A review of the House committee report regarding bank fees

The report of the Sessional Select Committee on Economy and Production of the House of Representatives on Private Members’ Motion No 31/13 regarding bank fees was recently tabled in Parliament and placed in the public domain. If the imposing name of this report does not resonate with most of us, by way of reminder, this report is the long-awaited outcome of a motion moved by Member of Parliament Fitz Jackson on the November 12, 2013 to address the charge that the banking sector is levying large and “unreasonable fees” on its customers.

It is noble, and indeed an imperative, for the representatives of the people to place a spotlight on any issue that is of concern to the citizenry. It goes without saying that the harsh economic challenges are a persistent concern. However, the manner in which allegations of rapacious pricing behaviour on the part of the banks is prosecuted can be interpreted as either advocacy for the interest of the masses, grist for the political mill, or as a well-intentioned but flawed evaluation and analysis of the issue.

I offer some observations and comments for those who may have not yet read the report:

The parliamentary committee met over an extended period of time and accommodated all relevant stakeholders, including the general public, to appear and make their contributions. Several commercial banks either appeared or made written submissions as well as associations and agencies such as the Jamaica Bankers Association (JBA), the Consumer Affairs Commission (CAC), the Fair Trading Commission (FTC), and the Bank of Jamaica (BOJ).

The first part of the report outlines the various aspects of the motion. The motion offers some generally acceptable points that appear to reflect popular consensus views. However, some of the points do not seem to be appropriately specified, as what is to be resolved cannot be objectively defined and will always be open to controversy and debate.

1. The motion speaks to “growing concerns by the public regarding levels of charges being levied by banks and other financial institutions for various inescapable banking services”. It should be noted that while financial entities other than banks seem to be in scope, and while the report does refer in part to credit unions and building societies, the report does not indicate that the credit unions or building societies appeared before the committee. This suggests that the relevance of the conclusions and recommendations of the report may not extend beyond the commercial banks.

2. The following two aspects of the motion are instructive: “Whereas there are many transactions that forbid the use of legal currency notes beyond statutory prescribed amounts”, and “whereas there are government and private entities that do not allow persons to make transactional payments using the legal currency notes”. Under current banking regulations, local currency is acceptable for settling indebtedness, accounts payable, or other financial obligations. However, local statues such as the Proceeds of Crime Act (POCA) and its various amendments and regulations do place limits on the use of cash under certain conditions. For example, unless otherwise permitted, it is a criminal offence for one to tender cash in excess of one million dollars for the settlement of any single transaction. And, the aggregate deposit or withdrawal of cash by a bank customer on a daily basis in excess of the local equivalent of fifteen thousand United States dollars (approximately $1.8 million) is to be reported to the Designated Authority, ie the Financial Investigations Division (FID). The point here is that, whereas the concern as represented by the motion is a valid one, the response or cure to the situation rests neither with the banks nor the regulators but with Parliament itself. Hence, if these situations are deemed objectionable by the committee, they should be addressed by Parliament itself.

3. The motion asserts that the “pass-through of unavoidable and increasing charges to business inhibit the growth of small- and medium-sized businesses, prohibit the creation of new ones, and contribute to making the lives of pensioners and low-income earners more unbearable”. If it is that banks incur costs in maintaining accounts for its customers, and if it is accepted that a for-profit enterprise, such as a bank, will pass on legitimate costs and not absorb them, the inference that such action inevitably contributes to making life unbearable for pensioners and low-income earners must also be accepted. One could also extend the point to say that any entity, and more so any utility or service, that is essential to human comfort that passes on costs to low-income customers is contributing to making their lives unbearable. The committee report is curiously silent on what alternatives there are for treating with the costs of providing the services under review.

4. The final point of the motion appears a bit odd as it asks that the committee submit recommendation on steps to be taken “to ensure that fees charged for some or all obligatory services to the public by banks are not exorbitant, oppressive nor serve as an impediment to national development and improved quality of life for the more vulnerable in particular”. On the surface, this is a most laudable statement, but to the cynic, this could be seen as a straw man, as the resolution is one that can never be fulfilled. How can one ensure in a market economy, that by edict, fees are not exorbitant? Who is to make such a determination, and on what empirical basis? Certainly, no one would publicly be in support of fees that are oppressive or which impede national development or which work to degrade the quality of life for the more vulnerable. But how can the recommendations serve to ensure the laudable outcomes of the report? I suggest that this aspect of the motion is not appropriately specified, and hence the outcome can never be achieved as posited.

The second part of the report provides an overview of the stakeholders who attended upon the committee and section three outlines the findings and recommendations.

1. The report states that “the BOJ concluded that fees and charges were being set independently and determined by service delivery costs, competitive factors and business strategies”. If this statement is accepted at face value, it suggests that there was no collusion or price fixing among the banks, and that fees and charges were a result of factors such as delivery costs and not rapaciousness on the part of the banks. The BOJ must have had empirical evidence to support them saying that the fees charged in Jamaica were not exorbitant in comparison to those charged with the region, and that the highest overall fees were not in Jamaica but in jurisdictions external to Jamaica. While the report did not state that the committee accepted this finding, neither did its conclusion challenge the finding.

2. The BOJ also noted that, while the banks experienced lower income from interest earned and, in turn, lower revenues, it was not the cause for the fees being charged by the banks — though it was a contributing factor. This finding should speak to whether the banks simply raised fees to compensate for reduced interest earnings due to the compressed spreads following on the JDX and the NDX initiatives.

3. The finding that the BOJ determined that competitive factors were at play in the market prompted the committee to raise an interesting point, namely, that increased access to information on fees and charges for services could enable consumers to make more informed choices and increase competition in the market. This is a reasonable view and an outcome of the report could be to urge the relevant government agencies to enhance and improve public education efforts in this regard. The implication seems to be that, with more market information, consumers could shop around for banking services and, like in other non-monopolistic markets, exert some pressure on the pricing of services. However, the committee observed that customers were reluctant to change their financial institution due to difficulties encountered in opening new banking relationships. Specifically, the committee was of the view that the information required to open bank accounts was onerous and should be reduced if regulation allowed. The caveat in this observation seems to acknowledge that banking regulations must take cognisance of international best practices that are locally imposed, such as conditionalities flowing from the Financial Action Task Force (FATF) and the Wolfsberg Standards. This is true but the risk-based approach now touted by the FATF provides an opportunity for the local regulators to have a tiered approach to the due diligence requirements based on the service being provided and the risk profile of the customer. Such an approach offers the prospect of reducing the onerous factor without sacrificing due diligence. Such an approach would also be in support of financial inclusiveness which would have a beneficial result of having more citizens as customers of the formal banking sector, which could possibly influence a reduction in cost if implementation is designed to benefit from scale and efficiencies.

4. The report acknowledged that the members learned, for the most part, that free services were offered in relation to electronic banking and the use of ABMs, and that free services were often offered to senior citizens.

The fact remains that many of our citizens remain unbanked for a variety of reasons, and many will remain unbankable in this technological age if they are unable to or choose not to have one of the standard government issued forms of identification; if living arrangements make it difficult for them to produce their own utility bills or proof of address; if they are unwilling to obtain a TRN; and if economic and social circumstances militate against them gaining employment, be it self-employment or otherwise.

Even though a certain percentage of our citizens will never gravitate to the Internet and social media platforms which offer prospects of online banking, Jamaica’s astonishingly high mobile phone penetration rate offers another opportunity, even for the elderly and those who are technologically challenged. Though the M-pesa (M for mobile, pesa is Swahili for money) mobile banking phenomenon in Kenya is not directly transferable to our Jamaican situation, it offers some opportunities for how risk-adjusted due diligence applied to mobile banking can be used to expand financial inclusion.

5. The committee was informed of specific overhead costs that impacted on the delivery of banking services and that this impacted on the profitability of maintaining accounts and the offering of services. The costs associated with dormant accounts was revealing. For example, a dormant account costs $612.90 based on per minute costing and special audits to ensure against fraud and defalcation on such accounts. Notwithstanding this information, the report reflected that the committee still was of the opinion that account holders should not be penalised, taken to mean, that the costs should not be for the account of the customer. The question then is, who should bear the cost if not passed through to reduced earnings and profitability of the bank?

The report went on to document other observations and recommendations of the committee. For instance, it was recommended that a minimum of 10 transactions be allowed, inclusive of withdrawals and deposits, at no cost to the account holder, whether done via an ABM or at the teller’s counter. The committee was opposed to fees for cheque encashment levied against the beneficiary of the cheque at the bank on which the cheque was drawn. This is a curious position which seems to disregard the cost involved for a bank to fulfil such a transaction in compliance with anti-money laundering and counter-financing of terrorism regulations imposed by statute.

Safeguards

Although the CAC has special consumer advocacy standing, there is a potential conflict were this agency to be giving binding directives to the financially regulated banking sector. However, a useful construct that may have flowed from the submission of the CAC is the notion of an ombudsman.

Whereas the report spoke to this in the context of a consumer complaints authority, this approach would not make the important distinction between general consumer rights and advocacy, and the peculiarities of consumer advocacy in the context of the provision of financial services. The ombudsman’s role is best not aligned to the CAC or to the BOJ but should be an independent function where the office of the ombudsman deals with complaints specific to the regulated financial sector, including banking. Such an ombudsman would not be a regulator, but an authority to address complaints. This is an area that, if properly researched and explained to legislators and the public alike, would gain traction and could enure to the benefit of public.

Empty chairs

Finally, one notes that of the 14 members of the committee, three members were absent from all sittings, and half of the members were absent from most of the sittings.

This is a useful report and should be read by stakeholders as a first step to addressing the key points mooted by the private members’ motion, even though a careful review will find that some of the assertions were, at best, ill informed. But the sentiment is real and worthy of good empirical review and research that will at least allow the banking sector, in their own self-interest, to respond positively in a way to improve the efficiency of banking services in Jamaica that will take us forward and benefit the account holders and economy of the country.

Christopher Pryce is a trained graduate engineering who has an active interest in public policy and regulatory matters. Comments: christopherjmpryce@yahoo.com