Select Committee on Treasury Minutes of Evidence


Memorandum submitted by the Consumers Association

  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 Committee.

  The Consumers Association has focussed its evidence on the following issues:

    —  Self regulation

    —  Competition in UK banking

    —  Banking Services Consumer Codes Review Group recommendations

    —  The retail banking experience

  We have also included relevant reports from Which? magazine.

SUMMARY

  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 industry—the continued existence of building societies—has 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.

SELF-REGULATION

  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 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;

    —  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 themselves—vulnerable 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).

COMPETITION IN UK BANKING

  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 banks—HSBC, Barclays Lloyds, TSB, NatWest—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, Money Bad Buys, Which?, September 2001).

  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.

CRUICKSHANK REPORT RECOMMENDATIONS

  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 made public:

    (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.

BANKING SERVICES CONSUMER CODES REVIEW GROUP RECOMMENDATIONS

  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 banking sector.

  21.  Switching current accounts.  The Consumers Association supports the Groups' recommendation of a new switching standard of five day start—five 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 tables.

  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.

THE RETAIL BANKING EXPERIENCE

  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? September 2001).

  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 this area.

  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 personally notified.

  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.

Personal loans

  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.

Cash ISAs

  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.

April 2002


 
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