Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 260 - 279)



  260. Moving away from the small business sector to look at that particular proposal, were your members pleased that the Government had moved away from the PayCom proposal to giving regulatory powers to the OFT?
  (Mr Sweeney) I have not taken a straw poll of my members and if I did for reasons I gave right at the beginning, I should get very different answers. Some were disappointed, some were pleased. It depends on your market position.

  261. Could I ask the organisations representing the card issuers to comment on that move by the Government from the PayCom proposal to giving the powers to the OFT?
  (Mr Hawkins) Yes, indeed. We received the White Paper and as a group we shall be looking at that White Paper in detail and commenting by mid-March which is the period for the consultation. We have not looked at it in complete detail and arrived at a consensus on this but I can certainly give you some initial reactions. By and large we welcome the move to appoint the Office of Fair Trading as the Regulator rather than a stand-alone regulator. We feel it is more appropriate to do it that way. We welcome that.

  262. Why is it more appropriate?
  (Mr Hawkins) The Office of Fair Trading has governance over many regulatory areas, Competition Act, etcetera. It is more appropriate as a body. We think that a stand-alone regulator in any event would probably not have the most beneficial effect on our industry. Our industry is extremely competitive. I dare say most of the members of the Committee have credit cards. There is a plethora of credit cards in the market and there is huge competition. We do not believe that a stand-alone regulator would necessarily increase that competition to the benefit of consumers.

  263. In your comments to the Committee before the Government response came out, so it was just based on Cruickshank, you raised quite a few concerns, some of which I found rather contradictory. You were saying that you did not like the idea of a UK-based licensing regime; you thought it would be unworkable. Then you were worried about allowing lots of new entrants in, saying that might create financial instability in your minds. Can you explain why you held those views?
  (Mr Hawkins) There are two things there. First of all, there is the international nature of the scheme. Perhaps I could ask Mr Goosse who looks after the licensing on an international level to comment on that. Then I shall come back to the risk aspect.
  (Mr Goosse) As far as we are concerned we look at the whole of Europe and as a matter of fact, especially after what is being discussed with the European Commission, the openness of the market is really being established at a European level. On the other hand, the advent of the new economy, e-commerce, etcetera, actually suppresses borders so it will be very difficult to determine who is doing business where and from where. We believe that anything which is not consistent with the overall practice at regulatory level in Europe and in line with the globalisation and virtualisation of the economy is prone to create difficulties.

  264. Did Cruickshank not try to get round that by using class based licensing rather than individual licensing? Did he not meet that objection?
  (Mr Hawkins) Members of MasterCard have licensing which is governed at an international level and in fact the international headquarters of MasterCard are based in New York; at a European level there is a European licensing delegation to Europay, so we are quite licensed as it is. Then the key qualification for membership of the schemes is that you have to be a regulated financial institution. This is important from the point of view of the stability of the system. We already operate under quite a strict licensing regime.

Mr Fallon

  265. Cruickshank described the payment clearing system as anti-competitive, slow, inflexible, opaque and a barrier to innovation. How has it improved since then?
  (Mr Tyson-Davies) There was one area where maybe we saw the world rather differently from Mr Cruickshank. There has been a significant measure of innovation since APACS was established with the approval of the authorities in 1985 to meet criticisms of the National Consumer Council in the early 1980s. We have presided over a range of innovation, the latest one that people will be aware of is the inclusion of chips on the plastic cards to guard against fraud. We were the first country to introduce a major real-time gross settlement system in the high value payment clearance. There is a long list of things that APACS has delivered as a cooperative organisation owned and governed by its members but with regulatory oversight in the form of the powers of the Office of Fair Trading, and everything we have done has been approved by the Office of Fair Trading, indeed we were given the 21.2 clearance under the Fair Trading Act establishing that fact.

  266. Does any of this innovation include actually speeding up this system which still takes three days to clear? You must be one of the only businesses in Britain which opens from 9.30 to 3.30, you have your own set of holidays, you are not operating on Saturdays and it still takes you three days to get a cheque cleared. You are still chucking pieces of paper around London by horse and cart.
  (Mr Tyson-Davies) The openness now is nearer 24 hours than ten o'clock to three o'clock.

  267. But cheque clearing is still three days, is it not? Why is it still three days?
  (Mr Tyson-Davies) The cycle of cheque clearing and processing is indeed three days from the day the cheque is paid in; it is processed on the second day and settlement occurs on the third day. Beyond that it is up to individual banks and building societies when they let the customers take the money or give them interest on it. That is a competitive issue. Cheques are a declining item: 30 per cent fewer than ten years ago and our forecasts are that they will be 50 per cent below the current figure in ten years' time. It is still a piece of paper, it is a promise. In order to improve the clearing cycle it would need a major investment and it is an investment which is being actively considered by the banks as we speak.
  (Mr Pearson) Mr Cruickshank also made the point that as a system where decline in numbers was clearly evident, major investment may be difficult to justify. Having said that, one has to look at the limit of one's ambitions in terms of the cheque clearing cycle as APACS run it. If on day two, which is the processing day—day one the cheques are paid in up to close of business and are then put into a processing cycle which takes place on day two—one could create an electronic image of the cheque, a proper readable electronic image, and that were able to be archived and retrievable by competing banks, then theoretically one could bring settlements and exchange, but exchange in electronic form, to day two; at some stage during day two. So you would bring it forward one day. If you could add to that an electronic unpaid system, because at the moment the unpaid system that Britain relies on is the first class post, which I would agree with anyone is a fairly inefficient way of handling unpaid cheques, but if one could create an image which were readable by the paying bank, plus an electronic exchange of unpaid cheques, then you could bring the settlement cycle forward by one settlement day. In itself that does not seem a lot when you look at the level of investment which might be required to achieve that, but we are working on that very thing: the exchange of image and electronic unpaid cheque systems.

  268. Why not bring the whole thing forward into the internet age and allow people to pay their bills on the web?
  (Mr Pearson) That is a different matter. Unfortunately the cheque is a highly popular method of payment amongst consumers. Once when I first joined APACS I was foolish enough to suggest to the OFT that killing the cheque might be a good idea as we moved towards electronic payment systems. I got my knuckles very firmly rapped that the cheque was a highly popular consumer implement and they would not take kindly to a group of banks deciding in concert to try to kill it.

  269. What is the level of amount on a cheque where the signature is not actually checked? Is it £50?
  (Mr Tyson-Davies) It varies very much from bank to bank but it is unusual for a cheque below £1,000 to be examined by a bank.

  270. So what is the point of taking all this paper backwards and forwards between the banks then if you are not even checking the signatures?
  (Mr Tyson-Davies) Because fraud is probably focused on higher value cheques and it is vital for the bank to examine those for risk-management purposes before payment is made.

  271. You do not see Cruickshank's central reservation about the cost of this three-day clearance system, particularly to small businesses, improving.
  (Mr Tyson-Davies) We do not see improvements beyond what Mr Pearson was mentioning at the centre, but from the industry's point of view a huge amount of effort goes to try to persuade small businesses to use electronic payment methods where their account is debited the same day the recipient gets the money, direct credit when people receive their salaries specifically can be used to great advantage by smaller companies at considerable cost saving. However, this country still has a love affair with the cheque.

  272. The point Cruickshank made was that if clearing banks make it hard for businesses to manage their financial affairs effectively this results in higher bank charges from unauthorised overdrafts and forgone interest revenues. You have an interest in keeping this thing in the Victorian era, have you not?
  (Mr Tyson-Davies) I am not in a position to answer that because individual banks will make their own decisions on the charges they make to their customers and there is a real difference between even the major banks in how they treat the clearance and settlement of cheques for their customers.

  273. May I turn to credit cards? The Consumers' Association has given us evidence about a new scam credit card companies have come up with, which is not posting out the statements until well after the statement date, thus allowing maybe only eight or nine days for customers to settle their bills. Who started that one?
  (Mr Hawkins) I heard that and it came as a complete surprise to me. We have no interest in doing that whatsoever. If people want to pay back within the period then that is what they do and many do that.

  274. You would make money out of them not paying back during the period.
  (Mr Hawkins) I would need the details of that so I could look at it and comment on it properly. It is not a scam. We do not do that. They are our customers. We invest heavily in our customers. We have no desire to do that sort of thing to them.

  275. When you say it is not a scam, do you think it is reasonable for a statement not to be posted for four days after the statement date?
  (Mr Hawkins) No, I am saying that I am not aware that we deliberately as an industry, indeed individual banks, withhold the sending out of the statement so that customers are forced into a situation of having to pay interest.

  276. Can I tell you that I have noticed that the statement appears later and later after the statement date? That is something I have noticed over the last few months. Can you take it from me that I think the Consumers' Association are on to something here?
  (Mr Hawkins) We do rely upon the post personal services but I am saying that, certainly speaking for my own bank, there is absolutely no intention to disadvantage our customers in that way.

  277. Would you deplore the practice of posting a statement four days after a statement date?
  (Mr Hawkins) If it were to be found that we were in any way deliberately withholding the sending out, but I just do not believe that happens. We have an efficient operation and I am not aware of the details of such practices. If the Consumers' Association would like to tell us both as an industry and as individual banks, then we shall look at that.

  278. Do you think it is a suitable matter to be included in the Banking Code?
  (Mr Hawkins) I cannot comment on that. I would want to look at the details. This is certainly the first I have heard of such a practice being suggested to be a scam and we have absolutely no intention of being involved in any scams.

  279. If it were true that payments were delayed by up to four days it would be a scam, would it not?
  (Mr Hawkins) Customers have a free credit period within which they can pay either their initial payment or in fact pay the whole balance off. A significant number of people actually pay the entire balance off. They cannot be receiving the statement too late to do that if a significant number do it.

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