Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 360-379)

MR GERARD LEMOS AND MR SEYMOUR FORTESCUE

14 MARCH 2006

  Q360  Mr Todd: Did you explore what the causes of the delay might be?

  Mr Fortescue: It is usually to do with identification problems, particularly if the documents have to be sent to a central point; they then get sent back with a letter which somebody, whose first language may not be English, may have difficulty in understanding and they really have to start again with the whole process. You can imagine the sort of delays which result.

  Q361  Mr Todd: Do you think the Code should have an explicit limit on how long it should take to open a basic account?

  Mr Lemos: That is one of the things we will argue for in the next review.

  Q362  Mr Todd: Have you got an idea of what that should be?

  Mr Fortescue: I think that is something we would want to talk to the industry about. I would have thought 10 days should be the right order of magnitude.

  Mr Lemos: Some do currently.

   Mr Fortescue: Yes. There used to be a problem with switching current accounts. People perceived that it was extremely difficult and time-consuming to switch their accounts. The Code says the bank that is losing the account must provide information about direct debits and standing orders within three working days. As a result of that, the switching problem I think has largely gone away. It is not difficult to switch accounts. There is a time limit on that process. We think there should also be a time limit on the process for opening a basic bank account.

  Q363  Mr Todd: We have talked about the barriers to opening an account, what about the process of actually running an account. Have you looked at whether there appears to be discrimination against those who operate basic bank accounts in encountering the services of a bank?

  Mr Fortescue: The area where we have perceived it to be a problem is in the length of time it takes for a cheque to clear on a basic bank account compared to regular current accounts. Six of the providers of basic bank accounts require a day or two more for the cheque to clear—presumably because there is a higher incidence of bounced cheques with basic bank accounts. It is not a huge problem because the benefit credits and the salary credits, which are the main source of funding for the basic bank accounts, go through BACS and, therefore, arrive as cleared funds. I think that is the area where we have perceived there to be some apparent discrimination against basic bank account holders.

  Q364  Mr Todd: There does not seem to be a logical reason why a basic bank account holder should have a longer wait to clear a cheque, to be quite honest, bearing in mind the very low-risk, low-opportunity (I accept that) nature of the account itself?

  Mr Fortescue: I would agree with that.

  Q365  Mr Todd: What steps are you taking to make that message clear in the Code?

  Mr Fortescue: The OFT has a group looking at the whole cheque clearing process at the moment and cheque clearing times. They are due to report during the summer and we are really waiting to see what they are going to say.

  Mr Lemos: It would certainly be helpful if they looked at clearing times for basic bank accounts, as well as other clearing issues.

  Q366  Mr Todd: It would appear to an objective observer that that is just another way of discouraging people from operating basic bank accounts, that it is just a little more difficult. Another example which was sent to us was there appeared, in some cases, to be discrimination over even basic things like access to a counter for ordinary transactions in a bank.

  Mr Fortescue: We have not come across that.

  Q367  Mr Todd: That appeared to be the case. "HM Treasury is aware of recent moves by some of the banks to restrict over-the-counter access to basic bank accounts". I think there was another reference to encouraging people to go at certain times, or something like that. Again that seems something which would be unwelcome and illogical?

  Mr Fortescue: We are certainly aware that banks encourage people to use their cards in machines rather than across the counter, but they do that for all their customers.

  Q368  Mr Todd: Yes. The tenor which comes from this line of questioning is that very gently there are attempts made to make clear to basic bank account holders that they are somewhat second-class citizens among the bank's customers, and their business is not entirely welcome. To be honest, I would have thought that is neither ethically nor in business terms sensible, since presumably at some point there may be a desire to convert that bank account holder to a full account holder, which I think my colleague will come on to and the means by which that might be done. Should not the Code be absolutely explicit, that all relevant services should be equally available to a basic bank account holder? Obviously there are a large number of bank services which are not available to them because there are restrictions on the account.

  Mr Fortescue: I think it might be difficult to mandate that all banks should treat all their customers in precisely the same way—there is some segmentation in the market . . . [2]19

  Q369 Mr Todd: Where those services are relevant I think that that is right, is it not?

  Mr Fortescue: It is not an issue which we have come up against, but we will certainly look into it and consider whether a change to the Code might be required.

  Mr Lemos: In principle I think that is right. Where it is relevant people should receive the same treatment.

  Q370  Mr Newmark: My question is to do with default charges. Last year you said that regarding penalty charges on credit chards, "If I were still a poacher I'd have a real job defending these charges. They do not appear to be related to the costs, they frequently hit those least able to pay them and they generate great resentment". What is your view on the level of default charges payable by users of basic bank accounts when there is insufficient money to pay standing orders and direct debits?

  Mr Fortescue: This is a concern to us—certainly to the independent directors. Perhaps I should make clear that I was speaking, as I think The Guardian article mentions, in a personal capacity. For people who are new to banking, who may not understand the system very well, if a direct debit for their gas bill comes in at a rather higher figure than they were expecting or a day or two earlier than they were expecting or their benefits are delayed, they get charged up to £30 or even more for a failed direct debit that blows the household budget for the week; so this is a serious concern to us. The theory is that we are not an economic regulator; we should not set prices. Our role is to ensure transparency so people can make informed decisions. The weakness in that argument is that the information about those charges is hidden somewhere in the terms and conditions which people probably do not read properly when they open the account, and at the time the charge is applied they are in no position to shop around or go with another supplier. I think we would like to see two changes at the time of the next review: one, the independent directors would argue for a summary box (and this Committee has been very positive about summary boxes for credit cards). We think summary boxes should be there for current accounts as well, so the key features of the product would be pulled out in a standard format so people would be made aware that there was a penalty charge. That would be the first thing. The second thing would be that there should be pre-notification. For other account charges the Code says that they should be pre-notified, generally on the customer's statement 14 days before they are applied so that people can be aware of them, argue about them if necessary and avoid the situation of having charges on charges. We think that the pre-notification should apply to penalty charges as well, as indeed it does for some banks, but we think that should be universal.

  Q371  Mr Newmark: Circling back to what you said a bit earlier, you do not really see an expanded role for the Banking Code in the area of penalty charges. I get the sense you think the market should be setting that?

  Mr Fortescue: I should also say that the OFT is on the case. In fact in this morning's Financial Times it mentions that the OFT is likely to cap charges on credit cards at a rumoured figure of £10 or £15 for a credit card default charge, and clearly there is a read-across from this into charges on basic bank accounts.

  Q372  Chairman: That is a good aspect to bring to your attention because it was this Committee which referred this issue to the OFT and then referred it to the Competition Commission. This is an example of industry coming before us when we asked them about penalty charges and saying, "We don't make any extra money out of this"; and we asked, "How much do you make out of it?" and they unanimously decide not to give us that information. As a result we referred it to the OFT and we now see the result of that. It is just an example, Mr Fortescue, for you in your role to say to the banks, "Look you should be thinking in a forward way in this issue so that we do not need to go through these laborious routes", because at the end of the day we find ourselves in this position. Related to Angela's question about the review in 2008, if they were seen to be taking this offensive approach then things would be a lot easier and there would be no need to get into this situation.

  Mr Lemos: Could I say one more thing in relation to your last question. There is a provision in the Code relating to customers in financial difficulties already, which says that they should be left with enough funds for their basic requirements.

  Q373  Mr Newmark: I understand that. I think the point Mr Fortescue was making hits the nail on the head—it is those, where for some reason for example, a cold winter and their fuel charge is suddenly a lot larger, who slightly go over and they are hit with a £38 or £26 charge. We are really focussing on the people who are on the lowest rung of society. That is really where our concern lies. For those people the £26 or £38 is a meaningful amount to them. That is where our concern lies. For those who just have two bank accounts there is this issue of off-set. I know that consumer groups have expressed concern that banks are beginning to offset one account for another, so if one goes overdrawn they effectively log onto another account to pay off debts. The problem arises sometimes even when a repayment plan has been agreed with the help of an impartial debt adviser. Would such action breach the Banking Code's requirement to treat customers in financial difficulty positively and sympathetically?

  Mr Fortescue: The Guidance on this point says that banks should leave the customer with sufficient money for day-to-day expenses, taking into account individual circumstances. We are aware of instances where that has not happened; where the bank has grabbed all the money when it is paid in after the salary date. We have got a very good liaison with a lot of money advisers and Citizens' Advice Bureaux who have frequently told us of this. We have taken them up with the bank concerned and been able to rectify the situation.

  Q374  Mr Newmark: Is this generally minutiae writing where you need a magnifying glass? Is this generally made clear to customers upfront, that you do have the ability to effectively seize the assets from one account to another, or not?

  Mr Fortescue: There is something in the terms and conditions about the right of set-off which people will not generally understand.

  Q375  Mr Newmark: I find a number of people find it irritating that they have to show the same set of identification to the same person and the same bank opening two sets of bank accounts because they are told that, "This bank account is different from this one and, therefore, you are required, for money laundering requirements, to show us the same ID to open a separate bank account". Therefore the impression from the consumer's standpoint is that these are two distinct bank accounts. Banks make that very clear in trying to open up the bank accounts, but, what I am not sure is made clear is that this right of off-set is anywhere other than in the teeny-weeny writing at the back of some large document. Is that made clear upfront?

  Mr Lemos: It goes to our general concern that customers have the right to know what is going on. There are some things which are more significant than others in all the terms and conditions. I think a fundamental principle on which the Banking Code operates is that people do have a right to know. As Seymour has already said, one of the things which we think has been successful is the summary box on credit cards. I think there would be a question if there were to be a summary box on current accounts about what would be covered and what would be the important requirements.

  Q376  Mr Newmark: On this issue do you think there should be some sort of change in the Banking Code in this area, or not?

  Mr Lemos: So far as the independent directors are concerned, I think we have already said that we would like to see a summary box on a current account and then there would have to be a discussion about what was most important and so on.

  Q377  Mr Newmark: Making it very clear upfront to customers opening two back accounts this right of offset?

  Mr Fortescue: For customers in financial difficulties basic bank accounts are an extremely good product, because there is a discipline in them that they are not allowed to go overdrawn. I know a lot of money advisers will encourage people in financial difficulties to open a basic bank account and keep that as a means of keeping their head above water whilst dealing with any other problems via monthly transfer.

  Mr Lemos: If we are talking about a customer in financial difficulty who is at risk of off-set the key thing is that they have independent money advice, independent debt advice, and if a payment plan has been agreed and is being maintained. Appropriation in the way you have described should not occur. Those are the requirements as they currently stand. We would stand by those and ensure that they were complied with.

  Q378  Mr Newmark: Citizens Advice are concerned that banks are taking the opportunity to upgrade basic bank accounts to conventional accounts with full banking facilities where this is not necessarily in the individual's best interests. They have called for the Banking Code to include guidance on how basic bank accounts should be upgraded and detail the safeguards that should be put in place. Is there any need for further guidance in this area, in your view?

  Mr Fortescue: I think it would be quite difficult to be prescriptive in that area—the precise circumstances when somebody's account should be upgraded. Clearly in tackling financial inclusion it is an evolutionary process. You start with a basic bank account; if that works okay and people use it sensibly then there is no reason why they should not have access to affordable credit, saving schemes and a credit card in due course; but I think that has to be a step-by-step process. I think it would be rather difficult to prescribe how that should be done.

  Q379  Mr Newmark: Other than necessarily wrapping it in a "know your customer rule", is this in the best interest of the customer? You cannot be prescriptive, but in terms of banking practices or best code of practice in the behaviour that one has towards one's customer there should be the "know your client rule" effectively where perhaps that should come up?

  Mr Fortescue: The thing which has concerned us is that the scenarios we have written for the mystery shopping have been very much about people who have no need for credit and they just want a simple account into which their benefits will be paid and they can perhaps use them for their utility bills and so on. We have been concerned in the past, but the situation has clearly improved recently, that people were being sold products (including credit) which they had no need for.


2   19 Note from Witness: The BCSB believe it is reasonable that banks should have some freedom to segment their market according to customer profitability. Back


 
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