Select Committee on Treasury Thirteenth Report

Conclusions and recommendations


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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