Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. Why do you think they have been so slow to do that?
  (Ms Johnstone) It is a question you need to direct at the banks. Maybe they see that market segment as a less profitable one to service and they are going to sell fewer of their higher value products to that sector. Maybe they feel they are going to require subsidies to run these accounts. I do not know the reasons but it is very clear that they are not going out and actively selling the accounts. It is a question you can address to the banks.

  201. But if they do not promote these basic bank accounts they are in effect freezing out good customers who happen to be on low incomes.
  (Ms Johnstone) Yes and who may be much more profitable customers in the future. Yes, that is true. One of the comments we have made is that the banks need to be doing much more work on promoting these accounts and so will the Post Office when the details of the universal account which is being talked about now become clearer and the details are very sketchy at the moment. They will need to put resources into marketing these accounts. It will become particularly important as benefits are all paid electronically. That process is going to begin in 2003. Obviously there is a role for Government there as it is their decision that benefit payments will be paid into accounts.

Mr Cousins

  202. You did draw attention to this and I ought to give you an opportunity of saying what improvements in the Banking Code both your organisations would want to see.
  (Ms Childs) It is no secret that the Consumers' Association has been very critical of the Banking Code in the past for two reasons. Firstly, we thought it did not cover all of the areas it should. Secondly, it was not enforced properly. We worked with the industry, along with others, on the revision to the Banking Code and broadly we welcome it. There have been notable improvements in it. There are probably two areas which I would highlight that I think need to be looked at and I have mentioned a couple of them before. Firstly, in relation to switching, there is now a requirement in the code that they have to cooperate, but, as we have discussed, I am not sure that goes far enough in dealing with the problem. There are issues around making bank accounts available to people with different identification that need to be looked at. There is also an issue for us in whether the banks really are going to comply with the spirit of the code as well as the letter. There has been a long running sore between us and the banks in relation to low interest payments on savings accounts. The previous code dealt with that. Basically the issue is that in order to attract new customers banks and building societies will heavily market new accounts with very good interest rates. Then what happens when attention is removed from that is that interest rates go down and they start the process again. They market new accounts to new customers with high interest rates. The customers they have already pulled in then get stuck with low rates. The revised Banking Code was supposed to have dealt with that. It said in the language of the code, if that account has been superseded, that is there is a new account with a higher interest rate, which has similar features, then the bank has to transfer the customer to that area or it has to offer them a similar interest rate. Which? has just finished carrying out research and we will publish in February and I am happy to share that with the Committee at that stage. We have shown that the banks are still using a variety of ruses to get round that. We think that is completely unacceptable. They know precisely what the problem is and yet they are using weasel words like "Well it has to be absolutely identical before it has similar features", or, "Okay, we are not actively marketing it, but it is still available in branches". They are still seeking to get round the spirit of the code. Although we broadly welcome it, we do think it is an improvement, it is very much in the banks' court to show that they really are going to apply to it. The other issue is in relation to enforcement and I have to say we were quite sceptical about whether the Banking Code Standards Board would have effective oversight. The important difference about the new Banking Code is that previously compliance was very much just a paper exercise. You just say "Yes, I'm complying". What they have done now is put in place better monitoring procedures so they carry out mystery shopping, they actually send people in to check. We have also been encouraged by a recent approach to low savings in Bristol and West. There is encouragement, but for us there is still a little scepticism about whether they are actually going to follow the spirit. We believe that detailed regulation is not appropriate in this area, but given their stranglehold and given the dominance in this area and the difficulty of consumer switching, there is a need for high standards and those standards have to be enforced. In summary, yes, it is a great improvement, yes, there are encouraging signs, but equally we have some concerns about whether they are really going to be committed to it and only time will tell on that.
  (Ms Johnstone) I should like to concur with what Michelle said about that. The code is a lot better than the previous one and we welcome that, but we have yet to be convinced that it will be adhered to completely. Earlier research we have done showed that the previous code was not necessarily complied with. Will they do what they say they will do and will that permeate right the way down the banking system? Policy and practice are not always the same.

  203. The report the Government requested on these issues, the Cruickshank report, recommended a licensing system. The Government has set aside that proposal for something much more complex and complicated. Do you think that the Government should have stuck to its guns and gone for a licensing system which would have provided an automatic means of enforcement over these issues?
  (Mr Evans) It is a very difficult one to answer because of the range of different problems which could be encapsulated in the licensing system. When you look at other industries which have licensing systems, they tend to be those which have moved from public monopoly into private quasi-monopoly or duopoly. There a licensing system is usually an effective way of dealing with, in a sense, structural abuses of the market. The difficulty with the banking sector is that because you have a private oligarchy, you have four large players, it is very difficult to separate out structural from behavioural problems and so a licensing regime may not fully deal with the issues because you do not quite have the evidence to prove the problems yet. That is why taking it on a staged basis before thinking about licensing is probably the best approach. A licensing approach and a very heavy regulatory system is not quite there yet in terms of the evidence to prove the case. That is why the role of PayCom is so important: to be able to identify whether there is a systematic problem in terms of the relationship between the charges you and I pay on a bank account and the charges for operating in the system and some of the other issues to do with the Banking Code. If those can function then there may not be a need for licensing yet. If they do not function then you may need to look at a much stronger regulatory hand. In a way you need to let those systems function before you can go the full gamut in a sense.

  204. Your colleague has set out a very powerful case of abuse. Why is it that you are not prepared from the Consumers' Association to be tough in defence of consumer rights?
  (Mr Evans) It is not necessarily not being tough on consumer rights, it is basically what are the best tools to achieve the job. When you are looking at the issue of the relationship between charges in the retail and wholesale systems, there is not yet sufficient evidence to prove conclusively the case. We all have fairly clear anecdotal evidence and we all have decent research to indicate that there is a problem, but to jump into designing a licensing system before you have very, very clear anecdotal evidence will cause you more problems at this stage than good. We are not ruling it out as a possibility, but you need to build a case very, very tightly because you are effectively dealing with regulating a private industry in a very, very tight way. I am not sure at this stage that that system can be designed as effectively as it should be.
  (Ms Childs) There are issues around the licensing system and then there are issues around the Banking Code. In relation to the Banking Code, what I have set out and what our research will set out is that there is still a problem with an aspect of it. The issue is: how is that going to be dealt with? If it is not dealt with appropriately, we are told that further regulation is not needed, there are costs and benefits to regulation, this is not an area which needs detailed regulation because it can be dealt with, they have upped their monitoring, they have upped their compliance, they are going to get tough. They now have to prove it and if they do not prove it, then it will be clear that self-regulation has failed in this area. I do think that there have been improvements and it is really in the hands of the oversight body as to how they are going to deal with this. If they do not deal with this robustly, then we would be coming back to you and saying that self-regulation is not working.

  205. Even the report which the Government commissioned, the Cruickshank Report, did not call for product regulation. What do you feel about that?
  (Ms Childs) It is no surprise that Consumers' Association believes there is a need for product regulation in relation to mortgages. This is where we part company with Cruickshank. The approach we take to whether you need self-regulation or regulation in the market is based on risk and that risk element has three parts to it. Firstly, the extent of the financial commitment that an individual consumer is making. Secondly, the complexity of the product: can they understand it and is there a genuine choice there? Finally, the length of the financial commitment and the time it will take to find out whether you have a right decision or not. We think, for example in relation to the banking sector, that a basic bank account is not that risky, is not that complex, so there is no need for detailed regulation, but we do believe there is a need for self-regulation. As you move higher up that spectrum, we believe that there is a greater need for regulation because the risk of what consumers are exposed to is great, both in financial terms and if something goes wrong. That has been accepted in relation to pensions and investments but it has been rejected in relation to mortgages. We are still astonished by that decision because our research showed that the mortgage code had been ignored by most of the banks and had not been enforced. The Council of Mortgage Lenders put their hands up and said, "Yes, it is". Despite all of that and the problems we have had with endowments, it was still decided that there was no need to regulate in this area. We believe that there is a real issue here. Consumers need advice and Which? surveys have regularly shown that they are not getting adequate advice. What we are now left with is in effect a regulatory gap. If you go to get a mortgage as a consumer there are two things you really need to know about. Firstly, which particular deal you should have, should it be capped or fixed, and what repayment method you should use. The situation we now have is that the mortgage code covers the terms of the deal, so they will tell you whether it is fixed or capped. But if you want information about the repayment mechanism then that is dealt with by the FSA. So they supervise it as investment advice. Some of our research has shown that you now have the ludicrous position that because the FSA has high standards for investment advice and you have to carry on and have higher exams, you can have one appointment with someone to tell you about whether you should have a fixed rate or a capped rate mortgage. Then you have a separate appointment with somebody who tells you about investments. They can give you great advice about the investment vehicle, they can tell you all about endowments, they can tell you about the different endowments, they can tell you about the different PEPs. What they do not tell you about is what you really want to know, which is the best repayment method for you to pay your mortgage: should you be having an endowment, should you be having some other method? Leaving aside the issue of whether you should have product regulation, which we think you should because of the detriment, we actually think that what we are now left with is an advice gap. One bit is dealt with by the mortgage code, the other bit, which is purely looking at investments, is dealt with by the FSA and the gap is the combination. People are not going to investment advisers for advice on investments, they are going to them to get advice on how they should repay their mortgage. We believe that element is getting lost. We shall still campaign for product regulation, we still believe it is necessary. We are carrying out further research into whether there have been any improvements in relation to mortgage advice and that will be published in March. In the meantime we think the Council of Mortgage Lenders and the FSA need to look at closing that particular gap.

  206. What view do you take of new style financial products which link mortgages, bank accounts, credit cards, in a single package?
  (Ms Childs) There can be some benefits to that for consumers in relation to savings. The key issue is how much information they get and whether they get clear advice on that.

Mr Plaskitt

  207. Can we turn to money transmission systems, in particular ATMs? We are told that there are about 28,000 ATMs in Britain, projected to grow to about 40,000, and currently something over £100 billion a year flows out of ATMs into customers' hands. It is the most popular way of withdrawing cash of all the options customers have. In your view, how should the banks be meeting the costs of providing this service?
  (Ms Childs) As the Committee will be aware, we have led a campaign about the costs of providing that service. Our position was that the cost to the consumers should reflect the actual cost. We were concerned about double charging. We were also concerned that at that stage consumers did not know whether they were going to get charged if they took money from a rival ATM. There have been some improvements there. Clearly there are now signs which will say you will get charged. The real issue for us is to what extent Link will continue to abide by that particular approach and to what extent PayCom will look at this issue.

  208. Do you have an idea of what the actual cost is of providing this service?
  (Ms Childs) The Cruickshank Report helpfully intervened by releasing elements at the time we were criticising the banks for charging one pound. He said it cost roughly about 15 pence. I can get the exact figures and provide that to you.[1] There was no cost reflectivity in the pricing to consumers.

  209. Banks appear to be abandoning disloyalty charges.
  (Ms Childs) Yes.

  210. Do you think they are and has that process got further to go?
  (Ms Childs) Most of them have said they will not have disloyalty charges. Obviously we welcome that. It comes back to how long that will continue.

  211. What has forced them to give up on disloyalty charges in your view?
  (Ms Childs) Adverse publicity.

  212. From customers?
  (Ms Childs) Yes, and in the papers and ourselves. In fairness you could make a case about whether they have been affected or seen a benefit from not having disloyalty charges. In our experience they have shifted considerably after there was a lot of adverse publicity.

  213. You appear to think there is a risk that they could revisit this area when the publicity has died down. Is that what you are saying?
  (Ms Childs) Yes.

  214. What leads you to think that?
  (Ms Childs) It is a voluntary arrangement and the banks have changed their behaviour in the past. It is something we shall have to watch. I do not have specific evidence at this moment that they are going to change their mind but we do know that there has been some discussion about whether that was the right approach.

  215. Do you think the fact that the issue could be revisited and that the current arrangements are voluntary suggests a need for some kind of regulation to be imposed in terms of the operation and cost of ATMs?
  (Ms Childs) This again is one of the issues around the remit of PayCom. Link is in effect the agreement between the banks and at the wholesale level and what we have been arguing for is that if there were transparency about the cost at the wholesale level, then that helps to put pressure on the banks to keep to their word. Otherwise they can come up with arguments about needing to charge this because their costs have gone up. There is an important link between the two.

  216. What in your view is the minimum it is necessary for PayCom to do to satisfy your concerns in this area?
  (Mr Evans) The key for us really is to identify the relationship between the operation of wholesale charging within the system and the charges you and I pay on accounts for all manner of transmission within our accounts and between our accounts and others. What we should like to see is publication of all of the data sets which come out and more importantly some study by OFT/PayCom of the relationship data so they actually do surveys to quantify the charges which are imposed through ATMs or through cheque clearing or the time it takes the cheque clearing between the wholesale level and the retail level and publication of that information on a very regular basis. I am sure they will not like the idea but we are sure that will do the banking system a lot of good because it will stave off the need to regulate prices very tightly and by transparency, giving this information to the public realm, I would hope you would see regular tables in newspapers indicating who is charging what and comparison with the charges they themselves are getting within the wholesale system.

  217. Do you think there are any circumstances in which it would be fair, in your view, for the banks to raise money through the charges they level for the ATM system in order to subsidise some other part of the banking service to other customers?
  (Ms Johnstone) The current charging system we have in basic banking services is totally untransparent and very strange. As Cruickshank pointed out, there are cross subsidies flying in all sorts of different directions between people who have low balances and lots of transactions and those who go accidentally overdrawn and those who do not. It is extremely hard to disentangle that. I do not know whether the subsidies end up having a regressive impact or not. One needs to have a much clearer, much more transparent system before one can make those judgements because there are cross-subsidies flying around the banking system already.
  (Ms Childs) It is very difficult to say yes or no to that in the abstract because it depends who is cross subsidising who and whether that is the appropriate mechanism to do it. If you think of the people who use ATMs and particularly if you are going to draw benefits from ATMs, if you are increasing charges there it can be having an adverse effect on one group of customers. It depends what that cross subsidy is used for. We should prefer transparent charges and if you need to subsidise something else, then you make that clear and you find a way to do it rather than use this rather indirect formation.

  218. After 2003 benefits will increasingly be paid directly into bank accounts. What points would you stress need to be considered post-2003 in order to ensure that people are not disadvantaged when making ATM withdrawals?
  (Ms Childs) It comes back to charges. If we went back to the bad days and you were having to lose two pounds of your benefit every time you took it out, that is just not sustainable. That would have to be an issue which would have to be agreed between the banks and the way that the benefit system was paid out.
  (Ms Johnstone) Either you need to increase benefits or you need to have free access to cash and we have suggested free access to cash.

Mr Davey

  219. Were you disappointed that the Government has backed down from its full blooded PayCom proposals and proposed that the job should be given to the OFT?
  (Mr Evans) We were rather amused by the response which came out of the Treasury where they asked us whether they could quote us in support of PayCom, only then to shove it into the OFT.

1   See p 59. Back

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