Examination of Witnesses (Questions 20-39)|
19 OCTOBER 2005
Q20 Lorely Burt: Internet sales,
on overall sales figures.
Mr Cook: The internet phenomenon
has hit us quite significantly. At the time this annual report
was produced, there was only two months' worth. It has continued
into the current year. I guess our annual run rate would indicate
that we will be selling about a billion pounds' worth over the
internet. That is not all what I would call "new" new
business. Those customers may have previously chosen to transact
with us over the telephone. Telephone-oriented customers are probably
going to be the first to make the switch to the internet, although
there is a fair amount of evidence to suggest that many of those
customers are new to NS&I, and would represent genuine growth
rather than just a channel switch, if you like.
Q21 Lorely Burt: Because they did
have huge growth last year, did they not, by 70%, but they only
accounted for 20% of your total sales?
Mr Cook: Yes. I think that internet
sales at the moment are about 14-15% of sales.
Q22 Lorely Burt: How do you see that
rising as a proportion of your total sales?
Mr Cook: I would expect it to
rise. I have to say that it is rising faster than my expectation
six to nine months ago. So how long I can expect that to continue
or not, I do not know. As I say, I think that what we are doing
is attracting a different type of internet-literate customer.
We have a very strong traditional customer base, but particularly
an older customer base that is very happy with the existing proposition,
the Post Office and whatever, and maybe, as a result, we will
move less fast than some other financial services providers. What
is interesting is that we are now beginning to attract other types
of customers to the organisation.
Q23 Lorely Burt: Looking at the total
sales figure, you achieved"achieved" perhaps
is not quite the right worda 15% decline last year. What
is your forecast for this year? Do you think that you will be
able to start making up that shortfall?
Mr Cook: My expectation is that
our sales would be at least equivalent to 2004-05, if not a little
higher. That would be my expectation.
Q24 Susan Kramer: Mr Cook, perhaps
I could pick up on a couple of things that have come up in your
conversations with my colleagues. You said that there were four
tax-free products, as you described them; but when you describe
the product, would you say that a more appropriate description
is that you have four products that were net of tax? Do you think
that your customers understand the difference between tax-free
and a product on which the tax in effect has already been paid?
Mr Cook: I think that what they
understand is we offer a very clear ratea rate of return
for the customer. There is no requirement for that customer to
disclose that return on their tax returns. It is not eligible
for tax. I think that the importance is to understand the nature
of the offer itself. If I look at those products, one of them
is Premium Bonds, which is pretty uniquean unusual proposition,
where we are effectively offering a rate of return paid in the
form of prizes. It would not be very practical if those prizes
were taxable. It would somewhat take the gloss off, I think, if
the envelope dropped on the mat and, several days later, you got
a tax bill. Another one is Index-Linked Savings Certificates,
which is our second most popular product, where what we are offering
is not so much a rate of return but a guarantee that your investment
will grow in line with inflation, plus a biteffectively.
So people are not necessarily, for those two major products, shopping
for a rate of return per se; they are buying an idea. They
are buying a prize draw or they are buying a very safe investment
that is linked to the rate of inflation. Obviously how attracted
you are to that proposition depends on how you believe inflation
will go. So I do not think that people are weighing up, "Is
this tax-free? Is this net of tax?", as you call it. I think
that they are buying a proposition, an ideal, and I think that
we make that proposition very plain to customers.
Q25 Susan Kramer: Do you explain
that in effect you do not have to report your earnings on these
products, or your prize winnings from these products, to HM Revenue
and Customs? Obviously the thought of the words "money laundering"
comes to mind. What kind of controls do you have in place to make
sure that the system is not abused in that way?
Mr Cook: We have a highly automated
system, where we will check automatically the identity of individuals
as we receive their business. We therefore undertake automated
checks. A percentage of those automated checks will fail and,
for those, we then follow up with requests for documentary evidence
of identity and the like. So it is a pretty intensive process,
in actual fact.
Q26 Susan Kramer: I have just a couple
of questions on distribution. The first is to clarify. You said
in the past that you were pretty happy with your product and pretty
happy with your customer service, but the issue for you was distribution.
Is that still a correct analysis?
Mr Cook: That is what I said 11
weeks into the job, when I last appeared before this Committee.
I think that probably is where I have put my emphasison
distributionand I am feeling a lot happier where I am today
than I was then. We have grown a significant telephony business,
which I think is quite important because now customers are interacting
directly with us. We are growingas opposed to have growna
very successful internet business. As you may or may not be aware,
we have recently signed a distribution deal with Tesco's as well,
and Tesco Personal Finance will be distributing Premium Bonds
and Index-Linked Savings Certificates, starting next month. That
is getting us to the position where the products which I think
are good propositions and are good for customers are now much
more widely available and are accessible to customers in whichever
way they feel the most comfortable. Some will like us in the traditional
sense, over-the-counter at the Post Office; at the other extreme,
some will like us over the internet. So I feel a lot happier about
our distribution proposition today.
Q27 Susan Kramer: A last question,
just looking at the productsbecause obviously the Post
Office does remain still your key outlet
Mr Cook: Absolutely.
Q28 Susan Kramer: Are you concerned
perhaps about the extent? In other words, could the other kinds
of products that you now see the Post Office bringing forwardlike
the ones that they have in co-operation with the Bank of Irelandincreasingly
erode your Post Office sales, and do you have a strategy to incentivise
the Post Office to continue to be an important seller of your
Mr Cook: We do, and the contract
does incentivise them to sell our products. What I think we have
put the most emphasis on over the last year or two is building
a strong working, practical relationship with the Post Officewhich
we have. So this is not two organisations that do not share and
are mistrustful, or whatever. This is two organisations that are
working together, recognisingwhen I deal with my opposite
number, David Millsthat he is building a distribution business
and wants a range of products available. In particular, if he
is selling in financial services, he wants products that I will
never have. He wants lending products, and I do not lend. I only
bring in money; I do not lend it out. So he wants a broader financial
services proposition. They have just launched a credit card. I,
on the other hand, want broader distribution, and he understands
why I would want to de-risk my business from a distribution perspective.
If you are running any business, you would not want all your eggs
in one basket. I guess there is a mutual understanding of where
each side is going, and we are working together in a very collaborative
way to deliver that.
Q29 Mr McFall: There is one point
that stimulates my interest. In our report a year or so back on
restoring confidence in long-term savings, the Committee identified
a range of those in incomes of, say, between £15,000 to £30,000
a year, who were not saving. It was subsequently described as
savings for the middle-class industry, and we are not getting
to those people at £15,000 to £30,000. There are a number
of reasons for that. From an industry point of view, the products
are expensive and people have other things to do with their money.
Do you have any advice on that? Are you undertaking any initiatives
to try to get the person with that category of income saving money?
Mr Cook: My primary remit is to
raise cost-effective finance for the Government. To do that, I
have to encourage people to save. So my belief is that we have
a broad appeal. As we do that, I think that we will inevitably
encourage all segments. We have enough sophistication now in our
marketing database to recognise that all customers are not the
same and that some customers will be attracted to one type of
product, and others will be attracted to another. At one extreme
you will have a guaranteed equity bond which, whilst not that
sophisticated, is probably the most sophisticated product that
we sell. It has a high minimum purchase amount and it will be
attractive to the upper end of the market. At the other end, we
have a passbook-based investment account which is sold through
the Post Office, with a minimum deposit of £20, or an ISA
with a minimum deposit of £10, which are attractive to the
other end. I believe that we have products through the range.
The trick is to put in front of the customer the right product
that suits their circumstance. In so far as we know enough about
our customers, then we endeavour to do that. Certainly our aim
is to offer a broad range of products.
Q30 Peter Viggers: What information
do you have on the age of your customers?
Mr Cook: We have a fair amount
of information on age, split by segment.
Q31 Peter Viggers: Would I be right
in thinking that your customers are predominantly amongst the
elderly, or the older range?
Mr Cook: They used to say, traditionally,
we were "for grannies and kids", because we have quite
a significant child customer base as well.
Q32 Peter Viggers: I want to ask
about the closure of the Ordinary Account. How many customers
remain in the Ordinary Account?
Mr Cook: If they are alive, we
have about 11 million accounts still outstanding, with about £200
million worth of balances.
Q33 Peter Viggers: The figure I was
given was £400 million. How does the low conversion of customers
from the Ordinary Account to the new Easy Access Savings Account
reflect the poor interest rates offered on the new account?
Mr Cook: The new account is offering
interest rates that were virtually 10 times higher than the old
Ordinary Account, I have to say. The Daily Mail have us
in their "Best buy" table for a high access savings
account category. The problem with instant access savings is that
there are many different types of instant access savings. I have
to say that some are more instant access than others. If you want
branch-based access with an ATM card, available at 11,000 Post
Offices and 30,000-odd ATMs, where you can get out £300 a
day, then our rate compares very favourably indeed. I think we
are fourth or fifth. If you are prepared to collect it only over
the phone and have it credited to your bank account, you will
get higher interest, but of course it is a different proposition.
Q34 Peter Viggers: What interest
rate do you pay on the Ordinary Account?
Mr Cook: I would have to check
that. It has gone up, I think.
Q35 Peter Viggers: Can I put it to
you that it is between 1.1% and 1.2%?
Mr Cook: Yes.
Q36 Peter Viggers: So there are 11
million people who have not transferred out of an interest rate
where they are getting 1.1% or 1.2%?
Mr Cook: There are indeed.
Q37 Peter Viggers: May I put this
to you? That you are preying on the elderly, whose lethargy and
lack of sophistication causes them to accept a rotten deal they
get from you rather than to move to better rates which are widely
available elsewhere. Please discuss!
Mr Cook: We have mailed extensively
those customers where we believe we have a current address. This
account was 142 years old. If the customer never closed it before
they passed on, then the money is still sitting there, and we
will have a devil of a job trying to track them down. However,
we have placed extensive advertising. We mailed all the Ordinary
Account customers, where we were confident of their addresses,
three times during the transition period, and we believe that
we have taken all reasonable steps to try to identify these people.
Mr Bayley: We also "cleaned"
the name and address file before we started to correspond with
customers; so we got a current address where we were able to write.
Q38 Peter Viggers: This inertia or
lethargy on behalf of the customers is serving the Chancellor
of the Exchequer rather well, is it not?
Mr Cook: This account was on commercial
offer for many years. My resolve was to make sure that we brought
in a new, modern proposition that paid, as I say, anything up
to 10 times the rate of interest in a much more convenient style,
and to make it as widely available as we can.
Q39 Peter Viggers: But you would
agree with mebecause you have just said sothat you
and I would wish to tell customers of the Ordinary Account that
they are losing money by staying there.
Mr Cook: We are doing everything
we can to make sure customers of the Ordinary Account appreciate
that there could be alternative, better offers. I think one has
to doubt that many of them are still active, but I cannot prove
how many of them are still alive today.
Peter Viggers: Let us hope the message
goes out from this Committee to move out of the Ordinary Account.