Memorandum submitted by the Consumers
The Consumers Association (CA) is an independent,
not-for-profit consumer organisation with around 700,000 members.
It is the largest consumer organisation in Europe. Entirely independent
of government and industry, we are funded through the sale of
our Which? range of consumer magazines and books. We campaign
on a wide range of issues of importance to consumers, including;
food, health, retail and personal finance.
The Consumers Association is committed to campaigning
in the interests of consumers of personal financial services and
we welcome the opportunity to provide evidence on banking to the
The Consumers Association has focussed its evidence
on the following issues:
Competition in UK banking
Banking Services Consumer Codes Review
The retail banking experience
We have also included relevant reports from
The Consumers Association and our publication
Which? magazine, has been researching banking products
and services for many years, providing information on an industry
that plays a central role in consumers' lives. A key part of ensuring
a competitive market working well for consumers is ensuring that
the regulatory approach is proportionate and the CA has been supportive
of the concept of self regulation for simple banking products.
Our approach is based on risk to consumers and for many simpler
banking products, self-regulation should deliver the protection
required, leaving the reputation of the industry in its own hands.
However, self-regulation must be robust and the industry must
genuinely comply and be prepared to respond to customer needs
and improve products' quality and value for money.
We would argue that recent attempts to boost
competition in this industry have failed to have any real impact,
with the last two years probably best characterised as a flurry
of activity with very little change for the consumer. Meanwhile,
consumers are still buying expensive, poor quality products with
much of the market dominated by large players. We have also been
disappointed that in recent investigations, one of the key elements
for ensuring a more competitive industrythe continued existence
of building societieshas been largely ignored. We would
argue that increasing protection for societies against further
demutualisation is one of the best ways to ensure greater competition,
choice and value for money for consumers.
1. The CA uses a risk-based approach to
regulation of financial services. Risk in this context is not
necessarily investment risk, or prudential risk. It relates more
to the complexity of the products, the ability of consumers to
make an informed choice, and the extent of the consumer influence.
This involves assessing all products on the market according to
four key factors:
the size of financial commitment
how risky and complex the products
the length of time of the financial
commitment and how long before the effects of a decision become
the power relationship between the
consumer and provider (ie how likely it is that, without some
form of intervention, relying on information and shopping around
would consumers be able to exert competitive pressure on providers
and raise standards, or indeed be able to protect themselvesvulnerable
consumers are especially at risk here).
2. These criteria allow us to analyse products
and sectors in a consistent manner and to assess the extent of
consumer detriment, and identify solutions which are effective
and proportionate to the problems consumers face. In many financial
services sectors the influence of the individual consumer is fairly
weak, and some mechansim is necessary to level the playing field.
These solutions fall into two broad themes:
the existence of a powerful intermediating
force acting on the consumers behalf. This can either be an independent
intermediary acting as the agent of the consumer providing impartial
advice; or more effectively, trusted institutional intermediaries
who can deliver economies of scale, and have buying power in the
market eg trade unions, employers' pension funds;
where an intermediating force is
not available and consumers must act individually, the alternative
approach is to ensure that the products and services are of sufficient
quality and value. This can be done by self-regulation or more
explicit product regulation depending on the nature of the detriment.
3. We have used these criteria in the past
to call for statutory regulation of complex investment products
such as pensions and endowments. However, for most simple banking
products where risk is much lower, such as savings and current
accounts, personal loans and credit cards, the alternative system
of self-regulation offers a flexible and less costly approach
which can benefit both consumers and the banking industry.
4. The Banking Code is currently under review
and we welcome the process being led by an independent reviewer.
The Consumers Association is being consulted and is keen to ensure
the Code reflects key changes to benefit consumers, for example
by ensuring personal notification for interest rate changes and
that the artificial distinction between branch and non-branch
accounts is abolished (see paras 31-34).
5. The retail financial services market
is characterised by a very small number of large players controlling
the vast majority of current accounts and savings products. Arranged
against this oligopoly position are a very large number of small
competitors who largely operate in niche markets. The pattern
of market entry in these markets over the last few years has been
largely niche in nature and has had relatively little effect on
the market position of the dominant players.
6. While there may be many thousands of
financial products available and in other markets this would normally
suggest a competitive environment, we question whether there is
real and effective competition in the banking sector. Choice in
this market does not automatically equal competition. Given the
sheer number of financial products on offer and the information
imbalances involved, financial services is the one sector where
confusion marketing is put into practice. In our view the concept
of choice is illusory.
7. 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.
8. In a recent Which? members survey
(published October 2001) on current accounts, fewer than a third
of the customers of the big four banksHSBC, Barclays Lloyds,
TSB, NatWestsaid 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, Money Bad Buys, Which?,
9. A major 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.
The Consumers Association has analysed five years worth of research
to examine what the potential impact will be on consumers if the
remaining mutually-owned building societies disappear. The research
concludes that the mutually-owned building societies deliver much
better value to consumers than the shareholder-owned banks. The
cost of the building society conversions to UK consumers could
be in the region of £33 billion over 10 years.
10. 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.
11. The Consumers Association (CA) welcomed
the recommendations of the Cruickshank Report on Competition in
UK Banking, published in March 2000.
12. Money Transmission. The CA welcomed
the proposals to regulate money transmission although primary
legislation is still required for the OFT to take up this role.
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. For the 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, we fully agree that the OFT in this role
should enforce 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.
13. No assumption should be made that the
appearance of competition at the wholesale level translates into
competition at the retail level in financial services.
14. The CA is keen to see the remit of the
OFT regulating money transmission supplemented with a data collection
and transparency provision to ensure that the following data are
(a) all data related to the operation of
the transmission system;
(b) a financial service supplier specific
data set to indicate the relationship between their charges and
performance within the transmission system and the charges and
performance that they offer to their retail and business customers;
(c) The "relationship dataset"
to be publicly available on a monthly basis and posted on the
internet and in press releases.
15. Mergers. Reflecting the recommendation
in the Cruickshank Report that the Government should refer all
mergers between financial suppliers to the competition commission,
the CA welcomed the referral of the proposed merger of Abbey National
and Lloyds TSB. In our evidence to the Competition Commission
we argued that allowing the merger through would chill competition
in the current account market and open the floodgates to further
consolidation, therefore further reducing competition. The CA
also highlighted the significant structural problems in the functioning
of the current account market, an issue that remains.
16. Benchmarks for financial products. The
CA welcomed the Treasury consultation paper on Standards in Retail
Financial Products 2001. In our response, we set out our views
on how a range of comparative tables, CAT marking and product
regulation would operate to drive up standards for a wide range
of financial products.
17. The FSA comparative information tables
particularly present an excellent opportunity to provide consumers
with easy access to objective market information. They should
allow independent consumer groups, media and academics to examine
the market. However, while relying on individually packaged information
may have limited impact (due to the challenges faced by consumers
processing and interpreting the information), the CA believes
that making information public and requiring intermediaries and
providers to contextualise the comparative information should
have an impact.
18. There are concerns that the publication
of comparative information tables and extended use of product
regulation could lead to providers grouping around undemanding
standards which in turn could stifle information and competition.
However, we take the view that publication of comparative data
on the entire market in conjunction with meaningful product standards
to act as beacons of good value should put upward pressure on
market quality. Cutting through the proliferation of products
and confusion marketing that exists even in the less complex sectors
will be a significant challenge. This proliferation of financial
products and confusion marketing allows poor value products to
escape scrutiny. For the beacon approach to work it will be important
to structure the regulatory system to ensure that maximum attention
is focused on the comparative quality and value of the product
or service the consumer is considering buying.
19. Complaints. The CA agrees with the
recommendations regarding complaints and is disappointed that
no further work has been progressed in this area. This was also
raised by the Banking Services Consumer Codes Review Group and
we wait for the industry to make progress on these issues.
20. The Consumers Association welcomed the
report and recommendations of this group and if the recommendations
are fully followed up, the report should make the Banking Code
more effective and help promote continuous improvement in the
21. Switching current accounts. The
Consumers Association supports the Groups' recommendation of a
new switching standard of five day startfive week finish
and the recommendation that data on performance against this standard
should be published. Furthermore, we take the view that the objective
should be to complete the transfer within one month salary cycle.
The speed of switching was an issue raised by
the Treasury Committee in its previous report into banking and
we view the ease and volume of switching as a key element to ensuring
consumers exert greater competitive pressure on banks.
Many of the large banks which dominate the market
for current accounts offer poor value products in terms of interest
rates and charges. Clear and comparative information and the ability
to easily switch is a key element to driving up the quality and
value for money of this most basic bank product. For too long
the process had been slow with consumers still wary of switching.
However, some interesting statistics came from Which? members
survey, published October 2001:
Of those who had considered switching,
55 per cent didn't do it.
46 per cent of those people who had
considered switching but didn't, gave the reason of being worried
about direct debits and standing orders; and
40 per cent of those people who had
considered switching but didn't, gave the reason of the whole
process being too complicated.
However, this survey also found that
73 per cent of people who switched, did so with ease.
We understand that a new electronic system for
switching has been introduced which should make the switching
system speedier. We also view the quite aggressive switching marketing
by smaller banks as a welcome move to ensure consumers know more
about the better deals on offer from banks outside the big four
high street names. We would therefore hope to see a greater degree
of switching in the coming year. We also believe that ensuring
consumers have access to information which they can use to more
actively shop around is essential (see below CASS).
22. Customer Annual Summary Statement (CASS).
We support the concept of the CASS which should be a useful tool
for helping consumers monitor their finances. We would suggest
that for this tool to be effective as a switching trigger, every
effort should be made to ensure that there is a high degree of
synchronicity between the CASS and the FSA's comparative information
tables. Consumers should be informed about where the comparative
tables can be obtained, and important information should be presented
on a consistent basis to allow easy comparison with the comparative
23. Biennial codes review. We support
a more transparent, formalised process, and are supportive of
the process now in train where an independent reviewer is leading
the 2002 review of the Banking Code.
24. Publication of aggregate and individual
compliance data. We take the view that publication of aggregate
and individual data is extremely important to exert peer group
pressure for continuous improvement in standards.
25. Money bad buys. Research by Which?
in member surveys has shown the big four banks dominate the current
account market and although precise market figures are hard to
come by, we believe their share to be in the region of 70 per
cent. This figure has altered little in the two years since Cruickshank
was published. In addition, when we analysed a range of simple
banking products, and reported in September 2001, the large high
street names fared badly compared to best buys, especially on
credit cards and personal loans (Bottom of the Class, Which?
26. Credit Cards. Over the last 10 years,
many credit cards have been charging high rates of interest, often
over three times the base rate of interest. Over the last year,
the Bank of England base rate has fallen by 2 per cent but the
majority of credit cards haven't reduced their interest rates.
It's quite likely that millions of people are still being charged
the same rate of interest for borrowing on credit cards than before
rates fell, and therefore credit card companies are making extra
profit at consumers' expense.
27. In a Which? members survey (published
January 2002), we found that almost everyone who switched their
credit card found it easy (97 per cent) and there are significant
benefits to switching in terms of lower rates on both transfer
amounts and new purchases.
28. Statement timing can also be problematic
for consumers. Many newer cards give a shorter period within which
to pay and we are concerned that this is not always adequate,
particularly 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 send them by second class
post, so 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 to 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. We recommend
that payment dates should be calculated from the date the statement
is sent rather than the date it is produced.
29. We would welcome the following to be
clearly indicated on credit card statements to improve consumer
information and understanding, and also to enable better comparison
between products and therefore act as a spur to competition.
APRs should be provided for purchases
and cash advances.
Promotional rates should be clearly
indicated with clarity about which transactions they apply to,
the amount charged at each rate and when the rates end.
Base rates should be displayed to
enable borrowers to compare this with the APR.
Statements should also indicate whether
an annual fee is charged, the number of days to pay from the statement
date shown, details for cash advance fees, exchange rate loading,
missed payment and over-limit fees.
How interest is calculated should
be explained and the statement should show the transaction date
and posting date for the transactions.
There should be an improvement to
information or a change in practice regarding special interest
rates for balance transfers. At the minimum, the issuers should
be clearer about whether the repayments reduce transferred balance
(at the low rate) or new purchases (at the standard rate). We
would prefer balances at the highest rate of interest to be paid
off first when payments are made to the outstanding debt.
30. 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.
31. Superseded accounts. The issue of
superseded accounts was raised by the Treasury Committee in its
report, Banking & the Consumer. This remains a key
issue for consumers and we are working through the Banking Code
review process to urge the industry to change its practice in
32. We have evidence of ongoing problems
with superseded accounts. Which? magazine reported in February
2001 that in spite of changes to the Banking Code, superseded
savings accounts were still an issue. This was for several reasons,
but crucially banks weren't defining accounts as superseded, even
though there were other, similar accounts available paying more
interest. In effect, banks were sticking to the letter of the
Code (rather than observing the spirit of the Code) and only telling
people about interest rate reductions via notices in branches
and the press. This meant customers often did not know when the
interest rate on their account had fallen, because they weren't
33. We have therefore concluded that in
order to ensure consumers are fully informed and able to make
timely decisions regarding their accounts personal notification
of rate changes is required. We believe it is unsustainable for
the industry to refuse to personally notify customers if the account
is "branch based" but then also reserve the right to
change rates whenever it chooses. This results in a lackof certainty
and with changing consumer behaviour in operating their accounts,
simply advertising rate changes in newspapers and through branches
is not sufficient. Many consumers will withdraw cash from ATMs
of other institutions and pay in cash through standing order.
Without personal notification, many consumers will not realise
the rate has changed.
34. The issue of personal notification highlights
a wider issue of the artificial and, we would argue, now redundant
distinction between branch-based/non-branch-based savings accounts.
Customers access their accounts in a variety of ways, many through
remote means, despite the account being defined as branch based.
It could be argued that the distinction is effectively an excuse
by banks to keep the interest rates on branch based savings accounts
low because they claim they are more expensive to run. From a
consumer's perspective perhaps what is more important when banks
consider whether accounts share "similar features",
are definitions such as an easy access or notice account.
35. Personal loans & Cash ISAs. Personal
loans and Cash ISAs are also two products which cause concern,
particularly regarding the sales of payment protection insurance
on loans and general advice and guidance during the Cash ISA sales
process. The Code should be strengthened to include standards
for these products.
36. Payment protection insurance is poorly
and over-sold, is often expensive with many exclusions and we
are concerned at the practice of adding the cost of the insurance
upfront to the loan as consumers therefore pay interest on it.
We would favour the use of monthly premiums. There is also an
extreme lack of clarity on the cost of insurance and its exclusions
and detail of cover.
37. We recommend that Rule of 78 is scrapped
and urge discussions on this to progress as quickly as possible
and that it or other repayment penalties needs to be clearly explained
in literature and terms and conditions so that consumers understand
the costs of early redemption. We would like to see the rebate
called a penalty and furthermore it shouldn't apply to the insurance
if this has been added to loan.
38. We have stated consistently, since the
introduction of the ISA, that the link between the three elements
should be severed so that each has its own independent limit.
However, in the meantime we would like there to be a clear warning
on mini cash ISA application forms to explain the effect of taking
one out on the limits for any stocks and share ISA investment.
In addition, bank staff should make this clear in a verbal explanation
and there should be adequate training to ensure correct guidance
is given to consumers.