Examination of Witnesses (Question Numbers
32-39)
Mr Peter Vicary-Smith, Mr Dominic Lindley, Mr Philip
Cullum and Ms Sarah Brooks
18 November 2010
Q32 Stewart Hosie:
On competition in particular, the retail bank market contains
a number of distinct segments, there's mortgages, there's a bit
of financial products. Do you view competition as ineffectual
across the whole sector or are there bits of the segments within
it where competition works well?
Ms Brooks: I think
there are sections where competition works better than in others,
but I think it's more a question of where competition doesn't
work well that I could look at. If you're looking at low-income
consumers, that is a big issue. Banks have not traditionally seen
low-income consumers as a group of people that they need to compete
for, and that's a big problem because, as we know, banking is
now an essential service. There is very little you can do. If
you don't operate a current account, our research on the margin
shows that you are excluded from being able to set up direct debits;
you can't buy online; you can't have your wages paid in if you
don't have a bank account; you can't buy insurance products or
pensions. So it is important that people do have access to a full
range of financial services, but banks have traditionally shied
away from this market, and that has led some other operators to
come in. We talked about payday loans earlier, because some of
the banks are not willing to be flexible with the way they operate
their bank accounts because bank account charges are so non-transparent.
That has led people to go to a market, which has APRs of 2,000%,
which then leads to calls to clamp down on that. The issue around
competing for the lower-income consumer is that there doesn't
seem to be enough choice. The Government had the opportunity to
use the Post Office as a way of increasing competition, by setting
up Post Office banking. Now they've closed that down. But what
they have done, quite excitingly, is to open up a possibility
that credit unions could come into Post Offices in a greater way
than they already do. There's already access to credit unions
at Post Offices, but there is a possibility that the Post Office
could form their own credit union and that could have a current
account there. I think that would be a good way of introducing
a new competitor. The Post Office has about 12,000 branches, so
if there were moves to encourage competition for the lower end,
that would certainly open up the market.
Q33 Stewart Hosie:
I'm sure that's something the Chairman has heard, because there
is a huge range of financial products the bigger credit unions
operate, compared with the very basic things that the smaller
ones do, and there is some real competition there as well. The
Which? independent banking commission concluded that the retail
market was characterised by rivalry between the firms, rather
than competition. Can you explain the difference?
Mr Vicary-Smith:
It is where you have a number of people who are doing a different
square dance of appearing to compete with each other, but in practice
there is precious little competition. If you look at PPI, for
example, I don't think there is a great deal of variation in either
the terms of PPI or the pricing charged. It was driven by the
levels of commission and Alliance & Leicester salesman received,
I believe, something like six times as much commission for selling
a loan with PPI as selling a loan without PPI. Surprise, surprise,
they sold an awful lot of PPI. That's what I mean by rivalry.
There are lots of products available and precious little transparency.
It is very hard for consumers to compare them one to another and,
as a consequence, consumers think, "Everything is the same.
What is the point of switching, because all these banks are the
same?" which they're not, but that's the perception people
have, and therefore there is no need to genuinely compete. It
is a much cosier industry than the BBA would like to portray,
and certainly—if I can just finish—one of the things
we often talk about is if banks are genuinely competing, why do
they spend all their time talking through the mouthpiece of the
BBA? I used to work at Procter & Gamble. Procter & Gamble
would not dream of sitting on an association with Unilever producing
a joint formulated response. Tesco and Sainsbury's and Asda wouldn't
dream of doing the same, yet in this industry, it is all very
cosy and everyone sits behind and we have the lowest common denominator
of the BBA, which represents the view of the industry. That's
a sign of rivalry, to my mind, not cut-throat competition.
Q34 Stewart Hosie:
You have spoken about a square dance. You have said "cosy"
twice. Is there collusion, or is it just pricing?
Mr Vicary-Smith:
I wouldn't want to get into the legalities around it. I don't
think you need to have anything overt in what goes in the market.
It's interesting, isn't it, that unauthorised overdraft rates
are at over 18% now, which is the highest they've been for 15
years, so all of the competition of banks in response to the OFT
court case, changing their terms, changing their rates, coming
out with new deals, all the rest of it, hasn't made a blind bit
of difference to what the consumer actually pays. So I have no
evidence there is any collusion that went on in those, but the
net effect to the consumer at the end of it is no difference.
Q35 Chair: Consumers
know the price of a bottle of shampoo from Procter & Gamble,
and they have a rough idea of what the rival prices are of most
of the products Tescos sell. They haven't in banking, and suggestions
on how they get closer to that are gratefully received.
Mr Vicary-Smith:
One thing the supermarkets have done is of course when you go
to buy your products, under the price it will say, "Price
per 100 ml".
Chair: Yes, but we don't
know what the—
Mr Vicary-Smith:
They make it very easy to compare and the banks don't.
Chair: Well, what we need
are suggestions on how to enable the banks to do it. The OFT are
looking at that, lots of other people are looking at that.
Mr Vicary-Smith:
We'll submit an—
Chair: I'm sorry to be
rushing, because I know a number of colleagues have already signalled
to me that they need to get away today.
Q36 Mark Garnier:
I just want to follow up on another question with a previous witness
about the big banks' access to huge quantities of data about their
customers, and how this relates to competition with independent
financial advisors, mortgage brokers, that kind of stuff. You
know that if you are a customer of a bank and you pay in some
money into your account and you have a lot of money floating around,
your bank manager will get in touch with you suddenly out of the
blue. As the last witness said, for the first time in 10 years,
you get a telephone call from a bank manager, who would then like
to sell you a product. There are two points about this that I'd
like you to comment on. First, the banks obviously have
this access to this data, which is not available to everybody
else, and they are using that, to my mind, unfairly. The second
point is that they are selling a product, and that product is
not only going to be their own product and not one from a wider
pool, but it will also be something to buy, and in many cases,
one of the best ways you can save if you have a pile of cash coming
into your bank is not to buy a savings product or a pension product;
quite often the best way of saving is to pay off your 25% credit
card debt, which of course will be the bank's product as well,
so they do not want you to do that. Do you have any comments about
how we can deal with this or whether you see this as a big problem?
Sarah, you're nodding vigorously.
Ms Brooks: I'm
nodding, because we've recently done some research into switching
rates on personal current accounts and it is relevant to your
question, because only 7% have switched in the last two years,
and that compares with energy at 32%, and 17%—so 8 million
people—had considered switching, but then didn't do it.
So those 8 million who thought, "Oh, yes, this might be a
good idea" didn't do it, and why was that? They were concerned
about how complicated it might be; they were concerned about things
going wrong, and also they were concerned about things like credit
rating, because your time with the bank can affect your credit
rating and that seems to me to be a very anti-competitive move.
But the other factor is that there is a huge amount
of brand loyalty, so of the people who hadn't considered it, it
was because they were satisfied with their bank, and I think it's
because people have very low expectations of what banks should
do. But also I think it's something to do with the fact that your
bank is so important to you. It's how you pay your mortgage; it's
how you put food on the table; it's your line of credit. You might
have your pension with them, so in a way, they have you to ransom
there. It's almost a sort of form of Stockholm syndrome, where
you want to believe that you can trust your bank, because if you
can't believe that, then that puts you in a very difficult position.
So what we see, and what we always say, is that loyalty seems
to be very much a one-way street with banks; that they will presume
on that, but they don't offer it the other way around, and I do
think that it should be incumbent on banks that if they want to
capitalise on that loyalty, then we need to see much more evidence
that they are offering the right products and the right advice
to their customers.
On of my colleagues used to work in a law centre,
and she had cases where adults with learning disabilities would
come in and there would be charges that they couldn't work out
on their bank accounts. It was because they'd been sold a bundled
account, so they'd been sold an account where you had to pay a
fee on it. Now, that is not only wrong, it should be illegal that
you can take advantage of people in that way, and these are not
isolated occasions. So going back to regulation, it is about reputation
regulation. We'd like to see the FOS doing more of that, more
of the putting out cases, but also the FSA taking action to make
sure that the customers are treated fairly.
Mr Vicary-Smith:
Two points: I think first of all you are absolutely right on information,
which is why it is a bit rich when banks complain about the cost
of running a personal current account, because, apart from the
£8 billion a year that they get and the fact that retail
banking was profitable right the way through the crisis—so
it is not an unprofitable stream anyway—they get an enormous
amount of data that they can use, as you say. If I was looking
at it as a businessman, I'd probably be quite happy to have personal
current accounts almost as a loss leader, because of all the other
things that it enables me to do. So we don't have much truck with
them complaining about the profitability of current account banking.
On the other dimension of what you get sold, you're
absolutely right, that often paying down debt is the best form
for many people of using windfalls. When you're then sold a product
from your bank, as we argue strongly—this is one of the
disappointing aspects of the retail distribution review—the
bank sales staff should be called "sales staff", not
"advisors". "Restricted advisors" doesn't
do it for me either. They're not giving advice, they're selling
a product their bank happens to make and I think we should be
clearer with consumers about who is giving advice and who is making
a sale. Finally, one of our recommendations to the Future of Banking
Commission was that we believe that frontline bank staff should
not be remunerated on the basis of commission, because we see
the enormous distortions time in, time out that that has caused
in the marketplace.
Q37 Mr Love: Let
me ask about unarranged overdraft facilities and the OFT. The
first question—and this is one that we hope that you'll
be able to respond to—if the case had been won, would that
have meant the end of what they call free banking? Secondly, the
OFT has suggested a way forward that hasn't met with universal
approval. What's your view on how we can take these matters forward?
Mr Vicary-Smith:
Well, first of all, you're absolutely right in the distinction.
We always call it free in-credit banking to differentiate it.
I don't think it would have meant the end of that, no, because
what we've seen is that current accounts are already highly profitable
ventures—50% of the £8 billion, I mentioned earlier,
is from interest foregone. It's not from other types of charges
anyway, so there are many ways that banks can make money and make
current accounts profitable, as they should be. We have no problem
with current accounts being charged for in some way, and people
are paying for it now and they would pay for it in the future.
The models may change and we'd like to see a variety of ways that
people can pay for their banking, but if the case had been won,
some banks would have changed, some banks would not.
Q38 Mr Love: Miss
Brooks, you mentioned earlier on about low-income consumers, vulnerable
consumers. It raised with me the question of where we go now with
the decisions that have been made in relation to the Post Office.
It doesn't seem to me there's been entirely a market failure.
Basic bank accounts are out there, there has been quite a lot
of take up. I notice from your submissions that you've redesigned—if
I can call it that—the basic bank account. Will that make
a difference and do we need to bring regulation into this to,
in a sense, put more pressure on the financial services sector
to respond to the needs of low-income consumers? How do we deal
with this going forward?
Ms Brooks: It relates
to a certain extent to the previous question about unauthorised
overdraft fees, because if we could resolve that situation, so
that the fees were transparent and people knew and they were reflective,
then people could understand what they were getting into. A low-income
consumer doesn't necessarily just need the most basic banking,
they still need access to the full range, but what they need to
be able to do is to control money coming in and money coming out.
If there were more regulation around the overdraft facilities,
but also if there was a way that people could control their own
direct debits, so that you could control the date it was going
out, you could cancel it yourself, so you had a sort of joint
mandate on direct debits, that would allow low-income consumers
to have more control of what they were doing. So I think it does
require some regulation. Not everybody who goes in wanting a basic
bank account comes out with one, and that should be looked at
as well, so that people aren't being sold the wrong products for
them, as I alluded to in my previous answer.
Mr Cullum: Just
to add to that, one of the key things that Sarah's alluded to
a couple of times is about control, and it's one of the things
that comes out again and again with all of our research of disadvantaged
consumers. The real market failure here is the failure of banks
to pay attention to their customers, to listen to what they want
from some of these accounts and then provide it, and hopefully
make some money out of it. That's what they're in the business
to do. We are bewildered at times by their failure to act in their
own self-interest and, as we listen to these customers and potential
customers, the big thing that comes out from our research is that
people want to have control, if they're not used to financial
products particularly, and yet the ones that banks provide just
don't provide them with that control. We then end up with the
bizarre paradox where people who don't have very much money pay
more for products that they perceive give them more control, and
so they're turning down the ones that are cheaper, because they
don't think it's doing the business for them, and that is a really
clear market failure on the part of the banks.
Q39 Chair: I'd just
like to put one question about UKFI to Peter Vicary-Smith. You've
suggested that UKFI should apply a public interest test to secure
greater competition in the market and the decisions they take
on divestment. Could you explain how that would operate in practice?
Mr Vicary-Smith:
UKFI of course has competition as one of its objectives, but looking
through what it actually does, I see scant evidence that anything
that it's doing is increasing competition in banking. The prime
example of that of course was the sale of the RBS branches and
payment centre to Santander, which could have been used to kick
start a new player in the marketplace. The public interest test
I mentioned would be to say, in looking at the future disposals
in particular, and of course, we all have in mind the Lloyds branch
disposals that will be coming up, it should not just be a matter
of looking for the absolute highest price. It needs to get a good
return, but not the £1 more than the nearest bidder. It should
also be saying, "What is this going to do to competition
within the banking sector, and is it going to enhance competition?"
because we have a once in a generation opportunity to increase
competition through enabling a new entrant to get to scale quickly
through these disposals, and it would be tragic if we didn't use
that opportunity and instead flogged it off to one of the existing
incumbents.
Chair: Well, there is
a great deal that has struck a chord with many of us that we've
heard this morning, and I'm very glad that the session ran on
a little longer so that we could hear some more. If there are
further points you want to come to us with, please do. Thank you
very much for your evidence this morning.
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