House of Commons - Treasury

Select Committee on Treasury Fifth Report

FIFTH REPORT

The Treasury Committee has agreed to the following Report:

BANKING AND THE CONSUMER

Summary of Conclusions and Recommendations

(a) We believe that very easy transfer of current accounts between banks is essential to ensuring increased competition in personal banking services. We believe that the major retail banks' efforts to achieving this aim in the twelve months since Cruickshank's recommendation on this point have been disappointingly slow. They must do very much better in the next twelve months. Once the computerised system has been devised and tested, we expect banks to commit themselves to a shorter deadline than ten working days within which to provide account details to the new bank. The time limit should be specified in the Banking Code. Furthermore, there should be penalties (or liability to pay compensation, or both) in the event of non-compliance. We look forward to Dr DeAnne Julius's report, which the Minister said would be available by the end of April 2001 (paragraph 12).



(b) We agree that the revised Banking Code must be implemented fully and fairly by all banks. If this does not happen, we believe that the case for further statutory regulation will need to be considered (paragraph 14).



(c) When banks pay lower rates of interest on older accounts, they hope that their customers will not notice. We regard this practice as unacceptable. The Banking Code Standards Board should report on the elimination of such bad practices and enforce the Code's provisions about superseded accounts rigorously (paragraph 17).



(d) We believe that banks and building societies providing banking services should include in their annual reports information on the number and distribution of their retail outlets, both via automatic teller machines and over-the-counter (paragraph 21).



(e) We believe that "Clear" accounts being designed by the Post Office as part of Universal Banking should also provide for cash withdrawals other than in single weekly payments and should provide direct debit facilities (paragraph 22).



(f) We agree that there may be a demand for bank accounts without borrowing facilities. We therefore welcome the development by the banks of basic banking accounts and the arrangements to make them available at post offices as well as bank branches. We urge banks to market these accounts more actively than they are at the moment. We believe that the draft Memorandum of Understanding between the Post Office and the banks participating in the "Universal Banking Service" should be published. We believe that there should be scope for transition from basic bank accounts to accounts with borrowing facilities and that these follow-on accounts should also continue to be available at post offices (paragraph 24).



(g) While we accept the need to guard against money laundering and fraud, we also believe it is essential that banks do not debar people from access to basic financial services because they do not possess the usual identity documents (paragraph 27).



(h) We welcome the abolition of charges for cash withdrawals from most machines, and recognise that this was largely the result of public pressure. We believe that charges should not be reintroduced (paragraph 34).



(i) Banks appear to be reluctant to invest in modern technology to speed up cheque clearing. Even though the use of other methods of payment is growing, we believe that cheques are likely to remain an important part of the financial system and customers' convenience should be given a higher priority (paragraph 36).



(j) We are persuaded that credit card networks need to be regulated along the lines suggested by the Government (paragraph 39).



(k) We welcome the undertaking by MasterCard/Europay to investigate the Consumers' Association claims that credit card statements are being sent out some days after the date on them. If the period allowed for payment of a credit card bill is to be meaningful, there should be no delay in sending out the statements (paragraphs 40 and 41).



(l) The OFT will need access to both bank charges and their internal cost details if it is to ensure that the market for banking services is operating competitively. In addition, consumers need accurate, comparable price information and we look forward to being able to assess the extent to which the Government's CAT standard proposals and the FSA's comparative tables achieve this (paragraph 45).

Introduction

1. In November 1998,[2] the Government announced that they had commissioned Mr Don Cruickshank to undertake a review of the levels of innovation, competition and efficiency in the banking industry, and the resulting report was published on 20 March 2000.[3] We decided that it would be appropriate to inquire into issues arising out of the Cruickshank Report, and took evidence from three of the "big four" banks, and from Mr Cruickshank, in April 2000. Following replies to the Report from the Government[4] and the Financial Services Authority,[5] we took further evidence in January 2001 from representatives of consumer groups, organisations running money transmission systems, the British Bankers' Association (BBA) and two internet-based banks, and the Royal Bank of Scotland,[6] and finally from Miss Melanie Johnson MP, Economic Secretary to the Treasury. During our visit to the United States last October, we took the opportunity to discuss banking regulation, and we have also received some written evidence on the subject. In making this Report, we are putting forward some suggestions about how the service to the public may be improved. In general we consider that the British banking system operates at a high standard of integrity and has a good reputation in the international financial community. To everyone who has helped with this inquiry, we express our thanks.

2. The Cruickshank Report identified three areas for detailed investigation:

(a) services to individual customers (including current and savings accounts, loans, mortgages and credit cards);

(b) services to small and medium-sized businesses (mainly current accounts and external finance);

(c) money transmission systems, including cash machines, credit and debit cards, cheques, standing orders and direct debits.

Cruickshank expressed concern about the level of competition in all three areas. He found that there were artificial barriers to entry by new participants in money transmission systems, high costs of cash withdrawals, an unwillingness by individual customers to change accounts because of perceived difficulties in doing so, and a high level of market concentration and high charges in the small business market.[7]

3. Immediately after the publication of the Cruickshank Report, the Government referred the relations between banks and small business customers to the Competition Commission,[8] which issued a statement of provisional conclusions on the day we considered this Report,[9] and we have therefore concentrated primarily on banking services to personal customers. In December the Government issued a consultation paper on the regulation of transmission systems,[10] and on the day of our final hearing they issued a paper proposing the establishment of CAT standards for basic bank accounts and credit cards (see paragraphs 20 and 41).[11] The Government has set up a committee chaired by Dr DeAnne Julius on the effectiveness of the Banking Code as a system of voluntary regulation of banks.[12] We return to the Code in paragraph 13.

Banks and individual customers

COMPETITION

4. Cruickshank concluded that competition between banks in the market for individual customers was not as restricted as in that for small business customers. However, he criticised the fact the supply of current accounts was highly concentrated. This was of concern because these accounts were in his view "the key to competition between suppliers in many other product areas". Furthermore, customers perceived it to be difficult to move their current accounts to another bank, were insufficiently aware of terms and conditions of their accounts, and had inadequate representation and redress. He did, however, see signs of increasing competition in mortgages, personal loans and credit cards.[13]

5. One possible measure of the extent of competition is the share of the current account market held by the "big four" banks, namely Lloyds TSB, HSBC (formerly Midland), Barclays and NatWest (part of the Royal Bank of Scotland Group). Witnesses put this share at currently about 70 per cent, compared with the figure of 68 per cent in 1998 quoted in the Cruickshank Report.[14] The Consumers' Association said that it had regularly reported that customers were less satisfied with big banks than with smaller ones, and that their products were "generally of poorer quality, be it in terms of price or service levels"; 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".[15]

6. Surprisingly, the BBA were unable to produce up to date, accurate market share figures for the current account market. Nevertheless, the BBA cast doubt on the use of the 70 per cent figure as an indication of the level of competition. They claimed that concentration of accounts did not imply a lack of competition, as the big four banks competed among themselves as well as with other banks and building societies, a point echoed by the Royal Bank of Scotland.[16]

7. As we have already mentioned, one reason which was noted by Cruickshank and advanced by witnesses such as the National Consumer Council (NCC) as to why smaller, newer banks were not increasing their market share was the difficulty, or at least the perceived difficulty on the part of customers, of transferring a current account from one bank to another. To do this, a customer has to ensure that payments in (such as salary) and payments out (such as standing orders and direct debits, including those for large items such as mortgage payments) are all transferred at suitable moments so as to avoid overdrawing.[17]

8. To assist in the process, banks are now required under the Banking Code to provide, on request, the details of standing orders and direct debit mandates which they hold. The Code does not specify a time limit within which these are to be provided,[18] but following a pilot of a paper-based system for providing the details, there has been agreement that account information should be provided within ten working days. In a written submission, Abbey National said that (on the basis of monitoring from 1 September to 22 December 2000) the average time taken by some of the banks was considerably more than this figure (18 and 24 working days for two of the big four banks).[19] However, the Royal Bank of Scotland said that when a bank received a request from a customer for details of the standing orders and direct debits, the customer had already decided to leave, and said that attempts to prevent this by delaying the provision of information would therefore be counterproductive.[20] Nevertheless, none of the bank witnesses sought to deny that delays occurred nor that public knowledge of the existence of such delays was a potential deterrent to customers deciding to leave a bank in the first place.

9. Since November 2000, some of the banks have been experimenting with a system under which the details of standing orders and direct debits are supplied electronically: as well as being quicker this system should result in fewer mistakes. The Association for Payment Clearing Services (APACS) expected that, following the pilot, the full system would be operated by all banks by the end of 2001, although they said that this would not necessarily result in the ten-day target being reduced.[21] The Consumers' Association said that not all the banks had been participating in the pilot of the electronic system, and doubted that it would be delivered in time.[22]

10. The Royal Bank of Scotland pointed out that the supply of information on standing orders and direct debits from the old bank to the new one was not the end of the story; amended instructions had to be passed to the originators of direct debits, who would not always act on them speedily, although APACS hoped that the electronic system would be able to circumvent this problem by intercepting direct debit requests addressed to the old bank and redirecting them to the new one.[23]

11. The Minister hoped that easier transfer of accounts, together with a general increase in transparency, should reduce the 70 per cent market share of the big four banks.[24]

12. We believe that very easy transfer of current accounts between banks is essential to ensuring increased competition in personal banking services. We believe that the major retail banks' efforts to achieving this aim in the twelve months since Cruickshank's recommendation on this point have been disappointingly slow. They must do very much better in the next twelve months. Once the computerised system has been devised and tested, we expect banks to commit themselves to a shorter deadline than ten working days within which to provide account details to the new bank. The time limit should be specified in the Banking Code. Furthermore, there should be penalties (or liability to pay compensation, or both) in the event of non-compliance. We look forward to Dr DeAnne Julius's report, which the Minister said would be available by the end of April 2001.[25]

REGULATION

13. Banks are regulated by the Financial Services Authority, as they previously were by the Bank of England, but this is "prudential" regulation, to ensure that they have sufficient reserves. They are not regulated in their supply to customers of ordinary banking services (as distinct from life assurance, investment advice, etc.), where, as already mentioned, there is a voluntary Banking Code.[26]

14. The Consumers' Association and the NCC welcomed recent changes to the code, which came into effect on 1 January 2001, including a greater emphasis on enforcement, but still had "a little scepticism" about whether it would be carried out in practice: "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".[27] We agree that the revised Banking Code must be implemented fully and fairly by all banks. If this does not happen, we believe that the case for further statutory regulation will need to be considered.

Superseded accounts

15. A particular issue raised by the Consumers' Association was the tendency of interest rates paid on older savings accounts to fall below those paid on new accounts with similar features. The higher rates are designed to attract new customers, and long-standing customers are disadvantaged. To counter this, the Banking Code requires that when a type of account is no longer available to new customers or is no longer being actively promoted, it is classed as "superseded" and those holding it are to be switched to a new account with similar features (unless the interest rate on the superseded account is kept at the same level). The Code gives examples of "similar features".[28]

16. In the February 2001 issue of Which?, the Consumers' Association reported that these provisions in the Code were being ignored; as their witness put it to us, "the banks are still using a variety of ruses" to avoid complying. In particular, there were different interpretations of when an account was being "actively marketed" or whether a new account had "similar features". However, banks pointed out to Which? that some of the newer accounts are operated by telephone or post or over the Internet, and the higher interest rates were at least partially a reflection of the lower costs of running these accounts as compared to those handled in branches.[29]

17. When banks pay lower rates of interest on older accounts, they hope that their customers will not notice. We regard this practice as unacceptable. The Banking Code Standards Board should report on the elimination of such bad practices and enforce the Code's provisions about superseded accounts rigorously.

2 Pre-Budget Report, Cm 4076, November 1998, p 40 para 3.65. Back

3 Competition in UK Banking: A Report to the Chancellor of the Exchequer, www.bankreview.org.uk/final_report.html. Back

4 www.hmtreasury.gov.uk/pdf/2000/cruickshank0408.pdf, 4 August 2000. Back

5 www.fsa.gov.uk/pubs/other/cruickshank.pdf, December 2000. Back

6 The RBoS owns National Westminster Bank plc, the one of the "big four" which did not give evidence in April 2000. Back

7 Cruickshank Report, p viii-ix paras 8-13. Back

8 Department of Trade and Industry Press Notice, P/2000/194, 20 March 2000. Back

9 Competition Commission, Supply of Banking Services by Clearing Banks to SMEs: The Commission's provisional conclusions on complex monopoly, 6 March 2001, www.competition-commission.org.uk/09-01pc.htm. Back

10 Competition in Payment Systems: A consultation document, HM Treasury, December 2000, www.hmtreasury.gov.uk/pub/html/reg/pay.html. Back

11 Standards for retail financial products, HM Treasury, January 2001, www.hm-treasury.gov.uk/pdf/2001/cat_standards_3001.pdf. CAT standards already exist for Individual Savings Accounts and mortgages and are proposed for long term care insurance. For credit cards, the "C" of CAT will stand for comparability rather than charges (see para 12 of the Standards: Cruickshank had recommended that standards should not specify price caps-Cruickshank Report, para 4.121). Back

12 See HM Treasury Press Notices 128 and 137/2000, 8 and 23 November 2000.The latest version of the Banking Code came into force on 1 January 2001, and is published on the BBA website at www.bba.org.uk/html/1906.html. Dr Julius is a member of the Monetary Policy Committee of the Bank of England. Back

13 Cruickshank Report, p xvii paras 43-44. Back