Select Committee on Treasury Thirteenth Report

6  Wider banking issues

Bill payment

78. There are a number of banking issues relating to financial inclusion which affect a broader spectrum of customers than those who have basic bank accounts. One of these is bill payment. OFGEM stressed that "in the current climate of rising wholesale costs feeding into energy bills, it is important that low-income consumers in particular take advantage of all the options available to them for keeping their bills as low as possible".[160] The Government recently stated that as a result of the rise in energy prices the its targets for cutting fuel poverty are being placed under serious pressure. They calculated that as a result of recent rises in energy prices the total number of vulnerable households in fuel poverty in England was due to rise by 1 million by the end of 2006, with proportional rises in other countries in the United Kingdom. Vulnerable households are deemed to be those containing children or those who are elderly, sick or disabled.[161] Professor Kempson told us that currently

there is no appropriate account-based method of bill payment for people on low incomes. A handful of banks have experimented with bill payment accounts of the type that were commonplace before being replaced by direct debits. The inflexibility of direct debits, and the associated charges if there are insufficient funds to cover a direct debit, are a major reason why people on low incomes do not wish to use transactional banking.[162]

79. The Fuel Poverty Advisory Group agreed that "direct debits are currently unattractive for many low-income consumers. There are very high charges if an account is overdrawn as a result of a direct debit, direct debits are taken monthly rather than weekly and this is not suitable for many on low incomes, and the use of direct debits can leave the customer uncertain how much he/she has available for other needs."[163] Sir Fred Goodwin noted that

Direct debits are a difficult tool: on the one hand it can make life very easy but the trouble with a direct debit is it is kind of binary because you are, effectively, giving someone else control over part of your resources, and if you do not have much in the way of resources then it does indeed make life that bit more difficult. Obviously, the people we are talking about here would tend to not carry a buffer in their account, so one of the reasons why you would want access to a direct debit would be to enjoy some of the discounts you get from a utility company, but it is difficult to do that if the utility company then comes and draws an amount out of your account which you do not have control over. Only about 30% of our customers use direct debits in the basic bank accounts, and I think many of them do not use them just because of their binary nature. I do not think it is so much to do with the charge; the charge is one part of your worries but if your direct debits start bouncing ,you then start to have problems with the originator, with the utility companies and anyone else they are coming from. So I think it is right direct debits should be made available as part of the account but they are quite a tricky thing to use.[164]

Paypoint, a company which offers a range of bill payment services across the country, noted that paying in cash allowed people to retain control of their finances and also provided a service for the unbanked to pay bills.[165]

80. The Government currently operates a third party deduction scheme, which allows benefit claimants to have deductions from benefits to clear arrears on household bills, and in some cases to pay for current consumption. Citizens Advice has recently published research citing problems with the current scheme and calling for a review.[166] OFGEM told us they were keen to see more progress made in

facilities to enable low income customers, particularly those on benefits, to have direct deductions for payment of fuel bills. In this area there is currently a rather limited direct deductions scheme known as Fuel Direct, which is operated by DWP for benefits claimants threatened with disconnection. This is a scheme which fuel companies and consumer groups would like to see expanded, so that it is more generally available as a budgeting tool. DWP have indicated that the current scheme is designed as a last resort measure, and that any wider expansion would be more appropriately undertaken by use of direct debits.[167]

Energywatch noted the limitations of the current scheme, observing that "once people are no longer in arrears they are invariably removed from the scheme. Many end up back in debt again when being able to stay in the scheme may have kept them out of debt."[168] Energywatch believed that the scheme would be more effective if "people could opt in and choose to manage their finances in this way and to remain on the scheme if they wish, after debts have been cleared".[169]

81. Water UK, the industry association that represents all water suppliers, believed that

there is a need for an account for all those on low income, which could be used for collecting income and for making direct payments for essential services (including water) on a regular customer/creditor agreed period without penalties. We believe this could be funded outside of Government with financing from creditor paid transaction charges.[170]

Water UK also noted that, unlike the third party deduction scheme, a new scheme along the lines proposed could aid in the transition from benefits to work.[171]

82. Rising energy costs are increasing the number of pensioner and other vulnerable households in fuel poverty. This in turn reinforces the importance of low-income consumers accessing low-cost bill payment services if they are to avoid fuel poverty. Direct debits are currently unattractive to many people on low incomes. We believe there is a need for discussions between utility companies, banks and the Government to consider what improvements could be made to the direct debit system and whether an improved method of bill payment could be developed. In the near term changes to the third party deduction scheme could provide an easy way of improving the ability of those on benefits to manage bill payment. We recommend that the DWP carry out a full review of this scheme with a view to its expansion.

Credit unions

83. The Association of Chartered Certified Accountants (ACCA) noted that the Government had committed to work in partnership with the banking industry to achieve real progress in reducing the numbers of unbanked, but that no similar commitment had been made to work with the credit union movement. The ACCA believed that the role of credit unions as a gateway to bring the financially excluded into mainstream banking ought to be further explored by the Government.[172] The Association of British Credit Unions (ABCUL) told us that credit unions were currently developing a service to provide credit union members with transactional banking through an agreement with the Cooperative bank. Sue Davenport of Leeds City Credit Union told us that this would be a full service current account with the ability to set up direct debits and an ATM card, and that quite a number of members would qualify for a debit card.[173] The new account would not have an overdraft facility, but account holders would be able to obtain a line of credit within the credit union's normal lending system. ABCUL also noted that fees for unpaid transactions would be able to be set "substantially lower" than those of banks. Mr Lyonette, Chief Executive of ABCUL, told us that initially 13 credit unions would offer this service, although that represented around one third of the credit union membership because those proposing to offer the service tended to be the larger institutions. He thought that the service could be expanded to perhaps 80 credit unions over the next two to three years.[174] We welcome the development of a credit union-based transactional bank account. We recommend that the Government actively support the development of this account through the Financial Inclusion Fund to enable more credit unions to offer an alternative to basic bank accounts in areas of financial exclusion. We further recommend that the Government give a commitment that it will work constructively with credit unions to maximise their contribution to improving access to banking services for the unbanked.

Local Housing Allowance

84. As part of the next stage of Direct Payment, the DWP is currently piloting in 18 local authorities the introduction of a new way of paying Housing Benefit, known as the Local Housing Allowance. These local authorities encourage tenants to have their LHA paid into their bank account, rather than direct to their landlord. Where the tenant does not have a bank account, they are provided with support and guidance to help them through the process of opening such an account. The DWP told us that paying money direct to the landlord does not encourage the tenant to take any interest in the rent payable or to budget their income to meet their rental liability. Paying the housing benefit to the tenant will encourage "tenants to move to a position similar to those in work thereby making the transition into work easier".[175]

85. We have not considered wider issues relating to LHA, such as its effect on the availability of accommodation or the various levels at which the LHA has been set in the different pilot areas, but it is evident that direct payment of housing benefit in some senses raises the stakes for claimants. For example, if the tenant has difficulties opening a bank account that tenant may be forced to rely on expensive cheque cashing services. In the pilot areas, some claimants had problems opening accounts because banks were not accepting confirmation letters of entitlement to housing benefit as proof of identity.[176] Although the new industry guidance on identification requirements should allow this to happen in the future, it will ultimately depend on the exact changes that banks make to their own internal guidance. If any of the problems operating basic bank accounts which we have already explored, such as excessive default charges or banks appropriating money in bank accounts to pay other debts, are encountered by tenants, this could leave tenants with rent arrears and at risk of losing their homes. Also, if Housing Benefit is paid late or inaccurately then this will run the risk of the tenant incurring overdraft charges. The National Housing Federation told us that

for [local] authorities in the worst performing 25% it took between 42 days and 101 days to process new claims in the last quarter of 2004-05. The Government's target is for 90% of new claims to be paid within seven days of being processed. Late payments by the local authority will mean individual tenants could incur overdraft charges and could find themselves in rent arrears.[177]

The National Housing Federation also noted that a study undertaken by London and Quadrant Housing Association had found that rent arrears increased to 6% in pilot areas. In non-pilot areas arrears were at 3%.[178] Before rolling out Local Housing Allowance further, the Government must ensure that problems opening and operating basic bank accounts are resolved. In particular, the Government should confirm that there is widespread acceptance by the banks of local authority housing benefit letters as a means of satisfying the identification requirements of the money laundering regulations. Alongside the roll-out of the Local Housing Allowance, the Government must also provide funding for services operated by Citizens Advice Bureau or other advice agencies to help people open bank accounts and provide guidance on how to operate the account. The target for 90% of housing benefit claims being paid within seven days of being processed needs to be met by all local authorities to ensure that tenants do not incur rent arrears or significant bank default charges as a result of the move to Direct Payment.

Understanding and promoting demand

86. As recognised by many witnesses, the problems of financial inclusion relate not only to the lack of availability of products, but also to the need to stimulate demand for appropriate financial products. The Financial Inclusion Taskforce believed that

individuals may benefit from assistance with understanding the options available to them, the potential benefits of different products, and the requirements for accessing products. Practical assistance in, for example, applying for a bank account may also be appropriate. This kind of informed choice process may be usefully facilitated through organisations such as: those with which individuals are already in touch, such as housing associations or Job Centre Plus; others which the individuals already trust, such as voluntary sector organisations or community groups; or central or local government.[179]

87. Barclays considered that the most effective way of reaching people on benefits and low incomes who did not have bank accounts was "via the extensive network already established by HM Government and the charitable sector … Conventional forms of marketing have proved ineffective at reaching this group of people."[180] RBS called for more research on the "distinction between the unbanked and those who do not wish to be banked—and the reasons why they may not wish to have a bank account".[181] The Financial Inclusion Taskforce has conducted research with financially excluded groups which concluded that most people who were financially excluded wanted a bank account: 79% had attempted at one time to open a bank account. However, there were significant barriers in terms of lack of awareness of the availability of accounts, a fear that a bank account could be the first step towards debt, and a fear of failure or a worry that they will not qualify for an account, or the banks would reject their application.[182]

88. We visited Services Against Financial Exclusion (SAFE), which is based in Toynbee Hall in East London, to examine its work helping people gain access to bank accounts and provide education on money management and how to operate an account. SAFE works with the Community Banking sections of banks to address access issues at a local level, as well as working with people on low incomes to help them understand the different options available and providing one-to-one support to help clients open a bank account. We talked to people about the difficulty they had in obtaining bank accounts and the additional help that had been provided by SAFE. On 20 April 2006, the then Chief Secretary to the Treasury, Mr Des Browne MP, announced that money from the Financial Inclusion Fund would be made available to raise awareness of the problem of financial exclusion amongst intermediary organisations such as charities and housing associations. The money was also intended to provide those organisations with tools and training to help their clients access financial services.[183] The Financial Inclusion Taskforce commissioned research on "Access to financial services by those on the margins of banking". One of the policy implications of this report was that "Demand stimulation will be needed to make people more aware of the benefits of banking" and that "this will need to go beyond making generic information and advice available—many people need to be supported through the process of opening an account by local contacts who are aware of locally-available services, and how they can be accessed."[184] The evidence suggests that the great majority of financially excluded people do want to access bank accounts. However, in many cases, real or perceived barriers can outweigh any advantage that they think might come from accessing a bank account. There is a need for action to stimulate demand and to provide support to the excluded in accessing financial products. Trusted, community-based institutions, such as Services Against Financial Exclusion and Citizens Advice, can play a vital role in promoting financial inclusion and acting as intermediaries. Conventional marketing efforts may not be effective at reaching financially excluded groups, and banks must work in partnership with community organisations to help people to access basic bank accounts. We welcome the additional funding from the Financial Inclusion Fund for intermediary organisations such as charities and housing associations to help raise awareness and promote access to financial services.

Bank branches

89. We received a submission from Andrew Layshon, Paola Signoretta and Shaun French of Nottingham University which mapped the changing location of bank and building society branches between 1995 and 2003 and listed the types of areas that saw higher or lower rates of branch closure. The research found that

the average branch closure rate for bank and building and society branches for all areas between 1995 and 2003 was 20%. However, the highest rate of closure—almost 24%—was experienced in Multicultural metropolitan areas, which include poor inner city areas. Higher than average rates of branch closure were also experienced in areas defined as Prospering metropolitan, Traditional manufacturing, Built up areas and Student Communities. Meanwhile, areas that experienced lower than average branch closures tended to be more affluent, and which could safely be described as typically 'Middle England'; these were Suburbs and small towns, Coastal and countryside areas and Industrial hinterland.[185]

However, the research also found that

senior managers in three of the top five British banking groups suggested that since 2000-01 large scale bank branch rationalisation has effectively been put on hold. Although closures have continued to take place since 2000-01 the respondents suggested that these were mostly the result of 'natural wastage' citing the end of leasing contracts, problems with making individual branches compliant with the Disability Discrimination Act and other mundane reasons for branch closures rather than the result of formal rationalisation programmes. Nevertheless, evidence also emerged during the research in 2005 that some banks have begun to introduce small-scale, phased closure programmes which go beyond the natural wastage described above.[186]

90. The Campaign for Community Banking suggested that a solution to avoid leaving communities without access to bank branches would be to introduce the model of shared branches.[187] They claimed that the pilot scheme conducted by the BBA during 2002 was flawed.[188] Mr Mark Lovell, Chief Executive of Action for Employment (A4e) noted that in other countries there had been trials of how "based on a different technology platform, you can take services out in a mobile way to communities"—describing such a proposal as a "bank in a boot".[189] Lack of access to a bank branch can be an important source of geographical financial exclusion. Some vulnerable groups, particularly the elderly, are heavier users of bank branches than younger people. While we note that since 2000-01 large scale bank branch closures have been avoided, we recommend that the Financial Inclusion Taskforce undertake a mapping exercise to determine the problem of lack of access to branches and explore with the high street banks the possibility of innovative models of delivery such as shared or mobile branches.


91. A remittance is generally defined as money sent from one place (or country) to another. This can include migrant workers sending money home to families that remain in their country of origin. According to the World Bank, remittance flows account for about one-third of global external finance, second in volume after foreign direct investment. Increasingly, offering remittance services to immigrant communities is seen as a useful way of encouraging engagement with the formal financial services sector.[190] If migrant workers are unable to access formal money transmission and remittance services, they may turn to the informal sector. The Department for International Development (DFID) estimated that, in 2005, the total value of outward remittance flows from the United Kingdom to developing countries was £2.3 billion. The Government has recognised the importance of remittances in promoting economic development, and DFID is therefore seeking to remove barriers to the flow of money transfers, to lower the costs and to make access to money transfer products easier for those on low incomes. DFID has established a remittances working group to provide a forum for private and public sector representatives to discuss opportunities, as well as constraints, and identify actions to expand and improve remittance transfer services to developing countries.[191] Regarding their role, HM Treasury told us that they were "concerned that the remittance services market in the UK should be competitive, efficient and sound, and that new opportunities for money remitters are introduced to enable them to enter and compete fairly in other EU markets".[192]

92. The FSA, the BCSB and Her Majesty's Revenue and Customs (HMRC) are responsible for regulating remittance providers, the first two covering banks and the last covering Money Transfer Organisations. The DFID working group noted concerns that "the FSA and HMRC do not always work in a coordinated manner".[193] The Money Transmitters Association (MTA) illustrated some problems with the current regulatory regime. HMRC is only allowed to give out limited responses to requests for information: for example, HMRC

can only confirm that a company is registered, it cannot give any details of visits made and whether any inspection yielded a positive result that AML controls were working. In effect, the registration scheme is not helping money transmitters to [obtain] banking facilities.[194]

The MTA told us that 75% of money transmitters had experienced problems in obtaining or retaining a bank account. The MTA believed that, "if money transfer companies are prevented from operating legally through the lack of a bank account, they will exit the formal sector but continue to trade in the black market".[195] Mr Tiner agreed that closing the bank accounts of small money transfer organisations increased the risk of money transmission activity migrating to illicit channels and that, in such circumstances, "those people go underground and are not subject to any scrutiny at all". Mr Tiner believed that, between HMRC, the FSA and DFID, they could take this issue forward.[196]

93. The Treasury told us that they were currently engaged in a review of the regulatory regime for Money Service Businesses (MSBs) to ensure that

the supervisory regime continues to support the needs of a dynamic and flexible MSB sector that is properly protected from the risk of money laundering and terrorist financing. This involves striking a balance between preventing the misuse of money remittance corridors for money laundering against the need to minimise regulatory burdens on the MSB industry, managing the risk of driving business underground and improving access to remittances services by honest users.[197]

A consultation document was published in September 2006.[198]

94. Access to appropriate methods of transmitting money is important for financial inclusion, and flows from international remittances are an increasingly vital source of finance and a lifeline for developing countries. Small money transmitters can play a valuable role by providing remittance services to communities that may not be engaged with the mainstream financial services sector. A lack of coordination in the current regulatory regime is hindering the ability of small money transfer businesses to obtain business banking services. Closing down the business accounts of money transmitters increases the risk of activity transferring to illicit or illegal channels, as the FSA has recognised. The Treasury and the FSA must ensure that this issue is dealt with in consultation with the BBA and the Money Transfer Association. We welcome the review of the regulation of Money Service Businesses by the Treasury, which should seek to identify an appropriate balance between preventing money laundering and terrorist financing on the one hand and improving access to remittance services for honest users on the other. We recommend that this review explicitly address the issue of access by small money transfer companies to business bank accounts.

95. There appeared to be some misunderstanding on the part of the banks concerning the role of HMRC in relation to remittances. Mr Fairey told us that he believed that "money transmitters are unregulated but registered with HM Revenue and Customs which is obviously not the same as being regulated for money-laundering purposes".[199] Sir Fred Goodwin believed that HMRC were not looking at money transmitters from a money laundering perspective.[200] The JMLSG guidance lists money transmitters as a higher risk business where banks should consider making more penetrating enquiries. No mention is made in the JMLSG guidance of the fact that that money transmitters are subject to registration and the regulation of their anti-money laundering controls by HMRC.[201] We recommend that the JMLSG guidance be amended to make clear that money transmitters are subject to regulation by HMRC. The revised guidance should indicate what information a bank should gather from money transmitters in order to satisfy the bank's obligations. We expect that the banks will work constructively with money transfer businesses to develop an appropriate level of control against money laundering.

160   Ev 414  Back

161   Defra, DTI, The UK Fuel Poverty Strategy, 4th Annual progress report, 2006 Back

162   Ev 425-426  Back

163   Ev 320  Back

164   Q 807 Back

165   Ev 421 Back

166   Citizens Advice, Take it away: CAB evidence on the DWP third party deduction scheme and financial inclusion, 16 March 2005 Back

167   Ev 414-415 Back

168   Ev 289  Back

169   Ibid Back

170   Memorandum from Water UK: not printed Back

171   Ev 497 Back

172   Ev 196  Back

173   Q 238 Back

174   Qq 242-243 Back

175   Ev 276 Back

176   Citizens Advice, Early Days-CAB evidence on the Local Housing Allowance, p 12 Back

177   Ev 390  Back

178   Ibid Back

179   Ev 301-302 Back

180   Ev 207  Back

181   Ev 453  Back

182   Opinion leader research, presentation at the Financial Inclusion Taskforce conference, 10 April 2006, Back

183   HM Treasury, press release, Chief Secretary announces funding to help the financially excluded, 20 April 2006 Back

184   Financial Inclusion Taskforce, Access to Financial Services by those on the margins of banking, p 2 Back

185   Ev 488 Back

186   Ibid Back

187   Ev 220  Back

188   Ibid Back

189   Q 165 Back

190   World Bank, Global Economic Prospects 2006: Economic Implications of Remittances and Migration, November 2005 Back

191   UK Remittances working group, The UK Remittance market, November 2005 Back

192   Ev 349 Back

193   UK Remittances working group, The UK Remittance market, November 2005, Key Finding 3 Back

194   Ev 483  Back

195   Ev 481  Back

196   Q 732 Back

197   Ev 349  Back

198   HM Treasury, 'The regulation of money service business: a consultation', September 2006 Back

199   Q 884 Back

200   Q 885 Back

201   Joint Money Laundering Steering Group, Part 2: Sectoral Guidance, para 1.36, Back

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