Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum by Barclays Bank plc


  1.1  The Review from Don Cruickshank is long and complex and contains many recommendations—some of which would have a fundamental impact on financial services in this country. The Review acknowledges that the UK already has one of the most stable and open financial systems in the world. Barclays is certain it can be improved further. However, we would caution against reaching conclusions before there has been an informed debate. We call for greater consultation, not just with banks, but all interested parties—the Treasury, Bank of England and FSA. Before any change is adopted, the Government should be satisfied that consumers would actually benefit as a result.

  1.2  One of the main reasons for commissioning the report was the Chancellor's concern that small and medium-sized enterprises may have difficulty accessing debt finance. Therefore, Barclays is pleased with the Review's conclusion that 95 per cent of SMEs applying for finance receive it. Moreover, it finds that the UK typically offers lower cost lending services to SMEs than other countries surveyed.

  1.3  The Cruickshank Review acknowledges that personal banking is becoming increasingly competitive. While Barclays welcomes this acknowledgement, we believe that the Review underestimates the extent of today's competitive environment. We also believe that it underestimates the significant and on-going transformation of our industry. Technology, globalisation, and ageing population, greater self—rather than state—reliance is radically altering every aspect of banking.

  1.4  In relation to Money Transmission, the Review concluded that a new licensing authority and economic regulator (PayCom) are required, despite a lack of detailed consultation. It is our view that the existing regulatory bodies and competition authorities already provide a suitable mechanism for promoting competition. The Review failed to provide a proper analysis of the costs and benefits of PayCom and the risk that it would not deliver the intended benefits. We believe that it is vital that any proposal to change the regulatory regime is carefully weighed against the ability of UK Plc to compete internationally.

  1.5  The Cruickshank Review indicates a market size of 1.3 million businesses. This figure appears to ignore most sole traders and partnerships. Barclays was not asked to exclude these businesses from the data it submitted. The total market of SMEs is in fact 3.7 million businesses. It is not clear which parts of the analysis are constructed on which parts of the market and this causes a lot of confusion when reading the report.

  1.6  We do not believe that SMEs pay too much for their services. According to the calculations we provided to the Review a typical small business with three employees pays around £282 per annum in Money Transmission charges, representing just 0.1 per cent of turnover. Our charges have fallen faster in real terms than utility charges over the past eight years and are half the charges paid by SMEs for their telecoms and insurance costs. We think that represents good value for money.

  1.7  We disagree with the Review's contention that customers focus on price alone when selecting a finance service provider. The majority of customers place more emphasis on their relationship with us and the efficiency of day to day service. We have invested heavily in the quality and training of our relationship managers to ensure that we offer the support our customers seek from us.

  1.8  The Review finds that when UK banking is compared with the rest of the world, we offer "reasonable value for money". Like every business we aim to make a profit. We are proud of running a successful and profitable business. Our success enables us to provide employment for many thousands, invest heavily in improving our service to customers (£545 million in 1999 alone) and make a substantial contribution to the government purse in taxation. Our profits reward our shareholders. The vast majority of our shareholders are UK pension funds helping families retire in financial security.

  1.9  Barclays is disappointed that those banks that are major supporters of British business are given very little credit for doing so. Collectively banks in the UK lend over £250 billion to UK industry and commerce of which Barclays lends more than £30 billion.

  1.10  We provided evidence to the Review team showing that Barclays' returns were not excessive over the economic cycle, either in absolute terms or when compared to other members of the FTSE 100. The Review team accepted the methodology and conclusions.

  Taking the main themes of the Cruickshank Review in turn, we would like to address these in greater detail as follows:


  2.1  Barclays welcomes the recommendation that the Government should encourage the FSA in its efforts to make the regulatory process more transparent in the UK.

  2.2  Barclays welcomes improvements that bring greater clarity, transparency and accountability. These include the efforts being made by the regulators to enhance disclosure requirements and the provision of comparative information for financial services to better inform consumers and to achieve more effective competition. However, such comparisons should not focus on price alone but also acknowledge the value adding elements of the service we provide, including the ability to access our services through branches as well as other channels such as telephone banking and the Internet.

  2.3  The focus of the Cruickshank Review is on UK regulation, which we regard as appropriate up to a point. However, neither regulation nor competition is any longer a domestic issue and the UK needs to remain competitive in the global marketplace, amid the technological revolution that is transforming the way we do business. Currently the UK's financial sector is ranked first internationally in that context and there is a danger that certain of the measures proposed might jeopardise the advantage and success the UK enjoys in this industry. Barclays therefore urges the Government to broaden the debate to reflect the globalisation of financial services.

  2.4  It is incorrect, we maintain, for the Review to assume that little will happen in terms of risk disclosure before the Basel Committee's proposed framework is implemented in 2002. UK banks have greatly enhanced their risk disclosure already, particularly in the areas of credit and market risk. We have also made a significant contribution to the new standard covering derivatives and other financial instruments, which further extended disclosures about management and market risk carried by banks. Furthermore, the banking industry is already participating in trials to define the proposed disclosure template. The 2002 timescale is necessary as Barclays and other banks will need to make significant systems changes to support the implementation of Basel.

  2.5  We note the recommendation that bank supervisors should disclose their assessment of the trigger and target ratios for individual banks. This is very much an issue for the FSA but if implemented we believe this may effectively remove one of the FSA's key regulatory tools.


  3.1  The Review is a catalyst for the industry to step back and review where we are today and how best to meet the challenges of the future. However, there are many good things about the Money Transmission experience in the UK, through which billions of transactions are processed very effectively each year, emphasising the efficiency and integrity of the current systems.

  3.2  Barclays, its customers and consumers as a whole benefit from competition and we support any cost-effective initiatives that enhance the competitive arena.

  3.3  The Review was critical of the level of innovation in the UK Money Transmission industry. In contrast we believe that there are numerous examples of both the UK payments industry and Barclays leading the world on innovation in Money Transmission and e-commerce.

  3.4  Pricing between consumers and system members and between the system and system members themselves is already transparent and the case for any additional consumer level transparency is not made.

  3.5  All payment systems have objective and publicly disclosed access criteria to guard against systemic risks. We agree that those access criteria should be set at a de minimis level (and must not act as an artificial barrier to entry) and the business model for payment systems must be also appropriate to support growing e-commerce. We would support a review of access criteria to ensure that that is the case.

  3.6  It is our view that the existing regulatory bodies and competition authorities already provide a suitable mechanism for promoting competition and that consequently a new licensing authority is not required. Furthermore, in competitive markets we do not believe that economic regulation is the best way to promote competition.

  3.7  The existing regulatory and competition authorities are already well placed to manage systemic risk and avoid anti-competitive behaviour. In the event that it can be shown that there is a need for any enhancements to these present regulatory protections, the level of change should be as little as is commensurate with attaining the intended objectives. The acid test should be to ensure that the end result delivers tangible, economic benefits for consumers.

  3.8  Any additional regulation must be compatible with international arrangements and guard against an adverse impact on the competitive position of the UK Money Transmission industry against EU and global mechanisms.

4.  SMES

  4.1  We agree with the Cruickshank Review's acknowledgement that raising debt finance is not a problem for SMEs. It indicates that the average success rate for obtaining bank finance is 95 per cent. This is supported by reputable surveys which show that other problems, unrelated to banking, are regarded as more pressing by SMEs. These include concerns about adequate sales turnover, Government regulation and paperwork, lack of skilled employees, prompt payment of bills by customers and the tax burden on small businesses.

  4.2  Barclays disagrees with the Review's conclusion that non-bank debt products do not constitute effective competition. We do not accept the assertion that the expanding secured lending and leasing markets, and the wide availability of point of sale finance to businesses buying vehicles, computers and other equipment, are not competing with traditional bank lending. The use of these products has grown while traditional bank lending has fallen. We are acutely aware of the competition we face from these alternative sources of finance for SMEs. We see this competition every day in our business and do not believe this received sufficient acknowledgement or emphasis in the Review. The Cruickshank Review betrays a lack of understanding of the reality of this market and the degree to which we believe it is contestable. Today, there are:

    —  over 90 secured lenders in the UK;

    —  over 60 commercial mortgage lenders; and

    —  almost 400 core financing products available to businesses, an increase of a quarter between 1994 and 1998.

  4.3  We think the Cruickshank Review's conclusion that UK SMEs get "reasonable" value for money from their banks, based on international comparisons, does not fully reflect the Review's own analysis. Notwithstanding some flaws in the methodology used by the Review, in three out of seven product comparisons, the UK was actually ranked cheapest. The UK was ranked second best for product innovation four times out of seven. When all the scores are averaged the UK ranked overall first equal with Australia on price and third on innovation behind the USA and Canada. We regard these findings as better than "reasonable".

  4.4  In the area of equity finance for SMEs we agree broadly that this is a matter mainly for public policy and the government. However, the Review fails to address the unwillingness of most SME owners to part with equity. Nevertheless, Barclays through its own venture and private equity capital operations recognises a gap in this market. We also believe we can help by working in partnership with government and other agencies to meet the needs of SMEs, who for whatever reason cannot qualify for direct financial support from ourselves. We have for four years provided funding for the Merseyside Special Investment Fund, who provide loan and equity finance to SMEs and we currently seek to extend this. To this end we are working closely with the "Objective One Alliance" and seek to fund their collective £140 million Fund programme in Merseyside, Wales, South Yorkshire and Cornwall.

  4.5  SME banking and our support for this important sector of the economy has been, and remains, a key corporate priority for Barclays, as further evidenced by our decision to establish a focused "SME bank within a bank", to operate from July 2000. We believe this market is contestable. For example, building societies have been empowered to lend to unincorporated businesses since 1986. They have branch networks, customers who start and run businesses and the ability to use credit reference data.

  4.6  We disagree with the suggestion that switching is not actively encouraged. The Institute of Directors recently reported that 40 per cent of the businesses it surveyed had switched at some point. For those businesses that do not switch, we believe this is because they are satisfied with the service from their bank. This has been confirmed by research from the independent Forum of Private Business. Encouraging switchers is integral to our marketing strategy and our Relationship Managers are targeted in this regard.


  5.1  There are recommendations on personal banking which Barclays supports:

    —  that government should avoid over-regulation of the industry;

    —  greater transparency of pricing to the consumer;

    —  the LINK recommendations; and

    —  easier switching of bank accounts. We agree with the report's finding that the difficulty of switching is mostly a matter of perception rather than reality. Nevertheless, this is a matter we are addressing and although the report found that "only" 14 per cent of those that had switched account actually experienced problems, we would wish to see this figure much lower still.

  5.2  Barclays disagrees with the premise, repeated frequently throughout the Review, that consumers naturally buy the cheapest of any given range of products. This is simply not true. By way of analogy, the most popular product sold in a supermarket, or anywhere else, is often not the cheapest but that which offers value rather than the lowest price. At Barclays we spend a great deal of time and money trying to add value for our customers. We provide a wide range of accessible delivery channels, including a large branch network, extensive telephone banking, card services and the country's largest Internet banking service. We add value to the products we offer our customers—for example immediate access to cheques presented by customers before they have been cleared, instant transfer throughout Barclays, interest from day one on deposits to savings accounts, pre-approved loans, and integrated statements covering all of a customer's business. We have deliberately chosen a strategy of creating more value and better service for our customers rather than to strip things down to a bare, cheap commodity service. The Review implies that our strategy will not work. It does work very successfully for our customers.

  5.3  In our view the Review did not give sufficient weight to the needs of our customers, which are undergoing radical transformation. Customer tastes are becoming increasingly diverse—over one million of our customers now choose the immediacy of 24-hour electronic access via the Internet. Over 1.2 million customers have signed up for our telephone banking service, and we now also offer access to accounts and card details via mobile phones. Some estimates indicate that 25-30 per cent of UK current accounts will be accessed by online banking within three to four years.

  5.4  The Cruickshank Review did not give sufficient weight either to the unparalleled levels of competition we face. Barclays provided the Review team with figures showing that between 1994 and 1998 the number of institutions competing for savings and mortgages each increased by 20 per cent, for personal loans by 53 per cent and for credit cards by over 100 per cent. According to the Review's own statistics there have been 21 new entrants into personal banking in the last five years. We are also now competing with banks that make a virtue out of the fact that they do not have a branch network.

  5.5  The Review seems to make light of the fact that the current accounts offered by the main UK banks are mostly provided free to consumers. By contrast many of the new entrants into personal banking provide only products that generate the highest returns, they are selective as to what they offer and generally this does not include current accounts and their access through physical branch networks.


  6.1  Barclays supports the concept of a basic bank account for those people who are currently excluded from the use of financial services and is developing such an account for launch by October 2000. We recognise the difficulties that those who are excluded face and the features of the basic account will serve to alleviate these difficulties and meet their specific needs.

  6.2  The Review suggests a number of minimum requirements for a basic bank account. The Barclays basic account will meet all of these requirements but we have chosen not to offer cashbacks due to resistance from retailers who are reporting high point of sale rejection rates for on-line cards. The Review overlooked the fact that cashbacks generate more fraud than any other kind of transaction.

  6.3  Barclays thinks the Review's comments on the issue of personal identification for account opening are somewhat harsh. We do, after all, need to convince ourselves that people who open accounts are who they say they are. We do have a need to combat the regular, persistent and professional attempts to defraud us. Having said that, the rules regarding personal identification have been imposed on us by regulators and by EU law. Within these restrictions we try to be as flexible as we can without compromising our legal obligations. However, we believe the issue of personal identification does require review by the Government, not least for the reason that the current rules result in a higher number of technically excluded consumers than might otherwise be the case. Beyond the issue of personal identification it is Barclays' view that the FSA has a role to play in addressing the broader financial education needs of financially excluded people. We do not believe it is the responsibility of the banks alone to do this but we are certainly willing to help.

  6.4  The Review suggests that benefit payments should be paid directly into recipients' bank accounts wherever possible. Barclays' view is that alternatives must also be made available for those who still wish to receive their benefits in cash, and so as to ensure they are not further excluded as payments become automated.


  7.1  In order to attract, retain and motivate the best people, Barclays needs to be able to offer competitive remuneration packages. Our senior executives therefore receive remuneration that is reflective of practice in organisations of a similar size and scale.

  7.2  Barclays' new share incentive scheme, which was approved by 89.2 per cent of shareholders at the Annual General Meeting in April 2000, has been the subject of some rather sensationalised reporting in the press. Indeed, some of the figures quoted in the newspapers would require an increase in the share price from some £16 today to £180. We believe this scheme is market competitive and that it combines more leverage with tougher performance conditions than most of the plans currently found in the market today.


  8.1  The banking industry is going through a period of fundamental change. We find that, with the increased choice Barclays customers have in dealing with us, we no longer can maintain the same number of branches we have had in the past. Barclays has to safeguard the longer term future of our various stakeholders, including 70,000 staff, by managing its business as effectively and efficiently as possible and we cannot ignore the following:

  8.2  Two years ago, Barclays had no internet banking service. Today, 4,000 customers are being recruited every day and Barclays now has one million customers banking over the internet.

  8.3  Ninety four per cent of UK homes have a fixed telephone line and over one million Barclays customers now use telephone banking from their own homes.

  8.4  Five years ago almost 60 per cent of Barclays customers used a branch for day to day banking, but today that figure has fallen to under 40 per cent. A further 40 per cent of our customers only use a branch once a month. By contrast the number of transactions through our cash machines has grown by over 30 per cent since 1994 to 450 million transactions in 1999.

  8.5  To keep abreast of these changes in the market place, Barclays constantly reviews all the services we offer, including our branch network. In fact, there are many places where Barclays has maintained a local presence longer than our competitors and our decision to close 171 branches in April 2000 was taken only when the level of business could not sustain them remaining open.

  8.6  Barclays still has a large network of over 1,700 branches and is expanding its cash machine network providing access points in shops, supermarkets, railway stations and other convenient locations for customers. Also, Barclays personal customers are able to access day to day banking service free of charge at an additional 15,000 post offices in England and Wales.


  9.1  In July 2000 Barclays announced that our cash machine network would remain free for cash machine withdrawals by both our own customers and customers of other banks after 1 January 2001. Barclays was the first of the major banks to abolish "disloyalty" fees last October, and the first to insist on on-screen pre-notification of all cash machine charges. The decision to continue offering free access means the following in relation to cash withdrawals from existing machines:

    —  Barclays customers will continue to be able to use all Barclays cash machines and all non-Barclays machines in the UK, free of charge by Barclays;

    —  Barclays customers will continue to be able to use the overwhelming majority of cash machines in the UK without being charged by other organisations; and

    —  those who do not bank with Barclays will continue to be able to use Barclays cash machines, free of charge by Barclays.

  9.2  The decision to keep our cash machine network free for cash withdrawals was taken after a year long debate about the complex issues surrounding cash machine charges. The debate had led to a great deal of confusion surrounding the whole issue of cash machine charging. Barclays decided to continue with free cash withdrawals in order to establish absolute clarity.


  9.3  In the spring of 1999, Barclays reviewed its pricing for cash machine transactions. At the time we made a charge to our own customers when they used other people's cash machines—a so-called "disloyalty fee", but we did not charge other banks' or building societies customers when they used our network. Barclays believed this situation to be unsatisfactory, for two main reasons:

    —  fees for cash withdrawals, charged either by the operator of the cash machine or by the consumer's own bank if the consumer was using the machine of another organisation, were not notified onscreen. By consequence, most consumers knew neither what nor by whom they were being charged; and

    —  Barclays customers were in effect subsidising the use of Barclays machines by the customers of our competitors.

  9.4  We reviewed the options, as a consequence of which Barclays abolished all disloyalty fees for our customers, which resulted in our customers being able to use most cash machines free of charge, regardless of whether or not the machine was owned by Barclays. Also, we proposed the introduction of a user fee for customers of other banks for obtaining cash from their bank accounts via our cash machine network. It was proposed that other transactions obtained through a cash machine, such as balance inquiries, would remain free.

Expansion of the Cash Machine Network

  9.5  The subsequent decision by Barclays, and our competitors, to keep all cash machine withdrawals free of charge will have a knock-on effect on the expansion of the cash machine network in the UK.

  9.6  Barclays' cash machine network is a great asset for our business, but it is not a profit making one and would not have been even with the introduction of a user fee. It costs us approximately £100 million per annum to build, maintain, improve and expand our cash machine network. The abolition of disloyalty fees meant a loss of income of £2 million per month for Barclays from October 1999 and the decision not to introduce a user fee means that we will not be making good any of this loss.

  9.7  Interchange fees that companies charge each other only cover the cost of cash machine transactions, and are not sufficient to fund a cash machine expansion policy. This means that the ability of companies to place cash machines in the areas where people live and work will ultimately depend on their ability to provide funding for such machines. A user fee would have led to increased revenue, which would have been used to put more cash machines in more convenient places for customers, including rural areas.

  9.8  We are beginning to see new non-financial services entrants, such as Securicor, installing cash machines in "convenient" sites such as petrol stations, railway stations and supermarkets. The fact that user fees on these machines will be at least £1 demonstrates the return required to allow investment in cash machines in convenient places for customers.

  9.9  There will be an expansion of the cash machine network but it is unlikely to be by those who have abolished all their charges.

July 2000

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