Banking Services and the Consumer (RLE: Banking & Finance)

Consumer Focus

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136297076
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

This report, prepared for the government by the National Consumer Council, examines money transmission, access to banking services, new technology, banking and the law, disputes between bank and customer, saving and borrowing. There are special sections on Northern Ireland and Scotland and on bank executor and trustee work – all from a consumer perspective. It is based on the findings of two surveys of consumer attitudes to banking services and evidence from the banks and building societies themselves.

Section 1 / Conclusions and recommendations

In this report we have concentrated on the service which makes banks different from other financial institutions – the provision of a current account, and the payment services which go with it. We have considered more briefly savings and borrowing services and we have dealt in some detail with executor and trustee business, a very small part of banks’ total relationship with their customers but one which seems to create particular problems.

The evidence of our research among bank customers is that they are, overall, highly satisfied with their banks. However they have substantial reservations about some aspects of bank services; bank customers do not find it easy enough to use banks. Many people do not understand bank charges and are dissatisfied with them. Bank customers who also have building society accounts tend to find building societies easier to deal with; significant numbers of them would like their building societies to offer payment services, like cheque books, which have traditionally been the exclusive preserve of banks.

This leads to the major thrust of our report – competition among banks and between banks and building societies. The last few years – including the time this report has been in preparation – have seen enormous changes in the banking services on offer to individual consumers. These have resulted from increasing competition between banks – both the traditional clearing banks and the Co-operative Bank, Trustee Savings Banks and National Girobank – and between banks and other institutions, most notably the large building societies. We very much welcome this growth in competition; our major recommendations are designed to encourage it and to see that the terms on which it takes place are as equitable as possible.

We seek more competition in current account services because we see the desire of the building societies to attract more depositors by offering a range of payment services as being a powerful instrument in encouraging the banks to improve their own payment services. If competition can be kept strong and strengthened further, then we hope that many of the improvements which we believe bank customers would like to see in banking services will emerge naturally.

This has led us to make some recommendations about the structure of building societies. We have already published in 1981 a more detailed report on building societies which we commissioned from the Mutual Aid Centre, Building Societies and the Consumer. Many of that report's recommendations were aimed at changing building society practice. We have supported their main thrust; some emerge again from this report.

Besides our recommendations about competition, we have also recommended a number of changes in banking practice. The most important of these are aimed at bank charges. We are strongly in favour of charging systems which make clear to consumers what they are paying for. We see competition as the best way of developing these, but we also see a need for better information for consumers about how their existing charges are made up.

Savings and borrowing facilities are important bank services. Our recommendations are aimed at improving the information that consumers get when choosing between offers and at improving the terms of competition between the different institutions. One of the institutions competing for consumers’ savings is the government: some of our recommendations are therefore directed at it.

We have also considered the legal relationship between banks and their customers. We have seen no need to recommend a codification of banking law nor, on balance, do we favour a written contract between bank and customer. We do see a need for legislation to clarify the rights and obligations of banks and customers for electronic payments. We have also made some detailed recommendations to remove particular anomalies and for improving customers’ knowledge of their rights and obligations.

Bank customers make relatively few complaints about banks. However, some complaints, particularly about trustee and executor business, are complex, deeply felt and touch matters of considerable importance to the person involved. We have therefore suggested that the banks should establish a Banking Ombudsman, on the same general principles as the Insurance Ombudsman.

The banking situation in Scotland and Northern Ireland is different in some respects from that in England and Wales. We have made specific recommendations about each country.

It is implicit throughout our report that consumers of banking services have much to gain by ‘shopping around’ for the services which best meet their individual needs. If competition is to work, as we hope it will, to develop banking services which more closely meet consumers’ needs, then bank customers may need to be more prepared than they have been in the past, to move their account when they see a service which suits them better than their existing one.

Recommendations to government

1.  The government should announce, as soon as possible, its intention to review the development of money transmission services within two to three years. If the institutions which wish to provide money transmission services have not been able to enter the market on equitable terms, the government should then consider whether the joint ownership of the clearing systems for cheques and electronic payments by the members of the Committee of London Clearing Bankers in their present forms, is still appropriate.

2.  The rights and obligations of banks and their customers for electronic payments and, in particular, for the operation of debit cards should be defined by legislation. This should ensure that the terms and conditions are not inferior to the terms and conditions of cheque and credit card use, so far as the comparison is practicable.

3.  The Office of Fair Trading should reconsider whether the limit on cheque guarantee cards (£50 at the time of writing) is a suitable subject for collective agreement by the banks, when the banks have improved the fraud-resistance of their cards. We believe that it is not.

4.  The composite rate of interest for building societies should be abolished. The Inland Revenue should make arrangements with banks, building societies and other savings institutions for interest payments to be made net of basic rate tax. Savers should be able to choose whether to receive their interest gross or net: if this is impractical for all savers, provision should certainly be made for non-taxpayers to receive interest without tax deduction.

5.  The Secretary of State for Trade and Industry should ask the Director-General of Fair Trading to explore with institutions which seek personal savings ways of quoting rates of interest in a standard, comparable way. If voluntary agreement cannot be reached, government should be prepared to legislate. The government itself should comply with any solution that is reached.

6.  Government should provide small savers with a no-strings-attached savings account which would guarantee small savers a rate of return equivalent to the rate of inflation plus, say, three per cent. Otherwise, government should not obscure the terms of competition for savings by offering tax-free concessions on particular types of saving.

7.  Building societies should be given limited powers to lend without the security of a first mortgage, subject to appropriate prudential arrangements. Such powers should be reviewed after five years to see whether they should be extended or further limited.

8.  All quotations for mortgages should be subject to the quotations regulations of the Consumer Credit Act.

9.  The Inland Revenue should ensure that the corporation tax position of banks and building societies does not inappropriately favour either.

10.  The exemption from restrictive practices legislation which allows the Northern Ireland Bankers’ Association to operate a cartel covering opening hours, charging tariffs and interest rates should be withdrawn.

11.  Section 53(2) of the Bills of Exchange Act 1882 should be amended so that the procedures for stopping cheques are the same in Scotland as in England and Wales.

12.  Section 6 of the Statute of Frauds Amendment Act 1882 should be repealed. This piece of legislation has the effect that banks in England and Wales are protected from the consequences of their employees giving fraudulent information about their customers’ financial position.

Recommendations to the banks

13.  We strongly welcome the development of interest-bearing current accounts which credit customers with the interest their money has earned and debit them with the charges for the work done on their behalf. We support charging systems which make it clear to consumers what they are paying for. We believe that, if our recommendations for encouraging competition in money transmission services are followed, such accounts should become more general. So far as current account practice is concerned we recommend that

(i)  banks should not take money for charges out of customers’ accounts without telling them first;

(ii)  banks should radically improve the way in which charges are presented to customers.

14.  All informal agreements on bank opening hours should cease. We welcome the gradual break-down in the standard pattern of bank hours, which many bank customers find inadequate.

15.  All automated teller machines and future point-of-sale equipment should give a printed record of transactions.

16.  Banks should give their customers better information about the costs of overdraft. They should inform customers of the annual percentage rate, calculated to a mutually agreed formula, when agreeing an arranged overdraft. They should also draw attention to the costs involved, when writing to customers about unarranged overdrafts.

17.  Banks should give all new customers opening current or deposit accounts a simple, attractively designed statement outlining the rights and obligations which customers have.

18.  Banks should inform all customers about the way their system for giving references on customers works. Customers should have the option to request their permission being sought whenever a reference is made to a banker. If this service imposes extra costs on the banks, banks should be able to charge for it, provided of course that this has been made clear to the customer.

19.  Bank customers should have access to factual records about the operation of their account.

20.  Banks should improve their internal procedures for dealing with trustee and executor work. Detailed suggestions are made on page 179.

21.  The banks should collectively make arrangements for the creation and servicing of a Banking Ombudsman comparable to the Insurance Ombudsman. The Ombudsman should be empowered to consider and adjudicate upon all complaints of a personal banking nature, including executor and trust business, and should be requested to make and publish annual reports.

22.  The Scottish clearing banks should consider offering their customers opening hours which will serve them at least as well as banks serve their customers in England and Wales.

Recommendations to other organisations

23.  The Building Societies Association should cease to recommend interest rates to its members. If it does not, the exemption it enjoys from restrictive practices legislation should be withdrawn.

24.  No changes are necessary in the control of advertisements for savings. However the Independent Broadcasting Authority (IBA) and Advertising Standards Authority (ASA) should continue to scrutinise such advertisements carefully, and ASA should monitor them on a regular basis.

25.  Financial advertising on satellite television and on cable should meet the standards set by the IBA and ASA.

Section 2 / Banking services and the consumer

From a consumer point of view the simplest definition of banking services would seem to be:

* a bank provides a safe home for your money

* a bank will make payments on your behalf

* a bank will lend you money.

To put it another way, banks can be seen to be in the market to provide consumers with savings services, money transmission services and credit services. These definitions bring us immediately to what is probably the most important issue that we have to deal with in this report: the fact that these services are not provided only by banks. A large number of different types of organisations compete for consumers’ savings and a large number compete to lend money to consumers. Some organisations – most notably the building societies and money shops – provide, to a greater or lesser extent, the same three main services as banks. In this report, therefore, while we have concentrated primarily on the banks themselves, we have also considered the implications for consumers of competition from other financial institutions.

Of course these are not the only services which banks provide. Later in this section we describe the services which are on offer to consumers and how we have dealt with them in this report. Given the breadth of the issues that we have had to face, we have not felt obliged to deal in any detail with ancillary banking services unless we had some evidence that there were consumer problems. The main ancillary service we have dealt with has been trustee and executor work, covered in section 11.

In looking at any service we take into account a number of consumer criteria:

* can consumers get adequate access to the service?

* do consumers have effective choice and can this choice influence what is provided for them?

* have consumers adequate information on which to base their choices?

* have consumers adequate redress when things go wrong?

* is what is provided safe?

Access raises particular questions with banking services and these are dealt with in section 4. Choice and safety are discussed largely in section 9 which deals with competition and regulation. Our discussion of redress is largely in section 6 on banking services and the law and section 7 on the resolution of disputes. Information will be a common theme throughout the whole report.

The services provided by banks

Banks offer the personal consumer a wide range of services – in the case of the traditional clearers, over 120 individual services. We do not intend to provide an exhaustive list, but below we give an indication of the range of facilities which can be obtained through the branch network. Within each broad term, there will probably be several variations. For example ‘personal loans’ may well be sold to the customer as ‘home improvement loa...

Table of contents

• Front Cover
• Half title
• Title Page
• Copyright
• Title Page
• Original Copyright
• Contents
• Introduction
• 1 / Conclusions and recommendations
• 2 / Banking services and the consumer
• 3 / Cash, cheques, credits, debits and charges
• 4 / Access to banking services
• 5 / New technology
• 6 / Banking services and the law
• 7 / The resolution of disputes between bank and customer
• 8 / Saving and borrowing
• 9 / Competition and regulation
• 10 / Northern Ireland and Scotland
• 11 / Executor and trustee services
• Appendix I / Some of the developments in consumer banking services during the time this report was in preparation
• Appendix II / Research into consumers’ attitudes to banking services, by Market Behaviour Ltd
• Appendix III / Research into attitudes of consumers with bank accounts, by Market and Opinion Research International
• Appendix IV / The economics of branch banking: a consumer perspective
• Appendix V / Letter to Dr Gerard Vaughan, MP, Minister of State for Consumer Affairs, from Mrs Rachel Waterhouse, Chairman of the NCC Banking Services Working Party
• Appendix VI / Cashless pay: the NCC’s response to the Department of Employment's consultative paper
• Appendix VII / Organisations which were consulted or gave written and/or oral evidence