Conclusions and recommendations
Background
1. The
evidence we have received indicates that those without access
to a bank account are likely to be on a low-income, the long-term
inactive or unemployed, the elderly, lone parents and council
and housing association tenants. (Paragraph 7)
The overall approach
2. 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. (Paragraph 19)
3. 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. (Paragraph 20)
Opening basic bank accounts
4. There
is evidence to indicate that steady progress has been made so
far towards target of halving the number of people without access
to a bank account. Banks are collectively accountable for progress
so far and in the future. However, it is also vital that each
bank can be held to account individually for its contribution
to meeting this target. This is not possible at the moment. Individual
banks need to accept this responsibility, and accordingly we recommend
that the Government, the Financial Inclusion Taskforce and the
banks reach agreement enabling each individual bank regularly
to publish figures for the numbers of basic bank accounts it has
opened in each year. We would expect each bank to develop strategies
for ensuring that it makes a proportional and appropriate contribution
towards meeting the target, and we would also expect such strategies
to take due account of the analysis which follows on the issues
surrounding the opening of basic bank accounts. (Paragraph 26)
5. While the provision
of basic bank accounts will not be immediately profitable, we
welcome recognition by the banks that they have a responsibility
to provide such a service and that, in the longer term, bringing
more people into the financial services sector will be profitable
for the banks. We also welcome the fact that banks are upgrading
consumers to full service accounts where this is appropriate for
the individual. It is important that the Financial Inclusion Taskforce,
in cooperation with the BBA and individual banks, assesses evidence
concerning the business case for banks to provide basic bank accounts.
(Paragraph 30)
6. Despite the undoubted
corporate commitment of the banks to offering basic bank accounts,
there is some evidence to suggest that many people are still encountering
problems opening basic bank accounts reflecting branch decisions
and attitudes rather than the policies adumbrated in head offices.
Banks need to redouble their efforts to tackle such problems and
ensure that all sections of their organisation are supporting
the corporate commitment to provide basic bank accounts. (Paragraph
31)
7. The Banking Code
Standards Board mystery shopping survey has been useful in identifying
improvements that need to be made to the process of opening a
basic bank accounts. However, improvement has not been universal,
and there remain several banks that are not meeting their responsibilities.
We note the action taken by the banks to improve matters, but
we consider it essential that the full results of the next mystery
shopping survey are published so that there is full transparency
about which banks are meeting their commitments under the Banking
Code and which are not. This will sharpen the incentives for the
worst to improve and enable the best performers to receive recognition.
The Chief Executives of the five major banks or their representatives
who gave evidence to this Committee have accepted the principle
of transparency and we expect them to lead the way by publishing
the full results for their banks and pressing for full publication
in relation to all banks. (Paragraph 36)
8. We recommend that
the Banking Code Standards Board ensure that any changes to the
Banking Code relating to basic bank accounts that they have made
or that arise from this Report are implemented no later than the
end of March 2007. (Paragraph 38)
9. Problems with satisfying
the identification requirements of the anti-money laundering regulations
are the single most significant barrier preventing access to basic
bank accounts. There is a need for a proportionate regulatory
regime that strikes an appropriate balance between promoting financial
inclusion and the need to combat money laundering. We welcome
the recent revision of the money laundering guidance that seeks
to accomplish these aims. The banks now need to ensure that this
flexible approach is reflected in their own internal guidance
and also that a flexible approach is taken at branch level. In
order to comply with the requirement of the Banking Code to "tell
customers what information they need to provide to prove their
identity", we recommend that all banks provide extended lists
to applicants and ensure that staff are advised to work with applicants
to inform them of all possible options for proving their identity.
(Paragraph 48)
10. It is important
that the FSA continues its actions to remove the risk-averse culture
at bank level and take a risk-based approach to enforcement. It
is also important that individual banks remove the barrier of
risk-averse individual employees through clear training on what
forms of identity are acceptable and the importance of promoting
financial inclusion. We recommend that the FSA monitor the implementation
of the revised JMLSG guidance closely and produce a report in
the first half of 2007 on the variety of approaches taken by the
banks, including an assessment of whether these have led to improvement.
We further recommend that the FSA take action under its rules
if it is found that the procedures or practices of individual
banks at branch level unreasonably deny access to basic bank accounts
to those who cannot reasonably be expected to produce particular
documentation as evidence of identity. (Paragraph 49)
11. We recommend that
the Government review the extent to which existing relationships
with public sector organisations can be used to help the financially
excluded prove their identity. We also expect the Government to
encourage banks to develop links with public sector organisations
and other third sector groups such as housing associations and
to work proactively with organisations such as SAFE to develop
solutions to help financially excluded people prove their identity.
(Paragraph 50)
12. To ensure that
the implementation of money laundering regulations and associated
industry guidance adequately consider the needs of financially-excluded
consumers, we recommend that membership of the Joint Money Laundering
Steering Group be expanded to include a representative of consumer
groups. (Paragraph 51)
13. We recommend that
the Guidance accompanying the Banking Code be amended to ensure
that, where applications for basic bank accounts are turned down,
banks should explain to applicants why their application has been
turned down and what steps might need to be undertaken to allow
their application to be accepted. (Paragraph 52)
14. Long delays in
opening basic bank accounts are unacceptable. These delays are
associated with the central processing of applications, as opposed
to banks allowing processing to be undertaken at branch level.
We recommend that the Banking Code be amended to require verification
of identity documents to take place at branch level rather than
applicants being required to send documents away to a central
point. We would expect that all banks would wish to ensure that
they have procedures in place for verification at branch level
even before such a change to the Code comes into effect. We further
recommend that the Banking Code be amended to establish a maximum
time limit of ten days for providing a fully functional basic
bank account where the customer has provided appropriate identification.
We would expect individual banks to ensure that their own standards
meet or improve upon that limit before such a change to the Code
comes into effect. (Paragraph 55)
15. We welcome the
policy of Barclays, Nationwide and the Cooperative bank in providing
access to basic bank accounts to all except those with a record
of fraudulent activity. Basic bank accounts are a useful way for
those in debt to manage their commitments and attempt to resolve
their problems. Because basic bank accounts do not offer any credit,
banks should not need to conduct credit reference checks—as
opposed to electronic identity checks—on applicants, and
we recommend that the Banking Code be amended to prohibit such
credit reference checks. Denying basic bank accounts to undischarged
bankrupts seems to run contrary to the spirit of the policy of
the Government to encourage enterprise by introducing a bankruptcy
procedure intended to provide a fresh start for those who fail
through no fault of their own. We recommend that the Banking Code
be amended to ensure that basic bank accounts are not unreasonably
denied to those with debt problems and we further recommend that
all banks review their policies on access to basic bank accounts
for those in debt and undischarged bankrupts. (Paragraph 59)
16. We recommend that
the Banking Code be amended to require all banks to display their
basic bank account literature in branches. Marketing material
should be developed with the needs of the financially excluded
in mind and we encourage banks to work with community groups and
others to ensure basic bank account literature is appropriate
and accessible. (Paragraph 60)
17. We expect the
Banking Code Standards Board to investigate the extent and form
of dissuasion of financially excluded people from opening basic
bank accounts and to take action against any banks found to be
actively dissuading such people from opening basic bank accounts.
(Paragraph 61)
Operating basic bank accounts
18. Financial
inclusion will require more than the achievement of numerical
targets for numbers of accounts opened. Survey evidence indicates
that a significant proportion of basic bank account holders withdraw
all their money in cash on the day it is credited and gain little
benefit from operating a basic bank account. There needs to be
a greater focus on ensuring that the terms and conditions of basic
bank accounts are appropriate and useful for those on low incomes.
We make a number of recommendations below and expect the Treasury,
the Financial Inclusion Taskforce and the banks to discuss and
take forward appropriate measures for their implementation. (Paragraph
65)
19. Unreasonable and
excessive penalty charges are detrimental to those on low incomes
and do not promote financial inclusion. We are not convinced that
penalty charges of up to £39 are reasonable and accurately
reflect the costs incurred by the banks. We welcome the actions
of Barclays in cutting its penalty charge, and the approach taken
by HSBC and Lloyds TSB, that do not levy penalty charges on basic
bank accounts. We encourage other banks to explore these approaches
or apply similar leeway such as not imposing charges for the first
three times that direct debits are unpaid. We would expect the
OFT to ensure that the level of default charges on basic bank
accounts is examined as part of its fact-finding exercise into
the fairness of bank default charges. (Paragraph 67)
20. There is broad
agreement that a small penalty free buffer zone of £10 can
help low-income households manage their commitments and avoid
the charges and hassle associated with failed direct debits. We
recommend that all basic bank accounts should incorporate such
a buffer zone. (Paragraph 68)
21. There is a compelling
case for establishing a formal dialogue between the banks and
utility companies to consider the extent of demand for weekly
direct debits and how such demand might be met. We expect the
banks to agree proposals for improvements to the direct debit
system so that payments could be triggered by money coming into
the account, although we note the complexities of the issues involved.
(Paragraph 69)
22. Treating basic
bank account holders like second class citizens by denying access
to branch counters causes exclusion and reduces the opportunities
for holders to become further integrated with the financial services
sector. We welcome the policy of RBS, Barclays, HSBC and other
banks that provide full counter access for their basic bank account
customers. HBOS and Lloyds TSB told us that in practice they do
not deny counter access to basic bank account customers. We recommend
that they amend their terms and conditions to make it clear that
they will provide counter access to such customers, although we
would expect banks to continue to advise customers on the different
ways of accessing their money and to provide practical assistance
to customers in using ATMs or other automated services. (Paragraph
71)
23. We note that five
banks currently apply longer cheque clearing times to basic bank
accounts and that there is some evidence that such an approach
has been successful in reducing fraud. However, longer cheque
clearing times represent a significant disadvantage to customers
and we recommend that the OFT payment systems taskforce specifically
consider the issue of longer clearing times for basic bank accounts
as part of its report on the cheque clearing system. That report
should lay out a clear timetable to reduce the clearing times
for cheques paid into basic bank accounts. (Paragraph 72)
24. We consider that
banks should not exercise their right of set-off from basic bank
accounts in cases where an individual repayment plan has been
agreed. In other cases, banks should always leave consumers with
sufficient money for day-to-day expenses. We recommend that the
BCSB investigate this issue further and propose any appropriate
changes to the Banking Code. We also consider that the fact that
banks may exercise the right of set-off needs to be made much
clearer to consumers in the literature issued by the banks and
when consumers open bank accounts. (Paragraph 73)
25. Basic bank accounts
should contain features that help people monitor their day-to-day
expenses. These could include regular statements or the ability
to check balances at Post Offices. We recommend that research
be undertaken by the Financial Inclusion Taskforce into methods
of helping communicate to basic bank account users the amount
of money left in their account and any impending direct debits.
We further recommend that the banks investigate innovative ways
of accomplishing this through mechanisms such as text message
banking. (Paragraph 74)
26. We recommend that
the Banking Code Standards Board conduct research as a high priority
into the experience of consumers operating basic bank accounts.
(Paragraph 76)
27. A strategy that
simply looks at the absolute numbers of accounts opened will not
deliver meaningful financial inclusion. The Government and the
banks need to take a broader approach and ensure that basic bank
accounts are useful and appropriate for those who were previously
financially excluded. The Government must ensure that the most
vulnerable are considered and given appropriate help and assistance
to enable them to open and operate accounts. In the medium term,
the Government should establish a more sophisticated goal which
should take account of actual usage of bank accounts by those
who were previously financially excluded rather than focusing
simply on the numbers with access to such accounts. (Paragraph
77)
Wider banking issues
28. 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. (Paragraph 82)
29. 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. (Paragraph 83)
30. 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. (Paragraph 85)
31. 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. (Paragraph 88)
32. 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.
(Paragraph 90)
33. 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. (Paragraph
94)
34. 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.
(Paragraph 95)
The Post Office Card Account
35. The
take-up of Post Office Card Accounts has been far greater than
the Government expected, with 4.3 million people currently using
the POCA to receive benefits, including 2.3 million pensioners.
This appears to reflect both the difficulties in opening basic
bank accounts and the perceived advantages amongst benefit claimants
of using the Post Office. (Paragraph 99)
36. There are around
1.2 million people using Post Office Card Accounts to receive
benefits who do not have access to another account. For any migration
from POCAs to basic bank accounts to be successful, there needs
to be significant progress in tackling the barriers to opening
accounts identified in this Report. In particular, in view of
the difficulties encountered by customers in proving their identity
to satisfy the anti-money laundering regulations, we recommend
that the Government investigate whether the provision of a statement
from a POCA could be used to help people prove their identity.
Substantial investment would also need to be made to provide help
and support through Citizens Advice and other community-based
institutions for people, many of whom may be pensioners, to enable
them to open and operate basic bank accounts. Clear information
that people will be able to continue to support their local Post
Office by making withdrawals over-the-counter will also need to
be provided. (Paragraph 110)
37. There will clearly
need to be a successor to the Post Office Card Account for those
who cannot manage with or obtain a full bank account. We recommend
that the DWP work with the Post Office to introduce a successor
to the Post Office Card Account with greater functionality. (Paragraph
113)
38. The approach of
the DWP to the future of the Post Office Card Account has been
characterised by inadequate consultation and a lack of clear strategic
planning. Sub-Postmasters and Citizens Advice were not consulted
at an early stage about the migration pilots. The high street
banks, which provided funding for the POCA and will be closely
involved in any transition to basic bank accounts, have not been
consulted. The DWP must develop clear plans for the future arrangements
for the 4.3 million people currently receiving benefits through
the Post Office Card Account, consulting widely with the Post
Office, Sub-Postmasters, high street banks and Citizens Advice
and other consumer groups. We expect the DWP to publish a document
outlining this strategy before 2007. (Paragraph 114)
39. The Post Office's
customer base, extensive branch network and trusted role in the
local community mean that the Post Office can play a lead role
in promoting financial inclusion. The Government is not maximising
the potential of the Post Office in this area. The loss of the
contract for the Post Office Card Account, whether these customers
are eventually transferred to basic bank accounts or to an alternative
Post Office product, is likely to result in a loss of income to
the Post Office. If this income cannot be replaced by alternative
services or products, then either Post Offices will close or Government
spending on the social network payment will need to increase.
This would result in a saving to the DWP but a corresponding increase
in expenditure by the DTI. The Government needs to ensure a joined-up
approach by the DWP, DTI and the Treasury to funding and providing
services through the Post Office network. In view of its overall
responsibility for public spending, we think that the Treasury
is the appropriate lead department for developing this strategy.
We recommend accordingly that the Treasury develop a clear blueprint
for the role of the Post Office and financial support for it.
The Government also needs to recognise the negative impact that
further Post Office closures could have on financial inclusion.
(Paragraph 117)
40. Universal banking
services available through the Post Office are far from universal,
with around 60% of current accounts not offering access to cash
withdrawals at the Post Office counter. We note that while some
banks have problems regarding the cost of such access, which presumably
can be overcome through negotiations, for others the main barrier
is the fact that the Post Office is a competitor in the sale of
financial products. We recommend that the DWP and the Treasury
discuss with the banks increasing access to Post Office counter
withdrawals and ensure that further progress is made. (Paragraph
121)
41. We welcome the
fundamental change in the Post Office's cash machine strategy
to increase the number of free ATMs. We recommend that they speed
up their installation of free cash machines and ensure that they
prioritise viable sites in areas that currently lack access to
free cash withdrawals. (Paragraph 123)
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