Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 460 - 479)



  460. Would it be fair to say that these companies can see in this service an opportunity to recruit customers into their basic bank accounts?
  (Miss Johnson) Yes. It is not necessarily the case that basic bank account customers are of one ilk. All the evidence shows that people's circumstances change. People may only want a basic bank account at one stage in their life but may progress on to a range of other financial services products, and obviously there is potentially an interest for the banks in seeing customers brought into the banking system and brought forward. So it is not a philanthropic enterprise as far as the banking sector is concerned. Obviously it does meet our desire to see financial exclusion tackled.

  461. The banks in the earlier session told us that they would not actually know who was signed up to the Universal Bank accounts and therefore they could not recruit from it.
  (Miss Johnson) My understanding is that their own bank accounts will be marketed through the Post Office. Perhaps I can ask if William Lea would comment further on that.
  (Mr Lea) I think the main emphasis, as the Minister said, was on provision of the basic bank accounts, and those basic bank accounts will be provided by banks and will be a stepping stone for people on to other financial services. There is provision also as part of the Universal Bank for a basic money transmission account. But it is envisaged that the main vehicle will be people having access to basic bank accounts that will be provided by the main high street banks, so they will be fully aware if they are providing those accounts of who has got them.

  462. So they have not signed up because they are philanthropists. They see a commercial interest in this.
  (Miss Johnson) I think they have signed up for a variety of reasons. I think some of that is commercial interest, and that is reasonable enough. They have accepted the fact that there is an issue to be tackled on the financial exclusion front, that people are disadvantaged by not having access to some of these basic financial services, particularly having a bank account, and obviously that coincides as well with the interests that DSS have in providing more benefit payments through bank accounts because, amongst other things, it will tackle social security fraud.

Mr Beard

  463. Can you explain the distinction between the Universal Bank account and the basic bank account and the basic accounts that the banks are providing?
  (Miss Johnson) My understanding of this is that they are going to provide their own basic accounts, but via post offices as an outlet, and so there will not be any real difference, but there will obviously be more marketing, I guess, done at the Post Office about the way these accounts are put out and the availability of it via the Post Office network. But we hope the banks will also address this through their own branches and their normal business too. If people come in wanting a basic bank account and they happen to go to a bank branch rather than a post office, I hope and trust that they will get the same offer and the same service as if they went into a post office to acquire that account.

  464. What is the incentive for someone to take out a Universal Bank account as opposed to a basic account with one of the main banks?
  (Miss Johnson) It is the same. It will be the same account. What it will do is provide the outlets. We recognise the fact that there are not branches in all the areas where there are largely financially excluded members of the population, and that those areas are probably lighter on bank branches. The Post Office will provide a number of outlets in areas where other bank branches may not be located. It provides accessibility for the accounts, and a higher profile for the accounts in those neighbourhoods where we think a lot of those people wanting basic bank accounts will be. In all cases, people will not be able to get overdrawn with a basic bank account, whether it is a Universal Bank bank account or one acquired through one of the main banks. That is the safeguard in this service, amongst other things that the basic bank accounts will do. One of the key things is that people will not be able to go into the red.

  465. What is gained by having a Universal Bank over having a basic bank account of the main banks available in the Post Office?
  (Miss Johnson) The advantage is the number of outlets. We are talking about a massive number of post offices. Obviously, a lot of those people who are currently receiving their benefit by giro will hopefully be moving over to basic bank accounts, and in so doing they will get access to a wider range of ways of dealing with their money than they would by getting a giro, and the DSS will be able to cut the undoubted fraud that goes on on the DSS giro benefit payments, which are difficult to police.

  466. I understand that, but I still do not understand the distinctive feature of the Universal Bank which makes it necessary compared with the basic bank accounts of Lloyds TSB and the HSBC and so on being marketed in Post Offices. If they are marketed in post offices, they are available to the public on just the same basis as the Universal Bank.
  (Miss Johnson) Yes, but there are many more branches of the Post Office available than there are bank branches, and where those branches are located is not in the same places either. So the availability of outlets, the extra marketing and the fact that quite a lot of the footfall through post offices is connected with those people, a disproportionate number, who currently do not have bank accounts at the moment means that that is a very good vehicle for getting basic accounts out, and it will have a greater marketing presence by being done through the Post Office than it will each individual bank doing it on their own, though no doubt they will be making the basic bank accounts available through their own branches too.

  467. I understand that. I still do not understand what is the distinction and benefit of the Universal Bank over and above that.
  (Miss Johnson) Why should there be an additional advantage over and above that?

  468. If you have these services, basic bank accounts marketed through post offices which are dispersed around the country, why do we need a Universal Bank as well?
  (Miss Johnson) The Universal Bank is a concept involving the main banks signed up to this actually making available their basic accounts through the Post Office. There is not a separate entity called the Universal Bank. The Universal Bank is the arrangement whereby the basic accounts are made available through the Post Office, and in addition to that, obviously there will be an electronic transmission account for those who do not sign up to the basic bank account. We hope and expect that the majority of those currently without a bank account will be signed up to a basic bank account.

Mr Kidney

  469. Minister, listening to you, when the Government made its commitment that people will be able to receive their benefits in cash at the post office free of charge, will it be compulsory upon them to have a basic bank account in order to get that commitment fulfilled?
  (Miss Johnson) No. It will still be possible for them to get their benefits either monthly or weekly, as they wish, and obviously we have given a commitment to that being available through the Post Office. If they do not decide to opt for a basic bank account, there will be systems put in place to enable people to get their benefit paid automatically into a much more limited form of creature which will enable them simply to draw out the payment. It will not, however, offer other facilities, as a basic bank account would, which would allow you to pay cheques and do a variety of other transactions through your bank account. It will enable automatic transfer of the money, and people will be able to go to the post office and draw that out, but they will not have a slip, as they might do at the moment, to go and get their benefit. They will not actually have a physical piece of paper to get that. It will be paid electronically into an account and be drawn out in that way—in one go, I think is the proposal.

  470. It is my understanding that the "creature" you describe is a basic account offered by the Post Office as opposed to the basic accounts offered by the participating banks.
  (Miss Johnson) There is a difference in the sort of things that basic accounts do. You can pay cheques into basic accounts, you can draw money out in different amounts. If people do not migrate to the basic bank account, the residual arrangements, which will meet their needs, will be extremely basic, if I can put it that way, because they will simply allow the money to be electronically transferred and taken out at the post office in one go for that particular payment, and that will be the scope of the arrangements. So it will be much more limited.

  471. Will the person be an account holder at the Post Office for that purpose?
  (Miss Johnson) They will be an account holder of the new arrangements. It is not an account in any real sense of the word, an account as you and I might understand it, because you will not be able to do anything except get your benefit out from it basically.

Mr Fallon

  472. It sounds a very basic account!
  (Miss Johnson) Yes, it is an extremely basic account. That is what I was saying.

  473. Hardly an account at all. Can I return to the issue of competition. The Consumers' Association said in evidence to us that fewer than a third of the Big Four bank customers were satisfied with their service. Given that they now still have 70 per cent of the market share a year on, would you conclude that that was a market failure?
  (Miss Johnson) I think we conclude that there is a lack of competition in our banking sector, and it is a significant lack of competition which exists in the banking sector at the moment. The purpose of the Cruickshank review was to find out the extent of that, and what the causes were, and as you know, that report highlighted a number of recommendations. We have taken all of those recommendations forward, and I think it is important to say that the Government wants to tackle all of those concerns, and we have made important steps in doing so. There is the DeAnne Julius codes review, and the measures that we have taken to improve consumer awareness of the CAT standards generally. I appreciate the Committee has not had a chance to look at today's release, but in terms of CAT standards in the market, certainly the evidence on ISAs is that people are being significantly helped by availability of CAT standards in the ISA market. We think that this provides scope for a greater transparency for the consumer, and therefore will drive competition, and the essence of our approach is really to get that greater transparency in there, to get information available for consumers that enables them to transfer the information across from one product to another, and compare easily, where they do not have hidden surprises and charges, and where it is clear to them that if they want to move, they can move from one provider to another and are easily able to do so. The measures we are putting in place will address that, and I am confident that we will see quite a different picture, with the passage of time, but obviously there are some issues like the reference to the Competition Commission which are still in the process of being considered at the moment. We can only deal with the issues that arise out of that when we get that information back.

  474. You have issued your document today and there are all these other bits of paper. Why is all this taking so long, do you think?
  (Miss Johnson) I do not think it is taking particularly long, but one of the issues is that we do want to tackle the root causes of things. We do not want to simply tackle the superficial symptom. We want to get underneath that, and in getting underneath that, we do need to do these things that will address greater competition and enable consumers themselves and small businesses themselves to be much more in the driving seat with their financial services providers, and with the banks in particular in this context. So obviously there is a whole lot of work going on. The Financial Services Authority is doing some of this work too, in doing things like comparative tables of financial services products, which they will be bringing out later this year. We are tackling the problems in the payment system as well as trying to reduce the profits which are being made at the moment which have been identified in the Cruickshank Report.

Mr Ruffley

  475. Economic Secretary, I wrote down what you said at the start of your remarks. You said of the problems that Cruickshank identified that "the Government had moved swiftly" to tackle those problems, and in the light of that statement, I would just like to see how swift you have been. On Mr Fallon's observation that 70 per cent of the current account market is where we are now, and it is roughly where we were at the time of Cruickshank, and I think you have indicated that the position may even have got worse, could you just explain to me what steps you think should be taken to reduce that market share of the Big Four?
  (Miss Johnson) The issue that has been clearly identified is that people basically do not choose to move their bank accounts around. There are a variety of reasons for that. One of the reasons is that there may be hassle involved in moving the account around, and that is something we need to determine the exact scale of. It is something that the DeAnne Julius review is looking at and will no doubt be reporting upon. It is one of the issues which has been flagged up, which is compliance with the Banking Code, specifically for that consultation which is going on at the moment. Secondly, it is important that people are able to make comparisons from one product to another, and actually decide therefore whether they are getting a good deal or not. I think a lot of people would be surprised if they were able to make those comparisons now on the basis of good, clear information. They will be surprised at the fact that they are not necessarily getting a good deal where they are at the moment and there may be a much better deal to be had somewhere. We need to make sure that consumers have better information, that there is more transparency about it, and that they are able to make comparisons. There are a variety of ways in which we are doing that. Obviously looking at the lack of competition in the money transmission systems through the proposals with the OFT is one way of dealing with that. The CAT standards is another way of dealing with that. Getting the small business banking services looked at by the Competition Commission is a third way of doing that, and as I say, the codes review as well. So there is a variety of approaches there, all of which are pinpointing the same purpose, which is to provide greater competition in the banking sector and to enable consumers to make better decisions for themselves.

  476. That is a helpful shopping list, if I may say so, but is not the root cause—and that is another phrase you have used, that you want to get to the root cause and not have superficial solutions—the real reason that the Big Four have a stranglehold on over 70 per cent of current accounts in this country, and it is not getting better, is because they are flagrantly and deliberately and gratuitously breaking the ten-day limit within which they are meant to pass information to transfer re BACS if the customer wishes to move from one of the Big Four. We have had a year since Cruickshank identified this problem, and you are telling us that you have another inquiry or report. Is it not the case that you know what the problem is, and is it not the case that the Banking Code should actually enshrine disciplinary measures, in particular financial penalties, for banks that do not hit the ten-day transfer limit? Is that not what you should be doing, not giving us more reports?
  (Miss Johnson) The examination which DeAnne Julius's group is doing, which is a group with a lot of expertise in it, will hopefully gather a lot of information to help us determine exactly what needs to be done—and I think it is always better that we do things on the basis of good evidence rather than partial evidence, and at the moment we only have partial evidence on this. I agree with you; I think there is a problem about people switching accounts, but it would be good to know the exact scale of it and to see what evidence is being brought forward in this connection. Of course, that group is not reporting some time next year or the year after; it is actually reporting at the end of April, so we are not talking about more than a couple of months' examination of this. They will come back and they will be able to say just how compliance with the Banking Code is going in a lot more detail, and there are obviously other aspects to the Banking Code than this one in particular, although I appreciate your concern that this is an important one. I share that. We are watching very carefully to see how that is. There are issues for the group which they are looking at, which are things like whether the industry is fully complying with it, whether it is monitored and enforced effectively, and what the redress is if it is not, but I think it is also worthwhile pointing out that at the end of it all, if there is shown to be a problem, one of the issues is clearly whether voluntary codes are a way forward or not, and if they are, how strongly they have to be enforced in order to be effective. I am sure that is something that DeAnne Julius's group will be reporting on.

  477. If I deduce correctly from your response, it is not the case that you have ruled out financial penalties for banks that miss the ten-day target. You have not ruled that out. You can tell the Committee that today. It is on the table as a potential sanction against these banks that have a stranglehold on the current account market, mainly because they cause such hassle to customers by not transferring within ten days.
  (Miss Johnson) I think it is a very serious issue. We are looking carefully to see what comes out of DeAnne Julius's group on this, and we will be wanting to see effective action taken.

  478. Does that mean financial penalties?
  (Miss Johnson) I am not being drawn by your efforts to try and pin me down on specifically what the response is going to be, but what I am saying is I do entirely share your concerns about this. We do think that there is a problem here. We would like to see the exact scope of it and what DeAnne Julius's group is going to say about it, and we will want to see an effective answer from the consumers' point of view out of this after the end of April.

  479. I am sorry. You have not ruled out as a Government—and you are the Minister; never mind what DeAnne Julius is saying—you have not ruled out as a Minister the possibility of financial penalties and a stricter disciplinary regime incorporating financial penalties?
  (Miss Johnson) We will be looking to see what is effective in tackling this. I neither rule things out nor rule them in. It is a question of what is effective. We want to have an effective answer. We think there is a problem. You think there is a problem. DeAnne Julius's group will be looking to see what the scope of that is, and reporting back to us, and when we see the nature of the problem, we will decide on an effective response to it and make sure consumers get a better deal.

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