Memorandum by the Consumers' Association
1. The Consumers' Association welcomes the
opportunity to provide evidence on banking to the Treasury Select
2. Consumers' Association and Which?
Magazine is committed to reporting and campaigning on banking
issues in the UK. For many years, CA has researched issues in
UK banking and has expressed concerns about levels of competition
within the industry and the quality of products and customer service.
3. Consumers' Association has focused its
evidence on the following issues:
4. We have provided a summary of our views
on the above issues on the following pages. We have also included
relevant research from Which? magazine covering the areas
outlined above [not printed]. In addition, we have attached
Consumers' Association comments on HM Treasury's response to the
Cruickshank report into banking in the UK [not printed].
Consumers' Association's detailed comments on
competition in retail banking can be found in the attached reply
to HM Treasury on Cruickshank Report into UK banking. This response
also contains our suggestions on the structure and remit of the
payments system regulator (formerly PayCom, now to be situated
within the Office of Fair Trading) to ensure that the consumer
interested is fully represented.
Key points on competition
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.
It is received wisdom that competition raises standards in industry;
however Consumers' Association questions whether there is real
and effective competition in the banking sector. While there are
many products to choose from, we believe the concept of choice
is illusory given the various barriers to effective competition
that exist in the financial services industry.
There are already a large number of providers
in the market offering a wide range of banking products and servicesin
many cases, offering reasonable quality products. However, a small
number of large institutions still control the vast majority of
basic banking services such as current accounts and savings accounts.
In a recent Which? survey (October 2000)
on current accounts, fewer than a third of the customers of the
big four banksHSBC, Barclays, Lloyds TSB, Natwest/RBSsaid
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).
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.
Consumers' Association guardedly welcomes the
new role for OFT in regulating payment systems, in the sense that
we can see advantages in the OFT retail specialists having the
opportunity for close co-operation with those charged with overseeing
the wholesale end of the market. However, as ever, we will reserve
full judgement on whether these proposed arrangements will work
for consumers until we see fuller details on resources, accountability,
transparency, and reporting mechanisms.
With regards to competition at the wholesale
level, it would be difficult to argue that by focusing on removing
the barriers to entry at the wholesale level with a view to encouraging
more entrants would automatically lead to improvements in competition
at the retail end. In our view, any assessment of effective competition
should factor in the barriers to access that prevent consumers
from exerting competitive pressure on the industry. For 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, with regards to payment systems
we fully agree that the OFT should be charged with enforcing 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. For example, assuming that
the cheque clearing system regulated under OFT rules assumed a
set time period and charging structure, we would like to see the
degree to which the principles embodied in the cheque clearing
systems between financial services companies was replicated in
the service offered to consumers.
No assumption should be made that there is an
automatic link between a fairer, less discriminatory and more
transparent money transmission system and a fairer, less discriminatory
and more transparent retail financial system. The nature of this
link is probably more important to consumers than the effectiveness
of the OFT in enforcing an effectively competitive transmission
However, another key 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. Consumers' Association analysis has consistently
found that on average building societies offer the best deal for
consumers in terms of lower mortgage rates and higher savings
As the Review of Banking in the UK was meant
to be about competition in banking, 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.
The Consumers' Association is supportive of
the Banking Code as we consider that overall, it sets good standards
for banks' working practices with customers. There are specific
areas where Consumers' Association has called for improvements
to the Code and although some of these are still outstanding,
we welcome the latest edition of the Code, which came into effect
on 1 January 2001.
Specific comments on the Code
Consumers' Association strongly believes in
a proportionate approach to financial regulation. Our methodology
for assessing consumer detriment is based on the level of risk
involvedrisk in this context relating to the complexity
of products and the ability of consumers to make informed decisions.
This involves assessing all products on the market according to
three key factors: the size of the 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. For most simple banking products, risk
is relatively low compared to complex products such as pensions
or investments and therefore self-regulation offers a flexible,
less costly approach than can benefit both consumers and the banking
One of the aims of the Code is to allow competition
to deliver higher standards of banking practice. As outlined in
the previous section, Consumers' Association believes there is
not the level of competitive pressure you would expect in a sector
that plays such a fundamentally important role in the everyday
lives of consumers. This is where the Banking Code has a vital
role to play. In the absence of natural competitive forces, there
is a real need for an alternative external agent to raise standards
and promote the interests of consumers. The Banking Code could
fulfil this role if the standards are challenging and regularly
reviewed and updated.
The success of any for of self-regulation depends
on two main factors. Along with challenging standards, compliance
with and rigorous enforcement of the Code is essential. Consumers'
Association has been critical in the past of the lack of enforcement
when breaches of the Code occur. However, we are hopeful that
the Banking Code Standards Board is determined to do more to enforce
the Code as it is written.
Consumers' Association remains concerned that
banks comply with the spirit as well as the letter of the Code
on the issue of superseded accounts. There are concerns that certain
banks are managing to get round the actual wording of the Code
to pay low rates of interest on accounts held by long-standing
customers. It may well be that the wording of the Code will have
to be tightened up yet again.
Consumers' Association welcomes the establishment
of the Financial Ombudsman Service (FOS) and the one stop shop
approach to financial complaints. One of the major failings of
the pre-FSMA regime was the fragmented nature of the various redress
mechanisms. We do believe that the creation of the single Ombudsman
service will do much to help consumers obtain redress, by having
a single point of entry. This will remove two of the main barriers
that prevent consumers getting access to due redress: it will
make it easier for the authorities to promote awareness of the
existence of a redress scheme, and once in the system it should
make it easier for consumers to negotiate their way through what
can be a complex system.
Consumers' Association welcomes the information
provided by the Ombudsman on the overall picture of the complaints
and judgements made. However, we believe there is a strong argument
in favour of releasing details of complaints about and judgements
against individual banks. This would increase pressure on banks
to rectify any longer term problems that may be arising and provides
consumers with more transparent information about their bank or
Consumers' Association is concerned about several
issues relating to the transparency of information available to
credit card customers.
Statement timing: many newer cards give a shorter
period within which to pay. We have received a number of letters
from our readers about this as it does not always allow an adequate
time to pay, especially 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 are sent by second class
post. 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: 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.
There should be clear explanations of how interest
is charged on statements, as many people still do not understand
that interest will be charged on the whole statement balance if
a partial payment is made.
Interest rates should be printed on statements.
There should be better information or a change
in practice regarding special interest rates for balance transfersat
least issuers should be clearer about whether your repayments
reduce transferred balance (at the low rate) or new purchases
(at the standard rate).
Non-comparability of APRs should be tackled.
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.
Under the Consumer Credit Act, a cardholder's
liability for loss should be nil, rather than £50, if the
card has remained in their possession. This should be reflected
in the Banking Code. For consistency we would like to see this
voluntarily applied to debit cards as well.