Examination of Witnesses (Questions 260
TUESDAY 16 JANUARY 2001
260. Moving away from the small business sector
to look at that particular proposal, were your members pleased
that the Government had moved away from the PayCom proposal to
giving regulatory powers to the OFT?
(Mr Sweeney) I have not taken a straw poll of my members
and if I did for reasons I gave right at the beginning, I should
get very different answers. Some were disappointed, some were
pleased. It depends on your market position.
261. Could I ask the organisations representing
the card issuers to comment on that move by the Government from
the PayCom proposal to giving the powers to the OFT?
(Mr Hawkins) Yes, indeed. We received the White Paper
and as a group we shall be looking at that White Paper in detail
and commenting by mid-March which is the period for the consultation.
We have not looked at it in complete detail and arrived at a consensus
on this but I can certainly give you some initial reactions. By
and large we welcome the move to appoint the Office of Fair Trading
as the Regulator rather than a stand-alone regulator. We feel
it is more appropriate to do it that way. We welcome that.
262. Why is it more appropriate?
(Mr Hawkins) The Office of Fair Trading has governance
over many regulatory areas, Competition Act, etcetera. It is more
appropriate as a body. We think that a stand-alone regulator in
any event would probably not have the most beneficial effect on
our industry. Our industry is extremely competitive. I dare say
most of the members of the Committee have credit cards. There
is a plethora of credit cards in the market and there is huge
competition. We do not believe that a stand-alone regulator would
necessarily increase that competition to the benefit of consumers.
263. In your comments to the Committee before
the Government response came out, so it was just based on Cruickshank,
you raised quite a few concerns, some of which I found rather
contradictory. You were saying that you did not like the idea
of a UK-based licensing regime; you thought it would be unworkable.
Then you were worried about allowing lots of new entrants in,
saying that might create financial instability in your minds.
Can you explain why you held those views?
(Mr Hawkins) There are two things there. First of
all, there is the international nature of the scheme. Perhaps
I could ask Mr Goosse who looks after the licensing on an international
level to comment on that. Then I shall come back to the risk aspect.
(Mr Goosse) As far as we are concerned we look at
the whole of Europe and as a matter of fact, especially after
what is being discussed with the European Commission, the openness
of the market is really being established at a European level.
On the other hand, the advent of the new economy, e-commerce,
etcetera, actually suppresses borders so it will be very difficult
to determine who is doing business where and from where. We believe
that anything which is not consistent with the overall practice
at regulatory level in Europe and in line with the globalisation
and virtualisation of the economy is prone to create difficulties.
264. Did Cruickshank not try to get round that
by using class based licensing rather than individual licensing?
Did he not meet that objection?
(Mr Hawkins) Members of MasterCard have licensing
which is governed at an international level and in fact the international
headquarters of MasterCard are based in New York; at a European
level there is a European licensing delegation to Europay, so
we are quite licensed as it is. Then the key qualification for
membership of the schemes is that you have to be a regulated financial
institution. This is important from the point of view of the stability
of the system. We already operate under quite a strict licensing
265. Cruickshank described the payment clearing
system as anti-competitive, slow, inflexible, opaque and a barrier
to innovation. How has it improved since then?
(Mr Tyson-Davies) There was one area where maybe we
saw the world rather differently from Mr Cruickshank. There has
been a significant measure of innovation since APACS was established
with the approval of the authorities in 1985 to meet criticisms
of the National Consumer Council in the early 1980s. We have presided
over a range of innovation, the latest one that people will be
aware of is the inclusion of chips on the plastic cards to guard
against fraud. We were the first country to introduce a major
real-time gross settlement system in the high value payment clearance.
There is a long list of things that APACS has delivered as a cooperative
organisation owned and governed by its members but with regulatory
oversight in the form of the powers of the Office of Fair Trading,
and everything we have done has been approved by the Office of
Fair Trading, indeed we were given the 21.2 clearance under the
Fair Trading Act establishing that fact.
266. Does any of this innovation include actually
speeding up this system which still takes three days to clear?
You must be one of the only businesses in Britain which opens
from 9.30 to 3.30, you have your own set of holidays, you are
not operating on Saturdays and it still takes you three days to
get a cheque cleared. You are still chucking pieces of paper around
London by horse and cart.
(Mr Tyson-Davies) The openness now is nearer 24 hours
than ten o'clock to three o'clock.
267. But cheque clearing is still three days,
is it not? Why is it still three days?
(Mr Tyson-Davies) The cycle of cheque clearing and
processing is indeed three days from the day the cheque is paid
in; it is processed on the second day and settlement occurs on
the third day. Beyond that it is up to individual banks and building
societies when they let the customers take the money or give them
interest on it. That is a competitive issue. Cheques are a declining
item: 30 per cent fewer than ten years ago and our forecasts are
that they will be 50 per cent below the current figure in ten
years' time. It is still a piece of paper, it is a promise. In
order to improve the clearing cycle it would need a major investment
and it is an investment which is being actively considered by
the banks as we speak.
(Mr Pearson) Mr Cruickshank also made the point that
as a system where decline in numbers was clearly evident, major
investment may be difficult to justify. Having said that, one
has to look at the limit of one's ambitions in terms of the cheque
clearing cycle as APACS run it. If on day two, which is the processing
dayday one the cheques are paid in up to close of business
and are then put into a processing cycle which takes place on
day twoone could create an electronic image of the cheque,
a proper readable electronic image, and that were able to be archived
and retrievable by competing banks, then theoretically one could
bring settlements and exchange, but exchange in electronic form,
to day two; at some stage during day two. So you would bring it
forward one day. If you could add to that an electronic unpaid
system, because at the moment the unpaid system that Britain relies
on is the first class post, which I would agree with anyone is
a fairly inefficient way of handling unpaid cheques, but if one
could create an image which were readable by the paying bank,
plus an electronic exchange of unpaid cheques, then you could
bring the settlement cycle forward by one settlement day. In itself
that does not seem a lot when you look at the level of investment
which might be required to achieve that, but we are working on
that very thing: the exchange of image and electronic unpaid cheque
268. Why not bring the whole thing forward into
the internet age and allow people to pay their bills on the web?
(Mr Pearson) That is a different matter. Unfortunately
the cheque is a highly popular method of payment amongst consumers.
Once when I first joined APACS I was foolish enough to suggest
to the OFT that killing the cheque might be a good idea as we
moved towards electronic payment systems. I got my knuckles very
firmly rapped that the cheque was a highly popular consumer implement
and they would not take kindly to a group of banks deciding in
concert to try to kill it.
269. What is the level of amount on a cheque
where the signature is not actually checked? Is it £50?
(Mr Tyson-Davies) It varies very much from bank to
bank but it is unusual for a cheque below £1,000 to be examined
by a bank.
270. So what is the point of taking all this
paper backwards and forwards between the banks then if you are
not even checking the signatures?
(Mr Tyson-Davies) Because fraud is probably focused
on higher value cheques and it is vital for the bank to examine
those for risk-management purposes before payment is made.
271. You do not see Cruickshank's central reservation
about the cost of this three-day clearance system, particularly
to small businesses, improving.
(Mr Tyson-Davies) We do not see improvements beyond
what Mr Pearson was mentioning at the centre, but from the industry's
point of view a huge amount of effort goes to try to persuade
small businesses to use electronic payment methods where their
account is debited the same day the recipient gets the money,
direct credit when people receive their salaries specifically
can be used to great advantage by smaller companies at considerable
cost saving. However, this country still has a love affair with
272. The point Cruickshank made was that if
clearing banks make it hard for businesses to manage their financial
affairs effectively this results in higher bank charges from unauthorised
overdrafts and forgone interest revenues. You have an interest
in keeping this thing in the Victorian era, have you not?
(Mr Tyson-Davies) I am not in a position to answer
that because individual banks will make their own decisions on
the charges they make to their customers and there is a real difference
between even the major banks in how they treat the clearance and
settlement of cheques for their customers.
273. May I turn to credit cards? The Consumers'
Association has given us evidence about a new scam credit card
companies have come up with, which is not posting out the statements
until well after the statement date, thus allowing maybe only
eight or nine days for customers to settle their bills. Who started
(Mr Hawkins) I heard that and it came as a complete
surprise to me. We have no interest in doing that whatsoever.
If people want to pay back within the period then that is what
they do and many do that.
274. You would make money out of them not paying
back during the period.
(Mr Hawkins) I would need the details of that so I
could look at it and comment on it properly. It is not a scam.
We do not do that. They are our customers. We invest heavily in
our customers. We have no desire to do that sort of thing to them.
275. When you say it is not a scam, do you think
it is reasonable for a statement not to be posted for four days
after the statement date?
(Mr Hawkins) No, I am saying that I am not aware that
we deliberately as an industry, indeed individual banks, withhold
the sending out of the statement so that customers are forced
into a situation of having to pay interest.
276. Can I tell you that I have noticed that
the statement appears later and later after the statement date?
That is something I have noticed over the last few months. Can
you take it from me that I think the Consumers' Association are
on to something here?
(Mr Hawkins) We do rely upon the post personal services
but I am saying that, certainly speaking for my own bank, there
is absolutely no intention to disadvantage our customers in that
277. Would you deplore the practice of posting
a statement four days after a statement date?
(Mr Hawkins) If it were to be found that we were in
any way deliberately withholding the sending out, but I just do
not believe that happens. We have an efficient operation and I
am not aware of the details of such practices. If the Consumers'
Association would like to tell us both as an industry and as individual
banks, then we shall look at that.
278. Do you think it is a suitable matter to
be included in the Banking Code?
(Mr Hawkins) I cannot comment on that. I would want
to look at the details. This is certainly the first I have heard
of such a practice being suggested to be a scam and we have absolutely
no intention of being involved in any scams.
279. If it were true that payments were delayed
by up to four days it would be a scam, would it not?
(Mr Hawkins) Customers have a free credit period within
which they can pay either their initial payment or in fact pay
the whole balance off. A significant number of people actually
pay the entire balance off. They cannot be receiving the statement
too late to do that if a significant number do it.