House of Commons - Treasury

Select Committee on Treasury Fifth Report

BANKING AND THE CONSUMER

Financial inclusion and basic banking

18. The NCC told us that, according to research conducted in 1999, seven per cent of households had no access to a bank account; many of those concerned found banks unhelpful or thought that they would be refused an account.[30] We were therefore concerned to find out if those without accounts, sometimes referred to as "financially excluded", were being unfairly deprived of banking services. The Consumers' Association and the NCC emphasised the importance of access to bank accounts to enable people to receive and make payments. An ability to borrow was secondary.[31]

19. The Cabinet Office's Social Exclusion Unit recommended, in a report in 1999,[32] the development and promotion of basic banking accounts suitable for those who did not want to be able to overdraw or whose credit history would make it unlikely that banks would allow them to do so. This recommendation was echoed in the Cruickshank Report.[33] Some banks had already developed such accounts—sometimes referred to as PAT 14 accounts after the Policy Action Team which recommended them—and most of the rest have been putting them in place during the course of 2000.[34] A related development is a range of debit cards which require each transaction to be authorised by the bank, to avoid the possibility of accounts being overdrawn by such means.[35]

20. The proposed CAT standards for basic bank accounts require banks to provide either free cash withdrawals over the counter or free withdrawals from cash dispensers. They may, of course, provide both.[36] Banks must also allow cash and cheque deposits, automated credit transfers, and direct debits, standing orders or budget accounts. Other services may be provided so long as they do not result in the risk of an overdraft and if their availability is not conditional on purchase of other services. As the Treasury's document was not completely unambiguous on the provision of free cash withdrawals, we asked the Minister to confirm what was intended. The reply stated that withdrawals from the bank's own cash dispensers would be free of charge, and that this would also apply to any other cash dispensers from which the bank's other customers could make free withdrawals.[37] We return to the issue of cash withdrawal charges more generally in paragraph 30.

21. Our hearing in April 2000 followed a period when many banks had been closing branches. This had caused considerable concern, and one response by the banks was to arrange for their services to be available at post offices.[38] The Post Office has put forward proposals to develop these arrangements into a system of "Universal Banking", involving the banks' basic accounts, and a new type of Post Office account, being available at post offices. The Trade and Industry Committee examined these proposals, as they then stood, as part of its report into the Post Office in November 2000.[39] 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.

22. Outline agreement on Universal Banking, involving financial support from six banks (the big four plus Halifax and Abbey National), was announced in December.[40] The new Post Office account, which the BBA told us was to be called "Clear",[41] was intended to be the destination of state benefits for recipients who have no other type of account (replacing the existing benefit book system in 2003). The recipient would then be then able to withdraw funds in cash. However, the Minister told us that it was planned that all the cash would have to be withdrawn at once and there are to be no other features, so she agreed with our description of this account as a "very basic account".[42] It is not the type of account which the Social Exclusion Unit had in mind, or which was envisaged by the Trade and Industry Committee in their report,[43] and the Royal Bank of Scotland pointed out that, unlike basic bank accounts, it would not allow customers to build up credit ratings and gain access to other services.[44] Furthermore, the banks are committed to supporting it financially only "for a period of time".[45] The Minister confirmed that both this account and the banks' basic accounts are covered by the term "Universal Banking".[46] We believe that "Clear" accounts should also provide for cash withdrawals other than in single weekly payments and should provide direct debit facilities.

23. The NCC criticised the low level of publicity for basic banking accounts: "The banks ... do not seem to be selling them very actively".[47] One of the new provisions of the latest Banking Code is that details of such accounts should be offered to enquirers "when appropriate". Some of the banks promoted the accounts through advertising, but others merely through the provision of leaflets in branches and contacts with those who ask.[48]

24. 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.

IDENTIFICATION OF CUSTOMERS

25. In order to combat money laundering, the Government introduced regulations in 1993[49] which require financial institutions to obtain satisfactory evidence of the identity of their customers. As a result, many financial institutions expect those opening accounts to be able to produce evidence of identity such as a driving licence or a passport. In addition, gas or electricity bills etc. are often asked for as proof of address. Many potential customers, of course, do not possess these documents.[50]

26. The money laundering regulations do not, in fact, specify any particular method of identification, and many banks will accept other types of evidence,[51] although there have been reports that their guidance is not always followed by individual members of staff,[52] perhaps because the staff are wary of laying themselves open to penalties by accepting identification which later turns out to be false. In addition, while proposing greater flexibility in the types of identification allowed, Barclays did point out that they had a continuing need (quite apart from preventing money-laundering) to identify customers to prevent frauds being carried out against them.[53]

27. 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.

Money transmission systems

GENERAL

28. The Cruickshank Report considered the issue of money transmission systems in some detail, and recommended a new regulator, "PayCom", to ensure that new entrants to the market were able to join the organisations taking part in the various types of money transmission systems, including cash dispensers (usually called ATMs—automated teller machines—as many provide services other than dispensing cash), cheque clearing systems and credit card systems.

29. The Government issued a consultation paper in December 2000 on the subject; the main differences from the Cruickshank proposals were that the regulator would be the Office of Fair Trading (OFT), rather than a new body, and it would regulate by reference to a series of rules rather than by issuing class licences (i.e. a licence for each type of network, rather than for each member). The Minister explained that the Government had decided that it was "probably better to give the powers to an existing body" with expertise in the area.[54] The Consumers' Association said that the arguments for having a separate regulator or using the OFT were not clear cut and said: "we want something that works".[55] The decision to make OFT the regulator was supported by MasterCard/Europay and the Royal Bank of Scotland.[56]

CASH DISPENSERS

30. Those who run cash dispensers have to cover the cost of installing and maintaining them and keeping them stocked with cash. Where a cash withdrawal is made by a customer of a bank other than the one running the cash dispenser, a charge is made between the two banks involved. It is then up to the banks concerned as to whether this charge is passed on to the customer. Banks could also, of course, charge their own customers for using their machines, but personal customers are not usually charged in this way (possibly because such a withdrawal is administratively cheaper for the bank than cashing a cheque at the counter).

31. Until recently, the customer's bank sometimes made a "disloyalty charge" if the customer used another bank's machine. In July 1999 Barclays Bank announced that it proposed to abolish its £1.50 disloyalty charge from October 1999 but charge non-customers £1 directly for the use of its machines from the beginning of 2001.[57] This could have resulted in a non-customer paying twice for a single transaction (if his or her bank levied a disloyalty charge). By the time of our hearing in April 2000 it had become clear that double charging would not take place,[58] and that, by January 2001, customers would always be informed of any charge at the time of use (so they could decide whether to cancel the transaction or proceed with it), as Barclays had proposed. At our hearing several of the major banks said that they were proposing to charge non-customers amounts ranging between 50p and £1 for cash withdrawals from their machines.[59]

32. Cruickshank quoted a survey by LINK of the cost of a cash withdrawal from its machines: the figure was 16.4p (marginal cost: the cost per extra withdrawal) or 29.3p (full burden cost: the total cost divided by the number of withdrawals).[60] We therefore asked the banks to justify the size of their proposed charges. It appeared that they were attempting to recoup the cost of all cash withdrawals from the charges to non-customers.[61]

33. Since the April hearing, the main banks have abandoned their plans for charges to non-customers, so that, except in certain places described as "convenience locations",[62] most personal customers should be able to withdraw cash without being charged. The Consumers' Association attributed this development to the adverse publicity attracted by the original proposals, and to campaigns both by themselves and in the press, but expressed doubt whether freedom from charges would last.[63] The Minister also ascribed the change to public pressure.[64] Mr Cruickshank welcomed the decision by LINK to allow non-banks to connect cash dispensers to their network on the same price basis as banks.[65]

34. 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.

CHEQUE CLEARING

35. Cruickshank criticised the time taken before those who pay cheques into their account can withdraw the money or earn interest on it: "Clearing delays make it hard for retail and business customers to manage their financial affairs effectively. This results in higher bank charges from unauthorised overdrafts and forgone interest revenues".[66] The NCC pointed out the difficulties that slow cheque clearing caused to people "on a tight budget".[67] The banks said that this delay did not result in extra interest for them, as the money came out of the payer's account on the same day as it was credited to the payee's.[68] They also said that the speed of the system was dependent on the need to deliver each cheque, physically, to the bank branch on which it was drawn. Although they were considering the possibility of replacing this system with one where cheque images were transmitted electronically, they pointed out that it would not necessarily be possible to justify the expense given that the use of cheques was declining.[69] APACS told us that they were encouraging businesses, including small ones, to use electronic payment methods as they were quicker and cheaper.[70]

36. 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.

CREDIT CARDS

37. The credit card networks involve each retailer having a contract with an acquirer, which will usually handle credit card transactions for a number of different credit card networks (e.g. Visa and MasterCard in the United Kingdom) and associated debit cards. The acquirer pays the retailer the value of the transaction (less a transaction charge), and collects the money from the appropriate credit card issuer, who then debits the customer.[71]

38. While MasterCard/Europay UK welcomed the Government's proposal to extend the role of the OFT rather than creating a new regulator,[72] they and Europay International cast doubt on the need for regulation as proposed by Cruickshank on the grounds that the networks were already regulated at both a European and a global level, and fees to retailers were low compared to elsewhere in the EU.[73] They also opposed the recommendation that any organisation should be allowed to join them; currently their members were all required to be authorised credit institutions and to relax this requirement might cause risk to the stability of the system if a member body were unable to meet its obligations.[74]

39. The British Retail Consortium, however, pointed out that the Cruickshank Report had estimated that more than 90 per cent of transactions were charged at a "default" rate set collectively by the member banks of a payment scheme, and said that there was "little scope for negotiation of lower merchant charges".[75] The Minister rejected both the objections to regulation made by MasterCard/Europay and Europay International: she said that a lack of competition in the credit card area justified the decision to regulate; and that the FSA would be able to check that those joining the network were financially viable and that their membership was not likely to give rise to systemic risks.[76] We are persuaded that credit card networks need to be regulated along the lines suggested by the Government.

40. A criticism made by the Consumers' Association of some credit card companies was a delay in sending out statements: some were sent out—by second class post—several days after the date on them, thereby reducing the period for the customer to pay the bill without incurring interest charges.[77] The MasterCard/Europay witness doubted whether this affected the number of card-holders paying interest, but undertook to investigate the issue.[78] We welcome this undertaking.

41. We observe that one of the suggested terms for a CAT-standard credit card is that the deadline for payment to avoid paying interest should be 25 days from the statement date. 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.

Cross-subsidy and transparency of charges

42. An issue which arose in connection with payment systems, and also more generally, was the extent to which different banking activities are cross-subsidised, or more generally the relation between the cost to banks of a particular service and the charges made to customers. The NCC, for example, pointed out that banks were absorbing the transaction costs for personal customers (cash withdrawals and others) by paying very low interest rates (or none at all) on current account balances and by their overdraft charges.[79] The BBA rejected the idea that product pricing should always be related to cost, on the basis that "variety and flexibility in the market" were needed. However, the charges should be clear and customers should be able to compare them to satisfy themselves that they were receiving good value for money.[80] The Royal Bank of Scotland pointed out that there were already regular surveys of comparative prices, such as those in Which? and Money Facts magazine, but that comparisons were not always simple because of different terms and conditions: price was not the only issue. However, the new CAT standards for basic accounts should help.[81] The Minister reminded us of the comparative tables which the Financial Services Authority would be publishing for some types of financial product later in the year.[82]

43. The measures proposed on the regulation of payment systems are intended to increase competition at the wholesale level, that is for dealings between banks; the Consumers' Association said that there was "insufficient data" to prove whether there was any link between a fair money transmission system (at the level where different banks make charges to each other) and a fairer retail banking system (how, if at all, these charges are passed on to retail customers), and called for OFT to be given the role of "publishing information on the relationship between the retail charges and wholesale charges within that system".[83]

44. The Minister did not go as far as this, but said that the aim was "for the OFT to have access to things so that it can make a very clear diagnostic analysis of what is going on in the payment system. Obviously, if it is to analyse the payment system in this way and to come up with effective answers and identify effectively any problems that are working in it, it needs to be able to get to the root of the information in order to achieve that task".[84]

45. 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.

30 Ev p 25. Back

31 Q 191. Back

32 Access to Financial Services, Report of Policy Action Team 14, HM Treasury, November 1999, http://www.hm-treasury.gov.uk/pdf/1999/pat14.pdf. Back

33 Cruickshank Report, Chapter 7. Back

34 Q 86, 90-93. Back

35 Visa Electron and Solo cards require authorisation for every transaction (APACS, In Brief 2000, p 4). Back

36 As cash dispensers generally do not issue notes under £10, a £10 overdraft facility ("buffer zone") is required to enable customers to withdraw all their money unless cash withdrawals are also free over the counter (Standards for Retail Financial Products, p 54). Back

37 Q 489-91; Appendix 8. Back

38 This is in addition to the services provided at post offices for National Savings accounts (formerly the Post Office Savings Bank), and by Girobank, formerly part of the Post Office but now owned by Alliance & Leicester. Back

39 Trade and Industry Committee, 13th Report, Session 1999-2000, The Post Office, HC 724, paras 36-46. Replies by the Government and the Post Office were included in that Committee's 1st Special Report, Session 2000-01, HC 141; the Welsh Affairs Committee has also supported the concept of Universal Banking at post offices in its Third Report, Session 1999-2000, Social Exclusion in Wales, HC 365-I, paras 75-84. Back

40 DTI Press Notice P2000/860, 20 December 2000; Post Office Press Notice, 20 December 2000. Back

41 Q 288. Back