Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Can I open this evidence session by welcoming you to the Committee. For the sake of the Hansard writers, could you introduce yourselves, please.
  (Ms Childs) Head of Policy, the Consumers' Association.
  (Ms Hanson) Senior Public Affairs Officer, The Consumers' Association.
  (Mr Naylor) Senior Researcher, Which? Magazine.

  2. Welcome, good afternoon. We are looking into this issue of banking, particularly two years after Cruickshank, and asking a number of what we hope to be fundamental questions. From the submissions we have heard already in the Memoranda, especially your own, we just wondered if much has changed at all in that two years; if there is any choice for the consumer in the market that is worth the name, and if there are quality products rather than perhaps inferior products, which you have highlighted in your Memorandum. Do you have any comment on that?

  (Ms Childs) I do think that we do feel the sense of deja vu here, particularly as you called us before you last year. Many of the comments that we have made in that submission we do repeat. There has been some change, particularly in relation to the smaller banks and some of the products that they are offering, but I think it is fair to say that we are very disappointed with some of the proposals that were put forward to try to alleviate some of the problems. PayCom, as the best example, have not been progressed. There has been some progress in relation to the Banking Code and we can talk about that in more detail. If we do, I think it is fair to declare an interest. I was part of the DeAnne Julius Committee, but I am here to represent the Consumers'Association's views.

  3. It does not look as if we are getting any change at all. What do we need to do? What outstanding issues need to be addressed by the banking sector following Cruickshank, DeAnne Julius and other reports?
  (Ms Childs) I will ask Mike to come in and talk about credit cards. In relation to current accounts, I think there are two main issues. The first is in relation to the ease of switching. A number of activities have been put forward, not least the commitment to have the five day and five week switching. I think it also has to be said that consumers have their own role to play in switching their current accounts. One of the issues there which our own Which? surveys have shown is that there is still a lot of concern out there which is misplaced, that if you switch your bank account, then you are going to put yourself at risk. We have to ensure that the switching process is made easier, but we also have to educate consumers that the risk is lower than they think it is. We, over the next few days, will be putting some effort into trying to get that message across. It is important in terms of ensuring that there is oversight of that process, and also the money transmission system, because we have real concerns about the time that it takes to clear cheques and the time it takes to transmit money electronically. That PayCom has pursued, and we are very disappointed that that seems to have lapsed at the present time.
  (Mr Naylor) As far as credit cards are concerned, 60 per cent of people still have a card with one of the big banks charging, typically, over the last decade, very high rates of interest, typically three or four times the base rates. What you find as well is that these high rates do not tend to change over time as base rates—for example, over the last year, base rates have fallen by 2 per cent, but most credit cards have not lowered their rates at all. It is very easy for people to switch credit card. There is lots of competition; there are lots of better cards around that people could be switching to. For some reason, people are not switching to those and they still have credit cards with the big banks.
  (Ms Hanson) People find it very easy to switch. We did a survey and the findings showed that the percentage was very, very high. Switching credit cards is very easy. People who switched current accounts, for those people who actually did it, 73 per cent of them found it to be a very easy process. So when people actually overcome their fears, or maybe inertia, they do find that switching can be beneficial, particularly for products where you can save money. For example, for many of the big four banks' current accounts, the interest rates on credit balances is as paltry as 0.1 per cent, whereas some of the best offers go as high as 3 per cent. Then, of course, if you go overdrawn, some of the interest rates on overdrafts are very low, just around 9 per cent for some of the best buys, but the big four banks are usually double that. So consumers can make huge savings by switching.

Mr Ruffley

  4. Could I ask, you state in your Memorandum that despite the failings of the big banks, providers of better quality products are being unable to challenge them in the retail market. Could you outline for the Committee what the main obstacles to greater competition are in the banking industry?
  (Ms Childs) It is a mixture of factors. There are still some structural issues in relation to the ease of switching and transmitting of money and switching accounts. There is also, as I have said, consumer inertia, which is based on that. There are also issues of the banks being quite clever in the way that they respond to some of the competition that comes in in relation to some of the discriminating prices that they are putting forward. For us, it is a mixture of those factors, which means that it is very difficult for some of the new entrants to come in.

  5. Could you be a bit more specific. You mention switching: are there any specific measures you think that the Authorities could take to rectify that, or is it merely for the market to sort out? If you could give some specifics: what could the Authorities do, in your judgment, to rectify some of these defects?
  (Ms Childs) In relation to switching we have to ensure that the Banking Code Standards Board implements and ensures that the Julius Committee recommendations on the five day start and five week ending are actually enforced. The Committee also made a recommendation that that figure should come down, and it would be possible over time as technology progressed to make that system easier. In relation to money transmission systems, it is very difficult to say whether a voluntary system is going to work. The Government made the case that PayCom was necessary following on from Cruickshank, and they have not found, it appears, a legislative time to push that through. I think it is a very important mechanism. We are also gathering evidence, but I cannot give specifics at this stage, about whether there are any other specific competition structural issues that need to be reviewed. When we have completed that investigation, then I am happy to pass that information to the Committee.

  6. That is helpful. Could you give us an indication of when that work might be available?
  (Ms Childs) I think that we are looking in the next couple of months. It may not be within the time of your report, I am afraid.

  7. Might it be possible, Chair, for us to ask you to give us a rough cut, so to speak, just to give us an indication of where your thinking is, even though it may not be in final form, because I think some specifics from you would be helpful?
  (Ms Childs) Yes, I will write to you and set it out.[1]

  8. Could I finally ask this: have recent changes to the structure of the banking sector, such as internet banks—I have in mind in particular—made any difference to the levels of competition in the sector as a whole? Is there any data on that?
  (Ms Hanson) We do not have any data on that overall. We have highlighted places and companies who have been quite aggressively marketing competitive products, for example, in the current account area.
  (Mr Naylor) Similarly for credit cards, competition has certainly reduced rates overall. There are much more competitive rates available which makes it even more surprising that people are staying with the high rates. Competition has undoubtedly led to rates being reduced.
  (Ms Childs) It is important on this point, and perhaps this is what you are driving at, to distinguish between the wholesale and the retail competition. A number of the internet banks are offering better rates. Some of them limit the type of customer who can use those accounts—you have to have minimum amounts of money in your account, but it also needs to be noted that a number of those are offshoots of the existing Big Four. So in terms of the overall balance of competition, it has made some difference in the retail offerings in terms of the control of the current account markets in particular. It has not yet made a big inroad into the Big Four's dominance in that area.

  9. Do you expect it to make significant inroads in the next couple of years?
  (Ms Childs) That is difficult to quantify in terms of the take up in internet banking. We have seen increases in that. I would prefer, rather than to waffle, to take that question and to write to you specifically on some of the work that we have done on that.

  10. On projections?
  (Ms Childs) Yes.

  Mr Ruffley: Thank you.

Mr Fallon

  11. You refer, in your evidence to us, to your continuing concern of the lack of direction from building societies. Can I just be clear about the research you are offering us: you say the cost of the building society conversions to UK consumers could be in the region of £33 billion over 10 years; is that the conversions that have already happened, or the conversions that might happen?
  (Ms Hanson) The ones that might happen, yes. We have got a Paper we can send you which sets that out, but it is if the building societies that are still in existence demutualise, and the cost in terms of higher interest rates on borrowing and lower interest rates on savings would add up to that amount over the next 10 years, that is what we have estimated.[2]

  12. We look forward to the Paper you are going to send us, but just in a sentence, how do you establish that cost?
  (Ms Hanson) By looking at the various different interest rates that are applied, because the building societies usually offer much better value in terms of cheaper borrowings and better returns on savings than either those building societies who have demutualised, or the existing banks and building societies, so we very much regard them as a competitive bulwark against the banks, and one of the key aspects that keep rates competitive for consumers.

  13. So the remaining mutuals are still strong enough and large enough, in your view, to ensure effective competition against the Big Four?
  (Ms Hanson) They are only one part of the factor, I think, but they are a very important part, to keep a check on the other banks, particularly the big four, and the rates they are offering consumers.

  14. What is the legislative protection you are particularly looking for for the remaining mutuals?
  (Ms Childs) Clearly you cannot stop someone pushing a vote forward for demutualisation. What we are looking for is a protection that allows some restriction to be based on the windfall payout that customers would get, based on the length of time with that particular building society and the amount that they have invested, and that would act as a deterrent to carpetbaggers that were coming in just for a quick kill.

  15. So it is not the statutory procedures that you need tightened up, it is the windfalls?
  (Ms Childs) It is a way of getting at the problem, which is if you had legislation which meant that it was possible to put a limit on the way in which the windfalls were paid out, then that is a way of deterring it because it is not possible to actually stop people putting a vote forward, because they have the democratic right to do that.

  16. You say there is a severe risk of levelling down competition in the high street because of the demutualisation that is already taking place. Is that your view, that the standard of banking services to the consumer has now been reduced to the lowest common denominator?
  (Ms Childs) . . . to maintain those standards and that is on the basis, as Louise has said, because if it offers an alternative and offers better rates, then that has an effect on banks. In relation to the service that banks give, repeated Which? research has shown that there is a low level of customer satisfaction with the Big Four, and less than a third of the customers of the Big Four that we surveyed have said that if they had their time again that they would open an account with their existing bank. So I think there is a separation, and I am sorry if our evidence is not clear on this, between the effect of the better rates, that type of service, and the service levels generally.

  17. If you are able to estimate the cost to the consumer of the conversion of the remaining mutuals, are you able to estimate the cost to the consumer of the conversions that have already taken place, over say, a 10 year period? Would it be of the same order of £33 billion?
  (Ms Childs) I did not carry out that calculation. I would assume that it would be possible to do it the other way, and I am happy to write to you on that point.[3]

Mr Tyrie

  18. What strikes me is that, first of all, you are suggesting that if there is a complete demutualisation, there will be much less competition in the market, yet there will be more players on a level playing field because they will be demutualised. What I cannot understand, and it closely relates to the switching issue, is why, whereas in the lending market, there has been huge competition—look what has happened to mortgage lending—but in the high street banking market, this competition does not seem to be getting through. Have you got an answer to that paradox?
  (Ms Childs) In relation to your first comment, there is a difference between the number of players in the market and the effectiveness of competition for consumers, and I think that is the distinction we would make. We would not judge competition just by numbers, but on the quality of the service that consumers would be getting in terms of the appropriateness of the product, so that is the point that we would make. There is an illusion of choice by just looking at the numbers; you have to look at the quality of the product they are getting. In relation to the paradox, I think with mortgages you are right, there has been a lot of competition in switching in that market. In relation to current accounts, and Mike will talk about credit cards, I think some of that, people just think that all the banks are as bad as each other, or it is not worth doing because you are not going to save any money, and there are also fears about losing direct debits and transfers. I think there is much more fear about doing that and inertia in that market than there has been in the mortgage market.

  19. On direct debits and access to various more sophisticated banking services, banks provide them on a hierachy. They grade their customers, everybody knows they grade them, some as A, B, C, D, E, some are graded some other way, with a number system or whatever it may be. Perhaps, is that not part of the information that needs to be disclosed, and also available at the time of switching, so that the bank that takes on the new customer knows exactly what the previous bank has graded them?
  (Ms Childs) The only danger with doing that is that it can replicate discrimination if you are actually saying that the bank who is receiving it should take as the word the grading that the previous bank put that person into. What the DeAnne Julius Committee said was that there was a benefit in giving positive data on consumers when they were switching. I think the issue of grading consumers is less of a positive benefit for them and is a way, as you would expect, for banks to target the consumers that they want and to exclude the consumers that they do not want.

1   Ev 45. Back

2   Ev 45. Back

3   Ev 30. Back

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