Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 179 - 199)




  178. Welcome. Would you like to introduce yourselves, please?
  (Mr Paul Dixon) I am Paul Dixon from the National Consumer Council; I am a Senior Policy Officer.

  (Ms Johnstone) I am Jill Johnstone; I am Head of Policy, Research & Strategy at the National Consumer Council.
  (Ms Childs) I am Michelle Childs; I am Head of Policy Research at the Consumers' Association.
  (Mr Evans) I am Phil Evans, Principal Policy Adviser at the Consumers' Association.

  179. Thank you very much for coming. Following the Government's decisions on the Cruickshank Report, do you think there will be a better deal for consumers? Do you think there are other things which need to be done? That is a general opening question which perhaps you would all like to answer, or at least some of you.
  (Ms Childs) The Cruickshank Report goes some way to dealing with aspects of problems in the banking sector. The Consumers' Association's position is that there is not effective competition in the retail banking sector. That is indicated by the fact that the four big banking institutions still hold about 70 per cent of the current account market. We do not think there is effective competition and that is indicated by consumer behaviour. Repeated Which? research has shown that consumers who bank with the four big banks do not receive the same level of service. There is a high level of dissatisfaction with big banks. Less than one third of the customers of the big four banks whom we surveyed said they would definitely choose their bank again. We think that there are several issues which need to be dealt with. The Cruickshank Report and its primary recommendation in relation to PayCom exists at the wholesale level and Mr Evans will talk about how we think that needs to interact at the retail level. We believe that there are certain aspects in relation to the retail market which also need to be dealt with which were not covered in the Cruickshank Report. Primarily we think that there is a need for a strong banking code. We are pleased with the revision of the Banking Code, but we think there are still aspects of the code which need to be improved. I can develop those if you would like me to, but I will give others a chance to come in. We believe that there are aspects of mortgage regulation which need to be looked at and we believe that there is also a necessity to have a strong mutual force in the market to ensure that there is strong competition in the retail market.
  (Mr Evans) On PayCom, we were very interested in the focus on the wholesale system. We fully accept and fully agree with the recommendations that there be non-discrimination and fair access to the wholesale network. For us the concern is the relationship between the transmission system at the wholesale level and the way in which charges are levied on consumers. Whilst we think there is currently basically insufficient data to prove a case one way or another in the way in which a relationship exists between the retail and wholesale networks, what we should like to see the OFT take on is an information provision role in publishing information on the relationship between the retail charges and wholesale charges within that system. It is really transparency at this stage which is the first order of play as far as we are concerned.
  (Ms Johnstone) To give a short answer to your question on whether it would lead to a better deal, the jury is out. We do not yet know. Like the Consumers' Association we welcome more regulation of the money transmission system. Obviously very little information is available about how the OFT is going to carry out that role yet, so in a sense we have to reserve judgement. In principle we welcome that tremendously. I should like to concentrate my comments on consumer disadvantage and the socially and financially excluded, which is where the National Consumer Council has a particular remit. There was a useful discussion of universal banking and the need for universal banking in the Cruickshank Report. He made two recommendations. One was the idea of having a benchmark for a minimum banking service to improve information and transparency. As Mr Evans has already said, there is a problem with information about banking services for consumers. The other was that the Government should tender for the provision of universal banking services having defined them. In other words that they should be taxpayer financed rather than consumer cross-subsidy financed. Since then the Government has been in discussions with the banks and with the Post Office, and in December there was an announcement of a much more combined banking service both with the basic banking accounts the banks are already providing or beginning to provide and the Post Office. We welcome that Government initiative. Obviously we need to understand more about the detail of it, but we think this is a welcome way of trying to bring banking services to the proportion of the population which is currently excluded from them, which is about seven per cent of households. In a sense that is a departure from the proposals Cruickshank put forward: it is based on a joint financing initiative.

Mr Ruffley

  180. May I put the same question to Ms Childs and Ms Johnstone? Cruickshank said that the supply of current accounts is highly concentrated and holds the key to competition between suppliers in other product areas. So the share of the current account market is pretty key. Could you tell me what share of the current account market the big four banks had at the time of the publication of Cruickshank? Secondly, what is their current market share today?
  (Ms Childs) I cannot give you exact figures. Roughly it was about 70 per cent at the time of the Cruickshank Report. The DTI came out with some figures in relation to the switching survey which they did where they said it was about 64 per cent of market share, but I believe you will be taking evidence from others who can give you the exact detail on that. Roughly we are talking about between 60 and 70 per cent. What I would say is that I thoroughly agree with the Cruickshank Report in relation to the importance of the control of current accounts. If you look at the market, current accounts are a key gateway to the sale of the high margin products like pensions. The banks know that. You also have to take into account the levels of consumer inertia which mean that if you control the current account market, four out of five consumers have not considered switching. Once you have them you can sell a whole variety of products. We agree that it is a very important issue to look at concentration.

  181. That is indeed my point. We are in agreement there. I am really trying to get a feel for what the statistics are because 12 months on some of the survey evidence I see suggests there has been no change in market share at all.
  (Ms Childs) There has been no significant change in market share.
  (Ms Johnstone) I would agree. I do not know the detailed figures, but there has been very little change if any. If you look at the DTI switching report, which is very interesting on this, where they looked at consumer behaviour in a variety of markets, when they looked at utility markets as well as financial service markets, changing your bank account was the thing you were least likely to do. There is very little switching. There are lots of barriers to switching; dealing with all your direct debits for example. Hopefully proposals to make that easier might help. It is clear that consumers do not switch their current account very much at all at the moment.

  182. It is said statistically you are more likely to get divorced than you are to change current account. On that point, may I just remind you what Cruickshank said where he talked about how customers perceive significant barriers to switching current accounts, which we know about. He then went on to say that for markets to work effectively in the interests of consumers it is vital that the cost of and difficulties of switching are kept to a minimum. That is in paragraph 4.84. He then went on to say that his proposed licensing framework for payment services should help to make switching accounts easier. He then went on to say that if this proved to be too slow a mechanism it should be possible for a compulsory account portability scheme to be imposed. It seems to me that given the market share has hardly changed at all, 12 months on is a long time, I consider. Is it not the case for more radical action to prevent the barriers to switching, radical action to tackle those barriers, what would your body's view be on that?
  (Ms Childs) It is helpful to disaggregate the different issues around switching. The PayCom proposals are dealing with one element which is the transfer between banks and that should have an effect. In relation to switching there are two important aspects from the consumers' point of view. There is a very real perception that it is a risky thing to do because your main financial outgoings are dealt with primarily through your current account, so there is a resistance by consumers in any event. We have all seen horror stories about what happened in the past, so there is an information requirement there. There have been several innovations from people like Abbey National and Halifax where they have been trying to take the hassle factor out of switching. One of the key problems is the time that it takes because if you are trying to switch, even if Abbey National, for example, just require two signatures from you and then they will try to arrange to move all your direct debits, it still takes six weeks to switch and part of that is that the bank you are switching from can take ten days to reply to any request. That is just unsustainable in this day and age. We do believe that more could be done on switching. What is unclear at the moment is to what extent, if PayCom gets involved in looking at the money transmission system at the wholesale level, that will improve at the retail level. What we would say is that we would want PayCom's remit to look at this interaction at the wholesale level. It is also worth bearing in mind that there is a pilot project which has been going on, which is looking at the electronic switching. We are not convinced that is actually working at the moment or that it will be delivered on time. A number of the banks have not been participating in it.

  183. That is pretty outrageous, is it not?
  (Ms Childs) Yes.

  184. You would say it is outrageous.
  (Ms Childs) Yes. Given the importance of current accounts to opening up competition in the market, we think it is very important that consumers have ease of switching. We also have to acknowledge that there is an element of consumer inertia but even with that said, there are both psychological and structural barriers to them switching which need to be addressed.

  185. The big four banks are dragging their feet, are they not?
  (Ms Childs) It is not in their interest to assist on this.

  186. I think you are being very diplomatic. May I give you some figures in a survey which I have in front of me? Under industry guidelines, voluntary of course, when a customer asks to transfer an account the bank should give the relevant details to the new bank within ten days, as you know. The survey was carried out on 1,000 sample customers who were switching their accounts from the big four high street banks. The average time it took for NatWest to transfer an account was 12.8 days, that is over the ten-day limit; HSBC took an average of 12.1 days; Barclays 10.5 days; Lloyds TSB just took 10 days. Some of the horror stories with each of those banks were that the longest it took in the case of NatWest in one case was 29 days, in the case of HSBC 38 days, in the case of Barclays 33 days and in the case of Lloyds TSB a staggering 41 days. What on earth is going on with the four big banks and what can you do to apply pressure to expose what is nothing less than a national disgrace?
  (Ms Childs) Which? has reported on the difficulties of switching for years. We have also put information up on our website to explain how people can switch, but the problem is that the power is not in our hands. It is a question you should be putting to the banks because clearly there are no incentives for them to assist in this process given the gateway control that current accounts give them. I also think that it is worse than that for the reasons I mentioned. It is not only the delay of the banks you are switching from in giving information but because it is still a paper based system, even the bank you are switching to is going to add some element of delay onto it. It is a longer period even than the one you suggest.

  187. Would it surprise you to hear specific examples of delaying tactics by representatives of the big four? First of all they feign ignorance of current account transfer systems, they tell customers to write to another part of the bank, they say they have problems getting the information from head office if they are at a branch. These things seem to me quite extraordinary and I think your organisation does fine work in exposing this. Is there anything more, apart from exhortation of the banks, which are not only greedy but are obviously quite, I would say, deceitful in the way they handle requests for switching in many cases, though not all? Is there anything more that can be done more than exhortation?
  (Ms Childs) Not by the Consumers' Association but the point you started with, which was looking at the way in which there can be rules and the enforcement of those rules to speed up that process. You also have to look at the electronic transmission.

  188. Could you say a bit more about that because it would be helpful?
  (Ms Childs) At the very least it gives them less opportunity for excuses if there is an ability to transfer. Things do not get lost in the post if you transfer them electronically.

  189. I think they would give it a good go though, would they not?
  (Ms Childs) Indeed; I am sure their systems would crash more frequently. Cruickshank did propose account portability, an idea he took from telecoms to try to assist, which is looking at bringing the details together and giving you a number so that it makes transference easier. It is something which is worth looking at. I do think we have to look at the remit of PayCom to see to what extent they are actually going to be dealing with it. Initially the switching is a bank to bank activity. Consumers are obviously involved in that, but the way that PayCom is looking at bank to bank transfers is an important aspect. Then we would push for the PayCom remit also to be looking at the effect of any rules in the wholesale transmission into the retail transmission and switching is a key element of that.

Mr Beard

  190. What are the services which people who are financially excluded are principally missing out on? Is it the ability to borrow at reasonable rates or simply having a bank account without any borrowing? Which are the issues which are most important?
  (Ms Johnstone) In a sense a basic current account is a gateway service. It is your way into the system and it enables you to receive payments, to make payments. It also enables you to get discounts on bills if you can do direct debits for utility bills. Not having access to that system does leave you out of easier and in some cases cheaper access to a whole range of goods and services.

  191. So borrowing is secondary.
  (Ms Johnstone) For the very disadvantaged people we are looking at and borrowing probably one of the problems they have had with the standard current account or ordinary current account is going into accidental overdraft and then finding huge charges whacked on which are probably in excess of the original overdraft accidentally gone into. Borrowing is secondary. Another thing about access to a basic bank account is that in a sense it gets you into the system and as your financial circumstances improve it is much easier for you to migrate up into a different kind of product which would provide more credit facilities. It is basically being able to make payments and receive payments which is the most important.
  (Ms Childs) I would agree. There are issues around both. Even the details you need to open a bank account have been a traditional problem. This is where it interfaces with the money laundering regulations, where the traditional forms of identification for opening an account are a passport, a driver's licence or a letter from somebody who has had a bank account. Many of the people who are financially excluded do not have that information, so they cannot even get in to open a bank account, let alone the terms of that bank account. The revised Banking Code has tried to deal with that. It usefully has some details in there about alternative forms of identification which can be used. What we are finding is that there are still differences between banks about what identification they will use; even within branches. There are several issues about how you can actually set up bank accounts and the costs of it. It is even the first hurdle of opening a bank account which needs to be looked at as well.

  192. Will the banks' own efforts at producing no-overdraft bank accounts solve these problems of social exclusion?
  (Ms Johnstone) We welcome the initiatives the banks have recently been engaged in. There are two problems. One is that there is a lack of publicity for these basic bank accounts. The banks are providing them, but they do not seem to be selling them very actively. People are unaware that there is a different kind of account to the one they, either through their own experience or others, expect might cause some difficulties. Another thing for people living on very low incomes is the huge amount of time it takes for the clearing system to work to clear cheques. If you are living on a very tight budget, you are waiting ten days for a cheque to clear and you just cannot manage that, you cannot handle it. Action to reduce that time lag is needed; other countries seem to be able to do it much more quickly. That is going to need regulatory action if the market is not delivering it.

  193. Do you think the proposal for a Universal Bank by the Post Office with support from the banks will overcome these problems?
  (Ms Johnstone) We have been watching this debate with interest as a huge range of proposals has been put forward since the Cruickshank Report. The latest proposal which was announced just before Christmas combined the Post Office with the banks working together to provide a Universal Bank. We can see much merit in that because it provides a greater range of products for consumers to choose from and also a greater range of outlets. There may be a post office where there is no bank and vice-versa. Having a unified system would be very useful.
  (Ms Childs) Slightly tangentially but Ms Johnstone has raised the point about cheque clearance times and it is an issue for people who are on a budget. We have also discovered a bit of a scam in relation to credit cards which is affected by cheque clearance times as well. The time for paying your credit card bill runs from the date on the statement. We have found that credit card companies are delaying sending the statement out and then they send it by second class post. By the time you have received it, in the worst case, you have nine days to pay that bill. If it takes, in the worst case our Which? research has shown, 11 days to clear a cheque—

  194. Are you saying this is the reason why the no-overdraft accounts run by banks themselves are not going to be useful in stopping financial exclusion?
  (Ms Childs) No, I am sorry. I am making an additional point in relation to cheque clearing to show that it affects not only those people who are on a budget, but people who use other forms of credit. The way in which you pay for credit—you may use your bank account, you may use a cheque to pay for it—because there are delays in cheque clearing times may mean you default on your payment because there is a long time to clear the cheque and credit cards are an example of that. In relation to the general issue, unforeseen charges are a perennial problem for consumers and they hit disadvantaged consumers particularly hard. The no-overdraft helps in the sense that it lowers the charges. The question is: what type of additional credit do people need to manage during that period and how is that provided? That issue has not been dealt with.

  195. Do you think the Post Office Universal Bank will deal with these matters?
  (Ms Childs) It is too early to say. There is an interesting correlation between the Universal Bank proposal and branch closures, but the details of it are not entirely clear to us about how it will deal with that specific aspect.

  196. You do not think either of these proposals will overcome the problems of financial exclusion.
  (Ms Childs) They will go a considerable way to help but we need to see more of the detail before we can definitively say that.

  197. In the United States, when we were there in October, the Community Reinvestment Act is a matter of some controversy even though it has been in being for over 20 years. Do you think there are lessons to be learned from the working of that Act for this country?
  (Ms Johnstone) That is not something we have looked at in detail, so I am not sure I can answer that question.
  (Ms Childs) Again, we have not done any detailed work but it is something we have looked at and some of the reporting requirements and the effect on different regions is something we have been looking at. As with Ms Johnstone, we have not pursued that in detail.

  198. The essence of it is that the bank is required to provide loans to the area in which they operate, which is the main point.
  (Ms Childs) Yes. It is important in actually defining an area of social responsibility. We are also looking at the role of credit unions, but we have not completed our work there. We are doing some practical work in Hackney. One of our researchers is looking at setting up a credit union so that we can try to find out to what extent that can deal with some of the aspects of social exclusion. At the moment you see different approaches which are dealing with different elements. It is not quite clear to us whether it covers all of the problems yet. We would need more detail on that.

Mr Fallon

  199. You said, if I understood correctly, that banks had not been promoting their basic bank accounts.
  (Ms Johnstone) Yes.

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