Written evidence submitted by Consumer
Focus
Consumer Focus is the statutory organisation campaigning
for a fair deal for consumers in England, Wales, Scotland, and,
for postal services, Northern Ireland. We are the voice of the
consumer and work to secure a fair deal on their behalf.
We welcome the opportunity to provide evidence to
the committee.
EXECUTIVE SUMMARY
Global and domestic financial policy and the impacts
of the recession have resulted in the market constricting. Prevailing
bank models, and the dominance of the major combined institutions,
have increased moral hazard, prevented new entry and restricted
choice. In looking at competition and choice in the banking sector
we ask the Treasury Committee to consider the following as crucial
to reform:
- Encouragement of new models
(not just new entrants) and consumer oriented innovation, including
retail only models, that both provide real choice and safety for
consumers.
- Promoting a fair and competitive market place,
one that ensures that consumers can have confidence in and exert
choice to influence the sector through increasing transparency,
providing early intervention in relation to unsafe or unsustainable
products, safeguarding consumer interests and ensuring accessible
and appropriate redress.
- Guaranteeing the provision of essential services
where it is clear that the market will
not provide and tackling problems of social exclusion by addressing
the needs of the vulnerable and disadvantaged.
- Enhancing the social usefulness of the market
by supporting a savings culture, reducing risk, and securing sustainability
of financial services in a broad sense—economically, environmentally
and socially.
1. Assess the impact of the financial crisis
on competition and choice in both retail and wholesale markets
1.1 In a sector that thrives on virtual products,
confidence can make or break a market. Addressing people's low
expectation of the sector is crucial,[1]
particularly to promote the savings and banked environment necessary
to replenish capital stocks and give customers confidence in exercising
choice. For low income consumers a lack of trust is the primary
impediment to being banked. The majority of customers without
a bank account are in this position because they've had bank accounts
previously and had a bad experience; or they simply don't trust
the banks with their money.[2]
1.2 The market has become more concentrated,
with bank failures, mergers, and state support for some major
players resulting in less choice for consumers and more barriers
to entry. The failure of companies like Icesave will add to the
concerns about whether a new entrant can be trusted, particularly
in times of crisis. There may also be a reluctance to move to
new or small providers because consumers know the Government will
bail out the big banks. More work needs to be done to determine
how this may impact customer choices and what assurances need
to be provided in relation to new entrants.
1.3 However, it is clear that some providers
have benefited from consumers' lack of trust with the main providers,
with the increased popularity of co-operative models and the increasing
success of peer to peer platforms such as Zopa. Competition and
consumer choice in this area needs to be facilitated by removing
barriers to these new models and extending the appropriate assurances
and guarantees.
2. Assess the impact of widespread consolidation
among banks and mutuals
2.1 The consolidation that has resulted from
both global and UK financial services policy has led to a lack
of diversity of models. Our recent research shows that a significant
proportion of people are reluctant to switch banks because they
feel there is little difference between them.[3]
2.2 Combined banking models standardise operations
across their branch networks in pursuit of a "single customer
view". This can make it too costly or difficult for banks
to service "hard to reach" parts of the market or assess
and respond to the needs of local communities and enterprises.
Prices for basic services (credit, overdraft charges) have gone
up while rewards for savings have gone down. Services are increasingly
being withdrawn from the less profitable markets or segments while
the proportion of the population rendered vulnerable by the financial
crisis has increased.
2.3 Low income consumers and those who are unbanked
cite the failure of the sector to cater for them, the lack of
options that would provide them with a functional service that
allowed them to manage their finances, and the prevailing model
of hidden charges, as impediments to banking and choice.[4]
Without the encouragement of different models banking will become
an exclusive service for the well-off.[5]
3. Examine the key barriers to entry inhibiting
increased competition—including regulation
3.1 The impediments to competition identified
in the Cruickshank report[6]
have not gone away, and in fact may be more significant as a result
of the recession, and therefore need revisiting and updating.
Regulation
3.2 New entrants have a significant role in changing
business models and delivering value for money. We suggest consideration
of more stratified regulatory approaches for different models
or activity. The EU requirements for Deposit Guarantees, which
permits exclusions for certain categories of authorised firms
such as Credit Unions, Friendly Societies and independent intermediaries,
go some way towards recognising this—as does the regulatory
regime for Credit Unions more generally.
3.3 The existence of separate regulatory processes
for credit and deposit taking activities adds to the cost of the
application process and the subsequent regulatory burden for those
wanting to carry out both activities. The current authorisation
process for deposit taking activities is complex and lengthy and
the requirements designed to avoid risk may also act as a deterrent
to new entrants. Market evidence, reputational and consumer protection
issues are not given the same emphasis they receive in consumer
credit licensing. More attention to these areas across the board
may deliver a better balance of offerings.
3.4 Where there have been new entrants they have
tended to adopt old models, given the cost and complexity of creating
branch networks and infrastructure from scratch. It seems far
easier to get authorisation if you buy off the rack rather than
tailor to needs, hence the takeover of existing shells or mergers
rather than stand alone applications.[7]
Assessments seem to favour those who take over existing networks
or old systems as being better equipped. This is in effect stifles
innovation and new approaches and creates the further challenge
of absorbing and integrating existing branches and updating information
technology systems.
Payment systems
3.5 New technology should offer great opportunities
for new business models, small operators and more efficient and
convenient payments methods. Firms' investment plans for information
technology are broadly flat for the next 12 months, while the
balance for those planning to spend more on marketing in the coming
year has risen to +53%, the highest in 10 years.[8]
The Faster Payments Service (FPS) is the first new payments service
to be introduced in the UK for 20 years,[9]
but despite three years of operation it still does not do what
it says on the label. The reason often cited for lack of innovation
is the slowness of systems to respond and the difficulties of
unifying and upgrading these, particularly post merger and acquisition.
3.6 The Cruickshank Review identified profound
competition problems and inefficiencies in the market for payment
services.[10]
Issues such as slow clearing cycles for cheques and automated
payments, high charges for cash withdrawals and interchange fees
levied by monopoly providers still prevail despite some improvements
leveraged by the Payments Council.
3.7 The Payments Council is dominated by the
major financial institutions and needs to do more to lead the
future development of services. Historically, innovations have
disproportionately arisen from small companies, however small
stakeholders expressed a measure of dissatisfaction with the access
and support they received from the Payments Council when proposing
innovations.[11]
More pro-active work in supporting innovation and overseeing adoption,
and a more inclusive membership structure to enable entry to payment
providers that are not financial institutions, is needed to remove
barriers to innovation and market entry.
3.8 New payment methods, and in particular payment
methods that may actually benefit consumers, must be fostered
within the system rather than developing outside it. For example,
there is support for the widespread introduction of contactless
and prepaid cards which are easy to use and accessible. Prepaid
cards in particular offer a number of opportunities to financially
excluded consumers, particularly those without a bank account
or those who are reluctant to use a standard current or basic
bank account to its full potential. Being able to transfer a set
amount of money onto a prepaid card can potentially help them
to manage their budgeting needs while at the same time allowing
them to use ATMs, buy goods on-line or over the phone or use the
cash-back facility in shops. There are no credit checks and no
fees for going overdrawn.
3.9 The Payments Council has been monitoring
the market and has agreed to review this again by the end of 2011.
Mobile payments are also being monitored. It is likely to mean
that these methods will develop without consistent standards and
consumer protections or will be left without support in a market
that has been slow to adopt them. These systems are likely to
offer less costly alternatives for small or new entrants.
3.10 There is a lack of offerings to attract
customers or to distinguish financial institutions. Customers
want to be able to manage their payments and so it is important
that there is more certainty about clearing times and a firm commitment
to a consistent service in relation to electronic transactions,
as well as a range of payment options that are customer-controlled.
Customer-controlled payments are a feature of the payment systems
of other countries and our research has indicated that these options
are key for consumers.[12]
Clearing fees
3.11 Highly concentrated markets, particularly
for credit card acquiring, may enable incumbent banks to restrict
new entry and charge high card fees.[13]
Fees set, essentially by the two main providers Visa and Mastercard,
are well in excess of the cost of processing the transactions,
and contribute to rising prices and restrictions on access to
these systems.[14]
Large financial institutions are in a much better position to
negotiate these charges whereas small organisations would not
have this leverage.
3.12 Interchange fees are also an issue for ATM
access and may discourage new entrants and provide impediments
to alternative providers or providers of services to low income
consumers. Interchange fees are likely to be an issue in DWP's
willingness to offer LINK ATM access to Post Office Current Account
users. Interchange fees may also be a barrier to the remaining
banks offering Post Office counter access, and therefore to improving
provision in areas poorly served by banks at present (eg rural
and urban deprived areas).
4. Examine whether competition is inhibited
by difficulties faced by customers in accessing information about
products
4.1 Most financial products, by their nature,
may not be conducive to market pressure as they are purchased
infrequently and their impact is often long term. The complexity
and sheer volume of offerings, charging structures, and the difficulty
in comparing products create further impediments to demand-side
drivers. The OFT studies in relation to the current account market
show that there is a lack of readily available information on
the various charges involved and this is exacerbated by use of
different terminology and different ways of presenting rates and
charges.[15]
4.2 In the area of product regulation, the Mortgage
Market Review Discussion Paper proposals[16]
and the policy paper on Distribution of Retail investments[17]
will help build consumer confidence that products and services
are safe and fit for purpose in terms of affordability and risk.
Intervention of this nature is needed at least in the short term
to ensure transparency of information, some standardisation of
products, and to restore balance to markets. Where there are choices
they should be clear, transparent and safe.
4.3 Consumers generally would welcome a set of
basic and safe products that met their needs.[18]
Basic bank accounts (BBAs) are important as a potential entry
level product and for those on low incomes. Their appeal might
be more universal, and less stigmatised, if some of the shortcomings
were addressed. These include practised and perceptual barriers
to opening accounts, the gap between essential account features
and the functionality some BBAs offer (or don't offer) and the
perceived and actual risks associated with operating such an account.[19]
These products should be readily available, not collecting dust
because of lack of sales incentives, and they should not be treated
as second-class products.
5. Explore the Government and competition
authorities' strategy to increase competition in banking, including
the likelihood that new entrants will successfully enter the market
Public policy initiatives and essential service provision
5.1 A true safety net and real choice for those
not currently being served is unlikely to be provided by the market
alone. In other utilities, and in the internet market, it has
been recognised that in delivering these essential services and
ensuring that competition is functioning Government must play
a role. Similarly the Government intervention in the banking crisis
indicates the crucial role that banking plays in both economy
and society and the legitimate role of Government when the market
is not working.
5.2 The Conservative and Liberal Democrat manifestos
and the Coalition programme have emphasised the push towards sustainable
and green banking alongside greater community engagement and the
promotion of social entrepreneurship. We are yet to see the "detailed
proposals to foster diversity in financial services, promote mutuals
and create a more competitive banking industry",[20]
but this is unlikely to be achieved, particularly in the current
environment, without specific incentives. Consideration needs
to be given to taxes or tax incentives such as the Netherlands
Green Funds Scheme.
5.3 Initiatives such as extending the services
and functionality of the Post Office bank provides an option for
addressing some of the defects in the market and for promoting
universality and improved accessibility to banking products. Our
research among low income consumers has shown that they want a
custom account that is simple, convenient and offers control over
their money, an account that is offered by a trusted provider.
There was strong support for the Post Office Bank delivering this
service, being seen as a community based and trusted institution.[21]
We call on the Government to view the Post Office as part of its
strategy for retail banking. This model will require Government
support. It should not, however, be the only model with a customer
focus.
Encouraging switching or relying on the market to
fix it doesn't work
5.4 In relation to personal current accounts
the OFT are seeking to rely on "significant changes in the
market that will help lead to a better outcome for consumers".[22]
There is no evidence of either significant changes or better outcomes
to date. Indeed, since the decision by the OFT not to further
pursue its action on charges, unauthorised charges have been creeping
up again and authorised overdraft charges have increased significantly
to ensure profit margins are retained. There has been no rush
to introduce new charging models.
5.5 The consumer currently has limited choice
in financial services and has intrinsically been reluctant to
exercise that choice because of a loyalty to institutions once
considered stable and providing an essential (not an optional
or desirable) service. Our recent research shows that switching
among consumers of financial services remains consistently low
as compared to switching in other areas. Switching rates for current
accounts in the UK has lagged at around 7% for the last 10 years,
whereas utilities such as energy and phones show switching rates
well in excess of this, starting at 26%. Those who are not interested
in switching believe that there is little value to be gained because
there is little difference in what is on offer and the switching
costs, such as the potential for error and impact on credit rating,
are too high.[23]
It appears that the market itself is
not consumer driven and unlikely to change unless motivated by
external stimuli that are more compelling.
Divestment rules, are they enough?
5.6 The public interest is a vital factor in
the consideration of divestment options. The return on our investment
is not just about selling to the highest bidder.
5.7 The German government has been able to agree
more stringent conditions for state aid with their Landsbanken.
Running through all of the Landsbanken restructuring plans is
the need to reduce their capital market activities and proprietary
trading, while returning to their local roots and core banking
business. These are the areas where the UK's divestment conditions
could be improved.
5.8 Divestment conditions should take account
of the public interest and aim to:
- Promote competition and sustainability.
- Prefer community based and controlled institutions.
- Provide for sectors of the market not being served.
- Focus on the provision of retail services and
particularly simple and transparent products and charging models.
5.9 Public monitoring, audit and review of the
divestment process to ensure conditions are being met needs to
be ensured.
6. Consider the relationship between competition
and financial stability
6.1 There is not necessarily discordance between
competition and financial stability. Consumers are now looking
for stability and sustainability (in a social, environmental and
economic sense) in their banking but choices are limited.[24]
6.2 Financial stability also involves encouraging
the unbanked to be banked, encouraging savings in an environment
of lack of trust, and providing essential and affordable banking
services to those market segments that are not serviced by current
models.
6.3 The failings of the market and competition
are associated with high risk and short term gains in the eyes
of consumers. Long term, sustainable models are not widely available
and need some help in overcoming the significant hurdles of regulation,
market power and trust on entering the market and developing their
business.
7. Consider the impact of free-banking on
effective competition
7.1 Under the prevailing model of so called free
banking, charges are hidden and punitive and present barriers
to comparison. A consumer will not make decisions and cannot make
comparisons on the basis that they are likely to encounter financial
difficulties. Penalty charging is not a fair business model and
is difficult for a consumer to predict or manage.
7.2 Penalty charging is also a barrier to consumers
entering the market. One of the concerns among low income consumers
is that the cost of having a bank account can lead to greater
financial insecurity due to revolving credit and penalty charges.
Respondents to our research on consumers without accounts cited
lack of transparency in account based transactions as undermining
budgetary control and planning.[25]
Our recent research into pay day lending has indicated that many
consumers chose pay day lending because they found the fee structure
easier to understand, even though rates are very high and it may
cost them more.[26]
7.3 The cross-subsidy model supports existing
institutions and combined models, as they have the established
business from which to divert resources and a wide model which
allows for this to happen. The big institutions have deep enough
pockets to offer products and services on terms which may not
necessarily reflect cost (at least in the short term) or be a
product of competitive measures. Existing players use introductory
offers to lure in customers with the confidence that profits can
be made once that offer ends because they can bet it is unlikely
a customer will switch.[27]
September 2010
1 Antony Elliot, Financial Services for All,
in Consumer Focus, Rethinking Financial Services, June
2010, 38. Back
2
HM Treasury, Financial Inclusion Taskforce, Policis, Realising
Banking Inclusion: the achievements and challenges May 2010 Back
3
39% of consumers who have not switched provider believe banks
are not sufficiently differentiated reinforcing OFT's evidence
that consumers perceive offerings as essentially very similar.
Personal current accounts in the UK 2008, 91. Back
4
Consumer Focus, On the Margins, Society's most vulnerable people
and banking exclusion, March 2010 and Opportunity Knocks,
Providing alternative banking solutions for low-income consumers
at the Post Office, January 2010. Back
5
Financial Services for All, Rethinking financial services,
Consumer Focus, June 2010. Back
6
Competition in UK Banking, A Report to the Chancellor of the
Exchequer, Don Cruickshank, March 2000 Back
7
For example, Virgin bought Church House trust and Walton and Co
is negotiating for Hampshire trust. Back
8
CBI/PwC Financial Services Survey, 28 June 2010. Back
9
http://www.chapsco.co.uk/faster_payments/ Back
10
Competition in UK Banking, A Report to the Chancellor of the
Exchequer, Don Cruickshank, March 2000 Back
11
OFT1071, Review of the operations of the Payments Council,
March 2009, 25. Back
12
Consumer Focus, Opportunity Knocks, Providing Alternative Banking
Solutions for low income consumers at the Post Office, January
2010, 9 and Keeping the Plates Spinning, August 2010, 35. Back
13
European Commission, Report on the Retail Banking Inquiry, Commission
Staff Working Document, SEC (2007) 106,
http://ec.europa.eu/competition/sectors/financial_services/inquiries/sec_2007_106.pdf Back
14
Recent figures from the British Retail Consortium estimate that
the average credit card transaction costs retailers 34p, compared
with 8.5p for a debit card transaction and 2.1p for cash. This
is in addition to the rental of the mobile card terminal, which
can be about £500 a year and interchange fees levied by the
customer's bank and the retailer's bank. http://bit.ly/cmiROL Back
15
Office of Fair Trading, Personal Current accounts in the UK,
2008, 90. Back
16
FSA, DP09/3, Mortgage Market Review, October 2009 Back
17
FSA, PS 10/6, Distribution of retail investments: Delivering
the RDR-feedback to CP09/18 and final rules, March 2010 Back
18
Consumer Focus, Opportunity Knocks, Providing alternative
banking solutions for low-income consumers at the Post Office,
January 2010 Back
19
Ibid. Back
20
The Coalition: our programme for government, May 2010. Back
21
Consumer Focus, Opportunity Knocks, Providing Alternative Banking
Solutions for low income consumers at the Post Office, January
2010. Back
22
Office of Fair Trading, Personal Current Accounts in the UK,
Unarranged overdrafts, March 2010 Back
23
Consumer Focus, Upcoming research report Back
24
See, EIRIS, What's needed to mainstream green and ethical finance?
November 2009 and Neville Richardson, How can the consumer gain
a voice in reform of financial services? in Rethinking Financial
Services, Consumer Focus, June 2010, 45. Back
25
Consumer Focus, On the margins, Society's most vulnerable people
and banking exclusion, March 2010, Back
26
Consumer Focus, Keeping the Plates Spinning, August 2010 Back
27
ISA Super complaint, http://www.consumerfocus.org.uk/campaigns/super-complaint-cash-isas Back
| 
