Examination of Witnesses (Question Numbers
60-79)
MR PAUL
SMEE, MR
STEPHEN LOCKE
AND MS
SANDRA QUINN
16 MARCH 2010
Q60 Mr Tyrie: Is this Annex B?
Mr Smee: Yes.
Q61 Mr Tyrie: Is that the sum total
of what is in the public domain on this subject? I just want to
clarify whether there is other material which is not in Annex
B.
Mr Smee: That is what we have
published, yes.
Q62 Mr Tyrie: Let us take a look
at Annex B. Annex B says, "Quantifying the existing benefits
of cheque use in comparison to other benefits is harder",
in other words, harder than calculating the benefits, that is,
the savings, to corporates and banks. If you read on in that paragraph,
and I am on page 26, you do not make any estimate of that amount
at all. So what you have done, have you not, is write in the benefits
to your firms, to the corporate side, but you have not written
in any costs to the users, that is disbenefits of loss of the
cheques? There has been no quantification of that loss.
Mr Smee: It is difficult to give
a quantification because at present most banks do not actually
make—
Q63 Mr Tyrie: The number is surely
not zero, is it? There must be a number which you should write
in. In any cost/benefit analysis you should write in a shadow
cost, should you not?
Mr Smee: The key will be what
alternatives are made available and the support that is put into
that to ensure that consumers can use those alternatives. We do
from our research feel that consumers have accepted that cheques
are declining and are willing to consider alternatives if they
are properly explained and properly justified to them.
Q64 Mr Tyrie: But that is not the
question I asked. I asked you what is the disbenefit of losing
the convenience and the familiarity and the other benefits that
cheque users enjoy at the moment. What estimate have you placed
on that in your cost/benefit analysis? You have told me, "We
do not know", have you not?
Mr Smee: I have, but—
Q65 Mr Tyrie: So what value can we
ascribe to your cost/benefit analysis? That may be more than the
£1 billion that you have ascribed as the gains, the £950
million, to corporates and banks.
Mr Smee: That is why it is crucial
that the alternatives should meet the needs of consumers preferably
in a better way than cheques currently do, because then there
would be a benefit to all concerned and that is why the triggers
which we have set for confirming closure of the cheque clearing
have been set so high.
Q66 Mr Tyrie: Do you not think that
the next stage, if you are going to make any serious case at all,
frankly, is to have your cost/benefit analysis put out to independent
verification by a body specialising in this kind of microeconomic
cost/benefit analysis which can then write in some proper shadow
costs? Otherwise Annex B, frankly, is not worth the paper it is
written on. You have only analysed half of the picture, have you
not?
Mr Smee: We have only analysed
the part which is capable of numeric computation at the moment.
Q67 Mr Tyrie: It needs to be written
in. The fact that the consumer benefit of using cheques is hard
to estimate, as you put it, and I agree with you, does not mean
to say that you just abandon all attempts at doing so. Clearly
you have got to write something in; otherwise the cost/benefit
analysis is meaningless. That is what economists mean when they
talk about shadow costs, is it not? Have you got an economist
on your team to do this work?
Mr Smee: Yes.
Q68 Mr Tyrie: Has he not made that
point to you?
Mr Smee: Yes.
Q69 Mr Tyrie: And what response did
you make?
Mr Smee: He felt that this was
the most effective way of demonstrating the issue at our current
state of knowledge. What we will be doing in the course of the
rest of this year is coming up with the detailed criteria which
need to be met if the three tests which I referred to earlier
are going to be justified in 2016. We are doing that in consultation
with those who are affected by the change, particularly the user
groups, and we will be making that public.
Q70 Mr Tyrie: I do not mean this
disparagingly, but may I ask you if you understand why it might
be that this Committee, having listened to your answer, which
is that only half of the cost/benefit analysis has been produced
and that there are no numeric counterweights to the figures you
have produced for the benefits to firms, will have to conclude
in our report, and I do not want to pre-judge what other members
of this Committee may say but on the basis of what I have just
heard from you, `case not made'?
Mr Smee: I think it depends what
the case is that you are referring to.
Q71 Mr Tyrie: It is whether the disbenefits
exceed the costs of the removal of cheques, and since we have
not got any figures for the benefits of cheques in your calculations
we cannot possibly answer the question.
Mr Smee: But the key case which
we are seeking to set out is a challenge to the payments industry
that as cheque usage declines there has to be positive and proactive
assistance for those affected by the decline in cheques.
Q72 Mr Tyrie: I was going to make
that my last question but, since you have talked about this positive,
proactive assistance, when you said that "the best outcomes
may often be achieved through the operation of market forces alone"
in your own consultation paper of 2008, did you exclude this particular
area or is this one area where you feel market forces should be
substituted with what you have described as the management of
decline?
Mr Smee: I feel in this particular
area that the management of decline is important if those who
are most reliant on cheques are to have their interests taken
care of.
Q73 Mr Tyrie: This is an area where
market forces should be suspended?
Mr Smee: I would not say they
should be suspended because I think in many cases the alternatives
will come about through market forces, but I do not think it can
be exclusively left to those forces.
Q74 Mr Tyrie: It just so happens
that this is one area where the operation of market forces alone—I
am quoting—"should not be brought to bear".
Mr Locke: One of the key objectives
is to set those market forces within a clear framework and that
is what the Payments Council has been seeking to do by setting
the 2018 and then the interim 2014 and 2016 deadlines, making
it clear that we expect innovation to arise from market forces
but with the very big carrot of there being the option of terminating
the cheque clearing system at the end of that if and when the
alternatives have arisen. Coming to this as an independent, I
have been very concerned that the rate of innovation in this sector
generally has been too slow and that consumer needs have not been
fully met, and that is another part of the cost/benefit which
has been complicated.
Mr Tyrie: I agree it is very complicated.
Do you not think it would be a good idea now if you went away
and did a proper cost/benefit analysis, and have it independently
verified and publish that?
Q75 Chair: I think as Chair I would
ask you to do that and I would ask you to submit it to us in the
next few months because you certainly have not made the case for
a cost/benefit analysis. In fact, it seems contrived, your approach.
Ms Quinn: It is certainly something
we could do and one of the things we will be doing later this
year, of course, is publishing the key criteria for how we are
assessing.
Q76 Chair: Okay, but I am asking
a very specific question as Chair of this Committee. Will you
go away and agree to do what Mr Tyrie has asked you and put it
out to independent professionals and then share that with us so
that we can share it with the public?
Mr Smee: I would be happy to do
that. I think it is important that several of the figures will
be more of an art than a science, but that is the case with cost/benefit
analysis.
Mr Locke: I think it is important
also to include in that—
Q77 Chair: That is what we are asking
for, right. Can I ask then, have you done any work on the fraud
levels of different types of payment? For example, cheque fraud
is declining. Is that correct?
Ms Quinn: We issued cheque fraud
figures last week and that showed a decline from £42 million
to just over £30 million, yes.
Q78 Chair: But card fraud is going
up?
Ms Quinn: No, that is not true.
We saw last week that card fraud declined from £610 million
to—
Q79 Chair: Give us the figures.
Ms Quinn: £610 million card
fraud in 2008 declined to £440 million in 2009. That is a
drop of £170 million.
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