Examination of Witnesses (Questions 200
TUESDAY 16 JANUARY 2001
200. Why do you think they have been so slow
to do that?
(Ms Johnstone) It is a question you need to direct
at the banks. Maybe they see that market segment as a less profitable
one to service and they are going to sell fewer of their higher
value products to that sector. Maybe they feel they are going
to require subsidies to run these accounts. I do not know the
reasons but it is very clear that they are not going out and actively
selling the accounts. It is a question you can address to the
201. But if they do not promote these basic
bank accounts they are in effect freezing out good customers who
happen to be on low incomes.
(Ms Johnstone) Yes and who may be much more profitable
customers in the future. Yes, that is true. One of the comments
we have made is that the banks need to be doing much more work
on promoting these accounts and so will the Post Office when the
details of the universal account which is being talked about now
become clearer and the details are very sketchy at the moment.
They will need to put resources into marketing these accounts.
It will become particularly important as benefits are all paid
electronically. That process is going to begin in 2003. Obviously
there is a role for Government there as it is their decision that
benefit payments will be paid into accounts.
202. You did draw attention to this and I ought
to give you an opportunity of saying what improvements in the
Banking Code both your organisations would want to see.
(Ms Childs) It is no secret that the Consumers' Association
has been very critical of the Banking Code in the past for two
reasons. Firstly, we thought it did not cover all of the areas
it should. Secondly, it was not enforced properly. We worked with
the industry, along with others, on the revision to the Banking
Code and broadly we welcome it. There have been notable improvements
in it. There are probably two areas which I would highlight that
I think need to be looked at and I have mentioned a couple of
them before. Firstly, in relation to switching, there is now a
requirement in the code that they have to cooperate, but, as we
have discussed, I am not sure that goes far enough in dealing
with the problem. There are issues around making bank accounts
available to people with different identification that need to
be looked at. There is also an issue for us in whether the banks
really are going to comply with the spirit of the code as well
as the letter. There has been a long running sore between us and
the banks in relation to low interest payments on savings accounts.
The previous code dealt with that. Basically the issue is that
in order to attract new customers banks and building societies
will heavily market new accounts with very good interest rates.
Then what happens when attention is removed from that is that
interest rates go down and they start the process again. They
market new accounts to new customers with high interest rates.
The customers they have already pulled in then get stuck with
low rates. The revised Banking Code was supposed to have dealt
with that. It said in the language of the code, if that account
has been superseded, that is there is a new account with a higher
interest rate, which has similar features, then the bank has to
transfer the customer to that area or it has to offer them a similar
interest rate. Which? has just finished carrying out research
and we will publish in February and I am happy to share that with
the Committee at that stage. We have shown that the banks are
still using a variety of ruses to get round that. We think that
is completely unacceptable. They know precisely what the problem
is and yet they are using weasel words like "Well it has
to be absolutely identical before it has similar features",
or, "Okay, we are not actively marketing it, but it is still
available in branches". They are still seeking to get round
the spirit of the code. Although we broadly welcome it, we do
think it is an improvement, it is very much in the banks' court
to show that they really are going to apply to it. The other issue
is in relation to enforcement and I have to say we were quite
sceptical about whether the Banking Code Standards Board would
have effective oversight. The important difference about the new
Banking Code is that previously compliance was very much just
a paper exercise. You just say "Yes, I'm complying".
What they have done now is put in place better monitoring procedures
so they carry out mystery shopping, they actually send people
in to check. We have also been encouraged by a recent approach
to low savings in Bristol and West. There is encouragement, but
for us there is still a little scepticism about whether they are
actually going to follow the spirit. We believe that detailed
regulation is not appropriate in this area, but given their stranglehold
and given the dominance in this area and the difficulty of consumer
switching, there is a need for high standards and those standards
have to be enforced. In summary, yes, it is a great improvement,
yes, there are encouraging signs, but equally we have some concerns
about whether they are really going to be committed to it and
only time will tell on that.
(Ms Johnstone) I should like to concur with what Michelle
said about that. The code is a lot better than the previous one
and we welcome that, but we have yet to be convinced that it will
be adhered to completely. Earlier research we have done showed
that the previous code was not necessarily complied with. Will
they do what they say they will do and will that permeate right
the way down the banking system? Policy and practice are not always
203. The report the Government requested on
these issues, the Cruickshank report, recommended a licensing
system. The Government has set aside that proposal for something
much more complex and complicated. Do you think that the Government
should have stuck to its guns and gone for a licensing system
which would have provided an automatic means of enforcement over
(Mr Evans) It is a very difficult one to answer because
of the range of different problems which could be encapsulated
in the licensing system. When you look at other industries which
have licensing systems, they tend to be those which have moved
from public monopoly into private quasi-monopoly or duopoly. There
a licensing system is usually an effective way of dealing with,
in a sense, structural abuses of the market. The difficulty with
the banking sector is that because you have a private oligarchy,
you have four large players, it is very difficult to separate
out structural from behavioural problems and so a licensing regime
may not fully deal with the issues because you do not quite have
the evidence to prove the problems yet. That is why taking it
on a staged basis before thinking about licensing is probably
the best approach. A licensing approach and a very heavy regulatory
system is not quite there yet in terms of the evidence to prove
the case. That is why the role of PayCom is so important: to be
able to identify whether there is a systematic problem in terms
of the relationship between the charges you and I pay on a bank
account and the charges for operating in the system and some of
the other issues to do with the Banking Code. If those can function
then there may not be a need for licensing yet. If they do not
function then you may need to look at a much stronger regulatory
hand. In a way you need to let those systems function before you
can go the full gamut in a sense.
204. Your colleague has set out a very powerful
case of abuse. Why is it that you are not prepared from the Consumers'
Association to be tough in defence of consumer rights?
(Mr Evans) It is not necessarily not being tough on
consumer rights, it is basically what are the best tools to achieve
the job. When you are looking at the issue of the relationship
between charges in the retail and wholesale systems, there is
not yet sufficient evidence to prove conclusively the case. We
all have fairly clear anecdotal evidence and we all have decent
research to indicate that there is a problem, but to jump into
designing a licensing system before you have very, very clear
anecdotal evidence will cause you more problems at this stage
than good. We are not ruling it out as a possibility, but you
need to build a case very, very tightly because you are effectively
dealing with regulating a private industry in a very, very tight
way. I am not sure at this stage that that system can be designed
as effectively as it should be.
(Ms Childs) There are issues around the licensing
system and then there are issues around the Banking Code. In relation
to the Banking Code, what I have set out and what our research
will set out is that there is still a problem with an aspect of
it. The issue is: how is that going to be dealt with? If it is
not dealt with appropriately, we are told that further regulation
is not needed, there are costs and benefits to regulation, this
is not an area which needs detailed regulation because it can
be dealt with, they have upped their monitoring, they have upped
their compliance, they are going to get tough. They now have to
prove it and if they do not prove it, then it will be clear that
self-regulation has failed in this area. I do think that there
have been improvements and it is really in the hands of the oversight
body as to how they are going to deal with this. If they do not
deal with this robustly, then we would be coming back to you and
saying that self-regulation is not working.
205. Even the report which the Government commissioned,
the Cruickshank Report, did not call for product regulation. What
do you feel about that?
(Ms Childs) It is no surprise that Consumers' Association
believes there is a need for product regulation in relation to
mortgages. This is where we part company with Cruickshank. The
approach we take to whether you need self-regulation or regulation
in the market is based on risk and that risk element has three
parts to it. Firstly, the extent of the financial commitment that
an individual consumer is making. Secondly, the complexity of
the product: can they understand it and is there a genuine choice
there? Finally, the length of the financial commitment and the
time it will take to find out whether you have a right decision
or not. We think, for example in relation to the banking sector,
that a basic bank account is not that risky, is not that complex,
so there is no need for detailed regulation, but we do believe
there is a need for self-regulation. As you move higher up that
spectrum, we believe that there is a greater need for regulation
because the risk of what consumers are exposed to is great, both
in financial terms and if something goes wrong. That has been
accepted in relation to pensions and investments but it has been
rejected in relation to mortgages. We are still astonished by
that decision because our research showed that the mortgage code
had been ignored by most of the banks and had not been enforced.
The Council of Mortgage Lenders put their hands up and said, "Yes,
it is". Despite all of that and the problems we have had
with endowments, it was still decided that there was no need to
regulate in this area. We believe that there is a real issue here.
Consumers need advice and Which? surveys have regularly
shown that they are not getting adequate advice. What we are now
left with is in effect a regulatory gap. If you go to get a mortgage
as a consumer there are two things you really need to know about.
Firstly, which particular deal you should have, should it be capped
or fixed, and what repayment method you should use. The situation
we now have is that the mortgage code covers the terms of the
deal, so they will tell you whether it is fixed or capped. But
if you want information about the repayment mechanism then that
is dealt with by the FSA. So they supervise it as investment advice.
Some of our research has shown that you now have the ludicrous
position that because the FSA has high standards for investment
advice and you have to carry on and have higher exams, you can
have one appointment with someone to tell you about whether you
should have a fixed rate or a capped rate mortgage. Then you have
a separate appointment with somebody who tells you about investments.
They can give you great advice about the investment vehicle, they
can tell you all about endowments, they can tell you about the
different endowments, they can tell you about the different PEPs.
What they do not tell you about is what you really want to know,
which is the best repayment method for you to pay your mortgage:
should you be having an endowment, should you be having some other
method? Leaving aside the issue of whether you should have product
regulation, which we think you should because of the detriment,
we actually think that what we are now left with is an advice
gap. One bit is dealt with by the mortgage code, the other bit,
which is purely looking at investments, is dealt with by the FSA
and the gap is the combination. People are not going to investment
advisers for advice on investments, they are going to them to
get advice on how they should repay their mortgage. We believe
that element is getting lost. We shall still campaign for product
regulation, we still believe it is necessary. We are carrying
out further research into whether there have been any improvements
in relation to mortgage advice and that will be published in March.
In the meantime we think the Council of Mortgage Lenders and the
FSA need to look at closing that particular gap.
206. What view do you take of new style financial
products which link mortgages, bank accounts, credit cards, in
a single package?
(Ms Childs) There can be some benefits to that for
consumers in relation to savings. The key issue is how much information
they get and whether they get clear advice on that.
207. Can we turn to money transmission systems,
in particular ATMs? We are told that there are about 28,000 ATMs
in Britain, projected to grow to about 40,000, and currently something
over £100 billion a year flows out of ATMs into customers'
hands. It is the most popular way of withdrawing cash of all the
options customers have. In your view, how should the banks be
meeting the costs of providing this service?
(Ms Childs) As the Committee will be aware, we have
led a campaign about the costs of providing that service. Our
position was that the cost to the consumers should reflect the
actual cost. We were concerned about double charging. We were
also concerned that at that stage consumers did not know whether
they were going to get charged if they took money from a rival
ATM. There have been some improvements there. Clearly there are
now signs which will say you will get charged. The real issue
for us is to what extent Link will continue to abide by that particular
approach and to what extent PayCom will look at this issue.
208. Do you have an idea of what the actual
cost is of providing this service?
(Ms Childs) The Cruickshank Report helpfully intervened
by releasing elements at the time we were criticising the banks
for charging one pound. He said it cost roughly about 15 pence.
I can get the exact figures and provide that to you.
There was no cost reflectivity in the pricing to consumers.
209. Banks appear to be abandoning disloyalty
(Ms Childs) Yes.
210. Do you think they are and has that process
got further to go?
(Ms Childs) Most of them have said they will not have
disloyalty charges. Obviously we welcome that. It comes back to
how long that will continue.
211. What has forced them to give up on disloyalty
charges in your view?
(Ms Childs) Adverse publicity.
212. From customers?
(Ms Childs) Yes, and in the papers and ourselves.
In fairness you could make a case about whether they have been
affected or seen a benefit from not having disloyalty charges.
In our experience they have shifted considerably after there was
a lot of adverse publicity.
213. You appear to think there is a risk that
they could revisit this area when the publicity has died down.
Is that what you are saying?
(Ms Childs) Yes.
214. What leads you to think that?
(Ms Childs) It is a voluntary arrangement and the
banks have changed their behaviour in the past. It is something
we shall have to watch. I do not have specific evidence at this
moment that they are going to change their mind but we do know
that there has been some discussion about whether that was the
215. Do you think the fact that the issue could
be revisited and that the current arrangements are voluntary suggests
a need for some kind of regulation to be imposed in terms of the
operation and cost of ATMs?
(Ms Childs) This again is one of the issues around
the remit of PayCom. Link is in effect the agreement between the
banks and at the wholesale level and what we have been arguing
for is that if there were transparency about the cost at the wholesale
level, then that helps to put pressure on the banks to keep to
their word. Otherwise they can come up with arguments about needing
to charge this because their costs have gone up. There is an important
link between the two.
216. What in your view is the minimum it is
necessary for PayCom to do to satisfy your concerns in this area?
(Mr Evans) The key for us really is to identify the
relationship between the operation of wholesale charging within
the system and the charges you and I pay on accounts for all manner
of transmission within our accounts and between our accounts and
others. What we should like to see is publication of all of the
data sets which come out and more importantly some study by OFT/PayCom
of the relationship data so they actually do surveys to quantify
the charges which are imposed through ATMs or through cheque clearing
or the time it takes the cheque clearing between the wholesale
level and the retail level and publication of that information
on a very regular basis. I am sure they will not like the idea
but we are sure that will do the banking system a lot of good
because it will stave off the need to regulate prices very tightly
and by transparency, giving this information to the public realm,
I would hope you would see regular tables in newspapers indicating
who is charging what and comparison with the charges they themselves
are getting within the wholesale system.
217. Do you think there are any circumstances
in which it would be fair, in your view, for the banks to raise
money through the charges they level for the ATM system in order
to subsidise some other part of the banking service to other customers?
(Ms Johnstone) The current charging system we have
in basic banking services is totally untransparent and very strange.
As Cruickshank pointed out, there are cross subsidies flying in
all sorts of different directions between people who have low
balances and lots of transactions and those who go accidentally
overdrawn and those who do not. It is extremely hard to disentangle
that. I do not know whether the subsidies end up having a regressive
impact or not. One needs to have a much clearer, much more transparent
system before one can make those judgements because there are
cross-subsidies flying around the banking system already.
(Ms Childs) It is very difficult to say yes or no
to that in the abstract because it depends who is cross subsidising
who and whether that is the appropriate mechanism to do it. If
you think of the people who use ATMs and particularly if you are
going to draw benefits from ATMs, if you are increasing charges
there it can be having an adverse effect on one group of customers.
It depends what that cross subsidy is used for. We should prefer
transparent charges and if you need to subsidise something else,
then you make that clear and you find a way to do it rather than
use this rather indirect formation.
218. After 2003 benefits will increasingly be
paid directly into bank accounts. What points would you stress
need to be considered post-2003 in order to ensure that people
are not disadvantaged when making ATM withdrawals?
(Ms Childs) It comes back to charges. If we went back
to the bad days and you were having to lose two pounds of your
benefit every time you took it out, that is just not sustainable.
That would have to be an issue which would have to be agreed between
the banks and the way that the benefit system was paid out.
(Ms Johnstone) Either you need to increase benefits
or you need to have free access to cash and we have suggested
free access to cash.
219. Were you disappointed that the Government
has backed down from its full blooded PayCom proposals and proposed
that the job should be given to the OFT?
(Mr Evans) We were rather amused by the response which
came out of the Treasury where they asked us whether they could
quote us in support of PayCom, only then to shove it into the
1 See p 59. Back