Select Committee on Treasury Minutes of Evidence

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 word—a 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 rate—a 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 unique—an 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 bit—effectively. 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 emphasis—on distribution—and 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 growing—as opposed to have grown—a 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 products—because 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 forward—like the ones that they have in co-operation with the Bank of Ireland—increasingly 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 products?

  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 Office—which 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, recognising—when I deal with my opposite number, David Mills—that 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 me—because you have just said so—that 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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 29 November 2005