Examination of Witnesses (Questions 1
WEDNESDAY 1 MAY 2002
1. Can I open this evidence session by welcoming
you to the Committee. For the sake of the Hansard writers, could
you introduce yourselves, please.
(Ms Childs) Head of Policy, the Consumers' Association.
(Ms Hanson) Senior Public Affairs Officer, The Consumers'
(Mr Naylor) Senior Researcher, Which? Magazine.
2. Welcome, good afternoon. We are looking into
this issue of banking, particularly two years after Cruickshank,
and asking a number of what we hope to be fundamental questions.
From the submissions we have heard already in the Memoranda, especially
your own, we just wondered if much has changed at all in that
two years; if there is any choice for the consumer in the market
that is worth the name, and if there are quality products rather
than perhaps inferior products, which you have highlighted in
your Memorandum. Do you have any comment on that?
(Ms Childs) I do think that we do feel
the sense of deja vu here, particularly as you called us
before you last year. Many of the comments that we have made in
that submission we do repeat. There has been some change, particularly
in relation to the smaller banks and some of the products that
they are offering, but I think it is fair to say that we are very
disappointed with some of the proposals that were put forward
to try to alleviate some of the problems. PayCom, as the best
example, have not been progressed. There has been some progress
in relation to the Banking Code and we can talk about that in
more detail. If we do, I think it is fair to declare an interest.
I was part of the DeAnne Julius Committee, but I am here to represent
the Consumers'Association's views.
3. It does not look as if we are getting any
change at all. What do we need to do? What outstanding issues
need to be addressed by the banking sector following Cruickshank,
DeAnne Julius and other reports?
(Ms Childs) I will ask Mike to come in and talk about
credit cards. In relation to current accounts, I think there are
two main issues. The first is in relation to the ease of switching.
A number of activities have been put forward, not least the commitment
to have the five day and five week switching. I think it also
has to be said that consumers have their own role to play in switching
their current accounts. One of the issues there which our own
Which? surveys have shown is that there is still a lot
of concern out there which is misplaced, that if you switch your
bank account, then you are going to put yourself at risk. We have
to ensure that the switching process is made easier, but we also
have to educate consumers that the risk is lower than they think
it is. We, over the next few days, will be putting some effort
into trying to get that message across. It is important in terms
of ensuring that there is oversight of that process, and also
the money transmission system, because we have real concerns about
the time that it takes to clear cheques and the time it takes
to transmit money electronically. That PayCom has pursued, and
we are very disappointed that that seems to have lapsed at the
(Mr Naylor) As far as credit cards are concerned,
60 per cent of people still have a card with one of the big banks
charging, typically, over the last decade, very high rates of
interest, typically three or four times the base rates. What you
find as well is that these high rates do not tend to change over
time as base ratesfor example, over the last year, base
rates have fallen by 2 per cent, but most credit cards have not
lowered their rates at all. It is very easy for people to switch
credit card. There is lots of competition; there are lots of better
cards around that people could be switching to. For some reason,
people are not switching to those and they still have credit cards
with the big banks.
(Ms Hanson) People find it very easy to switch. We
did a survey and the findings showed that the percentage was very,
very high. Switching credit cards is very easy. People who switched
current accounts, for those people who actually did it, 73 per
cent of them found it to be a very easy process. So when people
actually overcome their fears, or maybe inertia, they do find
that switching can be beneficial, particularly for products where
you can save money. For example, for many of the big four banks'
current accounts, the interest rates on credit balances is as
paltry as 0.1 per cent, whereas some of the best offers go as
high as 3 per cent. Then, of course, if you go overdrawn, some
of the interest rates on overdrafts are very low, just around
9 per cent for some of the best buys, but the big four banks are
usually double that. So consumers can make huge savings by switching.
4. Could I ask, you state in your Memorandum
that despite the failings of the big banks, providers of better
quality products are being unable to challenge them in the retail
market. Could you outline for the Committee what the main obstacles
to greater competition are in the banking industry?
(Ms Childs) It is a mixture of factors. There are
still some structural issues in relation to the ease of switching
and transmitting of money and switching accounts. There is also,
as I have said, consumer inertia, which is based on that. There
are also issues of the banks being quite clever in the way that
they respond to some of the competition that comes in in relation
to some of the discriminating prices that they are putting forward.
For us, it is a mixture of those factors, which means that it
is very difficult for some of the new entrants to come in.
5. Could you be a bit more specific. You mention
switching: are there any specific measures you think that the
Authorities could take to rectify that, or is it merely for the
market to sort out? If you could give some specifics: what could
the Authorities do, in your judgment, to rectify some of these
(Ms Childs) In relation to switching we have to ensure
that the Banking Code Standards Board implements and ensures that
the Julius Committee recommendations on the five day start and
five week ending are actually enforced. The Committee also made
a recommendation that that figure should come down, and it would
be possible over time as technology progressed to make that system
easier. In relation to money transmission systems, it is very
difficult to say whether a voluntary system is going to work.
The Government made the case that PayCom was necessary following
on from Cruickshank, and they have not found, it appears, a legislative
time to push that through. I think it is a very important mechanism.
We are also gathering evidence, but I cannot give specifics at
this stage, about whether there are any other specific competition
structural issues that need to be reviewed. When we have completed
that investigation, then I am happy to pass that information to
6. That is helpful. Could you give us an indication
of when that work might be available?
(Ms Childs) I think that we are looking in the next
couple of months. It may not be within the time of your report,
I am afraid.
7. Might it be possible, Chair, for us to ask
you to give us a rough cut, so to speak, just to give us an indication
of where your thinking is, even though it may not be in final
form, because I think some specifics from you would be helpful?
(Ms Childs) Yes, I will write to you and set it out.
8. Could I finally ask this: have recent changes
to the structure of the banking sector, such as internet banksI
have in mind in particularmade any difference to the levels
of competition in the sector as a whole? Is there any data on
(Ms Hanson) We do not have any data on that overall.
We have highlighted places and companies who have been quite aggressively
marketing competitive products, for example, in the current account
(Mr Naylor) Similarly for credit cards, competition
has certainly reduced rates overall. There are much more competitive
rates available which makes it even more surprising that people
are staying with the high rates. Competition has undoubtedly led
to rates being reduced.
(Ms Childs) It is important on this point, and perhaps
this is what you are driving at, to distinguish between the wholesale
and the retail competition. A number of the internet banks are
offering better rates. Some of them limit the type of customer
who can use those accountsyou have to have minimum amounts
of money in your account, but it also needs to be noted that a
number of those are offshoots of the existing Big Four. So in
terms of the overall balance of competition, it has made some
difference in the retail offerings in terms of the control of
the current account markets in particular. It has not yet made
a big inroad into the Big Four's dominance in that area.
9. Do you expect it to make significant inroads
in the next couple of years?
(Ms Childs) That is difficult to quantify in terms
of the take up in internet banking. We have seen increases in
that. I would prefer, rather than to waffle, to take that question
and to write to you specifically on some of the work that we have
done on that.
10. On projections?
(Ms Childs) Yes.
Mr Ruffley: Thank you.
11. You refer, in your evidence to us, to your
continuing concern of the lack of direction from building societies.
Can I just be clear about the research you are offering us: you
say the cost of the building society conversions to UK consumers
could be in the region of £33 billion over 10 years; is that
the conversions that have already happened, or the conversions
that might happen?
(Ms Hanson) The ones that might happen, yes. We have
got a Paper we can send you which sets that out, but it is if
the building societies that are still in existence demutualise,
and the cost in terms of higher interest rates on borrowing and
lower interest rates on savings would add up to that amount over
the next 10 years, that is what we have estimated.
12. We look forward to the Paper you are going
to send us, but just in a sentence, how do you establish that
(Ms Hanson) By looking at the various different interest
rates that are applied, because the building societies usually
offer much better value in terms of cheaper borrowings and better
returns on savings than either those building societies who have
demutualised, or the existing banks and building societies, so
we very much regard them as a competitive bulwark against the
banks, and one of the key aspects that keep rates competitive
13. So the remaining mutuals are still strong
enough and large enough, in your view, to ensure effective competition
against the Big Four?
(Ms Hanson) They are only one part of the factor,
I think, but they are a very important part, to keep a check on
the other banks, particularly the big four, and the rates they
are offering consumers.
14. What is the legislative protection you are
particularly looking for for the remaining mutuals?
(Ms Childs) Clearly you cannot stop someone pushing
a vote forward for demutualisation. What we are looking for is
a protection that allows some restriction to be based on the windfall
payout that customers would get, based on the length of time with
that particular building society and the amount that they have
invested, and that would act as a deterrent to carpetbaggers that
were coming in just for a quick kill.
15. So it is not the statutory procedures that
you need tightened up, it is the windfalls?
(Ms Childs) It is a way of getting at the problem,
which is if you had legislation which meant that it was possible
to put a limit on the way in which the windfalls were paid out,
then that is a way of deterring it because it is not possible
to actually stop people putting a vote forward, because they have
the democratic right to do that.
16. You say there is a severe risk of levelling
down competition in the high street because of the demutualisation
that is already taking place. Is that your view, that the standard
of banking services to the consumer has now been reduced to the
lowest common denominator?
(Ms Childs) . . . to maintain those standards and
that is on the basis, as Louise has said, because if it offers
an alternative and offers better rates, then that has an effect
on banks. In relation to the service that banks give, repeated
Which? research has shown that there is a low level of
customer satisfaction with the Big Four, and less than a third
of the customers of the Big Four that we surveyed have said that
if they had their time again that they would open an account with
their existing bank. So I think there is a separation, and I am
sorry if our evidence is not clear on this, between the effect
of the better rates, that type of service, and the service levels
17. If you are able to estimate the cost to
the consumer of the conversion of the remaining mutuals, are you
able to estimate the cost to the consumer of the conversions that
have already taken place, over say, a 10 year period? Would it
be of the same order of £33 billion?
(Ms Childs) I did not carry out that calculation.
I would assume that it would be possible to do it the other way,
and I am happy to write to you on that point.
18. What strikes me is that, first of all, you
are suggesting that if there is a complete demutualisation, there
will be much less competition in the market, yet there will be
more players on a level playing field because they will be demutualised.
What I cannot understand, and it closely relates to the switching
issue, is why, whereas in the lending market, there has been huge
competitionlook what has happened to mortgage lendingbut
in the high street banking market, this competition does not seem
to be getting through. Have you got an answer to that paradox?
(Ms Childs) In relation to your first comment, there
is a difference between the number of players in the market and
the effectiveness of competition for consumers, and I think that
is the distinction we would make. We would not judge competition
just by numbers, but on the quality of the service that consumers
would be getting in terms of the appropriateness of the product,
so that is the point that we would make. There is an illusion
of choice by just looking at the numbers; you have to look at
the quality of the product they are getting. In relation to the
paradox, I think with mortgages you are right, there has been
a lot of competition in switching in that market. In relation
to current accounts, and Mike will talk about credit cards, I
think some of that, people just think that all the banks are as
bad as each other, or it is not worth doing because you are not
going to save any money, and there are also fears about losing
direct debits and transfers. I think there is much more fear about
doing that and inertia in that market than there has been in the
19. On direct debits and access to various more
sophisticated banking services, banks provide them on a hierachy.
They grade their customers, everybody knows they grade them, some
as A, B, C, D, E, some are graded some other way, with a number
system or whatever it may be. Perhaps, is that not part of the
information that needs to be disclosed, and also available at
the time of switching, so that the bank that takes on the new
customer knows exactly what the previous bank has graded them?
(Ms Childs) The only danger with doing that is that
it can replicate discrimination if you are actually saying that
the bank who is receiving it should take as the word the grading
that the previous bank put that person into. What the DeAnne Julius
Committee said was that there was a benefit in giving positive
data on consumers when they were switching. I think the issue
of grading consumers is less of a positive benefit for them and
is a way, as you would expect, for banks to target the consumers
that they want and to exclude the consumers that they do not want.
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