Select Committee on Treasury Minutes of Evidence

Memorandum by the Consumers' Association

  1.  The Consumers' Association welcomes the opportunity to provide evidence on banking to the Treasury Select Committee.

  2.  Consumers' Association and Which? Magazine is committed to reporting and campaigning on banking issues in the UK. For many years, CA has researched issues in UK banking and has expressed concerns about levels of competition within the industry and the quality of products and customer service.

  3.  Consumers' Association has focused its evidence on the following issues:

    —  Competition.

    —  Banking Code.

    —  Financial Ombudsman.

    —  Credit Cards.

  4.  We have provided a summary of our views on the above issues on the following pages. We have also included relevant research from Which? magazine covering the areas outlined above [not printed]. In addition, we have attached Consumers' Association comments on HM Treasury's response to the Cruickshank report into banking in the UK [not printed].


  Consumers' Association's detailed comments on competition in retail banking can be found in the attached reply to HM Treasury on Cruickshank Report into UK banking. This response also contains our suggestions on the structure and remit of the payments system regulator (formerly PayCom, now to be situated within the Office of Fair Trading) to ensure that the consumer interested is fully represented.

Key points on competition

  We are keen to see an approach to regulation that recognises that competition at the wholesale level is only effective if the benefits are passed on to the retail consumer. It is received wisdom that competition raises standards in industry; however Consumers' Association questions whether there is real and effective competition in the banking sector. While there are many products to choose from, we believe the concept of choice is illusory given the various barriers to effective competition that exist in the financial services industry.

  There are already a large number of providers in the market offering a wide range of banking products and services—in many cases, offering reasonable quality products. However, a small number of large institutions still control the vast majority of basic banking services such as current accounts and savings accounts.

  In a recent Which? survey (October 2000) on current accounts, fewer than a third of the customers of the big four banks—HSBC, Barclays, Lloyds TSB, Natwest/RBS—said they would definitely choose their bank again if they had to open a new account tomorrow. Big banks do comparatively badly in terms of overall satisfaction. With around 70 per cent of current accounts being held by the big four banks, these customer satisfaction figures are not good news and it is not just on satisfaction that the big banks compare badly. Consumers buying a basket of products can make great savings by shopping around rather than use their high street bank as a one stop shop (see No Big Deal, Which?, January 1997, One Stop Flop, Which?, September 1999).

  The products of the larger institutions are generally of poorer quality, be it in terms of price or service levels. In a truly competitive market you would expect this poor performance to be punished by loss of custom. But for whatever reason, providers of better quality products are not finding a way through to the retail market to challenge the dominance of the big players. This has particularly serious implications given the opportunity for cross selling high margin products off the back of the basic products such as current accounts.

  Consumers' Association guardedly welcomes the new role for OFT in regulating payment systems, in the sense that we can see advantages in the OFT retail specialists having the opportunity for close co-operation with those charged with overseeing the wholesale end of the market. However, as ever, we will reserve full judgement on whether these proposed arrangements will work for consumers until we see fuller details on resources, accountability, transparency, and reporting mechanisms.

  With regards to competition at the wholesale level, it would be difficult to argue that by focusing on removing the barriers to entry at the wholesale level with a view to encouraging more entrants would automatically lead to improvements in competition at the retail end. In our view, any assessment of effective competition should factor in the barriers to access that prevent consumers from exerting competitive pressure on the industry. For Consumers' Association the key concern is to ascertain the relationship between the money transmission system and the manner in which the consumer interacts with it. For example, with regards to payment systems we fully agree that the OFT should be charged with enforcing transparency, non-discrimination and fair trading within the transmission system. However, we would be concerned to ascertain the relationship between the transparent, non-discriminatory and fair transmission charges and those charges made to consumers. For example, assuming that the cheque clearing system regulated under OFT rules assumed a set time period and charging structure, we would like to see the degree to which the principles embodied in the cheque clearing systems between financial services companies was replicated in the service offered to consumers.

  No assumption should be made that there is an automatic link between a fairer, less discriminatory and more transparent money transmission system and a fairer, less discriminatory and more transparent retail financial system. The nature of this link is probably more important to consumers than the effectiveness of the OFT in enforcing an effectively competitive transmission system.

  However, another key concern on competition policy in banking relates to the wider implications of the lack of protection given to building societies. Given that most of the main mutuals have been allowed to convert to PLC status, we believe there is a severe risk of a levelling down of competition on the high street. Consumers' Association analysis has consistently found that on average building societies offer the best deal for consumers in terms of lower mortgage rates and higher savings rates.

  As the Review of Banking in the UK was meant to be about competition in banking, we would urge the Government to look again at its decision not to provide any real legislative protection to the remaining mutuals. It is our view that a strong mutual sector is necessary to provide effective competitive pressure for the main banks. More than anything, this would ensure that there was real competition for the high street banks.


  The Consumers' Association is supportive of the Banking Code as we consider that overall, it sets good standards for banks' working practices with customers. There are specific areas where Consumers' Association has called for improvements to the Code and although some of these are still outstanding, we welcome the latest edition of the Code, which came into effect on 1 January 2001.

Specific comments on the Code

  Consumers' Association strongly believes in a proportionate approach to financial regulation. Our methodology for assessing consumer detriment is based on the level of risk involved—risk in this context relating to the complexity of products and the ability of consumers to make informed decisions. This involves assessing all products on the market according to three key factors: the size of the financial commitment involved; how risky and complex the products are; the length of time of the financial commitment and how long before the effects of a decision become apparent. For most simple banking products, risk is relatively low compared to complex products such as pensions or investments and therefore self-regulation offers a flexible, less costly approach than can benefit both consumers and the banking industry.

  One of the aims of the Code is to allow competition to deliver higher standards of banking practice. As outlined in the previous section, Consumers' Association believes there is not the level of competitive pressure you would expect in a sector that plays such a fundamentally important role in the everyday lives of consumers. This is where the Banking Code has a vital role to play. In the absence of natural competitive forces, there is a real need for an alternative external agent to raise standards and promote the interests of consumers. The Banking Code could fulfil this role if the standards are challenging and regularly reviewed and updated.

  The success of any for of self-regulation depends on two main factors. Along with challenging standards, compliance with and rigorous enforcement of the Code is essential. Consumers' Association has been critical in the past of the lack of enforcement when breaches of the Code occur. However, we are hopeful that the Banking Code Standards Board is determined to do more to enforce the Code as it is written.

  Consumers' Association remains concerned that banks comply with the spirit as well as the letter of the Code on the issue of superseded accounts. There are concerns that certain banks are managing to get round the actual wording of the Code to pay low rates of interest on accounts held by long-standing customers. It may well be that the wording of the Code will have to be tightened up yet again.


  Consumers' Association welcomes the establishment of the Financial Ombudsman Service (FOS) and the one stop shop approach to financial complaints. One of the major failings of the pre-FSMA regime was the fragmented nature of the various redress mechanisms. We do believe that the creation of the single Ombudsman service will do much to help consumers obtain redress, by having a single point of entry. This will remove two of the main barriers that prevent consumers getting access to due redress: it will make it easier for the authorities to promote awareness of the existence of a redress scheme, and once in the system it should make it easier for consumers to negotiate their way through what can be a complex system.

  Consumers' Association welcomes the information provided by the Ombudsman on the overall picture of the complaints and judgements made. However, we believe there is a strong argument in favour of releasing details of complaints about and judgements against individual banks. This would increase pressure on banks to rectify any longer term problems that may be arising and provides consumers with more transparent information about their bank or building society.


  Consumers' Association is concerned about several issues relating to the transparency of information available to credit card customers.

  Statement timing: many newer cards give a shorter period within which to pay. We have received a number of letters from our readers about this as it does not always allow an adequate time to pay, especially when payment is made by cheque as issuers usually require an unusual seven days for these to clear. In addition, there is a question as to the veracity of the time issuers state cardholders have to pay. In reality, issuers only seem to send out statements between one and four days after the date on the statement and even then the majority are sent by second class post. Even without postal delays, a statement could be expected to take as long as six working days to reach the cardholder. Both these issues should be addressed: by a minimum standard on a reasonable time period to allow people to pay, taking into account the likely date on which a statement will be received.

  There should be clear explanations of how interest is charged on statements, as many people still do not understand that interest will be charged on the whole statement balance if a partial payment is made.

  Interest rates should be printed on statements.

  There should be better information or a change in practice regarding special interest rates for balance transfers—at least issuers should be clearer about whether your repayments reduce transferred balance (at the low rate) or new purchases (at the standard rate).

  Non-comparability of APRs should be tackled.

  Guarantees and standards, along the line of the direct debit scheme, are long overdue for continuous authority transactions on credit cards. We would like this to be addressed through the Banking Code as the industry has been extremely slow to tackle it itself.

  Under the Consumer Credit Act, a cardholder's liability for loss should be nil, rather than £50, if the card has remained in their possession. This should be reflected in the Banking Code. For consistency we would like to see this voluntarily applied to debit cards as well.

January 2001

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