Select Committee on Treasury First Special Report

Letter from Melanie Johnson MP, Economic Secretary to the Treasury, to Rt Hon Giles Radice MP, then Chairman of the Committee



The Treasury Committee published its Report on Banking and the Consumer in March 2001. There were a number of conclusions and recommendations in that report to which the Treasury wishes to respond. I herewith enclose the Treasury's response.

I would like to thank the Committee for its work in preparing this report, which is a valuable contribution to an important debate.


(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 non­compliance. We look forward to Dr DeAnne Julius's report, which the Minister said would be available by the end of April 2001 (paragraph 12).

The Treasury agrees that considerable consumer benefits can be accrued through increased competition in personal banking services. Easier switching of current accounts between providers has a key role to play in this. There remains a perception amongst consumers that switching involves too much hassle, and we are looking to the banks to make good on their recent Banking Code commitment to facilitate easier switching. DeAnne Julius has indicated that her Group's report will contain specific recommendations designed to improve the process of switching personal current accounts. The Government has given this Group a month's extension to complete their work, and the Group is due to deliver its final report to the Government by the end of May.[1]

(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).

The Treasury acknowledges that the Banking Code should be enforced fully and symmetrically on those banks that subscribe to it. That is why we established a review group to consider, among other things, whether the voluntary codes for banking services are delivering sufficiently strong benefits to consumers. The group is due to report at the end of May, with what we hope will be a range of recommendations designed to maximise the benefits to banks' customers.

(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).

The Treasury agrees with the Committee that such a practice is unacceptable. We therefore welcome a recent commitment from the Banking Codes Standards Board to pursue disciplinary action against those banks and building societies that fail to abide by this aspect of the Banking Code.

(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).

The "Clear" Account is now known as the Post Office Card Account (POCA).

The Post Office is planning to outsource the POCA's banking back office operations. The precise features of the POCA are still being decided upon in consultation with Government and potential suppliers. But it is currently intended that customers will be able to withdraw less than the full amounts of their available balances; and that any remaining balances will accrue interest.

Under the proposals for Universal Banking Services banks will make their basic bank accounts accessible through post offices. Such accounts will include direct debit facilities. The POCA is for those people not yet ready for a bank account. It has therefore been designed to be as simple as possible and to meet customers' core needs. So it will allow payment in of benefits and tax credits only, and cash withdrawals at post offices only. Those people wanting more sophisticated features should be able to open a basic bank account allowing post office access.

(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 follow­on accounts should also continue to be available at post offices (paragraph 24).

The draft Memorandum of Understanding between the banks and the Post Office is a commercially confidential document whilst negotiations are taking place. Subject to the agreement of the parties it is intended that the final document will be made public.

The Post Office already has in place commercial arrangements with banks (including Lloyds TSB, Barclays, Alliance & Leicester and the Co­operative) which allow banking transactions to be done at post offices. The Post Office wants to extend these services through its plans for network banking and is in discussions with the banks about this.

(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).

The Treasury agrees with the committee that possession or otherwise of certain documents commonly used as evidence of identity should not, of itself, govern access to basic financial services. Where the lack of documents has presented such a barrier, this has invariably been as a result of a misapplication of banks' internal procedures, which generally make it clear that not possessing certain documents should not be a barrier to opening an account or otherwise accessing financial services. The Government is in frequent contact with institutions and trade associations to make it clear that there is no legal requirement to use only certain documents for the account opening process. The situation was further clarified in the FSA's Money Laundering Rules published in January 2001, which made it very clear that the simple fact that a customer does not possess particular documents should not, of itself, be a barrier to accessing financial services.

(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).

The Treasury agrees with the Committee that public pressure was instrumental in changing the charging structure for cash machine withdrawals. We believe that this demonstrates the benefits to consumers of clear price information. To this end the OFT, in its proposed new role as payments regulator, will aim to ensure that charges are made clear to consumers and are subject to an effective and competitive market. This should ensure that consumers are well informed about the charges they face and, for example, are made aware of any changes to charges for cash withdrawals.

(i) Banks appear to be reluctant to invest in modem 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).

The Government believes that increased competition and transparency is the key to innovation and development in payment systems. Better, clearer information about the cost and time involved in clearing payments will show up those providing a poorer service and help to drive up standards. Effective competition will give consumers real choice and innovative services at a fair price.

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

The Treasury welcomes the Committee's support for the Government's proposals.

(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).

The Government is proposing to give the OFT robust new powers to promote effective competition in payment systems. These will include powers to investigate complaints and to collect information, as well as powers to make determinations and to impose financial penalties.

The Treasury agrees with the Committee about the importance of accurate, comparable price information. The Government's proposals to extend CAT standards for retail financial services will help consumers to make informed choices.

1   HM Treasury published this reply on 9 July 2001 as Cracking the Codes for Banking Customers, Banking Services Consumer Codes Review Group, May 2001. Back

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Prepared 20 July 2001