:
A LIST OF PARTIES CONSULTED
74
B REGULATORY FRAMEWORK
76
C SCENARIOS OF TRAVEL MONEY PAYMENT METHODS
85
Please refer to the OFT website for the following Annexes:1
D SURVEY OF CARD USERS ABROAD REPORT AND SURVEY QUESTIONS
E SURVEY OF CARD USERS ABROAD REPORT DATA TABLES
F FOREIGN CURRENCY OMNIBUS SURVEY QUESTIONS
G FOREIGN CURRENCY OMNIBUS SURVEY DATA TABLES
1
www.oft.gov.uk/OFTwork/markets-work/super-complaints/travel-money/
1
EXECUTIVE SUMMARY
1.1
The travel money market in the UK has grown substantially in recent
decades, with consumers increasingly going on holiday abroad. In 2010,
UK consumers spent around £27bn2 while on holiday abroad, both on
debit and credit cards and using foreign currency bought in the UK.
1.2
We estimate total revenue from charges and spread in exchange rates
for travel money providers in the UK of around £1.1bn,3 or around 3.5
per cent of relevant spend.
1.3
On 21 September 2011, Consumer Focus submitted a super-complaint
on the travel money market in the UK. On use of cards abroad,
Consumer Focus raised concerns about hidden and complex foreign use
charges. On the marketing of foreign currency in the UK, Consumer
Focus considered that the use of certain phrases misled consumers and
deterred shopping around. In addition, Consumer Focus raised a specific
concern about card provider charges for use of their cards to purchase
foreign currency in the UK.
1.4
Our analysis of the available evidence broadly supported Consumer
Focus' concerns. Key findings were as follows:
•
Most consumers do not think (or are unsure) that the fee included in
the exchange rate applies to their card when using it abroad. Card
providers typically use an exchange rate that has been adjusted to
2
Foreign currency transactions only. This does not include £ sterling payments, for example for
flights or pre-packaged holidays. Source: Office of National Statistics
(www.ons.gov.uk/ons/rel/ott/travel-trends/.../travel-trends---2010.pdf).
3
This does not include revenue from £ sterling sold by foreign exchange providers to visitors to
the UK. It does include revenue from UK consumers travelling on business, as revenue data
provided by card issuers and foreign currency vendors do not distinguish between transactions
on holiday and business travel. Total consumer spending abroad was £31.8bn in 2010, of which
£4.4bn for business travel (source: Office of National Statistics ('ONS').
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include an 'exchange rate fee' which is in addition to other foreign
use charges that may apply.
1.5
•
On the marketing of foreign currency in the UK, we found that
claims such as '0% commission' and 'competitive exchange rates'
may in some cases be misleading. However, we consider that
consumers are able to shop around effectively on the exchange rates
offered.
•
Most card purchases of foreign currency in the UK are by debit card.
We found that consumers are in general unaware of the practice by
some banks of charging for use of debit cards to purchase foreign
currency in the UK.
In the context of the super-complaint, we worked with providers and
trade associations to agree initiatives that would address the above
concerns. The OFT is pleased to have secured a broad range of
agreements that should improve substantially the transparency of
charges paid by consumers in the travel money market. In addition, all of
the five banks4 that currently charge for use of debit cards to purchase
foreign currency in the UK have agreed, following close engagement
with the OFT, to drop the charge entirely.
Card Use Abroad
1.6
Cards can be a convenient and cost effective way of paying while
abroad. For mainstream debit and credit cards, charges – including the
exchange rate fee – range from around three per cent to six per cent,
depending on whether the transaction is a purchase or ATM withdrawal,
and on whether the card is a debit or credit card. A small number of card
providers do not charge at all for use of some of their cards abroad.
1.7
However, our review of card providers' websites, marketing materials
and statements uncovered a wide variation in how visible and clear the
different charges are to consumers. We found that in general, card
4
Barclays, Co-operative Bank, Lloyds, RBS Group, and Santander.
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providers do not explain foreign use charges clearly and consistently
across their websites and marketing materials.
1.8
In particular, we found that the cumulative nature of foreign use charges
is often not well understood by consumers. A number of card providers
do not break out and show the exchange rate fee on statements. Our
consumer research suggests that the majority of consumers are unclear
about the charges that may apply.
1.9
As a result of the OFT's close engagement with card providers, and with
support from the UK Cards Association and the British Bankers'
Association, the OFT is pleased to have secured a broad range of
agreements that should improve substantially the transparency of
charges paid by consumers in the travel money market. In summary,
these are as follows:
•
consistent terminology for foreign use charges to be agreed across
the industry
•
improved presentation of foreign use charges in credit card and (to
the extent that they are already provided) personal current account
summary boxes, making it clear where charges are cumulative
•
changes to call centre processes, so that where the card provider
requires or encourages them to do so, customers phoning card
providers in advance of travel will be asked whether they want an
explanation of foreign use charges
•
improvements to website travel pages, such as accessible links to
foreign use charges, worked examples of how foreign use charges
apply, and links to historic exchange rate information
•
all major card providers to break out and show the £s amount of the
exchange rate fee on monthly statements, and
•
annual statements to show the £s amount of foreign use charges
that have been applied, where these are shown on monthly
statements.
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Charge for using a card to purchase foreign currency
1.10
Our consumer research suggests that around 40 per cent of foreign
currency purchases in the UK are made using cards rather than cash,
and the large majority of these are made using debit cards.
1.11
Five banks currently may charge5 when their debit cards are used to
purchase foreign currency from other foreign currency providers in the
UK. Some consumers may not be aware that they have been charged
unless they check their statements carefully, since the charge does not
appear on the receipt from the foreign currency vendor.
1.12
The OFT has concerns that the debit card charge in particular is not
transparent to consumers in advance of purchase. We consider that
consumers should know the cost to them of different payment methods
at point of sale. While foreign currency vendors may alert customers to
the fact that they may be charged, they cannot provide certainty nor say
what the charge will be.
1.13
We also agree with Consumer Focus that this charge may drive abnormal
behaviour and increase the underlying costs of the system. When foreign
currency vendors alert customers that they may be charged for paying
by card, some customers act to avoid it by withdrawing cash at an ATM
(subject to withdrawal limits) and paying in cash.
1.14
The OFT welcomes the voluntary agreements from all five of the banks
that charge for debit card purchases of foreign currency in the UK to
drop the charge entirely. In addition, following engagement by the OFT,
Visa Europe has reminded its members of their obligations not to treat
foreign currency sales in the UK by non-banks6 in a way that results in a
5
Barclays, Co-operative Bank, Lloyds, RBS Group, and Santander. The charge is either 1.5 per
cent or two per cent and may not always apply, depending on whether the bank is itself charged
via the payment scheme.
6
Such as the Post Office, travel agents, bureau de change, and other non-financial entities.
These providers account for over 85 per cent of foreign currency sales.
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charge to the card provider.7 Further, Visa (UK) is consulting with its
members on changing the scheme rules such that foreign currency sales
in the UK by banks may not be treated in a way that results in a charge
to the card issuing bank.
Foreign Currency
1.15
Foreign currency bought in the UK before travel remains a popular option
with consumers. Close to 80 per cent of respondents in our consumer
survey bought at least some foreign currency before travel (around 55
per cent of the respondents also used their cards abroad).
1.16
The phrase '0% Commission' is widely used by foreign currency vendors
in the UK, in part because if it is not used customers may assume that
commission is charged. We found evidence to suggest that such claims
are sometimes made without sufficient clarity on the conditions that may
apply, such as minimum spend levels.
1.17
Further, we have concerns that some claims by foreign currency vendors
of 'competitive exchange rates' may be unfounded, or it may not be
clear that they relate to online rates only. We agree with Consumer
Focus that some consumers may be misled by such claims.
1.18
The OFT is pleased to have received agreements from most large foreign
currency vendors active in the UK to review and amend their advertising
in light of our concerns. Foreign currency vendors have also agreed to
improve the availability of exchange rate information on websites and
provide greater clarity on the channels to which they apply.
1.19
We found less evidence to support Consumer Focus' argument that use
of the phrase '0% commission' misleads consumers into thinking that
they cannot get a better deal elsewhere. Consumer Focus suggests that
the phrase may mislead consumers because 'the difference between the
buy and sell prices of foreign exchange is what we understand to be
7
The charge to the card provider (the issuing bank) is the main rationale for the charge then
imposed on customers.
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commission.' We consider that the majority of consumers understand
that the cost to them of purchasing foreign currency in the UK depends
on the exchange rate offered and that '0% commission' does not imply
that the exchange rate is as good as it can be.
Conclusion
1.20
Well-functioning markets depend on confident consumers activating
competition by making well-informed and well reasoned decisions,
rewarding those businesses which best meet their needs. Vigorous
competition spurs traders to deliver what consumers want as efficiently
and innovatively as possible. When both the demand and supply sides
function well, a virtuous circle is created between consumers and
competition.
1.21
The OFT welcomes the package of initiatives across the travel money
market agreed to by industry which will help the market function more
effectively to the benefit of consumers. Improved transparency of the
cost of different payment methods should increase consumer awareness
of, and interest in, their options for accessing travel money and spending
abroad.
1.22
These initiatives are consistent with work by the OFT on several other
aspects of financial services. In particular, the OFT remains committed to
ensuring that consumers receive transparent information on the key
costs associated with running their personal current accounts. Current
account and credit card products are a bundle of services, and
consumers should be aware of the detail of the costs to them of services
that they may use.
1.23
In light of the package of agreements secured across the travel money
industry, the OFT considers that no further action is needed by the OFT
at this time. The OFT welcomes the agreement by the UK Cards
Association and the British Bankers' Association to work over the
coming months to deliver these initiatives, and will support UK Cards
Association and the British Bankers' Association with the progress of
some of these initiatives. The OFT will also monitor, through the course
of 2012, the progress on the improvements to be made to the UK travel
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money market which will lead to anticipated benefits for holidaymakers
heading abroad.
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2
INTRODUCTION
The super-complaint process
2.1
On 21 September 2011, Consumer Focus submitted a super-complaint
in relation to the costs of obtaining foreign currency in the UK and
overseas use of credit and debit cards.8
2.2
The right to submit a super-complaint was created by section 11 of the
Enterprise Act 2002 (EA02). A super-complaint is defined under section
11(1) EA02 as a complaint submitted by a designated consumer body
that 'any feature or combination of features, of a market in the UK for
goods or services is or appears to be significantly harming the interests
of consumers'. Consumer Focus is a designated consumer body for the
purposes of the EA02.
2.3
Section 11(2) EA02 requires the OFT, within 90 days after the day on
which it receives the super-complaint, to publish a response saying
whether it has decided to take any action, or take no action, in respect
of the super-complaint and, if it has decided to take action, what action
it proposes to take. The response must state the reasons for the OFT's
proposal (section 11(3) EA02).
2.4
This report sets out the OFT's reasoned response to the super-complaint.
Issues raised in the super-complaint
2.5
In the super-complaint, Consumer Focus distinguished between 'prearranged' spending (purchasing foreign currency, travellers cheques
and/or pre-paid foreign exchange cards in the UK before travel) and
'cards', where consumers use debit or credit cards to withdraw cash or
pay for something while they are travelling abroad.
8
www.consumerfocus.org.uk/files/2011/09/The-hidden-costs-of-holidays-Consumer-Focussuper-complaint.pdf
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2.6
Consumer Focus identified three features of the UK travel money market
which in its opinion caused significant consumer detriment and which it
called on the OFT to investigate:
•
the lack of transparency and complex structure of charges for use of
credit and debit cards abroad, which Consumer Focus considered
may prevent consumers from making well-informed choices
•
the practice by some card providers of charging for use of their cards
to purchase foreign currency in the UK, which Consumer Focus
considered may restrict competition and consumer choice, and
•
the use of phrases such as '0% commission' and 'competitive
exchange rate' by foreign currency retailers in the UK, which
Consumer Focus considered may mislead consumers and prevent
them from shopping around.
2.7
Consumer Focus considered that these features make it difficult for
consumers to consider which method or combination of methods of
spending abroad may be best suited to them, and therefore undermines
consumers' ability to make effective choices.
2.8
In line with the scope of the super-complaint, the OFT's reasoned
response does not include an assessment of Dynamic Currency
Conversion (DCC).9 However, the OFT notes that the risk in opting for
DCC and paying in sterling is that the retailer or bank will use a poor
exchange rate, such that the DCC option may cost the customer more.
2.9
Also in line with the scope of the super-complaint, the OFT's reasoned
response does not include further consideration of travellers cheques and
pre-paid cards. From our meetings with industry parties, we understand
that use of travellers cheques is declining and that this decline is
expected to continue. We have been told that some banks and retailers
9
An optional service offered to cardholders by some overseas retailers at point of sale or at
overseas ATMs. With DCC, the consumer can opt to pay in pounds sterling, in which case the
bank (in the case of ATMs) or retailer's bank converts the payment from the local currency into
sterling. The conversion rate includes a charge to the customer.
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that used to accept travellers cheques no longer do, making them less
useful as a payment option abroad. Pre-paid currency cards are loaded
up in advance with currency (usually Euros, U.S. dollars or sterling) and
can be used abroad to withdraw cash or pay for goods and services just
like a debit or credit card. While use of pre-paid cards is growing rapidly,
consumer research suggests that they currently represent a small
proportion of the UK travel money market, approximately six per cent in
2010.
Information gathering
2.10
The OFT gathered evidence from a wide range of sources and sought the
views of a variety of interested parties from across the UK travel money
market in the course of our consideration of the super-complaint. This
included a general call for evidence on our website and specific
information requests sent to debit and credit card providers, card
schemes, foreign currency providers, relevant trade bodies (such as the
UK Card Association and the British Bankers' Association) and consumer
groups.
2.11
The OFT held a number of bi-lateral meetings with these organisations
and consulted with relevant government departments and regulators.
The OFT a roundtable meeting with consumer bodies to exchange views
and discuss practical solutions to our concerns. Following this meeting,
the OFT set out its proposed improvements to card providers and foreign
currency vendors. A list of the parties consulted can be found at Annexe
A.
2.12
In addition, we have received comments from consumers in response to
our call for evidence and have considered these alongside complaints
received by Consumer Direct. We also conducted further consumer
research into the charging structures that apply in the UK travel money
market.
2.13
We also reviewed previous relevant research, behavioural psychology
literature and the findings of the OFT's Advertising of Prices Market
Study, and analysed existing data from the Payments Council and
Defaqto on card transactions abroad.
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2.14
We conducted two specific pieces of consumer survey research on card
use abroad and on the purchase of foreign currency in the UK, in order
to probe relevant consumer attitudes and behaviour and to gauge the
potential scale and prevalence of the issues identified in the supercomplaint. A full report of GfK's in-depth consumer survey on card use
abroad and results can be found on the OFT's website. A consumer
omnibus questionnaire on purchase of foreign currency and the related
results tables can also be found on the OFT's website10.
2.15
We have also reviewed the existing legislative framework relevant to the
aspects of the UK travel money market identified in the super-complaint.
In the context of this super-complaint, the material legislation consists in
particular of the following EU and UK legislation:
•
the Unfair Commercial Practices Directive,11 implemented by the
Consumer Protection from Unfair Trading Regulations 200812 (the
'CPR')
•
the Payment Services Directive,13 implemented by the Payment
Services Regulations14 (the 'PSR') and
•
the Consumer Credit Act 1974, the Consumer Credit (RunningAccount Credit Information) Regulations 1983.15 the Consumer
10
www.oft.gov.uk/OFTwork/markets-work/super-complaints/travel-money/
11
Council Directive 2005/29/EC
12
www.legislation.gov.uk/uksi/2008/1277/contents/made
13
Council Directive 2007/64/EC
14
www.legislation.gov.uk/uksi/2009/209/contents/made
15
SI 1983/1570
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Credit Directive,16 implemented by legislation including the Consumer
Credit (Disclosure of Information) Regulations 2010.17
2.16
Finally, our consideration of the issues raised by Consumer Focus,
specifically the charges associated with using debit and credit cards both
abroad and for purchase of foreign currency in the UK, took into account
relevant existing and continuing OFT work, given that the issues raised
in Consumer Focus' super-complaint have wider relevance. For example,
charges that apply to withdrawals and purchases that consumers make
with debit and credit cards abroad may also apply to 'non-sterling
transactions'18 made online, such as purchases of goods advertised in
Euros or Dollars etc. Additionally, the practice by some debit and credit
card providers, and some retailers19 of charging consumers for using
their card to purchase foreign currency within the UK, echoes similar
concerns raised by the OFT in its report in June 2011 in response to the
super-complaint from Which? about the surcharges imposed by airlines
and other transport providers, which the OFT has termed 'pay for
paying' charges.20
Structure of the report
2.17
The remainder of this report is structured as follows:
•
Chapter 3 provides some background on the travel money market
•
Chapter 4 considers transparency of charges for card use abroad
16
Directive 2008/48/EC
17
SI 2010/1013
18
Banks often currently use this wording to describe any transactions made in a currency other
than sterling, whether made in the UK or abroad.
19
In relation to purchases made over the telephone or online with a MasterCard credit card
20
www.oft.gov.uk/OFTwork/markets-work/super-complaints/which-payment-surcharges
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•
Chapter 5 considers charges for purchases of currency by card in the
UK
•
Chapter 6 considers the marketing of foreign currency
•
Chapter 7 explains the outcome of the super-complaint and
summarises the package of initiatives across the travel money
market agreed to by industry
•
Annexe A provides a list of the parties consulted
•
Annexe B provides a brief overview of the relevant UK and EU
legislation which may apply to aspects of the UK travel money
market
•
Annexe C provides scenarios of how consumers may use different
travel money payment options, and
•
Annexes D through G provide OFT consumer research.
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3
THE TRAVEL MONEY MARKET21
3.1
UK consumers spent about £27bn while on holiday abroad during 2010.
Providing travel money, either as foreign currency or through use of
cards abroad, generates significant revenues for travel money providers.
We estimate total card issuers' and foreign currency vendors' revenues
from charges for travel money of around £1.1bn per year, or around 3.5
per cent of travel spending abroad.22 Chart 3.1 shows revenues by
category:
Chart 3.1 Provider revenues by payment method (2010)
500
450
400
350
300
£m
250
200
150
100
50
0
£430m
£410m
£260m
Debit cards
Credit cards
Foreign currency
bought in the UK
Source: OFT estimates based on 2010 data provided by card providers and foreign currency
vendors. Note: these figures include revenue from business travel spend abroad by UK residents.
Debit and credit card revenues include charges for foreign cash withdrawals by card.
21
Although the report may refer to a market or markets, the OFT has not reached any firm
conclusions on the definition of any relevant product and geographic markets concerned.
22
Total revenues of around £1.1bn per year excludes £ sterling purchased by travellers to the
UK but includes business travel by UK residents, since revenue data from travel money providers
do not distinguish between holiday and business transactions. Travel spending by UK consumers
abroad was £31.8bn in 2010, of which £4.4bn was four business travel (Source: ONS)
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3.2
This chapter sets out the different ways in which consumers may
arrange their travel money for spending abroad. It provides a brief
overview of the use of credit and debit cards abroad and of foreign
currency bought in the UK, and highlights the range of providers active
in each sector. It also sets out some further detail of the costs and
charges to consumers when purchasing foreign currency in the UK and
using their cards abroad.
Consumers' use of travel money
3.3
From our Foreign Currency Omnibus survey, a little under 40 per cent of
respondents had been on holiday abroad in the last 12 months,23 with
some of these going more than once. The average consumer spent
around £560 per visit abroad in 2010.24
3.4
For holiday spend, consumers can either use a payment card abroad or
purchase foreign currency before travel. Our Foreign Currency Omnibus
survey revealed that consumers often choose a mix of methods. Fortyfive per cent of respondents said that they both bought foreign currency
before travel and used one or more payment cards while abroad. In total,
78 per cent of respondents purchased foreign currency before travel and
60 per cent of respondents used one or more payment cards while
abroad.25
3.5
While purchase of foreign currency before travel is the most popular
option, the transaction value of card use abroad (both purchases and
cash withdrawals) is considerably higher. We estimate that card use
23
Thirty-seven per cent, based on a sample of 2020 respondents (Q1, The OFT Foreign
Currency Omnibus survey).
24
We calculated the average consumer spend per visit by dividing spending abroad (excluding
business spending) (£27.4bn) by the number of visits abroad (excluding business visits) in 2010
(48.9m), (source: ONS, Travel Trends 2010). The average spend does not include £ sterling
payments, for example for flights or package holidays.
25
Base: 695 respondents who have been on holiday in the last 12 months (Q2 - Q4, The OFT
Foreign Currency Omnibus Survey).
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abroad by UK consumers amounted to around £21bn in 2010, relative to
purchases of foreign currency before travel of around £6.8bn.26 Card use
abroad includes both purchases and withdrawals of cash at ATMs
abroad. Debit, credit and charge/pre-paid cards are used for purchases
abroad. Debit cards are predominantly used for cash withdrawals abroad.
These usage patterns reflect domestic behaviour. Chart 3.2 below
provides the detail:
Chart 3.2: Consumer spend abroad by payment method (2010)
14
12
ATM
£11.1bn
POS
10
£bn
8
4.5
6
4
£6.8bn
£6.9bn
0.5
6.6
6.4
£2.5bn
0.1
2.4
Debit cards
Credit cards
Charge cards
2
0
Foreign currency
bought in the UK
Sources: OFT estimates based on data from Payments Council, ONS and OFT foreign currency
omnibus consumer survey.
3.6
Evidence gathered during the course of our analysis also suggested
longer-term trends of increasing use of cards abroad and decreasing use
of foreign currency bought before travel.27 This appears to mirror
domestic trends of increasing use of cards relative to cash.
26
Estimated weighting revenues data provided by foreign currency vendors with market shares
from OFT Foreign Currency Omnibus survey.
27
Card transactions represented 50 per cent of total travel spending abroad (holiday and
business travel) in 2000, compared to 86 per cent in 2010 (sources: ONS and Payments
Council).
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3.7
Engagement with card issuers and foreign currency vendors informed our
view of how consumers perceive the advantages and disadvantages of
the different methods for spending abroad:
•
Debit and credit cards are convenient for larger purchases and can be
used to withdraw cash for smaller purchases abroad. Credit cards
offer a credit facility and Section 75 protection28 for purchases
abroad; debit cards may also offer some protection depending on the
card provider. Some consumers may be uneasy about the risk of
card cloning and ID theft, in particular for a debit card linked to their
main current account. For all cards, there is the inherent
disadvantage of not knowing the exchange rate at the point of sale
or when withdrawing cash at a foreign ATM.
•
Foreign currency bought before travel provides certainty while
abroad: the price tag on the good is the price you pay. Some holiday
makers may also budget by limiting their spend to the foreign
currency they take with them. Foreign currency also has the
advantage of being available at arrival and convenient for small
purchases. The disadvantages are risk of theft and the inconvenience
of using cash for larger purchases.
3.8
The cost of travel money for consumers depends on both the mix of
methods and on which cards and foreign currency providers are used.
While there is significant variation across travel money providers, some
forms of travel money tend to be cheaper than others. Purchase
transactions with credit and debit cards abroad and online purchases of
foreign currency in advance of travel appear generally to be cheaper than
ATM transactions abroad and in-branch purchases of foreign currency in
advance of travel.
3.9
Annexe C sets out three scenarios that illustrate how such choices can
affect the cost of a holiday. We have taken an example of an illustrative
28
Equal Liability under the Consumer Credit Act 1974 provides recourse for consumers to the
credit card issuer for breach of contract or misrepresentation by the supplier. This applies to
purchase transactions over £100 but under £30,000.
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€2,500, two-week beach holiday for a family of four in the
Mediterranean, and considered how different travel money decisions
affect the total cost of the holiday. Reducing the amount of foreign
currency bought before travel and increasing card use abroad, as well as
choosing the cheapest offerings for both options, suggests savings of
£64 to £111 (2.8 to 4.8 per cent of holiday spending). In particular:
•
Scenario A: If the family uses a mainstream credit card for hotel
costs abroad and foreign currency bought in-branch (in the UK) for all
other costs, we estimate that the total bill in pounds would range
from £2,255 to £2,302.29
•
Scenario B: If the family buys less foreign currency in the UK before
travel and makes greater use of cards abroad, including for cash
withdrawals at foreign ATMs, the total bill in pounds would range
from £2,244 to £2,282.30
•
Scenario C: If the family chooses the cheapest option for each
payment method (such as online purchases of foreign currency in the
UK before travel and cards with zero charges for card use abroad),
and with Scenario B's mix of payment methods, the total bill in
pounds would be £2,191—a saving of £64 compared to the lowest
cost found in scenario A.
Card use abroad
3.10
The five largest UK banks31 and Nationwide together account for around
75 per cent of debit card transactions abroad and around half of credit
card transactions abroad.32 The market shares of card providers for
29
Using information provided by card issuers and foreign currency vendors as of 21 September
2011.
30
We assume that the family's mix of payment methods is allocated in the same way as for the
overall travel money market as shown in Chart 3.2.
31
RBS Group, Lloyds/HBOS, Barclays, HSBC/First Direct, and Santander.
32
Source: OFT estimates based on data provided by card issuers.
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transactions abroad reflect broadly those for domestic transactions. The
main exception is Nationwide, which has a much larger share of
transactions abroad than domestic transactions, both for debit and credit
cards.
3.11
From card providers' and foreign currency vendors' responses to our
requests for information, we estimate that debit card charges for use
abroad amounted to around £410m in 2010, or three per cent of spend
on debit cards.33 We estimate credit card charges for use abroad of
around £260m, around 2.5 per cent of spend on credit cards.34 For card
providers, these charges for card use abroad represent a significant
revenue stream. Debit card charges for card use abroad represent around
5.5 per cent of annual revenues from current account products. Credit
card charges for card use abroad represent around 2.5 per cent of
annual revenues from credit card products.35
3.12
When consumers use their debit or credit cards abroad, card providers
incur scheme fees payable to Visa Europe or MasterCard for processing
payments. In addition, card providers pay a fee to the acquiring bank36
for ATM withdrawals abroad, but receive fees from the acquirer for card
purchases abroad.37 As a result, ATM withdrawals are more expensive
for card providers than card purchases. For purchases by card abroad,
card providers generally obtain net positive revenues even before
33
The total of value of debit card transactions abroad (including both holiday and business
travel) was £13.8bn in 2010 (source: Payments Council).
34
The £260m is before interest charges. The total of value of credit card transactions abroad
(including both holiday and business travel) was £10.8bn in 2010 (source: Payment Council).
35
Source: OFT estimates based on card issuers' responses to request for information.
36
In the case of ATM transactions, the acquiring bank is the bank that provides ATM services.
In the case of card purchases at point of sale, the acquiring bank is the bank that provides card
payment services to the merchants.
37
These fees are referred to in the industry as interchange fees.
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charging the customer (the fees received from the acquirer banks more
than offset the scheme fees).
3.13
Individual card providers do not appear to bear any direct costs or
significant risks related to converting foreign currency transactions, as
the conversion is done by the payment scheme (Visa Europe or
MasterCard) at their own wholesale rates, which are close to the 'spot'
exchange rate at which foreign currency can be exchanged on
international capital markets.
3.14
As highlighted by Consumer Focus in its super-complaint, the payment
schemes can also charge the card issuer an additional fee for foreign
currency card transactions. These charges tend to be zero or a few basis
points for European card transactions, but higher for non-European card
transactions.
3.15
Card providers set their charges to consumers for card use abroad with
reference to the scheme wholesale rate. Chart 3.3 shows the 'dual layer'
charging structure for the use abroad by customers of mainstream debit
and credit cards:38
•
For all types of card transaction (whether by credit or debit card, and
whether a purchase or a cash withdrawal), an 'optional issuer fee'
may be added to the scheme wholesale exchange rate. This
exchange rate fee typically ranges between 2.75 per cent and 2.99
per cent.
•
Depending on the type of card transaction and the card used, an
additional fee may be applied. For debit cards, the fee is typically
1.50-2 per cent for cash withdrawals abroad, and there is often a
£1-£1.50 per-transaction fee for purchases abroad. For credit cards,
there is a 'cash advance fee' of typically three per cent as for
domestic cash withdrawals, and no additional fee applies to
purchases abroad.
38
More information, including our analysis of how these charges are communicated to
consumers, can be found in Chapter 4.
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Chart 3.3 Typical card charges for transactions abroad
Debit cards
Cash
withdrawals
Cash
withdrawal fee:
1.5% - 2.0%
Purchases
Per purchase
fee:
£ 1.00 - £ 1.50
Credit cards
Cash
withdrawals
Purchases
Cash
advance fee:
3.0%
Exchange rate adjusted to include an optional issuer fee:
2.75%, 2.95%, 2.99%
None
Layer 2: Charges for the
different types of transaction
are similar across issuers.
Percentage fees are generally
subject to a minimum and
maximum amount e.g. £2.00
min and £5.00 maximum
Layer 1: The exchange rate
transaction fee is almost always
2.75%, 2.95% or 2.99%
(
Visa and Mastercard wholesale exchange rates:
close to the spot rate
Transaction abroad on a UK issued card
3.16
For most debit and credit cards, the sum of these various charges for
use abroad ranges from three to six per cent. Further, our analysis of
pricing structures reveals some clustering of charges. Chart 3.4 below
shows how a large proportion of the card charges is clustered in narrow
ranges.39
39
The position of the bubbles indicates the range in which charges are clustered, while the size
of the bubbles indicates the share of card issuers with charges that fall within the range.
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Chart 3.4: Clustering of charges for debit and credit card use abroad
Size of bubble indicates share of total debit/credit cards with
total charges within
a specific range
Level of total
card charges
7%
6.99%
6%
5%
4%
3.99%-4.25%
(two layers of fees)
63%
46%
1%2%
1%
Zero charge cards
5%
82%
2.75%-2.99%
(one layer of fees)
35%
3.40%
5%
3%
2%
5.25%-5.99%
(two layers of fees)
4.74%-4.99%
(two layers of fees)
2%-4.75%
96%
1%4.25%
11%
30%
6%
8%
Debit card
purchases
abroad
7%
Debit card cash
withdrawals
abroad
3%
Credit card
purchases
abroad
2%
Credit card cash
withdrawals
abroad
Source: Defaqto data of charges for 129 current accounts and 228 credit cards in October
2011. Note: Based on spending or withdrawing the equivalent of £100 in Euros. This does not
include interest rate charges on credit cards.
3.17
Over the period 2007 to 2011, when consumer spending abroad
generally fell due to the economic downturn, foreign use card charges
tended to creep up or remain stable. Our analysis of foreign use pricing
structures over this four year period showed that for 85 per cent of card
products, foreign use charges stayed the same, in 13 per cent of cases
they increased, and in only 2 per cent of cases they decreased.40
40
Based on 456 observations of year-on-year changes in charges for card use abroad (debit and
credit card purchases and debit card cash withdrawals) over 2007-2011. Source: OFT estimates
based on Defaqto data.
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Increase in charges for debit card purchases abroad included the
introduction of an additional per-transaction fee.
3.18
As highlighted by Consumer Focus in its super-complaint, a small
number of card providers impose no foreign use charge at all, for
example, Norwich & Peterborough's debit card, Santander Zero debit
and credit cards, the Halifax Clarity credit card and the Nationwide
Select credit card. These products may have eligibility criteria or (for
credit cards) may require that the customer is an existing mortgage or
savings account holder. There are also card products that offer lower
foreign use charges than typically applies. Our review suggests that this
type of 'lower or no' cost card represents approximately 16 per cent and
12 per cent of credit card and debit card spend abroad, respectively.41
3.19
An initial analysis of the competitive dynamics between UK card
providers conducted as part of this investigation suggests limited
competition on foreign use charges across card providers. In particular:
•
3.20
Foreign use charges appear to cluster within very narrow ranges and
are stable over time, suggesting that the large majority of card
providers may not seek to differentiate themselves on foreign use
charges applied.
The level of foreign use charges appears substantially higher than the
cost for card providers associated with cash withdrawals and card
purchases abroad, although we note that our analysis does not include
marketing and administrative costs and other general costs that are not
specific to card transactions abroad.
Foreign Currency
3.21
41
As highlighted in Consumer Focus' super-complaint, there are many
foreign currency vendors in the UK. The Post Office is by far the largest
such vendor. Other types of foreign currency vendor include travel
agents, retailers, independent bureaux de change, and banks. Chart 3.5
Source: OFT estimates based on data provided by card issuers.
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below provides approximate market shares. Foreign currency vendors
informed us that there are a small number of wholesalers of foreign
currency that provide 'white label' foreign currency services, enabling
vendors to 'outsource' anything from handling transactions at point of
sale to picking, packing and delivering orders of foreign currency. A
number of retailers, including banks, travel agents and supermarkets, use
these services for the provision of foreign currency to consumers.
Chart 3.5 Foreign currency market shares, 2010-2011
35%
30%
28%
25%
22%
20%
17%
13%
15%
12%
8%
10%
5%
0%
Post Office
Travel agents
Bank or
building
society
Supermarket
or other
retailers
Bureaux de
change
Other
Source: OFT Foreign Currency Omnibus survey, Q6. Base: 544 consumers who purchased
foreign currency before travel.
3.22
Foreign currency vendors tend to face higher costs than card providers in
selling foreign currency in the UK to consumers. While card providers
can leverage existing payment networks, foreign currency vendors have
high outlays in rent, staff, logistical and security costs for storing and
transporting foreign currency banknotes. Foreign currency vendors have
also drawn attention to the increased risk of money laundering and the
higher costs of complying with relevant legislation applicable to nonfinancial institutions active in the travel money market.42 In addition,
42
The Money Laundering Regulations require most Money Service Businesses (MSBs) to register
with HM Revenue & Customs, unless the business is already supervised by the FSA for the
purposes of the Regulations. MSBs are required by law to undertake checks to prevent money
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foreign currency vendors have explained that the cost of providing
foreign currency to consumers varies significantly by channel.
Consumers can purchase foreign currency either in-branch, or by preordering online or via telephone (for home delivery or in-branch
collection). Online and telephone sales of foreign currency require much
lower rent and staff costs than branch sales.
3.23
Foreign currency vendors make money in the 'spread' they apply to
exchange rates – in other words, the differences between the rates at
which they purchase and sell currency. Foreign currency vendors also
make money from other charges, such as commission, buy-back and
delivery charges applied, but these represent a much smaller source of
income than the exchange rate spread.43 We estimate that foreign
currency vendors' revenues from exchange rate spreads and other
charges on foreign currency sales in the UK were around £430m in
2010.
3.24
For the sale of foreign currency to UK consumers travelling abroad, the
relevant exchange rate spread is the difference between the foreign
currency vendors' 'sell' rate offered to customers and the costs to the
foreign currency vendor of procuring the currency. Given that the foreign
currency has to be procured in physical banknotes, the rate is different
from the 'spot' exchange rate determined in international capital
markets. The cost of banknotes is negotiated bilaterally by foreign
currency retailers with wholesalers. The procurement cost of any given
currency may vary significantly between foreign currency vendors.
3.25
Chart 3.6 below shows the range of spreads on Euros and US dollars
available from foreign currency vendors in the UK either in branch and
laundering, and in practice businesses will ask consumers to produce evidence to confirm their
identity, for example requesting to see passports.
43
Only very few foreign currency vendors have provided data on other charges. From the data
available, we estimate that other charges represent around three per cent of foreign currency
vendors' revenues, while the remaining 97 per cent of revenues is derived from spreads.
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online, on 21 September 2011.44The spread has been calculated against
the Visa Europe wholesale rate, not the rate at which individual foreign
currency vendors can procure Euros or US dollars (as described in
paragraph 3.22). Using a wholesale rate as a benchmark facilitates
comparisons across foreign currency vendors (and with card charges).
Our analysis indicates that:
•
Online foreign currency charges applied by foreign currency vendors
tend to be lower than branch charges. This suggests that foreign
currency vendors may be passing on to customers, in the form of
lower spreads, the lower costs to them of online foreign currency sales
relative to branch sales .
•
The dispersion of online spreads is narrower than the dispersion of
branch spreads applied by foreign currency vendors. While consumers
can compare prices online easily, for branch sales, foreign currency
vendors are able to price differently depending on geographical
location of individual branches, taking into account the prices charged
by nearby suppliers and the volumes of foreign currency purchased at
the branch.
•
Spreads on foreign currency applied by foreign currency vendors tend
to be higher than foreign use charges applied by card providers.
However, spreads on online purchases of foreign currency are often
comparable to charges for debit and credit card purchases. Further,
the best offers on foreign currency available at branches of foreign
currency vendors may be comparable to charges for cash withdrawal
abroad on debit cards.
44
The Visa Europe wholesale rate is the base exchange rate for card providers of Visa payment
cards, and is before the rate has been adjusted to include the exchange rate fee.
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Chart 3.6: Range of exchange rate spreads (difference
between sell rate and Visa Europe wholesale rate) applied by
foreign currency vendors on 21 September 2011
14%
12%
Dots represent spread applied by
individual foreign currency vendors
10%
8%
6%
4%
2%
0%
€ - branch
€ - online
$ - branch
$ - online
Source: OFT estimates based on data provided by foreign currency vendors representing around
50 per cent of total foreign currency sales in 2010.
3.26
Although foreign currency vendors that offer foreign currency through
more than one sales channel in the UK may price differently across the
channels, there are exceptions. Most banks, for example, offer the same
exchange rate regardless of whether consumers purchase foreign
currency in-branch or order online or over the phone. Banks appear often
to consider the provision of foreign currency services as a benefit offered
to existing current account customers. Our Foreign Currency Omnibus
survey revealed that of those consumers who purchased currency from a
bank, most (87 per cent) said they used their own bank.45
3.27
While many foreign currency vendors saw total foreign currency sales in
the UK decline over the period 2008 to 2010, foreign currency online
45
Base: 97 respondents who purchased foreign currency from a bank (Q8, The OFT Foreign
Currency Omnibus survey).
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sales grew fast.46 The proportion of foreign currency sold in the UK
online has increased from five per cent to 11 per cent between 2008
and 2010. However, sales of foreign currency in branches still account
for over 80 per cent of foreign currency sales in the UK. These trends
are illustrated in Chart 3.7 below.
Chart 3.7 Market shares of different sales channels for foreign
currency in the UK
100%
90%
5.6
5.7
8.0
5.5
10.8
5.5
80%
70%
Online
Telephone
Branch
60%
50%
40%
88.7
86.5
83.8
2008
2009
2010
30%
20%
10%
0%
Source: OFT estimates based on data provided by foreign currency vendors
3.28
An initial analysis of the competitive dynamics between UK foreign
currency vendors conducted as part of this investigation suggests that
competition may be more intense between foreign currency vendors than
between card providers, in particular for online sales and in certain
geographical locations:
•
46
The doubling in the market share of online sales by foreign currency
vendors between 2008 and 2010 suggests that this is a very
competitive and fast-growing segment of the travel money market in
the UK.
Source: data provided by foreign currency vendors in response to our request for information.
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•
Foreign currency vendors in the UK have suggested that competition
relating to branch sales may be geographically segmented. Where
several foreign currency vendors compete with each other within a
short distance (for example, on high streets), exchange rates offered
by foreign currency vendors tend to be lower than in remote locations
that may be served by the Post Office or the local bank branch only.
Remote locations, however, may have higher costs.
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4
TRANSPARENCY OF CHARGES FOR CARD USE ABROAD
4.1
This chapter considers the transparency and structure of foreign use
charges for payment card use abroad. It explains our views on the issues
raised by Consumer Focus in its super-complaint, our assessment of the
issues in the light of the evidence gathered, and summarises the
outcomes we have reached.
4.2
Consumer Focus was concerned that the structure and presentation of
charges for using debit and credit cards overseas was confusing and
made it difficult for consumers to make well informed choices. In
particular, Consumer Focus identified that:
•
charges for use of cards abroad are not always clearly presented on
websites, marketing material, product summaries and statements
and
•
the charging structure applying to the use of cards abroad has
multiple layers and is not always easy for consumers to understand.
4.3
Consumer Focus also raised a concern that foreign use charges were not
cost-reflective. The OFT has noted this, but considers that the analysis
necessary to assess whether prices are excessive in relation to costs is
outside the scope of a reasoned response to a super-complaint, given
the time limit to respond (particularly where some card providers have
informed us that they do not operate a 'cost plus pricing' model for
foreign use charges).
4.4
Accordingly, the OFT has focused on achieving greater transparency as
the swiftest and most cost-effective method of achieving our objective
of more active choice by well informed consumers, and greater
competition between card providers in the UK for the benefit of
consumers.
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Analysis of the transparency of charges
Charging structure for transactions abroad
4.5
4.6
As set out in Chapter 3 above, most card providers have a dual layer
charging structure for transactions abroad on a UK issued card, namely:
•
a card provider's fee that is embedded in the exchange rate used,
and
•
an additional fee that varies depending on the type of card used and
whether it is a purchase or a withdrawal of cash abroad.
In addition, foreign cash withdrawals by credit card incur interest at the
cash advance rate (typically much higher than the standard interest rate)
from the date the account is debited. Further, some foreign ATM owners
charge for use of their ATMs.
Consumer awareness of foreign use charges
4.7
The Consumer Focus survey findings referred to in the super-complaint47
showed that most customers have only a limited amount of time to think
about the cost of their travel money options before they travel and
typically only travel abroad once a year.
4.8
The Consumer Focus survey further indicated48 that around 70 per cent
of consumers do not shop around, because of a lack of time (21 per
cent), because they did not think it was important enough (21 per cent),
or because they thought 'they were all about the same' (17 per cent).
Only 11 per cent of consumers remembered receiving information from
their card provider on the cost of using their cards abroad.
47
www.consumerfocus.org.uk/files/2011/09/The-hidden-costs-of-holidays-Consumer-Focussuper-complaint.pdf page 20
48
www.consumerfocus.org.uk/files/2011/09/The-hidden-costs-of-holidays-Consumer-Focussuper-complaint.pdf page 2, and Annex1
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4.9
In the course of our investigation, we reviewed the major card providers'
terms and conditions for current accounts and credit cards, and assessed
the levels of relevant information through the customer journey –
choosing a current account or credit card, before travel and after travel.
4.10
Whilst some of the information we reviewed did set out factors to
consider in choosing payment methods abroad.49 Overall, it was clear
that there was room for improvement in the clarity and accessibility of
information on foreign use charges provided to consumers by several UK
card providers.
4.11
Further, our consumer research confirmed that consumers have very
limited awareness of foreign use charges:
•
Only a third of card users (29 per cent for debit cards, 34 per cent
for credit cards) say that they have seen information on charges for
using their own card abroad before they went away.50
•
Only a minority of consumers compare charges for card use abroad.
About 10 per cent of debit card users and 15 per cent of credit card
users who went on holiday abroad looked at charge information for
the card that they were going to use and compared this to other
cards.51
•
Most consumers do not think (or are unsure) that the exchange rate
fee applies to their card when using it abroad. When asked whether
the fee included in the exchange rate applies when they withdraw
money using their card abroad, 72 per cent of debit card users and
49
For example, one card providers' travel leaflet maps out potential foreign use charges using
scenarios, the best card for payment of an expensive souvenir, and potential disadvantages of
dynamic currency conversion.
50
Base: 215 debit card users (Q30); 167 credit card users (Q40), OFT/GfK survey of card users
abroad.
51
Base: 215 debit card users (Q30 and Q31); 167 credit card users (Q40 and Q41), OFT/GfK
survey of card users abroad.
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68 per cent of credit card users answered 'not sure' or 'no'. When
asked whether the fee included in the exchange rate applies when
they make a purchase using their card, 80 per cent of debit card
users and 73 per cent of credit card users answered 'not sure' or
'no'.52
Importance of transparent charges
4.12
A lack of transparency of charges results in an inability for consumers to
shop around, which further leads to the possibility that foreign use
charges are higher than they might otherwise be because there is little
incentive for card providers to compete. In turn, this means customers
have little incentive to shop around because it is difficult to do so, or
because they believe that there are no real differences in foreign use
charges between card providers.
4.13
Through their responses to the OFT's request for information, many card
providers made the point that foreign use charges are not a primary
factor for consumers in choosing a current account or credit card.
Nonetheless, the OFT believes that these foreign use charges should still
be accessible and visible. When a customer takes advantage of any
secondary features of a current account or credit card, such as the
ability to use debit and credit cards aboard, they still need to be able to
see clearly what they are being charged.
4.14
Given the continued use of the 'dual layer' charging structure by card
providers, we believe that it is all the more important that these charges
are made fully transparent to consumers and clearly presented as
cumulative.
4.15
In this context, card providers have suggested to the OFT that increased
transparency of their charges, and in particular the exchange rate fee,
may cause customers to think that card use abroad is more expensive
than purchasing foreign currency before travel, when this is not
52
Base: 215 debit card users (Q64 and Q71); 167 credit card users (Q76 and Q78), OFT/GfK
survey of card users abroad.
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necessarily the case. The OFT does not regard this as a compelling
argument for not improving the transparency of charges for consumers
regarding card use abroad.
4.16
In the OFT's view, achieving a greater awareness by consumers of the
level of foreign use charges by increasing transparency, in order to
promote more active and informed consumer choice, will encourage
greater competition between card providers. This in turn will result in
travel money products that are attractive to customers.
4.17
An optimal model to address the OFT's concerns would perhaps involve
a single fee structure, with one fee for ATM cash withdrawals abroad
and another for purchases abroad. We believe this would be less
confusing for consumers and would help ensure that they know the full
amount of the foreign use charges that apply. However, in the short
term, moving to this model would involve significant systems costs as
well as the costs of re-educating customers of a new approach.
Key Findings
Current account opening/applying for a credit card
4.18
The OFT recognises that foreign use charges are a secondary factor in
most people's choice of current account or credit card. In its supercomplaint, Consumer Focus noted that its survey found that
convenience of use and personal safety are the most important factors
for consumers when deciding how to take money overseas, with
'minimising commission and budgeting' being the next most important.
4.19
When opening a current account or applying for a credit card, customers
may have difficulty in both finding and understanding information on
foreign use charges for use of cards abroad. We found in general that
UK card providers do not explain foreign use charges clearly and
consistently across their websites and marketing materials. In particular,
we found that:
•
The 'double layer' of foreign use charges is frequently not clearly
explained. The cumulative nature of the foreign use charges is often
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not made clear in the current account or credit card terms and
conditions or summary boxes.
•
The fact that the exchange rate is adjusted to include an exchange
rate fee for the card provider is not clearly explained.
•
Many card providers do not use consistent terminology for the
different foreign use charges across their websites and marketing
materials, in particular for the exchange rate fee. In some cases this
fee is described in a potentially misleading way, such as 'currency
conversion fee,' when, in fact, it is the payment scheme and not the
card provider that is doing the conversion.
Before Travel
4.20
We found that the key relevant information relating to foreign use
charges was generally present on card providers' websites but was often
hard to find. Only some card providers feature a dedicated travel page on
their websites to bring together relevant information for consumers.
Those that do have a travel page appear not to present the information
in the most accessible way. For example, the website travel pages often
do not show or provide easy links to foreign use charges, or to exchange
rates. In particular, we found that:
•
The websites of many card providers with a travel page may require
a word search to find it, as there is no home page link, with the
search often bringing up a number of different topics including those
relating to business and international transfer of money.
•
Whilst some card providers have a travel link on the home page, the
linked travel page may
-
emphasise the promotion of ancillary services such as travel
insurance or the availability of foreign currency from the card
provider and give little or no information on foreign use charges,
and/or
-
require more than one click to reach relevant information on
foreign use charges.
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•
Travel leaflets, where provided by card providers, sometimes focus
on only one of a range of payment methods only, for instance debit
card use abroad.
4.21
Although many customers take a combination of foreign currency, credit
and debit cards on holiday with them and use all three, our review did
not identify any leaflet or single webpage that pulled together
information on travel money options and set out clearly the costs and
charges involved for the various payment options.
4.22
As a result, it does not appear easy for customers to look across and
compare different options for spending abroad when planning a holiday
or to understand the total foreign use charges involved.
After travel
4.23
Consumers can already see the £ sterling amount that they have been
charged in total for the transaction, the exchange rate used and any
additional charge applied by their card provider on monthly current
account and credit card statements for each purchase or withdrawal of
cash abroad. The provision of this information on statements is a
requirement of the Payment Services Regulations 2009 (PSRs).
4.24
However, only some card providers also break out and show as a
separate item the fee (usually referred to as an 'exchange rate fee' or
'foreign exchange fee') that has been charged by them in the exchange
rate. The PSRs are interpreted by some card providers as not requiring
this information to be shown.53
4.25
The following table summarises the present practice of the main card
providers in disclosing on the monthly statements the amount of the
exchange rate fee applied to purchases or cash withdrawals abroad:
53
In the OFT's view section 45 of the PSRs and the corresponding article 47 of the Payment
Services Directive (PSD) appear ambiguous on this point. The OFT will seek to have input into
the review of the PSD by the EU Commission in 2012, and recommend that this ambiguity is
removed so that there is a clear requirement that the fees contained in the adjusted exchange
rate are broken out and shown on statements.
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Statements set out the £s
amount of the exchange
rate fee
Statements do not
Current
accounts
Barclays, Nationwide,
RBS Group, Santander
Co-operative Bank
HSBC/First Direct,
Lloyds/HBOS54
Credit cards
Barclays, Nationwide,55
Santander
American Express,
Capital One, Cooperative Bank,
HSBC/First Direct,
Lloyds/HBOS, MBNA,
RBS Group.
4.26
In addition, the monthly statements we reviewed showed that the
majority of card providers only show the percentage amount by which
the exchange rate is adjusted from the payment scheme wholesale rate
on the reverse of statements. Further, the OFT considers that this
information is not always clearly presented, and it is not always
transparent that the exchange rate fee is included in the exchange rate.
In addition, customers may not think to look on the reverse of monthly
statements for an additional charge in the exchange rate if they see on
the face of the statement a charge shown next to the foreign currency
total for the purchase or cash withdrawal abroad.
4.27
There is a risk that consumers may not know the full amount that they
have been charged by their card provider over and above the payment
scheme wholesale rate,56 or may assume that the foreign use charge that
54
On 12 September 2011 the Bank of Scotland fee structure was changed to reflect that of
Lloyds, so for new customers of the Bank of Scotland, the fee structure is the same as Lloyds.
55
Save for two products no longer available, namely Classic and Gold credit cards.
56
The Visa or MasterCard wholesale rates, which are close to the Reuters spot rates. For
American Express, the wholesale rate of the American Express payment network.
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is shown on their monthly statement is the total cost of using the card
abroad.
4.28
Some card providers have suggested to the OFT that achieving greater
transparency of foreign use charges on the face of monthly statements
is less important in informing and empowering consumer choices as to
payment options when abroad, since this information is given after
travel.
4.29
However, in the OFT's view, consumers should be able to see clearly all
foreign use charges applied by their card provider. Indeed, consumers
appear to value this transparency too. Our consumer research indicates
that 75 per cent of debit card users and 80 per cent of credit card users
check their statements after travel to see whether they have been
charged any foreign use charges for using their cards abroad.
4.30
Further, we consider that this information may alert consumers to
foreign use charges of which they might otherwise be unaware. This has
the potential to contribute to current account switching and/or
application for other credit card products, even if it is not a primary
factor in the original choice of current account or credit card, if it
becomes a more important consideration for better informed customers.
In any event, it may encourage customers to focus more on their
payment choices for their next trip abroad.
Outcomes
Voluntary agreements for improved transparency from
industry
4.31
Following close engagement with card providers, we believe we have
secured significant voluntary improvements of practice across the
majority of the industry, and that this range of measures will improve
both how and where charging information for card use abroad is made
available to customers. The OFT believes that these initiatives will go a
long way towards addressing the transparency issues raised in the
super-complaint and will promote more active and informed consumer
choice of options for methods of spending abroad.
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Current account opening and applying for a credit card
4.32
In relation to the opening of current accounts and/or choosing a credit
card, the OFT considers that clear and consistent terminology for the
different types of foreign use charges should be used so as to aid
comparison by consumers between cards. Where possible, the OFT
considers that common terminology relating to foreign use charges
should be adopted across the industry.
4.33
The OFT welcomes, therefore, the joint response from the UK Cards
Association and British Bankers' Association on behalf of their members.
This joint response confirms that card providers will work to facilitate
the standardisation of a number of key terms used in relation to foreign
use charges, to ensure consistent terminology is implemented across the
industry. Consumers should see the benefits of these improvements
during the course of 2012. Some individual card providers have already
taken steps to improve the consistency of terminology within their own
websites and materials, which the OFT welcomes.
4.34
These improvements should help mitigate the potential for confusion
over the 'dual layer' charging structure, enabling customers to
understand more easily the cumulative foreign use charges that will
apply when they travel. In addition, these changes will also have value
at other stages in the customer journey, as sources of pre-travel and
post-travel information, for example, in helping customers in checking
and understanding their statements after travel.
Before travel
4.35
In order to address a lack of transparency for customers on foreign use
charges, and to make the application of these charges easier to
understand before travel, the OFT considers that the following
improvements are required:
•
A 'one stop' web page to enable a comparison to be made between
payment methods when planning a holiday abroad, with either the
foreign use charges and current and historic exchange rate
information on the page or with clear links to this information.
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•
Web pages and travel leaflets that set out different payment
methods available to a customer, and in addition provide worked
examples of purchases or cash withdrawals abroad so that
customers can see how the charging structure works in practice.
This will help them to choose the best payment method for spending
abroad.
•
Call centre processes that ask customers phoning in to inform the
card provider that they intend to go abroad whether they want an
explanation of the foreign use charges that may apply, and to advise
them if they do.
4.36
In the course of bi-lateral meetings, the card providers were receptive to
suggestions for improved transparency in this area, and many card
providers explained that they recognised that sufficient, accessible
information available to customers before travel is key to improving
customer awareness of foreign use charges.
4.37
The OFT welcomes the agreement of the UK Cards Association to
facilitate industry discussions to work towards best practices and the
adoption of improved core components of web pages and travel leaflets
to increase customer awareness and knowledge of
4.38
•
the exchange rate that the card provider will use for card use abroad
•
foreign use charges and applicable historic exchange rate information
for card use abroad, and
•
how multiple foreign cards use charges may apply to the same
purchase or cash withdrawal transaction.
In this context, one card providers is in the process of incorporating
worked examples of purchases and cash withdrawals abroad showing
the application of foreign use charges. Some of its leaflets include
worked examples already. Some card providers are in the course of
altering their existing information about foreign use charges to include
similar worked examples and are redesigning their web site to create a
dedicated travel page.
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4.39
In addition, other card providers are reviewing the possibilities of worked
examples along with the use of currency conversion tools to allow
customers to see the likely cost of transactions involving card use
abroad.
4.40
Further, in relation to giving information relevant to foreign use abroad of
debit and credit cards, as the OFT indicated was required, the members
of the UK Card Association and British Bankers' Association have also
agreed in their joint response that:
4.41
•
where the card providers encourage or require their customers to
inform them when they are about to go abroad, call centre processes
will be reviewed and altered where necessary to ask if a customer
wants an explanation of the foreign use charges that may apply for
card use abroad, and to advise them if they do, and
•
staff in bank branches will offer similar information where a
customer visits a branch and informs the card provider that they
intend to travel abroad.
The OFT recognises that the speed, costs and ease of implementation of
these changes will possibly differ depending on the information channel
in question. The OFT welcomes, therefore, that most card providers
have agreed to use their best endeavours to progress these
improvements on a phased basis throughout 2012, so that customers
will start to see the benefits from these changes before the end of 2012.
After travel
4.42
In order to address the OFT's concerns regarding a lack of transparency
for consumers in relation to statements after travel, we indicated to
industry that we expected to see the exchange rate fee embedded in the
exchange rate broken out and shown as a separate item on the face of
monthly statements, along with any other foreign use charges that
apply.
4.43
In addition, we set out to card providers that we considered that the
exchange rate fee should be included in the annual statement of charges
for credit cards and the forthcoming annual statement for personal
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current accounts. We consider it to be a card provider charge and
therefore it should be included in the annual statement. The OFT has
been informed by industry that annual statements depend on the
information in monthly statements, and that for the annual statement to
include this charge it must also be broken out and shown on monthly
statements.
4.44
As a result of our engagement with individual card providers, the OFT is
pleased that the following have agreed that they will make alterations to
their monthly statements to show a split out of the exchange rate fee on
the face of the monthly statements:
•
American Express
•
Capital One
•
Co-Operative Bank
•
HSBC
•
Lloyds/HBOS, and
•
RBS Group
RBS Group's monthly personal current account statements already show
this fee, but in the future, their credit card statements will also show this
fee. American Express' on-line statements already show this fee, but in
future, their monthly statements will also show this fee.
4.45
Smaller card providers in particular have raised concerns with the OFT of
the cost of IT systems changes to break out and show the exchange
rate fee as a separate item on the face of information. Whilst this is not
optimal, we recognise that it may be more proportionate, in the specific
circumstances and in the short term, if the monthly statements of
smaller card providers include:
•
on the face of the statement, wording in the transaction lines of the
monthly statements that states that the exchange rate fee has been
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included in the exchange rate, rather than showing the £ sterling
amount
•
on the back of statements, a prominent and clear explanation of the
exchange rate fee and how it is calculated.
4.46
The OFT has also indicated to card providers that summary boxes used
on monthly or annual statements should include rows for foreign
transactions, showing in one place all the foreign use charges that apply
for card use abroad. This may mean, for example, a cash advance fee
would be shown for foreign transactions as well as elsewhere in the
summary box. In this context, we note that one card provider, already
sets out the foreign use charges in such a way that the applicable
charges get a tick where applied to different types of transaction,
including card use abroad.
4.47
UK Cards will undertake customer research, in discussion with the OFT,
to improve how foreign use charges are presented in summary boxes on
monthly and annual statements, making it clear to customers where
multiple foreign use charges apply for card use abroad.
4.48
UK Cards Association and the British Bankers' Association have also
agreed to facilitate progress by its members to changes to credit card
and (to the extent that they are already provided) personal current
account summary boxes used on monthly or annual statements to
enhance the presentation of information relating to card use abroad for
consumers, including:
4.49
•
making it clear that multiple charges may apply to the same
transaction
•
making it clear that certain charges that apply to domestic
transactions will also apply to foreign currency transactions and
•
incorporating information as to the exchange rate used, and where
this current and historic exchange rate information can be looked up.
The OFT expects that the card providers will work to ensure that the
proposed improvements are incorporated into the card providers' on-
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going programme of planned alterations to, and replenishment of, the
various media through which they inform their customers about foreign
use charges. The OFT is pleased that these agreements from industry
will be implemented as soon as practicable, in the most part by the end
of 2012, with some following in 2013.
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5
CHARGES FOR CARD PURCHASE OF FOREIGN CURRENCY IN
THE UK
5.1
This chapter responds to the concerns Consumer Focus has raised in its
super-complaint about the charges imposed by card providers on
customers when they purchase foreign currency in the UK using a debit
or credit card.57 It sets out the issues raised, our assessment of them
and summarises the outcomes we have reached.
5.2
Consumer Focus argues that the level of charges levied by card
providers for purchasing foreign currency in the UK by debit and credit
card are unjustified. These charges amount to around 1.5 to two per
cent for some debit cards and generally three per cent for credit cards.
Consumer Focus questions the justification of these charges, given that
their level far surpasses the cost to the card provider of processing the
transaction.
5.3
Secondly, in Consumer Focus' view, the charge levied for using debit
and credit cards to purchase foreign currency in the UK encourages
seemingly irrational behaviour. Consumers buying foreign currency may
switch to cash payments to avoid paying the charge, inconveniencing
them and exposing them to personal risk, as well as increasing the
underlying costs of the system.
5.4
Thirdly, Consumer Focus complains that the charges levied for
purchasing foreign currency by debit and credit card create an uneven
playing field amongst foreign currency providers in the UK. The charge is
not levied when customers buy foreign currency from their own bank.
Consumer Focus argues that this effectively provides a subsidy to the
bank's in-house foreign currency service.
57
Purchasing foreign currency in the UK using cash does not incur additional charges. Cash is
not considered in any detail in this chapter. The OFT's foreign currency omnibus shows that
around 59 per cent of foreign currency purchases in the UK are made using cash. Base: 544
respondents who purchased foreign currency before they went away (Q17, Annexe D).
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Charges for debit card purchases of foreign currency in the UK
5.5
The OFT's main concerns are focused on the charge for debit card
purchases of foreign currency in the UK, rather than the charge for credit
card purchases of foreign currency in the UK. The large majority of
purchases by card of foreign currency in the UK are made using debit
cards. We consider later in this chapter purchases of foreign currency in
the UK by credit card.
5.6
In using a debit card to purchase foreign currency in the UK, a cash
withdrawal fee may be levied by the customer's card provider. This is
unlike other domestic debit card purchases where the customer does not
incur a fee for using their debit card in the UK.
5.7
We agree with concerns raised by Consumer Focus in its supercomplaint regarding the 'perverse charging system' which incentivises
customers to withdraw cash to buy their foreign currency in the UK in
order to avoid the charges that would be imposed if they used their debit
card to purchase the foreign currency.
5.8
The OFT considers that the charge for debit cards may drive seemingly
less efficient consumer behaviour. A customer can avoid the charge for
purchasing foreign currency by debit card in the UK by withdrawing cash
from an ATM and paying for the foreign currency with cash. The overall
system costs resulting from an ATM withdrawal and subsequent cash
purchase are evidently higher than those of a single card purchase.
Further, ATM withdrawals are typically limited to around £250 or £300
per day. If the currency purchase is for more than this limit, multiple
withdrawals would have to be made over more than one day.
5.9
Whether a customer incurs a cash withdrawal fee on their debit card
when they purchase foreign currency in the UK depends on the card
provider, since not all issuing banks charge. Table 5.1 below summarises
which major UK banks charge a fee for using a debit card to purchase
foreign currency in the UK and which do not.
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Table 5.1: Summary of banks that charge for debit card purchases of
foreign currency in the UK and those that do not
Banks that may charge
for debit card purchase
of foreign currency
Banks that do not
charge
Barclays
HSBC/First Direct
Co-operative Bank
HBOS Nationwide
Lloyds
RBS Group
Santander
5.10
In the OFT's bi-lateral discussions with the banks, they informed us that
they 'charge when charged'. This means that a charge is made to the
customer when the banks incur a fee that they have to pay as a result of
the transaction being processed as a 'manual cash disbursement' rather
than a 'purchase transaction' (see paragraphs 5.18-5.19 below).
5.11
For banks that do apply a debit card charge for foreign currency
purchases, this is generally set as a percentage of the value being
purchased, with lower and upper limits. Table 5.2 below details the level
of this charge for an example purchase of £500 worth of foreign
currency. Where such charges apply, they vary between £4.50 and £10
on a foreign currency purchase in the UK of £500.
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Table 5.2: Summary of charges incurred when using a debit card to
purchase £500 worth of foreign currency in the UK
Total charge on a £500
purchase of foreign
currency
Bank
Fee charged
Barclays
2% (min £1.50 to max
£4.50)
£4.50
Co-operative Bank
2% (no max)
£10
Lloyds
1.5% (min £2 to max
£4.50)
£4.50
RBS Group
1.5% (min £2 to max
£4.50)
£4.50
Santander
1.5% cash withdrawal
£7.50 where charge
fee (min £1.50 or £1.99 incurred
depending on card; no
max) where charge
incurred
Transparency and awareness of charges for purchases using debit
cards
5.12
Our investigation has identified a widespread lack of awareness amongst
customers of the existence and level of charges for purchasing foreign
currency in the UK. 84 per cent of respondents in our Foreign Currency
Omnibus survey who paid by debit or credit card (the large majority of
whom would have paid by debit card) said they were not charged a fee
for doing so.58 We estimate however that considerably more than 16 per
58
Base: 204 respondents who purchased foreign currency by card (Q19, the OFT Foreign
Currency Omnibus survey, Annexe F)
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cent of debit and credit card holders would have incurred a charge for
purchasing foreign currency in the UK.59
5.13
Customers do not appear to anticipate a possible foreign currency
purchase charge for debit card use at the point of sale. A customer
perceives the transaction to be a normal domestic debit card purchase
for which charges would not otherwise be applied and do not, therefore,
expect to have to 'pay to pay'.
5.14
Details of debit card charges applied for purchasing foreign currency in
the UK are contained on the back of some card providers' monthly bank
statements, and can be found on banks' websites and in travel leaflets.
However, the OFT considers that this information is not generally easily
accessible, even on the travel pages of several large banks' websites.
5.15
Information sent to the OFT's travel money super-complaint mailbox in
response to our request for consumer's views from a number of
consumers would suggest that charges for using a debit card to
purchase foreign currency in the UK are not sufficiently clear, visible and
transparent even for the reasonably informed customer.
5.16
When a customer attempts to use their debit card to purchase foreign
currency in the UK, some foreign currency vendors warn consumers that
they may be charged for using their debit card. As explained, debit card
charges vary between banks and may change over time. It is not
possible, therefore, for foreign currency vendors to say with certainty
that a particular customer's card provider will charge for using the debit
card, nor the amount that they may charge. At the point of purchasing
foreign currency using a debit card, it is likely that a customer will not
understand the full cost of the transaction.
59
Based on Mintel data, banks which charge customers for paying for foreign currency using
debit cards account for around 69 per cent of the debit and credit card market. It would
therefore be expected that considerably more than 13 per cent of debit and credit card holders
would incur charges for purchasing foreign currency with their debit card in the UK.
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5.17
Furthermore, consumers may be confused as to who is actually making
the charge to purchase foreign currency in the UK using a debit card.
When a customer receives their monthly statement, it gives details of
the amount of the debit card purchase, as it would with any other
purchase. Reference is also made to a 'fee'. Lack of clarity may mean
that consumers incorrectly assume that the foreign currency vendor or
the scheme provider is applying a charge for the transaction.
The cost to card providers of a debit card purchase of foreign
currency
5.18
When a debit card is used to purchase goods or services in the UK, the
consumer is typically not charged by their bank.60 Since the costs of
processing debit card transactions for foreign currency purchases in the
UK do not appear to differ from those of using a debit card to buying
other items, we have discussed with banks their rationale for charging
customers for foreign currency debit card purchases.
5.19
First, card providers have informed the OFT that Visa Europe debit card
transactions involving the purchase of foreign currency (cash) in the UK,
are usually classified by the acquirer banks (acting for the vendors) as
'manual cash disbursement' transactions rather than standard 'purchase
transactions'. The implication of this is a reversal of charge flows
compared with purchase transactions. While purchase transactions result
in a fee paid to the card provider by the acquirer bank, for manual cash
disbursements the card provider must pay a fee to the acquirer bank.
The classification of purchases of foreign currency in the UK as manual
cash disbursements therefore results in an additional fee being charged
to card provider. The manual cash disbursement fee charged to card
providers is £1.75 plus 33 basis points.
60
For a full discussion of the flow of charges arising from debit and credit card transactions, see
paragraphs 5 to 9 of OFT 'Investigation of multilateral interchange fees provided for in the UK
domestic rules of MasterCard UK Members Forum' September 2005.
www.oft.gov.uk/shared_oft/ca98_public_register/decisions/mastercard.pdf
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5.20
Second, it has also been argued by banks that the charges on debit
cards for foreign currency purchases in the UK are in place to protect
against higher fraud losses. The OFT notes however, that extensive antimoney laundering protection (such as the requirement to show a
passport when making the purchase or applying the usual checks when
using a debit card on-line) is in place to mitigate such fraud risk.
Visa Europe Payment Scheme Rules
5.21
We have been informed by Visa Europe that its payment scheme rules
were changed in 2008 so that purchases of foreign currency in the UK
involving non-banks were re-classified as 'purchase transactions' instead
of 'manual cash disbursements'. The change implies that no manual
cash disbursement fee should be charged to the card providers for
foreign currency transactions in the UK involving non-banks.61
5.22
The OFT's investigation established that this rule is not being complied
with – the majority of foreign currency transactions involving non-banks
in the UK continue to be processed as 'manual cash disbursements' and
not as 'purchase transactions'. Manual cash disbursement fees are
therefore being charged to banks, and in turn some banks are charging
their customers for the purchase of foreign currency in the UK by debit
card.
Charges for credit card purchase of foreign currency in the UK
5.23
In using a credit card to purchase foreign currency in the UK, a
consumer may incur a cash advance fee levied by the customer's credit
card provider. Cash advance fees are applied in situations where a credit
card is used to access cash, such as a cash withdrawal by credit card at
an ATM both in the UK and abroad. Interest is also likely to be levied at
an accelerated rate from the date that the customer's account is debited.
This differs from purchase credit card transactions, where the card user
is given an interest-free grace period.
61
Such as the Post Office, travel agents, bureau de change, and other non-financial entities.
These account for over 85 per cent of foreign currency sales in the UK.
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5.24
Credit card providers charge consumers a cash advance fee and
accelerated interest rates to cover the higher credit risk of cash
withdrawals. In meetings with the OFT, credit card providers have told
us that using a credit card to access cash when purchasing foreign
currency and when withdrawing sterling cash (rather than simply for
making purchases) is an indicator that the consumer may be in financial
distress.
5.25
As well as the cash advance fee, the customer may in some cases incur
additional charges applied by the vendor for using their credit card to
purchase foreign currency. We are aware of a number of foreign
currency vendors that charge an additional fee to customers paying with
a MasterCard Credit Card online or over the telephone.
5.26
The OFT considers that customers are less likely to be surprised by the
cash advance fee for purchase of foreign currency by credit card
because the same fee applies for sterling cash advances. We also note
that this charge may be imposed at least partially to cover the potential
credit risk to the card provider. Furthermore, only three per cent of
foreign currency purchases in the UK are made by credit card.
No significant distortion to competition
5.27
Consumer Focus raises an additional concern that the charges levied for
purchasing foreign currency by debit and credit card create an uneven
playing field amongst foreign currency providers in the UK, because the
debit card charge is not levied when customers buy foreign currency
from their own bank. Consumer focus argues that this effectively
provides a subsidy to the bank's in-house foreign currency service.
5.28
Responses to our requests for information suggest that banks in total
have less than a 15 per cent share of foreign currency sales. Further, our
Foreign Currency Omnibus survey suggests that banks sell
predominantly to existing customers.62 The OFT's initial consideration of
62
Of those consumers who purchased currency from a bank, most said they used their own
bank. Base: 97 respondents who purchased foreign currency from a bank (Q8, The OFT Foreign
Currency Omnibus survey, Annexe X)
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this concern suggests that there is not any significant distortion to
competition as a result of the imposition of this charge. However, the
OFT has not conducted a detailed assessment given the package of
outcomes achieved as a result of the super-complaint, including the
removal of the charge by those banks that applied it, as explained
below.
Outcomes
5.29
The OFT has discussed its concerns and reasoning with the industry
extensively. We welcome voluntary agreements from the five UK banks
which currently apply debit card charges for purchasing foreign currency
in the UK – Barclays, Lloyds, RBS Group, Santander and the Cooperative Bank– to drop entirely such charges. These charges will be
dropped during the course of 2012.
5.30
After our investigation revealed the discrepancy in the implementation of
the revised payment scheme rules, Visa Europe reminded its members, in
a letter dated 8 November 2011, of their obligations not to treat foreign
currency sales by non-banks in a way that results in a charge to the card
provider. The OFT considers that correct application of the rules removes
much of the possible rationale for applying a charge for debit card
purchases of foreign currency in the UK.
5.31
Further, Visa (UK) is consulting with its members on changing the
scheme rules such that foreign currency sales in the UK by banks may
not be treated in a way that results in a charge to the card provider.
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6
MARKETING OF FOREIGN CURRENCY PURCHASED IN THE
UK
6.1
This chapter responds to the concerns Consumer Focus has raised in its
super-complaint about potentially misleading marketing of foreign
currency in the UK. It sets out the issues raised, our assessment of the
issues in the light of the evidence gathered, and summarises the
outcomes we have reached.
6.2
We also consider in this chapter Consumer Focus' suggestion that
foreign currency vendors should provide details of how their exchange
rates compare to a given wholesale reference rate. In addition, we have
identified a potential area of concern not covered in the super-complaint,
relating to advertising of 'buyback' deals. Our findings on this issue are
covered towards the end of this chapter.
6.3
In Consumer Focus' view, as vendors make money on the 'spread'
between buy and sell exchange rates, it is misleading to use phrases
suggesting that deals attract '0% commission'. According to Consumer
Focus, this phrase and others, such as 'competitive exchange rates',
prevent consumers from shopping around effectively, obscuring valuable
information needed to compare foreign currency vendors and make a
properly informed decision. Consumer Focus also raised concerns about
the availability of exchange rate information.
6.4
We consider that currently, customers can more easily compare foreign
currency deals than they can compare the costs of using different cards
abroad. However, we agree with Consumer Focus that in some
circumstances misleading advertising can impair a consumer's ability to
shop around for foreign currency in the UK effectively.
6.5
Our analysis is informed by our experience of enforcing the Consumer
Protection from Unfair Trading Regulations 2008, by BIS' Pricing
Practices Guide November 201063 and by the Advertising Standards
63
www.bis.gov.uk/assets/biscore/consumer-issues/docs/p/10-1312-pricing-practices-guidancefor-traders
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Authority's (ASA) approach to gaining compliance with the Committee
of Advertising Practice and Broadcasting Committee of Advertising
Practice Codes (CAP and BCAP, the Advertising Codes).64
'0% commission'
6.6
As indicated by Consumer Focus, the phrase 'O% commission' is widely
used by foreign currency vendors in the UK. In response to an OFT
request for information, the majority of foreign currency vendor
respondents told us that they use this phrase in advertising materials.
Foreign currency vendors explained that if they did not use this phrase,
consumers may assume that they charge commission.
6.7
Consumer Focus argues that the use of this phrase may mislead
consumers into thinking that the foreign currency vendor is not charging
for the service. Our consumer research lends some support to this view.
Only a quarter of consumers surveyed in our Foreign Currency Omnibus
survey thought that, in relation to their most recent purchase of foreign
currency, the vendor they used made money on the exchange rate.65
Many (around 60 per cent66) did not recognise that their foreign currency
vendor might make money in this way or in others, such as through
commission, delivery or buyback service charges.
6.8
However, several consumer bodies and foreign currency vendors
considered that consumers generally recognise that the cost of any
64
The Advertising Codes incorporate conditions from the Business Protection from Misleading
Marketing Regulations 2008 covering comparative marketing communications. For more
information about the regulatory framework see Annexe B.
65
This compares to 62 per cent of respondents who reported that the vendor they used
advertised 0 per cent commission and half of respondents who reported the exchange rate and
level of commission or charges as the most important factor in choosing their foreign currency
vendor. Base: 544 respondents who purchased foreign currency before they went away; Q14
and Q15, The OFT Foreign Currency Omnibus survey, Annexe F)
66
Base: 544 respondents who purchased foreign currency before they went away (Q21, The
OFT Foreign Currency Omnibus, Annexe F)
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purchase of foreign currency depends on the exchange rate offered as
well as any commission charged. Most of the correspondence we
received from consumers during our consideration of the super-complaint
confirmed this. Indeed, it should be easier for consumers to compare
between vendors claiming not to charge commission, since they can
shop around on the 'sell' exchange rate alone.67
6.9
Our review did however find that some vendors claim '0% commission'
without making it sufficiently clear that conditions apply, such as
minimum spend amounts.68 We have also seen examples of
advertisements including '0% commission' and not being clear that other
charges (such as a home delivery charge) might apply.
6.10
We have raised these issues with the ASA given their remit in relation to
considering complaints about online, broadcast and non-broadcast
advertising. Although the ASA does not currently challenge claims of
'0% commission' purely on the basis that the foreign currency vendor is
earning income in the spread, the ASA does share our concerns about
the context in which '0% commission' deals are used.
Competitive exchange rates
6.11
Our review of foreign currency vendor websites found fewer examples
of advertising containing phrases such as 'competitive exchange rates'
compared to '0% commission' claims. Less than half of the example
advertisements included in Annexe 5 of Consumer Focus' supercomplaint included references to the exchange rate offered. The
examples we did find included other phrases such as 'best money
exchange rates' and 'best price guaranteed' and some foreign currency
vendor websites included comparative 'snapshots' of their exchange rate
67
Assuming that the '0% commission' claim accurately applies to the amount they are seeking
to compare (that is no level of spend conditions or other charges, such as delivery, apply).
68
We found some vendors charged 'handling', 'admin' or 'service' fees on smaller purchases to
cover their costs.
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on a foreign currency as compared with three or four other foreign
currency vendors.
6.12
The evidence we have gathered through our engagement with consumer
bodies, meetings with industry, and from our Foreign Currency Omnibus
survey, supports Consumer Focus' contention that comparative and
superlative claims of the type highlighted above may influence consumer
decision making when considering travel money options. If unjustified or
inaccurate, such claims may mislead consumers.
6.13
The OFT considers that foreign currency vendors should have clear
evidence supporting the basis on which they are claiming
competitiveness – whether comparative or superlative. In this context,
the OFT notes that the Advertising Codes administered by the ASA
require advertisers to be able to substantiate such claims. The
Advertising Codes require that any such comparative/superlative claims
must be supported by evidence and must make clear the aspect of the
product or the foreign currency vendor's performance that is claimed to
be superior.
6.14
The Advertising Codes and the Consumer Protection from Unfair Trading
Regulations 200869 also set out conditions that must be complied with
where foreign currency vendors are making direct comparisons between
a deal they offer and those of competitors. These include the
requirement that the comparative claim must not mislead consumers
about either the advertised product or the competing products. Further
general guidance on the advertising of prices, including comparative
claims, can be found in BIS' Pricing Practices Guide November 2010.70
6.15
Our review identified that in addition to the wider legislation and
guidance mentioned above, the Price Indications (Bureau de Change) (No
69
For more information on these and other relevant legislation, please refer to Regulatory
Framework at Annexe B.
70
For more information on these and other relevant legislation, please refer to Regulatory
Framework at Annexe B.
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2) Regulations 199271 apply specifically to UK foreign currency vendors.
These Regulations set out when foreign currency vendors must provide
buy and sell rates, and require that both rates, together with any
additional charges attracted by the transaction, are presented clearly.
6.16
The BIS Pricing Practices Guide complement these Regulations by
providing guidance on good practice in giving price indications to
consumers generally, however they do not currently include specific
reference to price indications in relation to the provision of foreign
currency.
Clarity of information on exchange rates
6.17
According to foreign currency vendors active in the UK, consumers are
increasingly using vendor websites and price comparison sites to check
exchange rates before they buy foreign currency. However, only around
half (52 per cent) of consumers interviewed in our Foreign Currency
Omnibus survey reported seeing information on their currency vendor's
exchange rate before they purchased.72
6.18
Consumer Focus found that while the majority of banks make exchange
rate information available on their websites, some banks do not.73 Our
review of the availability of exchange rate information on foreign
currency vendor websites is consistent with Consumer Focus's findings.
6.19
We agree with Consumer Focus that the potential for consumers to shop
around across foreign currency vendors effectively, on the basis of
exchange rates offered for a specific foreign currency, is currently
limited due to three main reasons:
71
Please refer to Annexe B.
72
Base: 544 respondents who purchased foreign currency before they went away (Q24, The
OFT Foreign Currency Omnibus, Annexe F).
73
Consumer Focus looked for exchange rate information for 12 banks; eight put this on their
websites, for one it was only available online to account holders, two only gave it over the
telephone and one did not sell foreign currency to consumers (page 22 of the super-complaint).
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•
While some foreign currency vendor websites display exchange rates
openly, others require consumers to enter desired amounts of foreign
currency into online calculators before the exchange rate is given.
This increases the time taken to shop around.
•
Many foreign currency vendors offer different exchange rates for
branch, online, or over the telephone sales depending on the sales
channel. Our Foreign Currency Omnibus survey and our engagement
with foreign currency vendors indicated that, although consumers
may check exchange rates online, their preferred method of purchase
of foreign currency is in-branch.74 Foreign currency vendors often
only include details of their online exchange rates on their websites
which, unless the context is clear, may mislead consumers about the
rate they can expect to achieve when they visit a branch.
•
The results of our Foreign Currency Omnibus revealed that using the
internet, visiting branches and looking at window displays are the
main ways that consumers shop around.75 However, some foreign
currency vendors do not display exchange rates in branch, either in
window displays or at point of sale.
Display of a 'loading' relative to a reference exchange rate
6.20
Consumer Focus recommended in its super-complaint that foreign
currency vendors should, in addition to showing exchange rates, display
how those exchange rates compare in percentage terms to the reference
exchange rate at which they acquire the foreign currency. In Consumer
Focus' view, this would enable consumers to better compare between
foreign currency vendors.
74
Base: 544 respondents who purchased foreign currency before they went away (Q7, The OFT
Foreign Currency Omnibus, Annexe F).
75
Base: 237 respondents who shopped around for foreign currency (Q12, The OFT Foreign
Currency Omnibus, Annexe F).
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6.21
Annexe 3 of the super-complaint provides a worked example showing
how percentage 'loadings' could be calculated for a range of foreign
currency vendors in comparison to the Visa wholesale rate, which it
gives as an example base rate. Consumer Focus used the Visa wholesale
rate in order to show how consumers could compare the costs for
purchasing currency to the costs of using cards abroad. The 'loading'
might be compared to the percentage charges76 applied by a card
provider relative to the applicable payment scheme wholesale rate.
6.22
However, in considering Consumer Focus' recommendation during
discussions with the OFT, several consumer bodies and foreign currency
vendors were concerned that the display of a 'loading' on top of a
reference rate in addition to displaying exchange rates might serve to
confuse consumers considering travel money options.
6.23
Foreign currency vendors also raised difficulties with implementation of
the recommendation in practice. Given that foreign currency vendors
may each have a different cost to them of purchasing foreign currency,
several respondents queried how any such reference rate would be
determined. They also raised concerns about exactly when in the day the
'loading' would need to be calculated. In doing so they highlighted that
due to exchange rate fluctuations, most foreign currency vendors update
their exchange rates at least once a day, and that the 'loading' of the
exchange rates would have to be similarly updated.
'Buy backs'
6.24
Some foreign currency vendors advertise a 'buy back' facility, offering to
buy back from the consumer any unused foreign currency after their
return from holiday abroad. While this can be a useful service for
consumers, our review of buyback deals in the course of our
investigation identified potential concerns.
6.25
Some foreign currency vendors advertising 'buy backs' did not explain in
their advertising the rate at which the currency would be bought back.
76
Both the 'exchange rate fee' and, in percentage terms, any other charges applied.
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We received anecdotal evidence which suggested that without further
explanation, consumers might infer that their foreign currency would be
bought back from them at the same exchange rate used when they
bought the foreign currency from the vendor. We found that, unless a
deal guaranteed a specific exchange rate, it was likely that the 'buy'
exchange rate prevailing at the time the foreign currency was returned
would apply instead. Given the spread between the 'buy' and 'sell' rates,
it is essential that consumers are clearly informed which exchange rate
will apply.
6.26
The OFT considers that related advertising by foreign currency vendors
should also make clear any conditions that may apply, such as time
limits, limits on the amount of foreign currency that can be returned
and/or the channel through which foreign currency can be returned.
Outcomes
Voluntary agreements for improvements from industry
6.27
77
In our investigations, we have noted a number of positive current
initiatives which aim to provide consumers with more accessible, clear
information relating to travel money options. These initiatives include:
•
the introduction of interactive calculators on several foreign currency
vendors' websites to help consumers estimate the cost of a given
amount of holiday spend
•
development of Plain English Guides by foreign currency vendors to
explain in simple terms how exchange rates work, and
•
reference on foreign currency vendor websites to advice pages on
travel money, such as those provided by the Money Advice
Service.77
www.moneyadviceservice.org.uk
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6.28
In our investigations, however, we have also noted some examples of
potentially misleading advertising, as outlined above. To encourage
increased transparency for consumers on the costs of purchasing foreign
currency, the OFT has engaged closely with foreign currency vendors
representing a large proportion of the market to outline and discuss our
concerns, and to clarify the amendments which we consider are
necessary to address those concerns. We have set out our view that:
•
Marketing and/or advertising involving statements of '0%
commission' should make clear any conditions that apply, including
minimum spend requirements. It should also make clear which sales
channel(s) (in-branch, online or over the telephone) are offering 0 per
cent commission and any charges related to each relevant sales
channel, such as delivery charges for online/telephone orders.
•
Advertising along the lines of 'competitive exchange rates' should be
used only if these claims can be substantiated. Comparisons with
other deals should be objective, relevant and verifiable. Material
differences, for instance where the sales channel of the deal
advertised is different to the sales channels of the deal/s it is being
compared with, should be clearly highlighted.
•
Where foreign currency vendors' websites advertise foreign currency
services to the public, these should provide dynamic information on
exchange rates, identifying (with sufficient clarity and prominence)
to which sales channels they apply.
•
Worked examples such as '£x will buy you $x' can help consumers
compare travel money options, but the sales channel(s) to which
they relate must be clear, be based on realistic scenarios, and reflect
the true cost of the deal.
•
Online interactive currency calculators can also help consumers
understand the costs of foreign currency deals, but they must be
similarly clear on the sales channel to which they relate, and must
include details upfront of any other foreign currency charges that
may apply.
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•
6.29
'Buyback' offers should make clear the terms on which the deal is
offered, including the exchange rate that will apply, any time limits
or limits on the amount of foreign currency that can be returned, and
the sales channel through which the foreign currency can be
returned.
The OFT is pleased that most of the foreign vendors we engaged with
have agreed to review and amend their advertising, where necessary, in
light of the OFT's concerns. Any necessary amendments or clarifications
will be implemented over the course of 2012. The OFT welcomes the
fact that some foreign currency vendors have already begun these
reviews.
Scope to update the BIS Pricing Practices Guide
6.30
In light of the observations we have shared with the foreign currency
industry, we consider that there is scope for BIS to consider updating
the Pricing Practices Guide to include specific advice in relation to
foreign to foreign currency sales.
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7
OUTCOMES OF THE SUPER-COMPLAINT
7.1
This chapter summarises the voluntary improvements agreed to by
industry, both in the joint response by UK Cards and BBA on behalf of
their members, and in responses from individual banks, other card
providers, and other foreign currency vendors active in the UK travel
money market.
7.2
The OFT's objective during its investigation of the issues raised in the
Consumer Focus super-complaint has been to encourage participants in
the UK travel money market to change current practices in order to
improve transparency of the cost of different options for travel money.
This should increase consumer awareness of, and interest in, their
options for travel money. In the OFT's view, this would be the swiftest
and most cost-effective means of achieving our objective of more active
choice by well informed consumers and encouraging greater competition
between travel money providers in the UK for the benefit of consumers.
7.3
The OFT is pleased, therefore, to have secured from banks and other
travel money providers a package of significant initiatives which the OFT
believes is sufficient to address the specific concerns raised by
Consumer Focus in its super-complaint and indentified during the course
of the OFT's investigation. The OFT will monitor the progress of the
agreed improvements, and on that basis, we consider that there is no
need for further action at this time.
Transparency of charges for card use abroad
7.4
As set out in Chapter 4, the OFT has found that, in general, card
providers do not provide clear information about their charges for use of
payment cards abroad clearly and consistently across their terms and
conditions, statements, websites and marketing materials.
7.5
The OFT therefore welcomes the joint response from UK Cards and the
BBA, on behalf of their members, to the OFT's proposals for
improvements. This joint response is summarised below.
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Consistent terminology
•
Agreement to work towards the standardisation of a number of key
terms used in relation to foreign use charges with agreed terminology
to be implemented across the industry.
•
These improvements will be phased in through 2012, and consumers
should see the benefits of this work during the course of 2012.
Summary boxes on monthly and annual statements
•
UK Cards will undertake customer research, in discussion with the
OFT, to improve how foreign use charges are presented in summary
boxes on monthly and annual statements, making it clear to
customers where multiple foreign use charges apply for card use
abroad.
•
Following this research, UK Cards will work with its members to
implement the changes to credit card and (to the extent they are
already provided) personal current account summary boxes to
improve the presentation of this information relating to card use
abroad. The changes will make it clear that:
•
-
multiple foreign use charges may apply to the same transaction
involving the use of a card abroad, and
-
certain charges, that apply to domestic transactions, such as
cash advance charges, may also apply to foreign currency
transactions.
These changes will also incorporate information as to the exchange
rate used, and links to historic exchange rates.
Website and travel leaflet information
•
UK Cards will progress constructive discussions with their members
to agree core components of, and best practices for, travel pages on
websites and travel leaflets. Those improvements have as their
objective increased consumer awareness and knowledge of:
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•
-
the exchange rate that the card provider will use for transactions
involving card use abroad
-
foreign use charges and applicable historic exchange rate
information, and
-
how multiple foreign card use charges may apply to the same
purchase or cash withdrawal transaction.
These improvements will also be phased in over the course of 2012.
Call centre processes
•
•
7.6
Members of UK Cards and the BBA have agreed that:
-
where card providers encourage or require their customers to
inform them when they are about to go abroad, call centre
processes will be reviewed and altered where necessary to ask if
a customer wants an explanation of the foreign use charges that
may apply for card use abroad, and advise them if they do, and
-
staff in bank branches will offer similar information where a
customer visits a branch to inform the bank they intend to travel
abroad.
These changes will also be phased in during 2012.
The joint response from UK Cards and the BBA did not cover changes to
statements relating to splitting out the exchange rate fee as a separate
item on statements. The OFT engaged bi-laterally with individual card
providers on this point and welcomes the agreements from individual
card providers as summarised below.
Statements
•
Lloyds/HBOS, HSBC, Co-operative Bank, Capital One, RBS Group,
and American Express have agreed that they will make alterations to
their monthly statements to split out and show the £s amount of the
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exchange rate fee as well as the other foreign use charges already
set out in the statements.
•
RBS Group have agreed to show this exchange rate fee on its
monthly credit card statements (RBS Group's debit card statements
already show this fee). American Express have agreed to show this
exchange rate fee on a customer's paper statement, as its on-line
statements also already show this fee.
•
Members of UK Cards and the BBA have also agreed to provide
information on the back of statements showing where customers
can find the exchange rates used.
•
It is anticipated that these changes be implemented in 2012 and
2013.
7.7
A number of individual card providers already split out the exchange rate
fee on the face of monthly statements. Once the above changes are
implemented, the substantial majority of UK current account and credit
card cardholders will see the exchange rate fee split out as a separate
item on their monthly statements.
7.8
The OFT will seek to have input, if necessary, into the review of the
PSD, which is due to be carried out by the EU Commission in 2012. Our
recommendation to the Government will be that we seek a clear
requirement that fees contained in the adjusted exchange rate are broken
out and shown on statements, to the extent that there remains any
ambiguity in the PSRs.
Charge for debit card purchase of foreign currency in the UK
7.9
As set out in Chapter 5, the OFT has found that close to 40 per cent of
foreign currency purchases in the UK are made using cards rather than
cash, and the large majority of these are made using debit cards.
However, some consumers may not be aware that they have been
charged.
7.10
We welcome the voluntary agreements from the five banks that
currently charge for debit card purchase of foreign currency in the UK to
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drop the charge entirely. These banks are Lloyds, Barclays,
RBS/NatWest, Santander, and the Co-operative Bank.
7.11
The OFT is also pleased that Visa Europe has reminded its members, as
a result of the OFT's investigation, of their obligations not to treat
foreign currency sales by non-banks78 in a way that results in a charge to
the card issuing bank. Further, Visa (UK) is consulting with its members
about a change to Visa Europe's payment scheme rules that will require
all card purchases of foreign currency to be treated as purchase
transactions.
Sale and marketing of foreign currency
7.12
As set out in Chapter 6, the OFT has found that close to 80 per cent of
UK holidaymakers buy at least some foreign currency before travel.
Accessing foreign currency before travel clearly remains a popular option
with consumers. However, some advertising of foreign currency is
potentially misleading.
7.13
The phrase '0% Commission' appears to be widely used by foreign
currency vendors active in the UK. Our review found that some vendors
claim '0% commission' without making it sufficiently clear that
conditions apply, such as minimum spend amounts.
7.14
The OFT has engaged closely with foreign currency vendors representing
a large proportion of the market and outlined the following concerns that
the OFT considers need to be addressed:
•
'0% commission' claims should make clear what, if any, conditions
apply
•
claims of 'competitive exchange rates' should only be used if they
can be substantiated, and comparison with other offers should either
78
Such as the Post Office, travel agents, bureau de change, and other non-financial entities.
These account for over 85 per cent of foreign currency sales.
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be on a like-for-like basis, or otherwise clearly highlight any
differences
•
information about exchange rates should be clear and make it plain
which sales channels they apply to
•
any foreign currency deals or illustrations of worked examples should
reflect the true cost, including any other charges and setting out any
conditions
•
'buy back' offers should clearly state the exchange rate that will
apply and any conditions on which the deal is offered
7.15
We are pleased that most of the foreign currency vendors we have
engaged with over the course of this investigation have agreed with the
OFT's approach, and have agreed to review their sales and marketing
material in the light of the OFT's concerns. We anticipate that those
foreign currency vendors will make any necessary amendments or
clarification over the course of 2012. The OFT welcomes the fact that
some foreign currency vendors have already begun these reviews.
7.16
We consider that there is scope for BIS to consider updating the Pricing
Practices Guide to include specific advice in relation to foreign currency
sales.
Next steps
7.17
As noted above, the OFT believes the voluntary improvements agreed to
by industry should be sufficient to address the specific concerns raised
by Consumer Focus and identified by the OFT during the course of our
work. On that basis, the OFT considers that there is no need for further
action at this time.
7.18
The OFT encourages the UK Cards and the BBA, and their members, to
progress the delivery of these initiatives as soon as possible. The OFT
will support efforts towards such delivery, as appropriate, and monitor
implementation, through the course of 2012, to see that the voluntary
improvements are delivered for the benefit of UK holidaymakers
travelling abroad.
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7.19
The initiatives agreed are consistent with existing and planned work by
the OFT on other aspects of financial services. The OFT acknowledges
that current account and credit card products are a bundle of services,
and that charges for use of cards abroad and for the purchase of foreign
currency in the UK may not be of primary importance to a consumer in
their choice of current account or credit cards. Nonetheless, consumers
should be aware of the costs to them of services that they may use, and
the OFT remains committed to ensuring that consumers receive
transparent and accessible information of the key costs associated with
running their personal current accounts and credit cards.
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A
LIST OF PARTIES CONSULTED
Advertising Standards Authority
Allied Irish Bank
American Express Services Europe Ltd
Bank of Ireland
Barclays
British Bankers Association
Building Societies Association
Capital One Europe
Change Group
Citizens Advice
Consumer Council for Northern Ireland
Consumer Focus
Department for Business, Innovation and Skills
European Commission
FairFX
Finance and Leasing Association
Financial Ombudsman Service
Financial Services Authority
First Rate Exchange Services Ltd
Hays Travel
HM Treasury
HSBC
International Currency Exchange
Lending Standards Board
Lloyds Banking Group
Marks and Spencer Financial Services
MasterCard
MBNA
Money Advice Scotland
Money Saving Expert
Nationwide
No1 Currency
Northern Bank
Post Office
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RBS Group
Sainsbury's Finance
Santander UK
Tesco Bank
The Co-operative Bank
Thomas Cook
Travelex
UK Cards Association
UK Payment Association
Vanquis Bank
Visa
Which?
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B
REGULATORY FRAMEWORK
B.1
This Annexe gives a brief overview of the regulatory framework that
applies to providers of travel money.
B.2
The framework consists of a number of pieces of legislation, but the
overall effect is that consumers should be given information about the
costs of purchasing foreign currency and using payment cards abroad
that is:
B.3
•
full and comprehensive
•
timely
•
clear, and
•
not misleading
In the context of this super-complaint, the material legislation consists in
particular of the following EU and UK legislation:
•
the Unfair Commercial Practices Directive,79 implemented by the
Consumer Protection from Unfair Trading Regulations 200880 (the
'CPRs')
•
the Payment Services Directive,81 implemented by the Payment
Services Regulations82 (the 'PSRs'), and
•
the Consumer Credit Act 1974, the Consumer Credit (RunningAccount Credit Information) Regulations 1983,83 the Consumer
79
Council Directive 2005/29/EC
80
www.legislation.gov.uk/uksi/2008/1277/contents/made
81
Council Directive 2007/64/EC
82
www.legislation.gov.uk/uksi/2009/209/contents/made
83
SI 1983/1570
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Credit Directive,84 implemented by legislation including the Consumer
Credit (Disclosure of Information) Regulations 2010.85
The Unfair Commercial Practices Directive and the CPRs
B.4
The main purpose of the Unfair Commercial Practices Directive is to
provide a high level of consumer protection against unfair commercial
practices harming consumers' economic interests,86 by prohibiting
misleading and aggressive commercial practices which distort
consumer's economic behaviour.87 The CPRs implemented the directive
and came into force in the UK on 26 May 2008.
B.5
The relevant regulations are:
•
a general prohibition of unfair commercial practices (regulation 3),
which include
•
misleading actions (as defined in regulation 5), and
•
misleading omissions ( as defined in regulation 6).
B.6
The CPRs apply to 'commercial practices', that is any act, omission or
other conduct by businesses directly connected to the promotion, sale or
supply of a product to or from consumers (whether before, during or
after a commercial transaction).
B.7
A commercial practice is unfair, in terms of the general prohibition
(regulation 3) if it is unacceptable according to an objective standard of
what is professionally diligent and it materially distorts the economic
behaviour of the average consumer with regard to the product, or is
84
Directive 2008/48/EC
85
SI 2010/1013
86
Recital 11 of the Unfair Consumer Practices Directive
87
Recital 13 of the Unfair Consumer Practices Directive
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likely to do so. Professional diligence means the standard of special skill
and care which a trader may reasonably be expected to exercise towards
consumers commensurate with honest market practice or the general
principle of good faith in the relevant field of activity.
B.8
A commercial practice is a 'misleading action' if it contains false
information or information presented in any way that deceives or is likely
to deceive the average consumer in relation to any of a range of matters,
including the main characteristics of the product (regulation 5(4)(b))
and/or 'the price or manner in which the price is calculated' (regulation
5(4)(g)).
B.9
A commercial practice is a 'misleading omission' if it omits or hides
material information or provides such information in a manner which is
unclear, unintelligible, ambiguous or untimely (regulation 6(1)). Material
information means and includes information that the average consumer
needs to take an informed transaction decision and any information
required by EU law.
B.10
For a practice to constitute a misleading action or omission it must also
cause, or be likely to cause, the average consumer who is reasonably
well informed, observant and circumspect, to take a transaction decision
he would not have otherwise taken.
The Payment Services Directive and the PSR
B.11
88
The main purpose of the Payment Services Directive is to harmonise the
rules relating to the provision of retail payment services across the
European Economic Area ('EEA').88
The relevant provisions on transparency of conditions and information requirements apply to
all payment transactions where the payment service providers of both the payer and the payee
are located in the EEA and where the payment transactions are in Euros, or the currency of a
Member State that has not adopted the Euro, with the exception of Article 73 (value date of
transaction and availability of funds) which also applies to transactions where the payment
service provider of either the payer or the payee is outside the EEA.
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B.12
One of its key aims in establishing the same set of rules across the EEA
on information requirements for consumers is that consumers should
receive 'the same high level of clear information about payment services
in order to make well-informed choices and be able to shop around
within the EU'89 on the basis that 'It is essential for payment service
users to know the real costs and charges of payment services in order to
make their choice'.90
B.13
The PSRs implemented the directive and came in force in the UK on 1
November 2009. The PSRs cover, for example, banks, building societies
and other payment service providers which issue debit and credit cards,
and e-money products such as pre-paid currency cards.
B.14
The PSRs apply different information requirements to 'single payment
service contracts' and 'framework contracts', which is a contract for
payment services that governs the future execution of individual and
successive payment transactions, for example, the use of a current
account.
B.15
The key information to be provided in good time before a consumer
enters into and is bound to a framework contract includes:91
(a)
'details of all charges payable by the payment service user to the
payment service provider and, where applicable, a breakdown of
the amounts of any charges' and
(b)
'where relevant, details of the interest and exchange rates to be
applied or, if reference interest and exchange rates are to be used,
the method of calculating the actual interest and the relevant date
and index or base for determining such reference interest or
89
Recital 21
90
Recital 45
91
Regulation 40 and Schedule 4 paragraph 3
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exchange rates.'
B.16
The information that needs to be given to the consumer following an
individual payment transaction under a framework contract includes:92
(c)
'the amount of any charges for the payment transaction and, where
applicable, a breakdown of the amounts of such charges, or the
interest payable by the payer', and
(d)
'where applicable, the exchange rate used in the payment
transaction by the payer's payment service provider and the
amount of the payment transaction after that currency conversion.'
The Consumer Credit Act, Consumer Credit (Running- Account
Credit Information) Regulations 1983, Consumer Credit Directive,
Consumer Credit (Disclosure of Information) Regulations 2010
B.17
The Consumer Credit Directive was implemented in the UK through a
number of Consumer Credit Regulations in 2010. Creditors were required
to comply with the regulations from 1 February 2011.
B.18
New requirements on pre-contract disclosure93 and content of credit
agreements94 require pre-contractual information to be given in good
time, and the rate of rates of interest which apply to the credit
agreement to be clearly set out in both the pre-contract information form
and the agreement. Details also have to be given of 'any charge payable
for using a method of payment in respect of payment transactions or
draw downs' together with 'and other charges payable deriving from the
credit agreement'.
92
Regulation 45(2)
93
Consumer Credit (Disclosure of Information) Regulations 2010 SI 2010/1013
94
Consumer Credit (Agreements) Regulations 2010 SI 2010/1014
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B.19
Post contractual information requirements95 specify the information to be
included in periodic statements for running-account credit such as credit
card statements and include the amount and date of any interest or
other charges applied to the account during the period.
Interaction of the legislative framework
B.20
Where there is an overlap between the Payment Services Directive and
consumer credit legislation, the consumer credit legislation takes
precedence. So, where a framework contract under which a payment
service is provided is also a regulated agreement under the CCA (such as
a credit card), the information requirements of the consumer credit
legislation will continue to apply, and only information on the exchange
rate and amount of the transaction following currency conversion must
be provided in addition to the information requirements of the consumer
credit legislation (regulation 34 of the PSRs).
B.21
The E-money Directive was implemented in the UK by the Electronic
Money Regulations 2011 (most of which came into effect on 30 April
2011). E-money issuers, which include issuers of pre-paid cards, do not
require authorisation under the PSRs96 but are subject to conduct of
business requirements which include information requirements.
B.22
Foreign exchange firms that offer money transfer services must also be
either registered or authorised under the PSRs, but over-the-counter
currency exchange business is not covered by the PSR. However, the
CPRs and the Price Indications (Bureaux de Change) (No 2) Regulations
1992 still apply to traders who deal with consumers to buy or sell
foreign currency. This means that consumers are entitled to expect that,
where exchange rates are given, full information on rates and charges is
given in a way that is clear, unambiguous, easily referable to the
particular currency and legible/audible. Any exchange rate displays on
95
Consumer Credit (Running-Account Credit Information) Regulations 1983
96
They must be authorised or registered by the FSA as an electronic money issuer ('EMI') or
small EMI.
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premises should be prominent and visible either just outside or just
within the premises.
Committee of Advertising Practice Code (CAP Code) and
Broadcasting Committee of Advertising Practice Code (BCAP Code)
B.23
The CAP Code and BCAP Code contain advertising rules set down by
CAP and BCAP. These rules are administered by the Advertising
Standards Authority (ASA). The advertising codes contain wide-ranging
rules designed to ensure that advertising does not mislead, harm or
offend. Advertisements must also be socially responsible and prepared in
line with the principles of fair competition.
B.24
The Codes of Practice are a key element of the self-regulatory system,
recognised as one of the 'established means'97 of consumer protection.
If certain types of adverts, including those that are misleading or contain
an impermissible comparison, continue to appear after the ASA Council
has ruled against them, the ASA can, where appropriate, refer the
matter to the OFT for action under the CPRs. The Codes themselves do
not have the force of law.
B.25
Non-broadcast advertising placed by debit or credit card providers on
using cards abroad to make purchases or withdrawals or in the UK to
purchase foreign currency needs to comply with Code rules that cover
non-technical elements of communications (such as serious/widespread
offence or social responsibility). More technical specific code rules on
financial marketing communications would not apply to the extent that
FSA and OFT's respective regulation of debit and credit products cover
the service advertised.
97
Established means' is a term used in the CPRs which refers to those systems and mechanisms
outside the OFT and other regulators which have the effect of encouraging the control of unfair
commercial practices under the Regulations.
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B.26
The CAP Code covering non-broadcast advertising includes online
content and newspaper advertising for example, but does not extend to
in-branch advertising unless it constitutes a sales promotion.
B.27
The following rules have particular relevance to foreign currency
vendors:
•
quoted prices must include non-optional taxes, duties, fees and
charges that apply to all or most buyers (3.18 of CAP code and 3.19
of BCAP code) and delivery charges (3.4.4 of CAP and 3.22 of
BCAP)
•
material information must not be omitted (3.3 of CAP code and 3.2
of BCAP code). Material information is information that consumers
need in context to make an informed decision about whether and
how to buy a product or service, such as spend levels, time limits or
where particular channels apply to deals. The measures that the
advertiser needs to take to make material information available to
consumers will often depend on the context and the medium used
•
marketing communications that include a comparison with an
identifiable competitor must not mislead, or be likely to mislead,
consumers about either the advertised product or service, or
competing product or service (3.33 of CAP. 3.33 of BCAP, which
includes a reference to service as well).
The Money Laundering Regulations
B.28
The Money Laundering Regulations require most Money Service
Businesses (bureau de change being one example) to register with HM
Revenue & Customs, unless the business is already supervised by the
FSA for the purposes of the Regulations. Businesses must not act as a
Money Service Business until they are either registered with HMRC or
supervised by the FSA.
B.29
HMRC guidance highlights that there is a high risk of money laundering
in this sector, as criminals frequently attempt to use bureau de change
(and money transmission businesses) to make the proceeds of crime
untraceable. Money Service Businesses are required by law to undertake
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checks to prevent money laundering, and in practice businesses will ask
consumers to produce evidence to confirm their identity. This may
include requesting to see a passport when in-branch or asking for
payment details during the online ordering processes. HMRC advise that
vendors should not complete transactions unless they are satisfied with
the information provided.
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C
SCENARIOS OF TRAVEL MONEY PAYMENT METHODS
C.1
We show three scenarios for a two-week beach holiday for a family of
four in the Mediterranean. We estimate that such a holiday could cost
about €2,500—or around £2,180 at the scheme exchange rate.98
C.2
For the purpose of the analysis, we use the Visa and MasterCard €/£
exchange rate on 21 September 2011. These were respectively 0.8719
and 0.8707. The minimum and maximum £ bills in scenarios A and B are
based on the card charges for debit and credit cards of four high street
banks (Barclays, RBS Group, HSBC and Lloyds/HBOS) and the in-branch
exchange rates for three large foreign currency vendors (Post Office,
M&S and Travelex).
C.3
Scenario A: the family uses a credit card to pay for the hotel (€1,100)
and foreign currency purchased in the UK for the other expenses. The
total bill in pounds ranges from a minimum of £2,255 to a maximum of
£2,302, depending on which bank and foreign currency vendor is used.
C.4
Scenario B: the family uses a mix of foreign currency and cards
according to the market share of each payment method.99 The total bill
in pounds goes from a minimum of £2,244 to a maximum of £2,282.100
A comparison between the minimum bill in scenario A and the minimum
98
This lower bound to the £ pound bill for the holiday is theoretically achievable for a consumer
who uses only zero charge cards abroad.
99
Based on the market size estimates in Chart 3.2, but excluding charge cards.
100
Given that the family is now using a debit card for purchases, the total bill may also depend
on the number of purchase transactions, as some of the banks we considered charge a pertransaction fee of £1-£1.25 for debit card purchases. For instance, by making five debit card
purchases (for a total of £650), the final bill may increase by up to £6.25 to a maximum bill of
around £2,287. Moreover, the maximum bill in scenario B increases if the family makes more
ATM transactions using the debit card in order to withdraw the same total amount of money
(£450), as some of the banks we considered charge a minimum fee for ATM transactions. For
example, if the family uses the debit card for cash withdrawals nine times (withdrawing €50
each time), the maximum bill would be £2,295, that is, there would be an additional £13 cost.
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bill in scenario B shows that family B is saving around £11 by increasing
the use of cards.101
C.5
Scenario C is similar to B in terms of budget allocated to each payment
method. However, the family is now choosing the cheapest options
(online purchase for foreign currency, zero charge credit and debit
card).102 The total bill in pounds is £2,191, a saving of £53 compared to
the minimum bill of scenario B exclusively from choosing the cheapest
provider for each type of instrument.
C.6
Through a combination of increased use of cards and cost-conscious
choice of providers, in scenario C the family saves £64 (or 2.8 per cent
of holiday spending) compared to the minimum bill in scenario A and
£111 (or 4.8 per cent of holiday spending) compared to the maximum
bill in the same scenario.
Table C.1 Spend scenarios
Scenario A
€ budget
% of
budget
£ bill (min)
£ bill (max)
Foreign currency
3 mainstream foreign
exchange vendors
1400
56%
984
986
Purchase - credit card
4 mainstream banks
1100
44%
1271
1315
2500
100%
2255
2302
£ bill (min)
£ bill (max)
Total
Scenario B
€ budget
Foreign currency
3 mainstream foreign
exchange vendors
700
28%
635
658
Purchase - credit card
4 mainstream banks
650
26%
582
583
Purchase - debit card
4 mainstream banks
650
26%
582
585
101
For comparisons across scenarios we use the minimum £ bill for scenarios A and B.
102
We have not considered delivery charges for online purchases of foreign currency.
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Cash withdrawal – credit
card
4 mainstream banks
50
2%
45
48
Cash withdrawal – debit
card
4 mainstream banks
450
18%
400
409
2500
100%
2244
2282
£ bill (min)
£ bill (max)
Total
Scenario C
€ budget
Foreign currency
Online purchase
700
28%
623
Purchase - credit card
Zero charge card
650
26%
566
Purchase - debit card
Zero charge card
650
26%
567
Cash withdrawal – credit
card
Zero charge card
50
2%
44
Cash withdrawal – debit
card
Zero charge card
450
18%
392
2500
100%
2191
Total
Source: OFT estimates based on data provided by card issuers and foreign currency vendors.
Note: we compare the £ bill for the four mainstream banks and three foreign currency vendors
and use the minimum and maximum for each group.
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