Select Committee on Treasury Thirteenth Report

3  The overall approach

The approach of the Government so far

12. Since the importance of access to banking services was highlighted in the 1999 Social Exclusion Unit report to the Treasury, the Government has sought to address the challenges in this area first and foremost through dialogue and cooperation with the banking industry.[14] This voluntary partnership approach led directly to the development of basic bank accounts as a near universal banking product and the subsequent agreement on the shared goal for reducing the number of unbanked adults. Performance by individual banks has been monitored first and foremost through the voluntary system of regulation operated by the BCSB rather than within the framework of statutory regulation undertaken by the Financial Services Authority (FSA).

A legislative approach?


13. Some evidence we received argued that the partnership approach alone was insufficient and should be replaced or supported by either legislative action requiring banks to enhance the availability of transactional banking services or by more explicit Government consideration of such action. The New Economics Foundation has advocated the introduction of a universal service obligation in banking:

The imperative for banks to develop innovative solutions to financial exclusion can only result from a universal service obligation. A universal service obligation would mandate the affordable provision of basic accounts to all individuals, making this inherent in the receipt and continued operation of a banking [licence]. Similar to utilities, telecommunications, and the postal service, access to a bank account is a basic right in order to function effectively in society. Unlike these basic services, banking remains exempt from the obligation to provide access to everyone.[15]

The case for some form of universal service obligation in banking, possibly including some form of neutral shared branching, was also supported by the Campaign for Community Banking Services, Help the Aged and the National Housing Federation.[16] Which? pointed to legislation in France and Canada designed to ensure universal access to banking services.[17]

14. Which? considered that existing voluntary arrangements were "insufficient to deal with exclusion from basic banking services".[18] Which? argued that it was time for the Government formally to consult on legislative options, including a possible universal service obligation, although it accepted that "these are difficult issues which need to be evaluated carefully".[19] As Mr Mick McAteer, Principal Policy Advisor at Which?, put it to us:

We would argue that the Treasury now should be looking closely at some form of universal service provision, if only in preparation for the end of this voluntary partnership approach. There is no point in waiting until the experiment is over and then doing the research into whether or not there should be a universal service obligation. We think you should be starting to look at that now, just in the expectation that the banks are not playing ball.[20]

Ms Claire Whyley, Director of Policy at the National Consumer Council, did not consider that a legislative obligation upon banks would be appropriate "at this stage", although she thought that it was "something that may be appropriate further down the line".[21] She nevertheless cautioned that

if we were to rush into a universal service obligation, we may have the wrong type of obligation … I would be certainly be very concerned about something which just made opening an account the end result, because clearly that is not financial inclusion. Financial inclusion is about being able to use that account and benefit from it.[22]

15. Witnesses from the leading banks were sceptical as to whether the benefits of additional regulatory requirements would outweigh the costs, particularly in view of the fact that the United Kingdom already had higher participation rates in banking than some countries with relevant regulatory requirements such as France.[23] Mr Pomeroy, Chairman of the Financial Inclusion Taskforce which has been given responsibility for monitoring progress towards the shared goal, believed that, "since there is a voluntary solution in place … our view is that we should see whether or not that works, but not take something more directive … like a universal service obligation off the table".[24] The Economic Secretary to the Treasury agreed with Mr Pomeroy that at this stage a voluntary approach was preferable, and suggested that the legislative approach in France had not led to universal banking accessibility.[25] The Economic Secretary to the Treasury indicated that there would be an assessment of the progress made at the beginning of 2007 and said:

The option of going beyond [a voluntary approach] has not been taken off the table … The evidence does not say that simply having an obligation delivers results. Even if you had that, you would still need to do all the work we are doing here. It is not off the table, but at the moment we are seeing whether we can make progress through the Taskforce.[26]


16. Another possible legislative approach that was frequently referred to in evidence was one based on the United States Community Reinvestment Act (CRA). We learnt more about the operation of this legislation during our visit to the USA in February 2006. The CRA was enacted in 1977 to prevent so-called "red-lining"—the practice of banks explicitly choosing not to offer lending services to people identified as living in certain districts—and to encourage banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighbourhoods. The CRA and its implementing regulations require federal financial institution regulators to assess the record of each bank and thrift in helping to fulfil their obligations to the community and to consider that record in evaluating applications for charters or for approval of bank mergers, acquisitions and branch openings. We were told that the CRA is part of a 'three-legged stool' that encourages banks to serve the needs of low-income communities, the other two legs being made up of fair lending and other anti-discrimination laws, and reporting laws such as the mortgage disclosure acts. Banks are evaluated in several areas and receive a rating based on their activities in low-income communities. Ratings are based on loan provision, branch and cash services and community development activity. The CRA is principally concerned with lending rather than the provision of current accounts. Banks can comply with the CRA and improve their rating through direct provision of financial products and services or by investing in organisations embedded in local communities such as Community Development Finance Institutions or local community banks. We learnt that banks increasingly view CRA activity as activity that could yield profitable business opportunities or attract tax relief. Sir Fred Goodwin, Chief Executive of RBS—which owns Citizens Financial Group in the US—told us that

CRA has not been problematic to our [US] business … It brought some structure and consistency across the industry … A number of the leading players have actually gone some way beyond it but it did act as a catalyst…[but] you could probably do better than a CRA if you were trying to invent something.[27]

A key lesson from our visit to the USA was that, over time, the CRA has become less important in forcing banks into investment and other decisions that it might not wish to make than in enhancing transparency about bank activities in deprived communities.

17. One of the key recommendations of the Social Investment Taskforce, which was established by the Chancellor of the Exchequer to consider ways in which increased investment could be made in the poorest communities, was that United Kingdom banks disclose their lending data in respect of low-income areas.[28] A recent report assessing progress in relation to the Taskforce's recommendations concluded that, "while a number of banks have disclosed some information about their activities, not all have done so. The current regime of voluntary disclosure leaves an environment where banks are providing information that makes helpful comparison problematic."[29] Ms Sarah McGeehan, Deputy Chief Executive of the Community Development Finance Association (CDFA), recognised that "a structure which was around disclosure of engagement in these markets, whether it be through CDFIs, credit unions or direct provision … could enable us to understand relatively how different commercial banks were doing, but also be able to show us where there were opportunities in the market place; [the CRA] has opened up niche markets for the commercial banks".[30]

18. Which? argued that the Government should consider introducing "CRA-style disclosure requirements so that policy makers can gauge the extent of financial exclusion and the behaviour of individual firms".[31] We put the suggestion to the banks that it would be useful to have some measure of banks' performance, in terms of their engagement with low-income areas. Mr Gary Hoffman, Chairman of UK Banking and Barclaycard, Barclays, told us that Barclays disclosed information concerning the proportion of Barclays current accounts, consumer lending and ATMs in deprived areas.[32] Mr Dyfrig John, Chief Executive Officer, HSBC, indicated that HSBC did not currently publish such information but would be happy to do so, providing that such information was reported by all the banks on a consistent basis.[33]

Our conclusions

19. Some evidence we received argued that the time is ripe to move beyond the current voluntary approach to enhancing access to banking services for the financially excluded by introducing a statutory requirement to provide banking services for all. The precise form such a requirement might take remains unclear, as some of its advocates acknowledge. The concept of a "universal service obligation" is generally associated with services that have been provided in the public sector or in sectors where licensing or high barriers to entry confers a particular market advantage. Banking could be seen as a more open and competitive market than some markets to which universal service obligations apply, making comparisons with postal or telecommunications services of limited value, although it is possible to envisage a situation in which statutory regulation undertaken by the FSA included more stringent conditions on the activities of banks in relation to the financially excluded. The case for the imposition of statutory requirements relating to access to, or the provision of, banking services for the financially excluded is closely linked to analysis of the current performance of the banking industry and of individual banks. This Report makes a contribution to such an analysis. As matters stand, we do not consider that the case for such legislative action has been made. We agree with the Economic Secretary to the Treasury that more can be achieved at present by a voluntary partnership approach, and also with his important point that the willing participation of the banks will be essential in tackling financial inclusion regardless of legislative action. However, we also note the statement by the Economic Secretary to the Treasury that a legislative approach "is not off the table", and our approach in this Report is based on identifying areas where we expect progress to be made by banks individually and collectively if they are to be able to satisfy the Government, legislators and the public in the future that the voluntary approach is the best way forward. This Report contains recommendations requiring action by the banks. We make such recommendations within the context of our wish to identify benchmarks by which to assess the effectiveness of the current voluntary partnership approach. We expect to monitor closely actions taken in response to those recommendations.

20. An important element in the monitoring by this Committee, by the Government and by others will be an assessment of information on the performance of individual banks. One of the strengths of the CRA in the USA lies in the requirements it imposed on banks to report information on activities in low-income areas and the culture that helped to establish where banks were more conscious both of their activities in such areas and of the profitable business opportunities such activities created. Although we do not see a case at present for the introduction of legislation comparable to the US Community Reinvestment Act, we recommend that the Government, the banks and the Financial Inclusion Taskforce work together to prepare and then publish measures of engagement by the individual banks with the socially excluded, provided on a standard basis no later than the middle of 2007. More generally, the adequacy of the provision by banks of information which enables full and effective monitoring to be carried out will be an important criterion in determining the overall success of the voluntary partnership approach to combating financial exclusion in banking services.

14   Q 981 Back

15   The New Economics Foundation, Basic bank accounts: the case for a universal service obligation, 2005; see also Ev 408. Back

16   Ev 225, 332, 389 Back

17   Ev 503 Back

18   Ibid Back

19   Ibid Back

20   Q 42 Back

21   Q 18 Back

22   Ibid Back

23   Qq 789-792 Back

24   Q 488 Back

25   Q 981 Back

26   Ibid Back

27   Q 789 Back

28   Social Investment Taskforce, 'Wealth beyond welfare', October 2000, recommendation 3 Back

29   Enterprising Communities, Wealth beyond welfare, a 2005 update on the social investment taskforce, p 2 Back

30   Q 310 Back

31   Ev 501 Back

32   Q 785 Back

33   Q 786 Back

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Prepared 19 November 2006