UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 945-i

HOUSE OF COMMONS

HOUSE OF LORDS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

SUB-COMMITTEE K

PANEL ON FINANCIAL EXCLUSION AND BASIC BANK ACCOUNTS

FRIDAY 1 FEBRUARY 2013

SUE EDWARDS and NICK WAUGH

MIKE GRANVILLE and NICK KENNETT

STEVE SMITH and ANTHONY WARRINGTON

ROBIN TAYLOR

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

Sub-Committee K-Panel on financial exclusion and basic bank accounts

on Friday 1 February 2013

Members present:

Mr Andrew Love (Chair)

Examination of Witnesses

Witnesses: Sue Edwards, Head of Consumer Policy, Citizens Advice and Nick Waugh, Social Policy Officer, Citizens Advice, examined.

Q1 Chair: I welcome both of you to this panel of the Banking Commission on financial inclusion. We will be looking specifically at basic bank accounts.

To start, I would like to get an overview of the progress we have made on financial inclusion, a sort of scorecard of where we have been in recent years. There seems to have been a lot of progress in the years from 2000, but in recent years there seems to have been a halt to that progress. Perhaps you could give us some idea of where you think are the main areas on which we need to focus to get some further progress.

Sue Edwards: We were very pleased when, in 2000, the banks were asked to put basic bank accounts into their product range, because we felt that would help many of our clients who were experiencing financial exclusion to become financially included: by having a bank account they could go to work, get benefits paid into the account and receive all the benefits such as cheaper fuel and cheap insurance deals. But it became clear very early on that it was often difficult for our clients to get a basic bank account. A lot of progress in reducing the number of unbanked was largely down to the change to paying benefits into bank accounts.

Nick Waugh: I would agree with that.

Q2 Chair: Will you confirm the estimate that some 5% of the population do not have a bank account? Can you tell us who are the unbanked? What are the consequences for them of not having a bank account?

Sue Edwards: They are generally people on quite low incomes. They might have an account of some kind, such as a savings account or a Post Office card account, that is basically only for the payment of benefits and state pensions. People who do not have an account of any kind face real difficulties. If they are paid by cheque, they often have to pay cheque cashers a fee to cash the cheque. They might be able to get a prepaid card with the payment of wages to buy things on the internet, but every transaction and withdrawal attracts a fee, so they pay more because they do not have a bank account.

Nick Waugh: Some people who are unbanked have been banked in the past but did not have the best experience. This is less the case now, but it used to be particularly easy to become overdrawn with a basic bank account. If you made a payment on direct debit for which you did not have funds, you could build up quite quickly a significant level of charges. The evidence suggests there is a bit of churn with people moving into the banking world and coming back out of it again. If people have had a bad experience, it is quite difficult to convince them to move back into the banking world.

Q3 Chair: I want to widen that out. I will come back to the issue, but I want to widen it. Are people prevented from having a bank account, or is it their choice not to have one? That is quite an important idea: are they reluctant or are they being stymied from their wish to have a bank account?

Sue Edwards: I think some people do want to have a bank account. They go into a bank and do not necessarily get the bank account that they need or want. They often do not have the ID or address verification that banks require as part of the money laundering regulations, so they try to make do.

Q4 Chair: You mentioned bad experiences. What is their experience when they go to a bank? Are banks reluctant to discuss basic bank accounts? Could the banks be doing more to promote and advertise basic bank accounts and to persuade customers who come into the branch to take up the very basic bank accounts?

Sue Edwards: Yes, we get evidence all the time of people going into a bank to open a basic bank account and being made to feel very small. The discussion might take place in a public area with the bank staff raising their voice: "This person wants a basic bank account!" We sent our researcher around all the banks in the area local to our office to get information about basic bank accounts, and what was really interesting is that only in one bank could you go and get the information about the basic bank account without talking to a member of staff. Generally, you have to talk to a member of staff who is not so interested in giving you any information about a basic bank account; what they want you to have is a packaged account.

Nick Waugh: The other aspect is online. We had a look at the websites of some of the banks, and, to varying degrees, some of them are easier than others. For some of the banks it was quite difficult to find any information about basic bank accounts. You had to click on several comparison tables and scroll down to the bottom, to find a small bit of text saying "Other Accounts" and in there you might find the information, so they are not prominently advertised.

Q5 Chair: What are the alternatives for people who do not have a basic bank account? There are prepayment accounts, there is the Wonga end of the marketplace-are any of these practical propositions, or are people losing out as a consequence of not having a basic bank account?

Sue Edwards: People do use prepaid cards, but also there are a number of what are called managed accounts. If you go to a fee-charging debt-management company because you have multiple debts, some of the companies have an arrangement where you can have a managed account for which a fee is charged-£15 or £20 a month. So you are given an account, but it is a very limited product, with limited facilities, and it is very costly-it is another cost.

Q6 Chair: That is the point I am trying to get to. One presumes that all the alternatives that are open to people from that client group who cannot access a basic bank account will end up being much more expensive for them.

Sue Edwards: Yes. Or, if they are on benefits, obviously they can have a Post Office card account, which is very simple and does not cost you anything, but does not have any facilities at all. It is basically an electronic purse.

Q7 Chair: That brings me neatly on to my next question, because the Government are toying with the idea of withdrawing the Post Office card account. Perhaps you can give us an idea of who is covered-who the client group is for that account-and of what will happen to them? Will they naturally gravitate towards banks and looking for basic bank accounts?

Sue Edwards: That is a good question.

Nick Waugh: Some of them might, some of them will not be able to. A lot of the Post Office card account customers are pensioners who are on pension credit, which is partly the reason they ended up getting a card account in the first place. They might have a reasonable prospect of getting a basic bank account, a slightly better one than, say, someone who is on JSA, someone who has been unemployed for a long time, because that client group will probably struggle. Anyone who is an undischarged bankrupt will struggle as well.

Q8 Chair: Let me come on to the features of a basic bank account. In 2010, the Financial Inclusion Taskforce, before it was wound up, recommended that banks should widen access and improve the features of their basic bank account. We have been told that that has not happened, that it has gone in the other direction, if it has gone in any direction. Tell us what your customers are telling you about the basic bank account feature.

Sue Edwards: It varies from bank to bank, but a number of banks have restricted the facilities that they provide with a basic bank account. So some bank accounts do not allow you to use the counter of the bank branch-you have to do all your transactions by an ATM or over the phone-and that is quite difficult for people who, perhaps, are moving into banking, because what they might want is some support on how to use a basic bank account properly. Other banks place restrictions on counter cheques-if you want to pay a bill and pay it by cheque, there is a minimum amount, and that makes it very difficult for people to pay their bills that way. Obviously, the main one, and most controversially, is restriction of access to the LINK ATM network. It is the issue that we researched last year.

Q9 Chair: Perhaps you could just tell me about that research, because we have been told by the banks that have restricted access that, yes, with the remaining ATMs and the other ways in which people can access cash, they are all within one or two miles of an access point. What are your customers telling you about these restrictions?

Nick Waugh: When we looked into it last year, we did a fairly large survey of our clients-people who came into bureaux, people online as well-and what we found was that, by and large, most people find it easy to access their cash for free, but a significant minority of basic bank account customers with RBS and Lloyds, which also restrict ATM access, found it difficult. About 12%, so one in eight roughly, found it difficult to access their cash. We have spoken to the banks about it. We have heard their argument that it is easy. The RBS group does have a large ATM estate-it is enormous-and it did make it possible for customers who could not access a cash machine to phone up and be given access to the network. The problem with that is that it relies on those customers first of all recognising that they can do it and second of all doing it. The feedback that we got from the customers who responded to the survey was that they did not really believe that they could do that. They felt that if they did phone up the bank they would get a challenging conversation, and lots of people do not have the confidence to do that with their bank.

Q10 Chair: We need to put this in context. How important is being able to access cash to basic bank account holders? We are told that there are various features that they approve of, and some that they are not so keen on. They certainly do not want to go overdrawn; they are anxious about that. How much is getting access to cash the most important feature of a basic bank account?

Sue Edwards: Well, it is, because you need to be able to use your cash. A lot of basic bank account holders budget in cash. They often withdraw all their money and then use it to pay their bills, buy their food and go about their daily lives. It is the key feature really.

Nick Waugh: If they are making a small transaction in a corner shop, they probably would not be able to use a card, so by necessity they need to withdraw cash. If they are on a very low income, using a fee-charging cash machine is probably not an option, so you need to have access to a free cash machine within walking distance. If you have mobility difficulties, that might not be a very long distance.

Q11 Chair: Obviously, RBS argued that the reason for the withdrawal was to save money. But to what extent might it also be to make its account less attractive, because there is not this access? Have you any evidence from your surveys that people who are looking for basic bank accounts are surveying the banks to see which one offers the widest cash availability and then go for them rather than those that have a more restricted service?

Sue Edwards: Certainly, we know from our research and from talking to other banks that other banks have ended up with more customers as a result of RBS’s decision to restrict access. We met a Barclays manager in Cardiff after RBS made its decision and he said, "We had a lot more people coming in and asking to open a basic bank account with us."

Q12 Chair: Let me move on, because of course the real difficulty that we all face here is that some basic bank account customers are not profitable for the bank that is opening accounts for them. Some people-certainly CAB and Consumer Focus-have argued that the consequence of that and the restrictions that have been brought in over the past few years mean that we might have a race to the bottom. How big a danger do you think that is in relation to the provision of basic bank accounts? Are we going to see further restrictions as a consequence of the ones that have taken place so far, and will we have an unrecognisable marketplace in a few years’ time?

Nick Waugh: We could do. It is true that basic bank accounts generate a lot less revenue for banks than other kinds of current accounts. Whether or not they make a loss or profit on them depends on how the banks allocate the overhead costs, and the costs of providing an individual account. Certainly they all say that they lose money on it, and I suspect that if you take the average cost of providing all the accounts, it is true, but it is not an enormous amount of money. From our point of view, the banks have a responsibility to be absorbing that loss. They occupy a privileged position in our society and our economy. They benefit greatly from things such as policy initiatives that pay benefits directly into accounts. As part of that, bank accounts have become an essential product. If people cannot access that because they are not profitable enough, then, from our point of view, the banks should be absorbing that cost. Whether or not there is a race to the bottom and whether other restrictions will come in depend on what happens to the market in general. If there is a further drop in revenue from these current accounts I would expect other banks might think about removing access to the LINK network. We do not know of any who are planning to do it imminently. They have all told the Treasury Committee that they are not planning to do it at the moment, but none of them have committed not to do it.

There is a risk that if somebody else-another bank-does this, there starts to be a knock-on effect for other users of the LINK network, not just basic bank account customers. If you take away access to the LINK network from a certain group of customers the number of transactions on the machines-the drop in those transactions-is not spread across the network. It is concentrated in particular areas, so the cash machines in those areas potentially become uneconomical, at which point they either become fee-charging or they disappear completely. That affects everybody who uses them-not just basic bank account customers. So if the market goes down that direction we could reach a point where free access to your cash is just a memory-it is not something we still have.

Q13 Chair: You think that is a real danger.

Nick Waugh: It is a possibility. It is not necessarily guaranteed to happen, but there are circumstances where it could happen, and they are not unlikely.

Q14 Chair: We will be speaking to some of the banks later on-I suspect they are sitting in the audience at the present time-about these issues. Coming back to the race to the bottom, what steps do we need to take in order to reassure ourselves that that won’t happen? What can we do? The banking industry says-and I take the Co-operative Bank as a perfect example-because others have withdrawn from various parts of the market that puts an unreasonable weight of basic bank accounts on to them, and therefore they then find themselves unable to continue to provide that service. How do we overcome that?

Nick Waugh: There are a couple of ways you could do it. I think the Co-op argument is fair. I think the decisions of other banks have meant they have had a disproportionate share of those accounts; so one way of addressing it would be perhaps to find a way where the share is spread a bit more fairly across the market, according to what sort of market share banks have got.

Potentially you could look at introducing minimum standards. We would be in favour of that, so that not only would you get rid of the race to the bottom, because there would be minimum standards that all banks that provided a basic bank account would have to meet, but it would be easier for customers to compare what they would get from different banks. At the moment it can be quite difficult to work out what you would get-whether you will get a cash card, a debit card, whether you can use branch services. The Money Advice Service used to publish this very useful table which showed you which bank accounts offered which features. They do not do that any more, unfortunately, but in an ideal world they would not need to do it, because there would be minimum standards, and you would know what you would get.

Q15 Chair: I have a copy of the last one they did. Perhaps it is needed more now than ever, when we are in a state of flux. Let me ask you, Sue, what should be that common set of minimum standards? What are the things that the customer base would like to see in a basic bank account, that can be delivered at reasonable cost for the banking industry?

Sue Edwards: I think what we would like to see as a minimum standard is certainly free access to the LINK network. We would like to see-I think most people would like-the option to have a debit card, given that online purchasing has become more and more a feature of everyday life. We would like to see either no fees for bounced direct debits or very low fees for bounced direct debits. Is there anything else we’d like to see?

Nick Waugh: Counter access, definitely. Online banking. The banks have been moving to try and innovate, to reduce their costs but also provide the services people want, so one of the big costs for banks-surprisingly big-is people checking their balance at cash machines, and some of the banks are trying to find other ways of doing that that don’t cost them so much money but are still as useful for those customers. Text message is one where they have looked at it. Even things like that: they sound esoteric, fancy technologies but some of those things could actually be quite useful as minimum standards. Again, if you are trying to budget on a very low income knowing exactly what your balance is is extremely useful.

Q16 Chair: If I may put it to you, that was a little bit of a wish list. What are the essential features that a basic bank account has to have, according to the client group that you are representing? Is there-because we also hear that there are certain things that they don’t want-anything that they don’t want that they would get in another type, an ordinary current account or another type of account with a bank? Give us the essential features in anything that they don’t want.

Sue Edwards: The main thing that they don’t want is the worry about having to go overdrawn and having to pay unauthorised overdraft fees. Despite the change in the way that banks now calculate overdraft fees, we are still seeing people come in who have gone overdrawn by only very small amounts and yet, with daily charges, they end up several hundred pounds in debt very quickly. That is the really key thing that they don’t want.

Nick Waugh: In terms of the absolutely essential features, the ability to accept payments from anywhere, the ability to have direct debits and standing orders, and access to the LINK network are the bare bones of any useful account. Would you add anything to that?

Sue Edwards: No.

Q17 Chair: Let me move on. One of the reasons why the basic bank account is so critical, certainly according to the Banking Commission, is of course that it offers a gateway into other financial services. It is really quite difficult to access a lot of these things if you do not have any form of bank account. Has that happened for basic bank account holders? Is there evidence to suggest that they are taking out other financial services? The industry says to us that it does not make money from basic or ordinary current accounts; where it generates its profits is from the other services that they can sell to their and other banks’ customers. Is that happening with basic bank account holders?

Sue Edwards: When we get evidence, it tends to be where people are basically mis-sold. They go in and ask for a basic bank account, but they are given a packaged account or they are sold other products-credit cards, usually-that they do not necessarily want or need, and they often end up in financial difficulty as a result.

Q18 Chair: Let me come back to a point that you made earlier, Nick, which is this idea that many basic bank account holders are very passive. They either do not use their account very much or they use it simply to access cash, getting whatever payments-their benefits or their wages-paid into the account and taking it out pretty much immediately, because they operate in the cash economy. Do you have any figures about how many basic bank account holders are in that position, and about where they end up? Do they end up just abandoning the basic bank account or do they kick this passive role in the longer term?

Nick Waugh: I suspect that the banks would be able to give you more detail on that. To be honest, we do not have any specific statistics on that.

Q19 Chair: Anecdotally, from your customer base, do you get a lot of people who, when you broach the subject of financial inclusion, say, "Well, I’ve got a basic bank account, but I effectively don’t use it: I only have it under sufferance, because I need to have somewhere to pay in my benefits, but I get the cash immediately, because I operate and feel more secure in the cash economy"?

Sue Edwards: Yes. If people are going to be able to use their basic bank account, they need to have the skills and confidence to do so. That requires some training and the right advice, but not everybody can access that. A lot of our bureaux do financial capability skills training, and one of the key elements of that is actually how to open and use a bank account.

Q20 Chair: An important part of inclusion is the availability of advice on financial matters, and being able to budget and manage your money. For example, Lloyds offers an online money manager service to basic bank account holders, and other banks have similar but different facilities. Are these important? Do they contribute to financial inclusion? Do basic bank account holders get more experienced and knowledgeable as a result, or is that just the froth on the coffee?

Sue Edwards: People who have basic bank accounts probably need much more support. Part of the problem is actually people’s attitude to basic mathematics. If they did not do well at maths at school, they are very worried about having to look at their finances. Sometimes, people who come to us, particularly people in debt, have often spent a very long time trying to manage it themselves. They are quite worried about having to seek advice, because they think they have failed. To make people more financially included, you have actually got to support them more. Something that is online might be useful once they have a bit more training and a bit more confidence, but for a lot of people that is just too scary a step.

Q21 Chair: Let me come on to cost. The chief executive of Lloyds TSB, in a letter to the Treasury Select Committee, indicated that the cost of the account was £39 gross and £17.20 net a year. I do not know whether you have the figures yourselves-I doubt very much whether you have-to be able to tell us whether that is accurate, but let us assume, for the sake of it, that it is entirely accurate in the case of Lloyds. Isn’t that an argument for not offering basic bank arguments at all? Aren’t the banks being rather honourable citizens by offering something that is a net cost to them? If a bank said to you, "This is costing us a lot of money. We simply can’t afford it in these difficult times," how would you argue the counter-case?

Nick Waugh: It comes back, again, to the unique position of retail banks within our culture, our society and our economy: so much of the rest of the economy depends on their ability to provide accounts for people, and on people’s ability to make transactions and to receive payments. Accounts are also a much safer way of receiving cash, but that is another issue.

In pursuit of that role, the banks make quite a lot of money; they are very profitable businesses, by and large, although there are obviously parts which, in recent years, have not worked out quite so well. But, by and large, retail banking is profitable; it makes decent profits. The cost of a basic bank account is relatively small in the overall picture, but having a basic bank account contributes a great deal to financial inclusion and makes a massive difference. Otherwise, you are either completely unable to accept a job, because you cannot get wages, or you have to pay money to accept your wages, because you need to pay a cheque-cashing fee. You will also pay more money for your utilities, because you will not be able to pay by direct debt, so you will end up with a poverty premium. Ultimately, the net benefit is huge.

There are other aspects as well. Basic bank accounts increase the use of debit cards. Debit card transaction numbers are fairly small for basic bank account customers, compared with other bank account holders, but every time somebody uses their debit card, your bank makes a little bit of money in an interchange fee. The more people have debit cards, the more shops will offer debit card transactions. The more that is available, the more other people will use debit cards, and the banks will make money from that. Overall, in the round, there is a very strong case for banks doing this.

Banks have a social responsibility in some ways. To a certain extent, they have acknowledged that-some more than others-and that is why they provide basic bank accounts and why we have seen a drop in the number of the unbanked. But the job is not finished: there are still between 1.5 million and 3 million adults without a bank account of any kind in this country, and that is just far too many.

Q22 Chair: There is quite a lot of evidence that not only basic bank accounts but ordinary current accounts do not make banks any money-indeed, the banks have claimed that themselves. Do you think the real problem lies in the free in credit system that we operate, and that the banks need to move away from that to a different charging structure that would allow basic bank accounts and ordinary current accounts to be run on a more commercial basis?

Nick Waugh: It is difficult to answer that question, because unless there is a particular model of a paid-for bank account in front of us, we do not really know if it would be any better than the current model. There is no particular reason why moving to a paid-for model would lead to greater financial inclusion, because there is no link, necessarily, between charging for transactions and banks not charging as much for overdraft fees, interest and everything else. You might find that the net cost to bank account users would go up-if the banks are going to be making money out of this, that would presumably be the case. The question then would be, are banks willing to use more profitable accounts to cross-subsidise basic accounts? If they are willing to do that in those circumstances, they should be willing to do it now.

Q23 Chair: You mentioned earlier the idea that banks have a social obligation. They certainly promote financial inclusion in all the other ways, particularly through financial education. What can we do to ensure that they live up to their obligations on financial inclusion?

Nick Waugh: There are a couple of ways. One of the main ways is political or public pressure. As well, if they are not meeting their explicit requirements, the regulators can move in. The FCA will have the ability to consider people’s access to services that they want but cannot access. It will be able to consider financial exclusion in the marketplace. There are a number of routes where you could look to hold them to that responsibility.

Q24 Chair: I want to come back to that point about the FCA having a new obligation, because I think it is quite important and I would like to get a formal view on it, but let me pursue this for a moment. Would you support the idea that banks should not have the right to refuse a customer some form of bank account? Should we be going that far? At the moment, as you know, they credit-check customers and highlight whatever they feel is appropriate, whether it is an ordinary current account, a basic bank account or no account at all. That is left entirely in the hands of the banks. Should we at least pressure them to be more accommodating of more vulnerable consumers?

Nick Waugh: We should definitely be pressuring them to be more accommodating. What you are talking about sounds like a universal service obligation. I think it would be preferable if we could come to a situation where the banks offer accounts to everybody who needs and wants them without the need for a universal service obligation, but if we cannot reach that point, there may be a strong case for one. The previous Government included a commitment to introduce one in their last Budget, in 2010, so it is not a completely unheard-of, left-field idea. The European Commission has been considering legislative intervention in this area. What they will do is unclear, but there is certainly an appetite to move in that direction.

One issue that would come up is that there would need to be an exemption around money laundering and terrorism legislation, which is where the ID requirements come from. It is also where we see one of the biggest barriers at the moment. People who do not have a passport or a driving licence struggle to open an account, so even if you had a universal service obligation, you would have to address the ID issue as part of that as well.

Q25 Chair: Let me come to that. I will come back to universal service obligation and what it means, but I want to pursue the money laundering issue, because it has proven a large hurdle for that particular client group. I know that lots of people have done studies on what sort of evidence could be provided by, for example, people who do not have a passport, who make up a large proportion of this client group. How can we reach an agreement that meets the challenges of money laundering legislation but also makes it reasonably easy for people to provide the evidence to open an account?

Sue Edwards: I think the problem is that all the banks have got a list of documents that they will accept-it is not just passports and driving licences-but the reality is that branch staff are told that they are liable in criminal law under the money laundering regulations if they open an account which is subsequently used for money laundering or to finance terrorism. They are the gateway. If someone comes in saying, "I would like to open an account," but they do not have the required evidence, the bank doesn’t say, "In that case, you need this, this and this"; it just says, "Well, you can’t have one." The person does not necessarily have the confidence to challenge the bank, so they go unbanked.

Q26 Chair: So how can we help the consumer to overcome their reticence or the barriers being erected? I assume that you mean that some of those barriers are simply a mechanism to stop customers getting access to a bank account.

Sue Edwards: They act as barriers. I do not think the bank staff mean to-they are just worried about their own jobs, basically.

Nick Waugh: The FSA has a list of alternative forms of identification that banks can accept, which is where the long list of other things comes from, like benefit award letters, and so on. Making that a list where it is more explicitly stated that you must accept these forms of ID-not just that you can accept them from an applicant-would be a step forward. At the moment, if somebody does not have a passport or a driving licence it is voluntary, really. Part of that is around the risk of prosecution, but it has been interpreted differently in other member states and it has not caused quite as much of a problem everywhere else-at least, according to the Commission, anyway.

Q27 Chair: I think that you at CAB have promoted the universal service obligation, and I think Consumer Focus have indicated that this might be the way forward. As you say, there is a debate going on at European level about how to address that. But don’t you think it is a little bit of a sledgehammer to crack a nut? Is there not enough good will out there on all sides to make arrangements that will cover vulnerable consumers, without having to go this far?

Sue Edwards: The original idea of the PAT 14 report in 1999 was that banks would provide this, and we have tried to work with banks to improve their basic bank account offerings, but the reality is that the market has got ever narrower. Originally we did not want a universal service obligation. For example, in France only the Banque de France provides bank accounts for the unbanked, so it is not held by all the banks. We thought it would be better if all the banks contributed, rather than having one bank singled out.

Q28 Chair: I want to discuss financial services, but let me ask you a question that I omitted earlier about undischarged bankrupts. The Government have promised an amendment to the Insolvency Act. Everyone expected-at least, most people in Parliament expected-that that would be enough to signal to the banks that they could then offer a bank account to an undischarged bankrupt. That does not seem to be meeting entirely with the approval of the banking sector. What is your view on that change in the law and whether it should be made possible?

Sue Edwards: We would prefer the banks to come to a voluntary agreement, but the banks want to see this legislation changed. It is interesting, actually, that in Scotland insolvency legislation is separate-a devolved matter-and there is no equivalent of section 307 of the Insolvency Act in Scottish insolvency legislation. Yet undischarged bankrupts in Scotland have exactly the same problem.

Nick Waugh: You are right. It has not triggered banks to start offering accounts where they have not in the past. There are two ways of looking at it, I suppose. One is that if you take the point of view of the banks, other than Barclays and the Co-op-that they believe there is a real risk from after-acquired property legislation-then you can see why they would not move now, because there is still a risk and they would wait till the legislation has been changed. That leads to two things we really want to see happen. One is for the amendment to that legislation to happen as soon as possible-it could be years away, and in the meantime bankrupts are left probably in the worst position they have been in for quite a long time. Barclays will offer them accounts and the Co-op will let an existing customer who becomes bankrupt open a basic bank account. But that is a reduction of what they used to be able to get, because they had the Co-op or Barclays.

From our point of view, it is not tenable to leave that situation as it is for years, potentially. We want that legislation to happen quicker and we would also like the banks to come to some sort of arrangement, where they can either agree with the Insolvency Service to manage those risks, or even to come to an agreement where if any of their existing customers were declared bankrupt they would offer them a basic bank account. Anything like that would be extremely helpful in the interim. Apart from anything else, the likes of the Co-op are unlikely to start offering them again until other banks start doing it as well. We are kind of dependent on the banks to move forward.

The final point about the amendment to the Insolvency Act is that it will still be a commercial decision for banks as to whether they offer accounts to undischarged bankrupts. We would expect that they would start doing it. They have always said that the Insolvency Act is the big hurdle. We have had indications from most of the banks that they would consider doing it, but we will wait and see what happens.

Q29 Chair: We have two of them here today, so we will no doubt ask them that very question.

On the point you made earlier about the Financial Conduct Authority with regard to the access to financial services obligation, it is early days, and you may have seen the debate in the House of Lords, where this was agreed. There were, shall we say, different interpretations put on what it actually meant. Would you assume that this would mean that the regulator had to take an active interest in this whole issue of basic bank accounts?

Sue Edwards: We think so. Obviously, the FCA will have for the first time product intervention powers, so they could actually order banks to change their basic bank account products.

Nick Waugh: The wording of that-

Q30 Chair: Let me just ask you, Nick, what would you be expecting the FCA to do with this new power in order to address-if I can call it this, because it is not a great title-the race to the bottom? Not wishing to sound too dramatic, alarm bells are ringing about the future of basic bank accounts. The regulator now has an obligation to address these financial inclusion issues. What would you expect them to do?

Nick Waugh: At the very least, they should be looking into it. Their powers to intervene are restricted to what they can do with the product intervention powers. They might not be able to do anything particularly useful with that, so it could end up with them having to make recommendations to the Treasury to act. It would probably be within the Treasury’s gift decisively to deal with it. Where there is mis-practice or mis-selling, they would be able to intervene to prevent that, but where there is a lack of a product being delivered, they would not be able to intervene with the product intervention powers there. However, we definitely expect them to be taking an interest in this. If they do not, we will be pushing them to do it.

Q31 Chair: Let me ask you one final question. It is one that I have turned around in my head quite a bit in recent days. The terms of reference under which the Banking Commission operates are to address standards and culture in the banking industry. What contribution does having a concern and addressing financial inclusion make to assist that role of addressing standards and culture in our banking industry?

Nick Waugh: It comes back again to how banks see themselves. If banks think of themselves primarily as being for delivering value to shareholders, you would expect them to be less interested in financial inclusion. Were they to recognise their wider roles and responsibilities, we would expect them to be interested in financial inclusion to varying degrees, and some of them are and some of them are not so quite so much. To that extent, therefore, there is an underpinning here of an issue about standards.

Sue Edwards: I suppose it is about to what extent banks are interested in doing this. Some banks have done a lot more than others, such as the Co-op. Barclays have really made a lot of changes to their basic bank account, such as giving it more features. Even before the announcement that they would not be incentivising their staff on selling products, but rather on people’s needs, they had previously implemented a change actually to incentivise staff on selling basic bank accounts as well as current and packaged accounts-so it is up to the bank, really.

Q32 Chair: Is there anything that we might not have touched upon that is important for you to get across to the Commission in relation to basic bank accounts? I give you your opportunity now.

Nick Waugh: The final point might be around universal credit, which will create problems for people who cannot access basic bank accounts at the moment, because an awful lot of them will be on universal credit. While they will be able to receive it in a Post Office account, that does not fit very well with the intentions of universal credit, because you will not be able to receive any wages, which will act then as a barrier to work.

Sue Edwards: The other problem with the Post Office card account and universal credit is that obviously your housing benefit will now be paid into your account as part of your benefits. You might actually receive quite a substantial amount of money in your Post Office card account, then you have to withdraw it all and take it along to your landlord, so that is a security problem.

Q33 Chair: Well, we will have the Post Office in front of us in a moment to get its view of whether the Post Office card account will be relevant to this. As I understand the discussion going on with the Department for Work and Pensions, they are thinking about a new type of account. Have you been involved in any of those discussions, and how different would that new account be from a basic bank account?

Sue Edwards: They are looking at some sort of jam-jar account, which would basically enable people to budget and put money aside to pay their rent and other bills, and put that aside from their basic household spending money. They have looked at the market and there is not very much out there; only the managed accounts provided by some of the debt management companies. They are trying to get banks to develop them.

Q34 Chair: So that would be very restricted functionality. There would not be a debit card or a cash card, there would just be transactional-

Nick Waugh: There would be a debit card. They have a list of features they would have to have, and it is basically a basic bank account with a budgeting element attached. They are discussing the possibility that they would subsidise a provider to provide these kinds of accounts, but the tendering process is still fairly early on just now. I think there have been some discussions about how they balance the need to provide one of these new accounts with the need to fund greater financial awareness advice and financial capability advice.

Q35 Chair: But the assumption is that there will be additional pressure on a banking system to address this particular client group with basic bank accounts, so we need to be aware of that.

Witnesses: Yes.

Chair: I thank you for coming today, particularly since it was short notice. It is really appreciated. We will feed this evidence into the work of the wider Commission, which will produce a report in April or May-we are not sure at the moment, but it will not be much longer. Thank you again for coming.

Examination of Witnesses

Witnesses: Mike Granville, Financial Services Director, the Post Office and Nick Kennett, Head of Stakeholder Relations, the Post Office, examined.

Q36 Chair: I welcome you to this panel of the Banking Commission looking at financial inclusion, with particular reference to the services provided by basic bank account holders. I should have mentioned earlier that Lord McFall was meant to be here but he has been called away to Scotland on an emergency. I am sorry that I am the only person on the panel, but all the evidence presented today will go into the mix with the other issues that the Commission is addressing.

The Post Office plays an important role in the delivery of basic banking. You provide various services to basic bank account holders. Can you give us an overview of those services and, particularly, who bears the cost of their provision? Is it the banks? Is it the Post Office-I suspect not? Tell us who bears the cost of the services you provide.

Nick Kennett: Certainly. I would like to reiterate our thanks for the opportunity to come to you today. The Post Office has a national infrastructure position in the UK market, providing a cross section of support to people in all parts of the community to meet their financial needs and also, going back to the earlier conversations, their cash needs. We provide a wide range of products. The Post Office card account allows consumers to access benefits. We have basic bank account customers. The majority of normal current account customers accesses services over the counter. I am sure we might talk about that a little later. We also have our own product sets that we offer to consumers: savings products, mortgages and simple lending products.

Also, in terms of financial inclusion, we have things such as the Christmas club account and budget accounts that have perhaps 400,000 people using them to save small amounts of money each week over a long period of time. We give them access to the wider financial market.

Q37 Chair: The thrust of your activity is in savings products. I will come to that in a second. What I am trying to get clear, without going into it in minute detail, is whether all basic bank account holders have access to the post office network. Do some not? Are they entitled to withdraw money? What other services do you provide? Do you deal with balance inquiries and other services, if I can broadly call them that? Do you provide that to some and not others, or is it a universal service? Give us a feel for what a basic bank account holder can access through the post office.

Nick Kennett: The main services that we provide are cash withdrawal, cash deposits, balance inquiries and other deposits such as cheque deposits. All basic bank account customers and the vast majority of wider current account customers have the opportunity to withdraw cash at any post office counter. The other services-both basic bank account and general current account-are a matter of the specific requirement of the underlying bank and what they have requested us to provide. Each one will be different.

Q38 Chair: And what determines it? Does it depend on whether it is costly? Is it all based on cost?

Nick Kennett: I could not comment on what has driven it, but it is a commercial decision that each of the individual banks has made. Some offer all the services; others offer simply a cash dispensing service. It has been very much a matter of the individual institution’s desire, and through that we contract with them to provide that service.

Q39 Chair: You mentioned savings products. Your activity in financial services seems to be geared towards savings and lending. Are any of the products and services that you offer subsidised in any way, as are basic bank accounts? Or is it an entirely commercial operation?

Nick Kennett: For the core products that we offer-the savings products-we have a commercial relationship with our banking partner. We also provide some services for the NS&I, again on commercial terms. The Christmas club and budget account are similarly commercial arrangements with third party providers who provide the balance sheet that we as the Post Office do not currently have.

Q40 Chair: Taking a much wider view, you are a much larger network with much more accessibility than all the banks put together. Do you consider that part of your responsibility is to promote financial inclusion? In what ways would you do that?

Nick Kennett: We have the widest network in the UK with more outlets than all the other financial institutions put together. There are a number of areas where we encourage and facilitate inclusion. We have touched on the most basic one already. Almost any banking customer can access their funds and in many cases make deposits in a secure, convenient, safe environment, rather than perhaps using an ATM. We have traditionally provided access to benefits through POCA. About 3 million customers a week do that. About 1 million customers each week withdraw cash over the counter from their bank account or post offices.

By being in every community, 99% of consumers are within one mile of a post office in urban areas, and within three miles in rural areas, so that inclusion goes as far as the access point, which is a key part of the service. For some of our more vulnerable customers we provide budget accounts and the Christmas club, which are simple savings accounts that allow them to accumulate for Christmas, for specific purchases. Those products allow them to do that.

Q41 Chair: It is presumably in response to the Farepak scandal that you offered that, on a basis that is much more sympathetic to the customer group?

Nick Kennett: Indeed. We stepped in when that happened, and provided a service. There are over 400,000 customers using that every week.

Mike Granville: Can I just add-

Q42 Chair: Let me just be clear, when you’re answering, Mike, that although these are obviously vulnerable consumers you are talking about, this is not done on a subsidised basis; it is done in a normal commercial atmosphere. Can you comment on that as you answer the previous question?

Mike Granville: Yes. I was going to say that the accessibility of the network is clearly a key part of serving customers throughout the UK. For the products that we offer access to, as I say, we deal with the banks on a commercial basis: they pay us for doing those transactions. Most of our network consists of sub-postmasters in their local communities; clearly, we need to pay sub-postmasters for the work that is being done on our behalf. The accessibility of the network across the whole of the country is a key part of our role in assisting financial inclusion. We have 130 post offices in areas that would be called urban deprived, so more than 10% of our network is in such areas. The population in urban deprived areas within a mile of a post office is way above 99%. We are there with an infrastructure that is providing cash and accessibility to cash, and by doing that we are in a position to provide a structure that assists financial inclusion. The other point I would make is that we are committed to staying in those communities and on those high streets.

Q43 Chair: I can certainly vouch for that: I have one of the most deprived constituencies in London, and I have a reasonable network of post offices within my constituency, both Crown post offices and others. Has offering a basic bank account ever been part of your discussions with your partner, the Irish bank? Is that something you have thought about, or do you leave it to the British banks to do that?

Nick Kennett: It has been on public record before that we continually consider and look at the opportunities of opening a bank account. We know-it is the background to the conversation today-that there are gaps in the market. We continue to evaluate that market and consider the options, and indeed, as part of that, discuss that with our partners.

Q44 Chair: Let me turn to the budget card or prepayment card. That is aimed at people who want to save relatively small amounts. Have you ever thought about increasing the functionality of that by turning it into a debit card or extending the services that are available from the budget card?

Nick Kennett: We do continually look at it. The particular purpose of that card is to save a small amount over a period of time with a specific outcome in mind-a purchase of something or the accumulation of a small amount of savings. The concern with a debit card attachment to that would be that it would become more of a transaction account rather than a savings account. The intention was very much that it be a savings facility for those who may not have access to that elsewhere.

Q45 Chair: Is finance an issue for you-the cost of converting it-or is it just that you do not think that that is a market you particularly want to enter into?

Nick Kennett: That particular product has a particular segment of customers and that service meets their needs. It is not an issue of the Post Office saying that it is too expensive or anything like that.

Q46 Chair: Let me ask a wider question. The Post Office card account and the counter bill payment are services, as you have indicated, that have a very wide canvas across the country, which means that you are, in a sense, picking up a lot of customers who would fall through the safety net if you did not pick them up. Could you be doing more promotionally to address this group and make it clear that these services are available to them, or are you satisfied that the public generally have a reasonable view of what is available at the post office?

Nick Kennett: There are two issues to your question. First, for the customers with a basic bank account who come in to withdraw cash or do other services-those who are coming with a Post Office card account-they are and, through the promotions we do in branch when they come in for other services, become aware of the services that we provide and that they can get access to their cash in the safe and convenient environment that we talked about earlier.

In terms of other products-savings products, small borrowing products and so forth that we offer-we play an active role in marketing those to consumers, both in branches and in wider media, and helping to support those customers to include them in the financial system, but also ensure that the local agency is benefitting from the value that is created through the product development.

Q47 Chair: Let me ask the very obvious follow-on question. Are you convinced that, and do you have discussions about whether, the Post Office is addressing financial inclusion, broadly speaking? It is clear from your earlier answers that-certainly in savings and various services you provide-you are in contact with the vulnerable consumer group. Have you thought about whether you could be doing more for that group? Not in a subsidised fashion, but just in the provision of services that they would value that they could access through your network.

Nick Kennett: We regularly look at our role as an access point to the widest range of consumers and population, including those who are excluded or partially excluded. We have developed, are developing and continue to support products and services that help meet those needs. We do look at ways of improving that.

For example, we still offer the postal order. Eight million customers every year who may not have access to other payment mechanisms use the postal order to transmit money to alternative providers. Some of the other products that we talked about earlier very much provide those services to consumers who might otherwise not be able to access them.

But underneath it all, the philosophy and strategy that we follow is to give consumers products that are simple, flexible and transparent, as well as being fair. So people see what they get and there are no hidden pieces that might come to surprise them later. That is the sort of position that we put with all the products we offer, and we feel that that helps customers and consumers understand, as part of their own education, what the products can offer and how they can maybe benefit them.

Q48 Chair: How does your relationship with the Bank of Ireland operate? Clearly, you are in a partnership. My understanding would be that, because they are bankers, they design banking products. You go to them and tell them, "This is our client group. This is who our customer base is." Would I be right in saying that you are more concerned about financial inclusion than the Bank of Ireland is, or would that be too presumptuous?

Nick Kennett: With the Bank of Ireland, it is a long-term relationship, and it has a long way to go.

Q49 Chair: You have just extended it, I believe.

Nick Kennett: To 2023, as part of some changes that we announced last year.

In engaging with the Post Office, the bank would clearly have understood the Post Office’s position in the UK community and the access and obligations that gives. Between us, we develop products. We develop services that meet the wider population.

As you suggest, it is very much a collaborative partnership process around product development, product testing and competitive pricing, to ensure that it is both a product that meets customers’ need and one that meets the wider banking requirements of the two partners. So it is a commercial relationship, but one that assists and provides value-for-money products to consumers and our wider financial inclusion requirements.

Q50 Chair: The other partner-in a sense, a silent partner-in all of this is the Government. Do you think that they recognise the value or the advantage of the Post Office network in addressing financial inclusion, or do you think that they are missing a trick here by not using you to the maximum to address some of these issues?

Nick Kennett: I probably could not comment on Government thinking, but we are certainly benefiting from the investment that is being made in our network at the moment. £1.3 billion is being invested in upgrading the branches, in making them more modern and in helping on some of the technology pieces as well, and the commitment that the Post Office will maintain 11,500 branches right the way through the UK. So the investment and the commitment are very much on keeping the access and availability, ensuring that all parts of the population can access the services, and through that encouraging financial inclusion.

Q51 Chair: Perhaps, Mike, you can address this, because I fully understand the need for the investment; I am fully behind the work that is ongoing in upgrading the Post Office network. But nothing that Nick said in all of that-if I can put it that way-said what they are doing on financial inclusion. They are turning the Post Office into a 21st century operation; that is to be lauded. The Post Office has a very special place in the hearts and minds of the British public, and this will go a long way to burnish that reputation. But what about financial inclusion?

Mike Granville: Again, I think that if you look at the network and the criteria to which we develop the network, some of those criteria specifically look at the accessibility in what might be called financially deprived urban areas, and in rural areas. So there is a keen commitment to ensure that the Post Office network stays and develops in those communities, and there are specific criteria that target the requirements to stay within urban deprived areas.

One thing about the Post Office is that the customer base, in many ways, reflects and echoes the UK population base. All sectors and segments of society use post offices, which is one of the great strengths of the Post Office network. And within that, it gives us the capability for us to offer services across that range. So we have talked about some of the service offers that we have, and probably the other side of this is the cash provisioning capability that we provide in communities. We have a large cash provisioning capability that supports post offices, which is part of the Post Office network, and that is a critical factor in ensuring that we can provide these services that assist financial inclusion in communities where often nobody else is providing those services. So there is a strong acceptance that part of our role is that we have a clear social purpose.

Q52 Chair: I mentioned earlier on-and from your responses it is certainly confirmed-that you have developed a number of savings products specifically geared for the vulnerable consumer. I understand that you are talking to the credit union movement about this very subject, and I wondered whether you think, "Leave the banks to do the basic bank account, and we will come up with a range of savings products." Is that something you are looking at?

Nick Kennett: We have a very good relationship with the credit union movement, most particularly through their association, the Association of British Credit Unions Limited, or ABCUL. And it has been on public record that we are keen to facilitate cash access. That is yet to be concluded, but that is certainly an ambition that both parties have, to ensure that credit union customers have access.

With regards to savings deposits or savings products, there is no development of those at this stage.

Q53 Chair: Savings in our society are not nearly as high as they should be, for all sorts of reasons, and particularly among this group. Now, I would be the first to say that we have to be realistic. Many people only have enough money-in fact, they do not even have enough money to get by on, so being able to save is difficult. But there are quite a lot of that group-the "Christmas club" customer-who would value being able to put a little bit away for Christmas, or a birthday, or any event that is going to require them to buy a present. Is there a greater role for the Post Office in this area?

Nick Kennett: As we have talked about a number of times, we do play an active role in that particular provision and continue to develop it and to encourage customers to avail themselves of that service. We are active and will continue to be in helping those particular groups of customers, who are looking for small-level savings growth, to avail themselves of that in a safe environment. We very much see that as part of both our commercial positioning and our financial inclusion work.

Q54 Chair: I come back to a theme that I suspect you will be expecting me to raise-the future of the Post Office card account. The Government are looking at this in a variety of ways, but the assumption-correct me if I’m wrong-is that they may be moving towards withdrawing the right to put benefits into the Post Office card account. Are you in discussions with them-I don’t expect you to tell us the outcome of discussions-about this issue? Who is in the group that would be affected if there was any change in the Post Office card account? What are their characteristics?

Nick Kennett: The Post Office card account has about 3 million consumers who access their benefits either at post office counters or through Post Office ATMs. The current arrangement, on public record, is a contract through to 2015 with the DWP, and there is an opportunity, an option, to extend that, which is to be determined in the future. The specifications that the POCA product operates under are defined by the DWP, and we work with them on how to improve it. We are in regular dialogue, regular conversation, about how the product is working, what the opportunities are and so forth, but in the end it is very much the DWP who set the parameters that they want us to deliver the product on, and it is providing a very, very good and valuable service to a customer base of about 3 million, which I’ve touched on already. We see that value from the point of view of both the consumers, who are using it, and the sub-postmasters, who value the footfall-the customers coming in to transact those withdrawals and then maybe spend something in the local shop.

Q55 Chair: Are you speaking to the Government about improving the functionality? Is that one of the debates that is ongoing? The functionality is very limited. I think that was intentional at the time, but we seem to be moving on and people are looking for something a little more service-oriented. Is that part of your discussion?

Nick Kennett: As I mentioned, there is ongoing discussion about the product and, as I said, it is very much a matter for the DWP to confirm to us what they would like us to do with it. We are very much an agent for them in delivering that.

Q56 Chair: I understand the necessity to have discussions with the DWP, but in your own right as an organisation you could look at improving or extending the services available through the Post Office card account. Is that something you are doing anyway, or are you driven by the needs of the DWP because the client group is that group that the DWP services?

Mike Granville: As Nick was saying, the specification of the product is a DWP issue. In terms of customer needs, clearly a range of customers want to use the post office to fulfil those needs and continue to do so. We very much cherish those customers. We do want to provide what the customers need. If we look across the range of services we offer, going back to basic bank accounts and other facilities whereby people can use the post office to access their cash, we do have a range of services, and the card account is a very important one of those. We are very much in the place of wanting to maintain those service availabilities and make sure those overall service availabilities meet the needs of customers. We are committed to the network and committed to the communities the network is in, and we are committed to the customer base, so that they can continue to gain the services. Clearly it suits them, their lifestyle and their approach to be able to use the post office, so we are very keen to develop and to build on that position. Maintenance of the network and commitment to it are absolutely core to where we are.

Q57 Chair: We heard earlier on from CAB, and this was supported by other evidence we have received, that the DWP is looking into a new type of account, which is a sort of basic bank account with some additional budgeting features. Is that the death knell of the Post Office card account? Are you becoming irrelevant to that group? What are you doing to address or respond to what appears to be the need in relation to the introduction of universal credit over the next few years?

Mike Granville: In terms of the introduction of universal credit, the post office is still a place that is convenient for a lot of people to obtain cash and to handle financial transactions, so clearly there is a role to be played.

Q58 Chair: That is absolutely right. How are you going to ensure that that continues into the future under the new obligations that the DWP is going to demand for the provision of universal credit through your network?

Mike Granville: It is right, and we do want to continue that capability. How that fits exactly with the DWP and the specifications with respect to universal credit, that is a matter that-as I think was mentioned earlier-is still being looked at by the DWP, so we will have to see how the specification position develops. Clearly, however, the access to cash that we offer is an important part of the way forward here.

Nick Kennett: Subject to agreement with whoever is providing the universal credit product set, we would look to be able to provide access in the same way that we do for existing basic bank account customers.

Q59 Chair: So if you cannot do it yourself, you will provide access through-

Nick Kennett: We will certainly provide it, yes.

Q60 Chair: Which would be a major advantage to the customer group.

Nick Kennett: To customers for their access and to sub-postmasters for the footfall they get from that.

Q61 Chair: Is there anything that we have not had an opportunity to discuss today that you would like to inform the Banking Commission of in relation to your work on financial inclusion?

Nick Kennett: Thank you. The Post Office plays a unique role in UK wider society. The access problem we have talked about a lot at this meeting is absolutely critical to our raison d’être and our strategy. We are and will continue to be in all communities. Behind that, we offer a wide product set, some of which we have talked about and others we have not talked about, which will always be fair, transparent and value for money, so that it provides financial inclusion, financial simplicity to consumers, and other products as well which are perhaps not in the remit of this discussion. We see that as being part of our role in the wider community, and we will continue to do that. The commitment we have on the Post Office side is that we will continue to do that in a changing world, so that consumers can continue to have access to and the availability of financial services products.

Q62 Chair: May I once again thank you specifically, because of the short notice? We really do appreciate you in this work, and the evidence you have given will be fed into the wider Commission.

I am going to suspend the sitting for two or three minutes. We will then move on to the Lloyds Banking Group.

Sitting suspended.

On resuming-

Examination of Witnesses

Witnesses: Anthony Warrington, Director Current Accounts, Lloyds Banking Group and Steve Smith, Retail Competition Strategy Director, Lloyds Banking Group, examined.

Q63 Chair: I can see that you are both raring to go. Welcome to this panel of the Parliamentary Banking Commission. We are looking specifically at financial inclusion, focusing on basic bank accounts. Let me start with a very obvious question. Your chief executive wrote to the Treasury Committee, indicating that the cost of a basic bank account was £39 gross and £17.20 net per annum. I think those figures were from 2012. Why do you offer basic bank accounts in those circumstances?

Anthony Warrington: As an organisation Lloyds Banking Group feel we have a social responsibility to provide current accounts to this segment of the population. We do an awful lot in the financial inclusion arena. We understand it is difficult in any walk of life to get by without having a current account. We feel that is very much part and parcel of what we must do as an organisation. In addition, supporting that are the PAT 14 requirements that insist that we do. My answer would be that our position is that we have a strong social responsibility to do so.

Q64 Chair: Without being specific, does the rest of the banking sector recognise that social responsibility? One issue that keeps coming up in relation to this is that one bank changes the functionality of the basic bank account and others feel that, for competitive reasons, they have to follow. Does the rest of the banking sector recognise the social responsibility that you have talked about?

Anthony Warrington: Broadly it does, but I would say some banks take the responsibility more seriously than others. I would point to the different market shares and levels of effort that different organisations put into providing basic bank accounts. At Lloyds Banking Group we have a very large market share of this sector. We believe it is around 47%, nearly half of the market. We take our responsibility very seriously. Other organisations are beginning to catch up, I would say, in terms of what they are doing.

Q65 Chair: Could you give us a rough global figure of how much the basic bank account costs? We know how much per account. Not all of the basic bank account holders will be loss making by any means. Is it possible to give us an overall figure for how much it costs Lloyds to maintain the basic bank account?

Anthony Warrington: The numbers we published in the most recent reporting were that we spent £150 million on providing the basic bank account.

Q66 Chair: That is for the basic bank account per annum.

Anthony Warrington: Yes, and it has been around that level for the last few years. It goes up or down a little, but that is annually.

Q67 Chair: Earlier on, you mentioned financial capability, and talked about corporate social responsibility activity, of which that is one part, and the basic bank account. How much overall does Lloyds Bank spend in a year to uphold its reputation for being socially responsible?

Anthony Warrington: It is difficult to pluck an overall figure. I can talk about different aspects of it, such as £150 million for provision of the basic bank account-

Q68 Chair: Take the example of financial education. Most banks are doing something, but you seem to be doing perhaps a bit more than others. This is obviously part of your corporate social responsibility, but there must be other aspects. I am just trying to get a flavour of how extensive the work you are doing on financial inclusion is as part of your corporate social responsibility.

Anthony Warrington: We have a money-for-life programme, which is a broad training scheme that we roll out into communities throughout the UK. We spent £4 million on that last year, and we have committed to spending £4 million on that for the next two years. We have recently done other research with Circle, the housing association, trying to investigate and probe parts of the population that may be unbanked and not coming forward. We have done some work with UNLOCK to provide accounts for prisoners, who are another excluded segment, and last year we rolled out that programme to 31 prisons, up from five. I do not have an accurate number, but we have a number of different activities that we continue every year to promote this agenda.

Q69 Chair: I will come to this in more detail. I don’t know whether you were here for the CAB’s evidence.

Anthony Warrington: Yes.

Chair: We asked about the critical features. You have different features for different parts of the group. What are the central features of a basic bank account in the view of Lloyd Banking Group?

Anthony Warrington: First, we don’t look at the basic banking customer as one homogenous mass. There are lots of individual needs, and different problems and issues within them. One we have researched-I think Consumer Focus’s research supports the point I am about to make-is that if you ask the basic banking customer for the most important features, they say the very basic things: putting money in the account specifically and having some payment functionality from it. Below that obvious tier, by far the most important thing that comes out is a debit card, and then some way below that list you get a bundle of other provisions, which include branch access, some form of financial control on the account, be that text messaging and such features, and then ATM access beneath that. The most important thing would seem to be a debit card from our perspective, but of those other features different groups of customers require them in different doses. Not all customers require counter access, but some absolutely do. Not everyone requires full ATM access, but some customers do, so we provide our bank accounts differently in the brands to support those different needs.

Q70 Chair: I want to come back to why you have differences within an overall network, but I will leave that aside for the moment. Does the Lloyds part of the Lloyds group only provide access to its own ATMs?

Anthony Warrington: Yes.

Q71 Chair: How much would it cost Lloyds to expand that to the whole of the LINK network?

Anthony Warrington: We costed that at £7 million.

Q72 Chair: We have the context of the overall issues that we are dealing with and the figures that you gave us earlier, and you will have heard the evidence from the CAB, which has done studies on this. Consumer Focus has also done studies on this, and said how important it is to have access to cash. There are other studies that show that limiting it to only the machines, even for banks like your own, which have a wide network of their own machines, restricts it significantly. It is a relatively minor cost to you to extend it, so, in an effort to be uniform across your whole group, would it not be sensible to extend it? Have you discussed that?

Anthony Warrington: We have. There are a couple of points on that one. We absolutely agree that access to cash is vital, but, on the prior point that I made, we believe that we are serving the needs of the Lloyds customer base in the provision that that account has. It provides a counter service and rich additional functionality around text messaging, the "Money Manager" and access to the "Save the Change" feature that the bank also runs. Because those customers have chosen Lloyds and have access to that branch and therefore that network of ATMs, and also the Halifax and Bank of Scotland ATMs, as well as the Post Office, we feel that that is a sufficient provision for those customers. It meets their needs.

The second point is that-

Q73 Chair: Let me interrupt you there, because that sounds very much like, "If we make our offers too attractive, everyone will come to us." In other words, you do not want to make yourself too attractive and by restricting access to cash machines, you are, if I can put it in your terms, levelling the playing field. You are not making yourself the bank that most of this client group would come to. Is that part of your rationale?

Anthony Warrington: No. The rationale is simply to build products based around customer needs and to have a strategy within the bank that has multiple brands that can meet different customer needs. We find many customers who want full LINK access in Halifax, and they value that access. Equally, they use the counter a lot less, so that account offers less counter access. We feel that the Lloyds account offers a relatively rich range of product features and value for money for the customers.

The other point is-

Q74 Chair: Let me stop you there, because I suspect that you know what I will go on to speak about. There has been a concern expressed by various consumer bodies, if I can call them that-people representing customers, some with a basic bank account, and others-that, as banks continue to withdraw parts of the functionality of the basic bank account, we are getting into a race to the bottom, where there will be such limited functionality that the account will not be worth having. Is that a concern for Lloyds bank, and how should we address that concern?

Steve Smith: If you look at the features that the three main brands in Lloyds banking group offer, we are at the top of the pile. We are focusing on ATM cash access here, but we offer debit cards, which many of our competitors do not, and customers really value that. We offer text messaging and everything else.

Q75 Chair: I understand that. I laud some of the services that you provide, particularly through the Halifax. I come back to the point that was made earlier on that you have a very large slice of the basic bank account market, because you have good functionality. If you attract a disproportionate amount of the people who are seeking basic bank accounts would that not put pressure on you to address that issue and will we not then lead ourselves into a race to the bottom, and how do we address that?

Steve Smith: I am not seeing any sign of that at the moment.

Q76 Chair: The Treasury Committee has had reassurances from all the banks, but banks have to take decisions in relation to their overall financial position; we understand that. What we are trying to do is seek a way forward that banks can agree to as well as the consumer bodies, because that will at least try to halt the race to the bottom.

Steve Smith: I understand that, and I suppose what I am trying to say is that what we need to do is focus on what customers really value, what they really want and what they need from those accounts. Anthony has expressed our view that debit cards are very important. Even the consumer groups’ own research says that, so access to cash is clearly important. But as your previous report said, that is quite a regional thing. Obviously, for Lloyds customers in the south-east, being restricted to Lloyds-only ATMs is not going to be as big an issue as in other regions. I suggest that when we are looking at that access-to-cash issue that we consider that it is perhaps not a national issue. You have seen our own research. There are clearly pockets where it is an issue. Perhaps focusing on how we address the issue in those regions or in those pockets might be a way of addressing that.

Q77 Chair: That sounds as though you are hesitant about including access. CAB said that that would be a core function of a basic bank account: access to the total LINK network. You obviously are hesitant about that. What other services would be critical to a standard basic bank account?

Anthony Warrington: Again, if you ask customers about all the basic things, PAT 14 is a really good starting point. It has done an awful lot for the industry, and the banks have largely fallen in behind that. The world may have moved on a little bit; it is a bit more technological now and you may want to add in some additional access to different channels. The absolute core features are making sure that money can be paid into the account and that it has paying-in functionality and a debit card. For us at least there is then a debate around whether the remaining features are discretionary or compulsory. We would rather the issue was pushed out into the market and banks were made to be competitive around these features, so that everyone took their fair share of the market.

Q78 Chair: Well, let me just ask you this-I am veering a little off course here-because in the original discussions, when they set up the basic bank account, they only made very small mandatory features on the basis that the banks would compete in provision. Of course it is quite difficult to compete in a market where quite a lot of the banks will be losing money. Is not there an attraction to suggesting that there ought to be a basic standard for the banks to then work to, whatever that cost will be to them, and make a judgment on that and on what other services they might wish to offer? What I am trying to do is to find a way forward that will meet both the needs of the customer group, as represented through the consumer organisations, and the challenges that the banks face in delivering that.

Anthony Warrington: We would agree with that. I think that we would agree that a basic set of standards is a good place to be. PAT 14 is a good starting point. The Consumer Focus research paper that was recently released built on that significantly and would also be a fair place to start. We are very much in a place where a set of standards for the industry would be appropriate.

Q79 Chair: I come back to the point that I was going to touch on earlier, which is my surprise that Lloyds Banking Group seems an integrated group-we have continued to hear stories, not only from Lloyds, but from all the banking groups, about how difficult it is to merge IT systems from different, previous organisations-and yet, although you merged all those things and had great difficulties, you have chosen to allow the Bank of Scotland, Halifax and Lloyds to retain different functionality for their basic bank accounts. It is a very different proposal in each part of the country, although any one of your customers, if they happen to be in another part of the country, can use those facilities that are available. Why have you done that? It seems rather strange that, now you are united under one flag-if I can put it that way-a basic bank account holder in every part of the country wouldn’t be given the same offer.

Anthony Warrington: In answer to that, I would broaden it out to say that we do not just do that for basic banking customers, but for our mainstream banking customers as well, and all of the other-

Q80 Chair: So they have different offers in different parts.

Anthony Warrington: Yes. Each of the brands has really retained its core values, its heritage. It still understands the people and communities that it serves, and it provides different products, be they for basic bank accounts, mainstream bank accounts, savings, investment products, or credit cards. You would not see a homogenous Lloyds Banking Group range anywhere you looked within the business.

Steve Smith: We try to offer customers some degree of choice in basic bank accounts. As we have said, we do not believe that all basic bank account customers are the same. I don’t think CAB’s consumer research, or Consumer Focus suggest that. You would not expect 8 million people to all have the same priorities, and therefore, we are trying to say that within the scope of a piece of the business that we do not make money on, what package of things can we put together in the two different brands so that customers have some choice? "So, if this really matters to you, go with Halifax, because then that will work. Actually, if you are not worried about ATM access, because you live near a Lloyds branch"-and there will be lots of parts of the country where you do-"and counter access is really important, go for the Lloyds basic bank account." But if we offer all those things in all the different brands, obviously it pushes on the costs and economics of the business, so within that constraint, we are trying to do the best that we can to give customers different packages of options of the things that we know they are telling us matter to them.

Q81 Chair: If I may characterise that, what you are telling me is that Lloyds, which traditionally offered commuters into London and people living in rural areas banking services, is very different from Halifax, which was originally a building society that offered savings accounts to working people-if I can call them that-and that it is because of those histories that you have a different offer in each of the areas. Mr Horta-Osório said in his letter that it cost-net-£17.10 a year in losses for the basic bank account. Does that differ in the three different parts of the organisation? Is a basic bank account more expensive to you in Halifax, which seems to have the greatest functionality, and can you give us any idea what the differences are?

Anthony Warrington: I haven’t got the numbers to hand. It will vary a little between the different organisations, depending on the level of use. The Lloyds account, with its counter access, tends to demand more people, and different-sized and different-shaped branches, those types of things. The Halifax offer is broader, as you say, so we serve some people at the counter for certain things, but push them to an ATM machine or an instant deposit machine, which we have in all the branches, for other things. It will vary a little between the brands, but overall, not an awful lot. You would not see a very polarised, different position for Lloyds than you would for Halifax, because of the way that we try to balance out those features.

Q82Chair: I am trying to draw comparisons. Would you accept that your ordinary current account, whatever form it takes, is also loss-making?

Steve Smith: No, we would not.

Q83Chair: I understand that you would sell other services on it to make it profitable, but as a stand-alone, you do not subsidise the ordinary current account?

Steve Smith: No, we do not. I know that that is sort of an article of common currency at the moment. The Office of Fair Trading has just done a big review of the personal current account market, covering basic accounts, standard accounts and packaged accounts. They published something last week, and they were absolutely clear, having looked across the market, that standard current accounts were profitable and they therefore did not see any argument that banks needed to sell other products. I think they quoted that across the industry as a whole, we make about £8.8 billion in revenue, so current accounts stood on their own.

Q84Chair: Just for clarity, I assume that that £8.8 billion would include all the other services that you sell to bank account holders?

Steve Smith: No, that was £8.8 billion in revenue from providing basic bank accounts, standard accounts and packaged accounts, and they broke down how it breaks down between them. It is a very data-rich report, and it is in the public domain. There is a very clear statement in there that the current account business across the industry as a whole is profitable, and therefore does not create any need to cross-subsidise or sell other services.

Q85Chair: If I may put it that way, £8.8 billion is for the whole industry, of which Lloyds is roughly 30%. If we take 30% of £8.8 billion, the £150 million that basic bank accounts cost you and the £7 million to add cash machine functionality seem to pale into insignificance. Is that not a cross-subsidy worth paying to be able to say that you are the premier banking group that looks to include all members of the community?

Anthony Warrington: It could be. I think it comes back to your point about industry standards. What we need is to have a set of industry standards that make it very clear what every bank has to deliver, and to get every bank up to that benchmark, rather than to have some banks which have very rich functionality and some banks which do not. The Lloyds account, given the functionality it already has, would be and is far and away the best.

Steve Smith: Given our overall market share and the fact that we go well beyond the minimum requirements to offer customers a range of features we think they value, although I know that ATM access is a particular issue, I think we would say that we are doing as much as we can to meet our requirements. Some might even comment, as Consumer Focus and others have pointed out, that we do more than others. Given a market share in current accounts of 30% and a market share in basic accounts of 45%-I do not think anyone is contesting that these are loss-making accounts-we are doing more than our fair share. It is against that background that you have to ask the question you asked.

Q86Chair: I accept that point. The reason why I am asking these questions is the concern about a race to the bottom, with everybody having a different offer and people withdrawing parts of their offer. We are in a spiral, or we appear to be getting into one, and we want to ensure that we do not.

Let me move on. I wanted to ask you about marketing and promoting basic bank accounts. One of our staff went on to the Halifax website. I think their basic bank account was called Easycash, and they did not exactly promote it. What efforts do you make? There are all these anecdotal stories about people being told, "Go to the branch down the road; they’ll give you a basic bank account." I know these are somewhat elongated stories, but there is a concern that there is little in the way even of information for the customer to decide, and it is rare for banking staff to mention the basic bank account offer except in certain circumstances. How would you respond to the concern that you are not marketing these?

Anthony Warrington: The first thing I would say is that we market current accounts. I would not say we market the basic bank account specifically. As an organisation we market current accounts. Our customers would not recognise the terminology "basic bank account;" they would recognise "Easycash," "reward current account," and those types of thing. We promote our banking services generally and put ourselves out there as a provider of current accounts. For all three brands we put material online that signposts people to the different current accounts that we have. For Halifax in particular, word of mouth is a very big means of recruitment in terms of gathering basic bank accounts for the Halifax range. Over the years, Halifax has gathered a reputation, along with the Post Office, for being the place to go.

Q87 Chair: I want to come back to that, but let me ask you one final question on this. We have taken a lot of evidence in the Commission generally on the incentives, both management pressure and financial incentives, for staff in branches to sell all sorts of products. Do you incentivise your staff to sell basic bank accounts?

Anthony Warrington: They do get rewarded for selling basic bank accounts, and they get rewarded for upgrading a basic bank account, where appropriate, to a mainstream account. Part of what we want to do is to get that basic group of customers into mainstream banking, and through that financial education cycle make them more aware of the bank’s products and services. Yes is the simple answer.

Steve Smith: Essentially, when somebody comes into branch, as Anthony says, they want bank accounts. I think it is a good thing that they do not see this as a basic bank account or some stigmatised product. Consumer Focus’s research referenced that customers who have basic bank accounts just think of them as a current account, which is what they call them. They do not recognise the distinction. When people come into one of our branches to open an account, the important thing for us is getting them in the right account. If it becomes clear very early on in that conversation that the right account for them is a basic account, as we would see it, then that is what we will put them into. That is the way we see that. So it comes back to Anthony’s point.

Q88 Chair: Do you accept that the report commissioned by Consumer Focus on basic bank accounts shows that the so-called target group, which is financially excluded, is not really addressed? That is nothing to do with Lloyds, but it is a general comment: the people who are attracted into basic bank accounts are people who are either desperate not to go overdrawn, perhaps because of a previous experience, or without a credit history, for whom it is less risky for the bank to open a basic bank account-they will probably gravitate towards a normal account eventually, when they have a credit history. Do you accept that evidence? Is that what is happening with Lloyds? Is it a different group-a potentially more profitable group, if I might put it that way-that is coming into basic bank accounts at the present time?

Anthony Warrington: I would say that there are some of those customers in basic bank accounts, but, by far and large, the bulk of customers in our basic bank accounts are what I would describe as genuine basic banking customers, so they are on a very low income, they are not transacting very much in the account by way of payments functionality, they are heavily using cash and they have very basic requirements. There is a small group of customers who are in there because they have failed a credit score for a mainstream bank account. Actually, the basic bank account is definitely the right place for those people, whom we need to provide with a current account to get their credit rating back on line and to try to move them back into the mainstream.

Q89 Chair: Are people who do not credit score adequately to go into the mainstream automatically offered a basic account?

Anthony Warrington: Yes.

Q90 Chair: Let me move on to the product that you call "control," where customers pay £10 a month and do not have any worries about an unplanned overdraft. That seems awfully like a basic bank account, except with a £10 charge. How would you respond to that criticism?

Anthony Warrington: I see it as a slightly different group. You have the basic banking customers, where it is literally impossible to go overdrawn, and that is a measure of control. This product is aimed at customers coming from mainstream accounts with overdrafts. They may have a planned overdraft or no overdraft at all, but they have a mainstream account and they do not want to go into the unplanned position and incur unplanned fees. It does cost us money to provide that service. We provided this account in response to some OFT findings. I don’t necessarily agree that it is the absolute right solution for customers.

Q91 Chair: I accept that the surveys all show that one of the biggest concerns of people who are appropriate for basic bank accounts is the worry about going overdrawn. I do not have any problem with offering a service that gives them more of a guarantee that they will not go overdrawn, and I do not mind that you have to charge for it. The issue is whether you are being entirely upfront in the sales process, if I can call it that-the information provision process that tells them there is a basic bank account, which does such and such, but there is this other account. In other words, to what extent are you replacing the previous conversation about the plain, basic bank accounts with one about control?

Anthony Warrington: The way the sales process works is a customer who comes in wanting a bank account goes through an interview. We ask them a series of questions and we produce a list of accounts that would be suitable for them. We describe each account, and leave it to them to decide which account they want to choose. Customers will be aware that there is a basic account, an account with control and accounts without control, right the way up to the packaged account, if they are eligible for it.

Steve Smith: But the number of control accounts we have across both brands is tiny compared with either the basic bank accounts or the main current accounts. When we researched that, the people who are really interested in control accounts tend to be those who have full service accounts, who are looking for ways to manage the risk of overdraft charges. They tell us that they don’t like the binary nature of it, if I can describe it like that. They say, "Look, there are certain payments I’d rather you did make. For example, I don’t want my mortgage or a utility bill not to be paid, even if it will involve a late payment fee of £10. For other things, such as if I am in a shop, or about to do something where I have some discretion, I’d rather you didn’t." Unfortunately, the control account does not offer that feature at the moment. When most customers look at the control, they start by saying, "That sounds like a good idea." But when it is actually explained to them, they say, "Well, no. That is not actually useful to me." The challenge for us is how to provide something a bit more meaningful, which gives people more control over what gets paid and what does not.

Anthony Warrington: I would just add one thing to that. Actually, the bulk of customers who are in the control account do not pay £10 for it. We provide it free when customers are in financial difficulty-collection situations. We use it more as an account to ring-fence them and make sure they have control of their finances. We provide it free in those circumstances.

Q92 Chair: So it de-risks your exposure, in a sense.

Anthony Warrington: Yes. It is the best solution all round, for us and the customer.

Q93 Chair: Let me add something that has suddenly occurred to me about undischarged bankrupts-we will come back to this subject. When you credit score them, they will come bottom. But they cannot go for a basic account, because you do not offer them to undischarged bankrupts. Do you just say sorry? Is that the situation? They do not get offered anything at all by Lloyds?

Anthony Warrington: Yes, that is right, at the moment.

Q94 Chair: Let me ask you about the costs of basic bank accounts. The unpaid items charge is £10 per item, up to a maximum of £30 per day. I assume that is correct.

Witnesses: Yes.

Q95 Chair: How much does it cost you to process those items?

Anthony Warrington: About £10.

Q96 Chair: So you are only charging the cost to you?

Anthony Warrington: Yes, approximately. We-yes.

Q97 Chair: You seem a little hesitant. I am not asking you to say definitively that it is such and such an amount. But, broadly speaking, you just recoup your costs.

Anthony Warrington: Yes. They used to be much higher, and they have come down to the level that we believe is the cost of providing that particular service.

Q98 Chair: What I am really trying to get at-perhaps you can answer this-is whether basic bank account holders take on higher charges than ordinary current account holders, or is the charging structure the same, as you have indicated, based on the cost, roughly speaking, to the bank?

Anthony Warrington: Yes. The cost, as I say, is roughly the cost of returning the item itself. On the whole, I would say basic banking customers do not incur charges anywhere near the level that customers do who opt into a planned overdraft or who have unplanned overdraft fees applied to their account. On the whole, they are probably the best budgeters in the book; they run their accounts very close to the wire, but they do not tend to go into the territory where we are returning items. Actually, on the Lloyds account, in particular, there is a £10 buffer before the £10 is charged, so we do not charge for those little indiscretions, which are potentially common.

Steve Smith: The other thing is that the debit cards we give them are, without getting too technical, slightly different to mainstream debit cards, so they do not actually allow you to go into a shop that is not hooked back to your live balance and to spend money that would then be returned. There is a protection in the debit card people have, to avoid them incurring one of those charges if they have come unhooked from where their account balance is. So this charge is not in any sense an attempt to generate revenue; it is an attempt to cover the cost when we return items. But the account is very much designed to minimise the risk of a customer incurring these charges. As Anthony said-I think this is supported by the consumer research you have talked about-most of these customers know to within a very precise amount what is in their account and tend to manage their account in a way that means they completely avoid these charges.

Q99 Chair: That brings me back to my genuine sense of surprise about one thing. You are calling for industry-wide standards and you are offering a good-quality product-admittedly with variations-so why aren’t you out there leading the debate about industry-wide standards, rather than possibly having measures enforced by Europe, which is discussing this in relation not just to Lloyds or the UK, but more widely? Wouldn’t that be fantastic for your reputation? You would be able to say that you are the bank that is genuinely concerned about financial inclusion and that you provided your service to the broadest customer base across the country. If you look on it strictly commercially, do you not see that as a marketing opportunity?

Steve Smith: I think we do, and I think we market quite hard on our position in the UK economy and what we bring across the piece. It is a fair challenge. We need to reflect on this exchange and to think quite carefully about that. It is a very sensible and logical position, so we need to think hard about where we stand.

Q100 Chair: Let me give you something else to think hard about. I mentioned undischarged bankrupts earlier. Because of the concerns of the banking industry, the Government are proposing to change the law to make it harder for banks to be sued for whatever moneys are in accounts held by the banks. There is now a genuine debate about whether that was what the industry asked for. There now seems to be some concern that that might not be enough to trigger all the major banks to offer this banking service to undischarged bankrupts. What would the position of Lloyds be?

Anthony Warrington: We saw the letter from the Department for Business, Innovation and Skills. We saw the proposed change in legislation. The response we went back with was that we would be very supportive of that change. It would bring us into a position where we would offer these accounts, subject to that legislative change going through and our being comfortable with the fine tuning of the words.

Q101 Chair: Let me be absolutely clear that if this change goes through in the form that has been suggested, you will then offer basic bank accounts to undischarged bankrupts. You will not say, "When HSBC, RBS or somebody else starts offering it, we’ll offer it"; you will offer it, because you have been given that security.

Anthony Warrington: Yes. Certainly, based on the proposed change that I have seen, our response was that we would.

Q102 Chair: Let me ask you another question in relation to this, which has come up in previous sessions, on the Post Office card account and the introduction of universal credit, which is a big issue. It looks likely, from all that we hear and see, that the Government are going to move away from the Post Office card account to something much closer to a basic bank account. You are going to have a whole new client group all looking for a basic bank account. How do you look on that prospect, and will you be entering into discussions with the DWP about how best to arrange the type of account that they are looking for?

Anthony Warrington: Overall, we are concerned, potentially, about what is going to happen to the Post Office current account. We see Lloyds Banking Group as part of a broad infrastructure that supports basic banking customers. The Post Office current account, credit unions and citizens advice bureaux-everybody-is very much part and parcel of that. We are drawing an element of it from one part, and placing more pressure on the banking system.

Q103 Chair: Have you had discussions with the DWP or anyone in relation to this?

Anthony Warrington: Yes, we have discussed with the DWP our overall concerns about the position.

Q104 Chair: And are they pressing you to come up with these so-called jam jar accounts. That seems to be the term that is used. Are there active discussions, and is it being done through the BBA or directly with the banks?

Steve Smith: I think that there is an element of both. The other thing, which we mentioned earlier, is that we are doing work with some of the organisations on the front line with people who will actually be recipients of universal credit. It is not just about talking to the DWP; it is actually about doing work, as we have done with one of the big social housing associations, to understand what the impact will be on their clients and what they actually need, rather than just going directly to the DWP and their sense of it. We do work with organisations like that to see what they think people will want in the new environment in terms of accounts and to see what, within the constraints of being a commercial organisation, we could do to service that.

Q105 Chair: I just want to say that you should be speaking to all housing associations, because of course housing benefit is going to be paid to the recipient. Housing associations, among many others, are very worried about the consequences of that, so please speak to them.

Anthony Warrington: We provide banking for a good number of them and they are concerned. We are concerned about what potentially would happen with ring-fenced accounts, and we have had discussions through the BBA and directly with the DWP. We do not necessarily agree that ring-fenced accounts are a mass-market solution. Some customers will really like them, in the way that some customers like the idea of managed accounts, which cost between £10 and £15, but I do not think it is a wide solution. More communication and better integration of the whole system supporting basic customers is what we actually need to support this change. It will be a really big change for people in these positions.

Q106 Chair: Let me just ask you a final question on this. Is the attitude of the BBA and of individual banks that you are reluctantly going down this route because this is what the DWP and Government are after, or are you entering into this on the basis that there is a new client market and even though I suspect that quite a lot of them will not be a profitable proposition, it is something that you recognise you have to do?

Anthony Warrington: We are aware that there is a potentially different market out there. Equally, we are aware from a social responsibility perspective that this is a problem that needs addressing.

Q107 Chair: You do not sound too enthusiastic. I suspect you are not alone.

Anthony Warrington: In providing ring-fenced accounts, I just do not think that is the solution. I think that might be part of a broader solution that involves banks, the Post Office, the CAB and every part of that system.

Steve Smith: As one of the witnesses from the CAB noted, if you look at ring-fenced accounts, those sorts of concepts already exist in the marketplace. They are provided by fairly small players, such as Secure Trust and various other banks. When you look at how they have put them together, they tend to attract fees of £10 to £14 a month. Our view is that that probably reflects the costs of the really advanced ring-fenced accounts. If that is where the DWP is driving and if those sorts of accounts will cost those levels, we question the affordability and we have concerns. It is not a lack of enthusiasm; it is more a sense of: "We are going to have to work really hard to try to find a way of providing this functionality at a cost that is affordable and acceptable for people."

Q108 Chair: A lot of people are talking about new technology solutions in financial inclusion, and there has been a lot of publicity for the way in which mobile phones are used in Africa, particularly in Kenya. There are various other things that are talked about, such as having an app on your phone that can move money around. Is Lloyds TSB looking actively at any of these?

Anthony Warrington: Yes. For all our customers, basic and otherwise, through all three brands there is a mobile application, which all customers can access. They can check their balance, recent transactions and so on. So we already provide that.

Q109 Chair: And that is secure? I know there has been trouble with some of them and they have had to be withdrawn. You have got a product that is up and running and secure?

Anthony Warrington: Yes, we are happy about that.

Steve Smith: And it has had enormous take-up. Last time I saw, we had more than 3.5 million customers using it. The rate of take-up has been unprecedented compared with any other technological development. We are looking to build on that and enable it to provide customers with some of these prompts and services when they are buying things, so that it tells them, proactively, "Don’t do this; do that, because there might be charges or other things involved."

I think that is potentially a very interesting development, but obviously the thing we need to be careful of with this demographic is access. The apps only work on smartphones, and although smartphones are getting cheaper, they are probably still out of the reach of large numbers of these customers. They will be a big revolution, but we have to work out whether that is going to be the solution for this group of customers.

Q110 Chair: Is there anything we haven’t touched on that you would like to draw to the attention of the Commission? I will give you an opportunity if there is anything-or you want to draw it all together in any way.

Anthony Warrington: Just one thing, thank you. I think I just wanted to go back on to a couple of comments I heard earlier, just on behalf of Lloyds Banking Group, about, essentially, basic banking customers-second-class citizens, being sent out of branches and things like that.

I would say that within all of our brands there is actually a huge amount of front-line discretion used when dealing with all customers. If we don’t have counter access, for example, for everything on the Halifax brand, if somebody has been waiting in the queue, we obviously go ahead and serve them. Where customers are finding it difficult to open a current account, what we have found is that where external organisations have helped that customer-particularly, if I take an example of Toynbee Hall: we have a very informal relationship with them, but they often refer customers through to us who may have been homeless, and we will do absolutely everything; we will send branch managers out, and we will do everything we can to get those customers verified and with a bank account. It is a time-consuming process, but we do that, and that is where I talked about the banks placing the infrastructure with all the other organisations. I think there is a responsibility on everybody to help those customers find their way into a bank and then help them out through that process.

Q111 Chair: Thank you for that. Toynbee Hall has been before the Treasury Committee and does an excellent job in many of these areas, so having a good relationship with it, and partnership, was certainly very helpful in the circumstances.

I thank you both for coming, particularly as it was at very short notice. It is very much appreciated, especially on a Friday, and all this evidence will be fed into the Commission when we are looking in more detail at what we are going to recommend. Thank you again.

Can we move straight on? We are running slightly late.

Examination of Witnesses

Witness: Robin Taylor, Head of Banking, The Co-operative Bank, examined

Q112 Chair: Robin, welcome. Good morning. This is a panel of the Parliamentary Banking Commission and we are looking specifically at financial inclusion, but with a focus on basic bank accounts. Lord McFall was meant to be here with me this morning. Unfortunately he has been called away on an emergency and is in Scotland presently, so I am left to carry the flag by myself; but it is good to see you here.

Let me ask you straight away, do you see your role in promotion of financial inclusion and basic bank accounts as a social duty? We asked this question of various others earlier on. Is this a social duty that the bank has to perform?

Robin Taylor: The Co-op is in a unique position because it is owned by members, and I suppose it is within the DNA of the co-operative movement to help all of its members, so from that point of view obviously the answer is yes. For us, I think, if people in society are able to have what we might call financial inclusion, it includes them in social inclusion. I think it is really important that they are able to take advantage of benefits from being in that group of people, whether it be cheap bills for utilities, through direct debits, or access to cash, etc. So I think it is extremely important that everybody is included in that, and especially with the advent of universal credit coming up later in the year-

Chair: We will come back to that.

Robin Taylor: Yes, that is an important element, though.

Q113 Chair: Let me ask you-I asked the Lloyds TSB witnesses-does the Co-op take this issue more seriously than the other banks? Are some of the other banks letting the side down on social inclusion?

Robin Taylor: I think the banking industry as a whole could do more. We agree with Citizens Advice and Consumer Focus and believe there is a race to the bottom. That is why, for the last few months, we have been calling for minimum standards to be put into the banking regime across the country, because we do not see why those customers who have basic banking needs do not get the same products and services as what you might call the general public in the current account market.

Things for us which are really important include being clear and precise in terms of what is available to customers and access to cash, whether that be debit card. I agree with the previous speaker in terms of debit card, but access to cash is important in terms of ATMs and LINK, because effectively if you do not allow LINK transactions you are pulling out of what you might call the deprived areas-so you are pulling out of the market. It is important for direct debits and standing orders, as well.

Quite a diverse group of people require basic banking accounts; it is not all people who-I think there is a stigma to say that people on benefits are those who want basic bank accounts. Far from it. There will be customers who particularly like having basic bank accounts because it gives them an element of financial control that they will not be going overdrawn.

Q114 Chair: How would you respond to the criticism that the Co-operative Bank is good at talking the talk, but when you look at the offer-in other words, the reality-you are pretty much the same as everyone else?

Robin Taylor: I disagree, because unlike most providers we will provide access on ATMs. It is quite important, that point. There has been a lot of talk about market share in terms of-excuse my language-the stock of accounts that you may have in terms of the market share, but it is not talking about the reality now. Since there has been a race to the bottom, we have seen within the Co-op a surge of applicants over and above the surge we have had in the last 18 months from the overall market.

So if I give you some examples. We are small player in the current account market, at 2%, in terms of market share, but a 4% of new business in the-

Q115 Chair: These figures clearly do not take into account the branches that are coming in from Lloyds-

Robin Taylor: No, and that deal obviously has not been done, so this is purely the Co-operative Bank as it stands now.

If you look at new business-new accounts being opened-whereas we have a market share of 4% for all current accounts, it is 8% in the basic banking market. So it is really important. That is why we have been voicing our concerns that, as there has been a race to the bottom, those of us who are maintaining the level of service and making it consistent with our other accounts are continuing to see our market share increase.

That said, as the Co-operative movement, we are clearly happy to have a market share that is a little bit more disproportionate than our overall market share. But as it is being trialled today, there is a cost to these accounts and, commercially, that starts to become unsustainable if it increases significantly.

Q116 Chair: I will come back to those issues. There has been general concern, both about the lack of action on basic banking in recent years, after a great deal of progress five to 10 years ago. Why has this happened and how can we get the industry to take a lead in this matter?

Robin Taylor: We have been calling, as you are probably aware, for a round table to agree minimum standards. In fact, we are supporting Consumer Focus and Citizens Advice next week in a round table. I believe some of the other banks are attending, too. We clearly want to make sure that, here and now, we make some movement. You could argue that legislation would be a way forward. I think that is going to be too late, because of universal credit. There is going to be, in our opinion, an awful lot of customers wanting basic bank accounts later in the year and we need to ensure that we have a consistent basis on which they can open accounts and that there are some consistent accounts that they can open and have access to cash, etc. That is vital.

Q117 Chair: Let me ask you the same question that I asked Lloyds. They make a lot of their corporate social responsibility activities, although they do not brand it-I am not quite sure whether the Co-op brands it-as part of their corporate social responsibility to provide services for basic bank account holders. Would it not be a strong business case for all banks to say, "As part of our corporate social responsibility, we will offer these accounts," and to be more open about how much it is costing? Lloyds say that it costs £150 million. Would you care to tell us how much it is costing the Co-op?

Robin Taylor: It is difficult. I heard your comments earlier. Not every customer is the same. There are elements of this market that actually do make banks money. That is very clear.

Q118 Chair: Could you give us an idea of what proportion? We hear that the people who are coming into basic bank accounts aren’t the traditional client group, if I can say that. It is people without a credit history, many of whom will go on to have normal bank accounts. It is people who want the functionality of a basic bank account but are otherwise credit worthy. What sort of proportion?

Robin Taylor: Traditionally, before we made the changes on undischarged bankrupts last year, just over a quarter of our basic banking portfolio was from those customers who have either had bankruptcy or some kind of credit judgment. In the past, it is fair to say that we have been recommended by Citizens Advice and other organisations as a bank that will be able to help. Up until then, we were one of two providers, with Barclays. Obviously, our proportion of accounts in that area is probably-probably-larger than others because of the fact that we have been doing it.

Q119 Chair: Can we interpret that as meaning that three quarters of basic bank account holders may well be credit worthy and may reach out to other services, which could be a commercial proposal for the banks?

Robin Taylor: I do not think that it is three quarters by any stretch of the imagination. There are a number of components there. There will be people who have had no credit history. There will be people who have a credit history that is more CCJs rather than bankruptcy or insolvency routes. There will also be a smaller element, probably around 10%, who literally want a no-frills, no-overdraft, basic bank account that suits their needs. I do not think that there will be a 70% pocket of a certain type of customer. It is quite widespread.

Chair: But the interpretation that some in the industry have put on it that basic bank account holders are all loss making is inaccurate.

Robin Taylor: It is inaccurate, but in terms of our overall portfolio, it does cost us money if you look at it in the round.

Q120 Chair: Can you give us a global order of magnitude?

Robin Taylor: Yes. Typically, at the moment, it is probably £10 million to £11 million for us. In terms of the size of our organisation, that is quite considerable. That figure is increasing, because we are growing at around 5,500 customers a month, which is why we have been calling for an even playing field. As I said right at the start, we are happy to have a disproportionate market share, but not a four times difference in terms of our new business to our overall stock. That is the crux of the matter for us.

Q121 Chair: Let me ask you two questions in relation to that. The Co-operative Bank marketing effort is very much around being an ethical bank. It sets you apart in a sense from the other banks, and you make great play on that. Could that be part of the explanation as to why you attract a disproportionate number of basic bank account holders? Is there any connection between that marketing effort and the people who are coming to you?

Robin Taylor: Undoubtedly. I think we also have a reputation in terms of customer service, so customers will come to us in all fields, let alone basic banking. That is why customers generally go to the Co-op. We have, however, seen an acceleration. Over the last 18 months, the acceleration in terms of basic banking accounts has been disproportionate even to our acceleration. We have obviously grown tremendously in the last two years from customers switching to us, but the acceleration in this market has been even greater. That is our concern, because of the race to the bottom. Specifically, we believe that the cash issue is the main thing.

Debit cards are extremely important, but the debit card’s other functionality is to get cash out. If there is no cash machine near where you live and you are on a low income, you literally have to spend money to get your cash out. That does not feel right.

Q122 Chair: Let me ask you the second question. You have a link with the credit union movement. You provide back-office services and bank accounts-I am not sure which, but presumably, quite a lot of them are basic bank accounts. Could that be an explanation for the increase in numbers?

Robin Taylor: They are not included in the numbers I have given you.

Chair: Okay.

Robin Taylor: They are separate. We bank about 60% of the credit unions in the UK. We also provide what you might call the back-office infrastructure for the credit union current account, but that is separate to the figures I have been talking about. That is a separate organisation. We manufacture their current accounts for them, rather than do the front office and the helping of their customers.

Q123 Chair: I have asked everyone else, so let me ask you this. There is a lot of concern that we are on a race to the bottom. You mentioned it in an earlier reply. How real do you think it is? Through the Treasury Select Committee, Parliament has received reassurances from all the major banks that they will not further restrict access to cash, but commercial decisions are being taken out there. You have been forced into various commercial decisions as a result of changes in the market place. How confident are you that we will not see a continuing race in the wrong direction?

Robin Taylor: I will talk Co-op first and then in terms of the industry. Our position is quite clear: if the current status quo continues, we will obviously continue to be a full member in terms of LINK and allow access to all ATMs. If a big player moved, that potentially could cause us real commercial difficulties, and we would have to reassess that. There is no point in me sitting on the fence. If another big player did that, it would be an issue, because we would in effect be saying that in the charging arrangements we have between the banks, they would be quite happy for our customers, through the Co-op-the Co-op pays the charges on their behalf-to pay the charges, but not vice versa. That would be an uneven playing field.

In terms of the whole market, I have also seen the assurances from the CEOs when they were written to, and I have to believe them. The two of the three largest providers, potentially, have moved, and we did not think they would. Unfortunately, with my crystal ball, I do not know whether that will change in the future, if commercially they decide that that is a route they want to go down.

Q124 Chair: In the evidence we heard early this morning, there was a concern that this would affect the free nature of the ATM structure. If everybody starts withdrawing, you would eventually find that free ATMs, especially in deprived areas, would disappear and charges would be introduced. How big a danger do you see with that in this race to the bottom? How much would that affect non-basic bank account holders-those people who have current accounts who think that they can use them anywhere at no cost?

Robin Taylor: I think there are two parts there. I think that LINK came out and said that about 10% of the market could be under threat, in terms of ATMs, from the smaller and independent providers of ATMs. Those would typically be in a corner shop and so on. Generally, it is really a big issue in areas where there is no bricks and mortar bank, because people will not be able to get cash. I have said it before, but you are effectively coming out of the market, and our concern is that the amount of growth in this market over the next 12 months will be considerable.

There is universal credit. We need to ensure that basic banking customers are able to access their cash and contribute into society, socially as well as financially, because that could be undermined. We seriously believe certain action has to be taken in the next six months, not in the next two years, to ensure the even playing field is there for everyone.

Q125 Chair: I cannot remember if it was you-I think it was-but others have spoken about this forum, trying to bring people together. Clearly, that would be to address how we stop or reverse the race to the bottom. What are the essential features? What is it that needs to be agreed between the industry and the consumer representatives about the basic bank account?

Robin Taylor: The ability to have standing orders and direct debits is extremely important. You have previously heard evidence about having the ability to use mobile technology, etc., to know where your balance is, and I think that that is quite important because, for some of the group of basic bank account customers, the last £5 is extremely important. Understanding where your balance is is really important. We also offer, for non-advanced phones, just a texting service as well, so all customers are able to use that.

Q126 Chair: Do you have one of these apps that Lloyds Bank were talking about?

Robin Taylor: We have an app for all of our customers, where you can get your balance, you can see what entries have gone through, etc.

Q127 Chair: How many of your customers have that?

Robin Taylor: We launched ours last June, and now we have gone over 170,000.

Q128 Chair: So it is growing rapidly.

Robin Taylor: Yes. It is growing by about 6,000 or 7,000 a week. It is spiralling, which is great, because it enables customers to get use of their cash and what cash is in their account.

Access to cash, I have talked about. A debit card, I agree with the previous speaker, is extremely important-being able to use that technology as much as anyone else is absolutely right. For me, a basic bank account should be about being exactly the same as what you might call a traditional bank account, except that you do not go overdrawn. I do not see any reason why we would-back to your earlier question-say that a basic banking customer does not need a LINK machine like anyone else. You still might be away from home and need the £10 at 11 o’clock at night. If you are not near one of your own ATMs, how are you going to get home? It is that moment-of-truth part that is really important to all customers, let alone basic banking accounts.

Q129 Chair: What is the role we all-the industry, the consumer groups, the regulator and the Government-play in getting an agreement together? Should it be led by the industry? Clearly, it would be sensible to be led by the industry, but there does not seem to be much sign of that, apart from unusual examples like the Co-operative Bank. There does not seem to be an industry initiative coming along any time soon, so how would you bring this about?

Robin Taylor: I fear that there will not be immediate action. We have been working with Citizens Advice and Consumer Focus. Indeed, we have supported their proposals to have minimum standards. So we are there next week. I hope the other major players are there, too, with an open mind on the key things that I have articulated in terms of cash accessibility. Also, I think you made a very good point earlier, which was about making sure that, when someone comes into a branch, they know that that account is available-I think that is consistent, that is customer service-and that also you have your branches available if they need advice, or on the telephone.

I fear that there will be a need for Government to intervene if the banking industry does not move very quickly to change some things. When we made the announcement, with heavy heart, on undischarged bankrupts last year, we said on the day that we would reverse that decision tomorrow if all the rest of the banking industry-apart from Barclays, which continued-would reverse their decisions not to allow undischarged bankrupts. It is simply that we, as a smaller player, cannot be bucking the whole of the industry. That is the vital piece: coming with an open mind and, in some ways, putting aside some of the smaller commercial issues, which you went on to earlier, to benefit those customers.

Q130 Chair: How does the Co-operative Bank react to the suggestion about a universal service obligation? Do you think that is a sledgehammer to crack a nut and there are other ways in which we can go about getting industry-wide agreement?

Robin Taylor: I would hope that there is no need for more regulation; with regulation comes more costs, etc. We need to keep the costs of this provision as low as we can. But if there is a need eventually, because a disproportionate way of looking at these things across the industry is prevalent, then I see no other alternative than to make that happen. That is because, at the end of the day, some of the things that we are going on to later in the year-in terms of universal credit, etc., etc.-we need to financially include all elements of society. An example is undischarged bankrupts. We have talked about that. At the moment, Barclays are the only providers. Come universal credit, all of those customers have got to find a bank account if they are on some kind of benefit.

Q131 Chair: I want to come back to that, and I want to come back to the role of the regulator as well. However, before we go off the subject of undischarged bankrupts, you have explained your decision to us, leaving Barclays as the only provider. Doesn’t that place a lot of pressure on Barclays to not be an outrider on behalf of undischarged bankrupts, and aren’t we, through your decision, likely to find ourselves with undischarged bankrupts not being able to access anywhere?

Robin Taylor: There is a real danger. Putting it into context, we are talking about our decision as a 2% player in the overall current account market and being one of the only two providers. Obviously, the other banks that we have been talking about are much larger, and they have told us about their market shares, so the significant difference in this would be if those other players took on those customers. I think Barclays are being extremely reasonable in this circumstance to continue to do it, but to back them up, we would like to see all providers do it.

Q132 Chair: I don’t want to embarrass him, but as he is sitting at the back of the room, I will mention the public affairs manager. He had a meeting here in the House of Commons in 2010 and he said, "Bankrupt account holders tended to be less risky and less likely to default." That seems at odds with your decision, which was based on a preponderant share of undischarged bankrupts, assuming that they were a cost to the bank. But the suggestion made in 2010 was that they were actually less of a risk and less costly to the bank than some other customers. How do you square those two views?

Robin Taylor: There are two parts there-cost and risk. In terms of risk, I think that sometimes when customers have got themselves into financial difficulty the last thing they want to do is to get back into financial difficulty. I think it is also a fallacy that those customers who are on lower incomes are worse at managing their money. In fact, I would probably say that, in many respects, they are better, because they have to be. In terms of cost-

Q133 Chair: But would you accept that the only thing that many of them trust is cash?

Robin Taylor: Not necessarily, and when I say that I mean that I think they would still use a debit card-credit card potentially. I have got no evidence, but I can see that argument that they might be wary of a credit card but not a debit card, because effectively it is a plastic piece of cash. So I don’t think there is a tendency.

In terms of the costs, the costs are probably still there. It depends on the individual and there will be some people with extremely high incomes continuously; there will be some lower incomes where, potentially, the costs to the banks in general would be higher. So I think we can’t mix the two. I can see the risk-adverse piece-absolutely- from bankruptcy, but I can also see the cost piece.

Q134 Chair: I have asked this question of the others. The Government have announced that they will change the Insolvency Act to deal with the concern that the industry expressed about undischarged bankrupts, the indication being at the time that that would be enough to get individual banks to change their policy in relation to those customers. The Co-operative Bank has poured a little cold water on whether that is the case. Let me ask you two questions. First, what will the Co-operative Bank’s policy be in relation to this change in the law? And secondly, are you concerned that others may not follow the lead?

Robin Taylor: As I said, we would change our policy the next day if, in this round table next week, the other banks came and said, "We will all put our hands up and start taking undischarged bankrupts." So we make that really clear. We have made that clear, and we have made the announcement.

Q135 Chair: So from your point of view, it is not the change in the law but the industry agreement that is critical for you.

Robin Taylor: Let me make it really clear: the reason why most banks are saying that they will not do that is because there is a risk potentially, which has never materialised. That is why the legislative change was done, which we think is a good thing. But in terms of solving this issue, I think it is going to be too elongated, so we would call on the industry to act now, and accept that the risk is extremely low and change our policies from now. The issue we would have if we get back to the status quo is that if we were the only ones to do that again, the acceleration of those costs into the Co-op on behalf of the banking industry would be unsustainable. That is the main reason why we took that decision, not because of the risk.

Q136 Chair: Let me move on to-you have mentioned this in a couple of your responses-the Post Office card account. We had Post Office representatives here, and they are in discussions, like, I think, the banking industry, with the Department for Work and Pensions. In relation to the payment of universal credit, the indications are that the functionality of POCA is not what the DWP is looking for; it is much closer to a basic bank account. Have you been involved in any discussions, either through the BBA or directly yourselves, in relation to this? How do you look on the prospect of perhaps having a much larger consumer base that will be looking to some form of account-a basic bank account, or whatever variant comes along-in relation to universal credit?

Robin Taylor: The answer to that is yes, on both accounts. We are actively involved with the BBA, where most of the discussions have been happening with the DWP and the Treasury, to ensure that the banking industry is fit to receive many more applicants later on in the year. I think it is a staged process. From autumn, you will start to see an influx of customers wanting a basic bank account. It is twofold there. We have to work with the Government, because we have a responsibility to ensure that we have great processes and accounts, which I think the basic bank accounts have, in general, but to make sure that that is standard across the industry; that is to my previous point, really. That is the most important bit.

In terms of POCA, my understanding is that the majority will be basic bank accounts that are required, rather than POCA. I feel as though I am going in circles with my answers, but that is why getting minimum standards now is so important. They deserve the right to the functionality that the rest of society has, so that they can actively participate in society in the same way.

Q137 Chair: You mentioned that the BBA, naturally enough, was playing a co-ordinating role in your discussions with the Government. Do they not recognise the issues that you are concerned about? Are they not trying to play a role and say, "Universal credit is coming. Let’s get our show on the road so that we are adequately prepared when this phased process happens"? In other words, are they sponsoring a debate among the membership about what they do with basic bank accounts?

Robin Taylor: The BBA-I will speak on behalf of the BBA, because I have been in some of the discussions-is actively speaking to DWP to ensure that the banking industry is ready and fit for purpose. I do not think-on behalf of the other BBA members-that there is any disagreement that we need to work extremely closely with the Government.

Also, there is a need for financial education, because there will be a big difference in how people have their benefits and so on paid into their account in terms of timings. It is important that we play a part in helping that, but it is obviously a wider issue.

Q138 Chair: Are there any ballpark figures about what the cost will be to the banking industry, making the assumption that most universal credit customers who are either unbanked or possibly have Post Office card accounts will gravitate to some form of basic bank account, perhaps one with amendments? Are you working on any assumptions or figures?

Robin Taylor: Not yet. That is one thing we have been in discussions about with DWP, so we can understand what the total number is.

Chair: It is large.

Robin Taylor: It is large, but it is also a myth that all those customers who will go on to universal credit do not have bank accounts now; I think the vast majority will, and that will include traditional current accounts, because there will be customers who have tax credits and the like, who may well be on average income. So we need to get to the root of that. The most important part of that is that there will be pockets or areas in the country where there are an awful lot of unbanked people. It is really important not to miss that: you could look at the overall global scheme, but there will be those areas in the country. That is what the BBA has been speaking to the DWP about, to understand what that situation will be and how we might be able to help.

Q139 Chair: Do you see any problems? Lloyds hinted that there was some concern that if you have an account that is not simply a basic bank account, but a basic bank account with something else, you are adding to costs but without getting any great value. Are these so-called jam jar accounts creating waves in the industry?

Robin Taylor: That issue has been discussed at some length, actually, in the industry. From a Co-op point of view, for the vast majority of customers-I am talking about way over 90%-I do not think there is a need, or that research has shown that there is a need. If you get the basic principles right, with some minimum standards for a good current account, which has basic functionality and does not allow people to go overdrawn, and so on, that will cater for the vast majority of customers. We ought to concentrate on the larger picture rather than getting diverted on to some of those accounts. That is the bigger picture that we should be concentrating on.

Q140 Chair: Finally, I talked to Lloyds about what is going on in Africa and Kenya, in particular, where they don’t have a properly functioning banking system but have now found a mobile phone solution. I understand that solution is provided by Vodafone, so no doubt it is available to discuss here. What I wanted to find out was whether the Co-operative bank, as part of its social inclusion agenda, was looking at ways other than the basic bank account to address the financial needs of that particular group of customers: those who may well have basic bank accounts, or those who come in and do not really want a basic bank account-they want something that they can understand and control. What innovation is going on in this part of the sector?

Robin Taylor: Telephony innovation changes week by week, to be quite honest. It is hard to keep up. Certainly, our concentration of effort has not been in that area, traditionally; it has been to make sure that we have a great proposition for mainstream basic banking, as that covers the vast majority of needs in the UK.

Throughout the banking industry, there is an awful lot of innovation in terms of person-to-person payments and so on; whether that is done through telephony companies or companies such as Visa or Mastercard, there is an awful lot of innovation going on. That is not something that we are concentrating on at the moment-we are looking to provide core banking services to those customers-and it does not get around things such as paying your direct debits, so it is a bit wider than just person-to-person payments, but I would certainly say that there is a growing need to look at those areas for all banks. You have seen some innovations from some of our competitors that look quite interesting.

Q141 Chair: Is there anything that we have not asked you about this morning that you think is important to get across to the Commission? We will be having a main session on financial inclusion. All the evidence amassed this morning will be fed into that process. I am giving you an opportunity if there is anything you want to draw to our attention.

Robin Taylor: I think we brought out most of those things. The key thing for me-I am sorry if I sound like a record-is accessibility to cash. Effectively, if you are a bank that does not allow accessibility in your local neighbourhood, you are pulling out of that market, and you are saying, "I am only going to deal with city centre dwellers." That is No. 1. There is also being transparent about what you do and do not offer, whether it is on your internet site or publicised. Making sure that there are not incentives in branch to sell one product rather than another is extremely important. Those are the key things.

The last thing I would say is urgency. Universal credit is coming at the end of the year. The example that I used of undischarged bankrupts is real. The only place where people will be able to go at the moment is Barclays, and I do not think that is right. We do not need legislation to change that. Legislation does help, so I would not say that it is not helpful; it clears up any misgivings about it. But we could act this time next week to change that as an industry. Speaking for the Co-op, we would be prepared to do that. I think it is really important. Speed is of the essence.

Q142 Chair: You have reminded me of one thing I intended to ask you, about the change in the FCA’s remit to have regard to financial inclusion. I assume you accept that as a positive step. What role do you think the regulator should be playing now in the whole issue of basic bank accounts, based on the fact that the FCA has that objective as one of its core purposes?

Robin Taylor: If we go back over the last two or three years, you would hope that the banking industry does not need the regulator to get involved, and I mean that genuinely. You know from the comments you have heard me make today that we do not believe it is needed. We could act this week.

I have also indicated, though, that if minimum standards are not brought in and there is not an even playing field, as there needs to be, I think it is inevitable that there will be intervention from regulators, Government and so on, or there needs to be. There must be sustainable, universal provision of basic banking that is consistent and provides the level of-I hate the word-functionality for those customers to operate in the same way as you or I might in terms of our bank accounts. They should not be disadvantaged from getting such things as cheaper utility bills paid by direct debit and so on. That is absolutely vital, and the Co-op, being what it is, stands behind it and wants to commit to it.

Chair: We thank you, particularly because I suspect you came from Manchester today at such short notice. We appreciate it. I hope you will follow the discussions that we in the Commission have about these and other issues. We will be producing a report fairly soon. Thank you again for coming.