Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 283 - 299)




  283. Good morning, gentlemen. May I open the meeting by welcoming you to this our latest inquiry into the banking process following the Competition Commission's proposals. I note in the submissions which are made by all of you, for example HBOS, that you make no substantive comment on the methodology adopted by the Competition Commission, nor does Abbey and nor does the National Australia Bank. May I ask for your comment on the methodology adopted by the Competition Commission? Do you have any complaints about that?

  (Mr Crosby) I understand you are referring to the methodology in terms of profit calculation.

  284. Adjusted; yes.
  (Mr Crosby) We argue very strongly that the critical issue is around whether there is adequate competition in the market rather than the level of profitability per se. In that respect, as you will see from our submission, as we did when Cruickshank's report came to a similar conclusion, we would agree with the Commission's finding that there is less than perfect competition in the small business banking market. We would say that is the key issue and that is what needs to be addressed. Sure, but after our last evidence session the Chairman wrote to us and pointed out that the Competition Commission based its findings on what he termed excess profits at a particular time in the economic cycle when bad debts were low, but they looked at a longer period and made specific adjustment for it. They adopted an average figure of bad debt of 1.2 per cent of lending, significantly above that of the latest year, 0.48 per cent. What I want to get clear from all of you at the moment is the integrity of the Competition Commission's approach and your views on that.
  (Mr Harley) I would agree with the conclusion reached, that is that there is insufficient competition.

  285. Sorry: the Competition Commission's approach.
  (Mr Harley) I have not studied the approach because we were not subject to the same degree of examination as the Big Four in the sense of the actual calculus.

  286. Do you agree with the Competition Commission's approach?
  (Mr Harley) I agree with their conclusion that this is an attractive market for new entrants because the returns are high.

  287. Mr Targett, do you agree?
  (Mr Targett) I guess from our perspective it is a calculation that suggests that 41 and 45 industries on that sort of methodology produce excessive profits and that financial services are somewhere in the middle. It is a calculation which is broadly sound but as the other two gentlemen say, the key issue is around competition rather than just looking at that in isolation because it is just one measure which is taken at a point in time.

  288. You would therefore have no complaint with the Competition Commission's Table 2.21 on page 115, when they looked at the years 1998 to 2000 for adjusted profit and provided their table with the four largest clearers in 1998 making £575 million, in 1999 £709 million and in the year 2000 £896 million, whereas the rest in 1998 made minus £13 million—that does not mean it is not profitable—in 1999 minus £54 million and in 2000 minus £86 million. Would you be quite content with that table?
  (Mr Harley) It is a clear reflection of the fact that we are struggling to get into the market and therefore we are spending money; yes.

  289. When the Federation of Small Businesses were before us I asked them about the future of the market with SMEs. The four biggest clearers have 86 per cent of the market. I asked if he could look forward over the next 20 years how he would see things. He still sees the situation as being largely unchanged. Do you share that view?
  (Mr Targett) Our view as a series of regional banks is that it is a very difficult market to penetrate. For us it is not trying to penetrate it on the basis of price, it is more on the basis of product offering and trying to be first in the market with things which are tailored to meet customers' needs. We do not see ourselves as being able materially to compete because of their size and leverage. It is a market in which we are looking to compete on what we can do in front of customers rather than price, so I agree.
  (Mr Crosby) I would not. I think it will change faster than that. We have seen that happen in other financial services markets. From our own origins it is fair to say that 10 or 15 years ago you could have raised questions about the competitiveness of the mortgage market and individuals rarely re-mortgaged. Now that is a completely different picture. It is an intensively competitive market. Our view of the SME market would be that there are three things which break down competition and inhibit competition. One is: is there a real choice? Do customers believe there is a real choice? The other is: do they understand? Can they embrace the complexity of the products and understand what they are being charged? The third is: do they believe they can move? It seems to us that in every financial services market, if those issues are addressed, then customers start to move much faster than you would expect. It happened in mortgages, it has happened in credit cards, where the Big Four have lost significant market share. It is happening in current accounts. We believe it will take longer and be slower in small businesses, but it will happen on a five- to ten-year time horizon to an extent that will change the competitive dynamics of the industry. That is not to say the Big Four will still not have the majority, but they will have lost their pricing power.

  290. So the Competition Commission's proposals will go a long way to help that diversity in the market.
  (Mr Crosby) We feel very positive about those of the remedies which relate to portability and portability of credit references and helping customers. We have always argued that that is the key thing. If there is anything to regulate about, that is where it is. I have to say, if I am honest, that the short-term regulation of interest on accounts is probably from our perspective unhelpful, but in truth not massively so. We believe that from our own point of view in terms of entering the market what we offer customers is a really credible choice, a full product service and a distinctive proposition. We do not think that will be seriously unsettled by that but it is unhelpful.
  (Mr Targett) My view on price controls is that we just need to be careful that they do not have the opposite effect, in other words new entrants in the market, and, particularly when there are going to be reviews in three years and so on, that it is not a situation which provides less rather than more competition and just plays into the hands of the Big Four. They may have the opposite effect to that intended.
  (Mr Harley) The short-term remedies will help to lower the barriers to new competitors, so I am in favour. Equally, I agree that long-term price controls are more likely to be distorting than helping the competitive playing field. On the other hand, if the barriers to entry are lower, competition will take care of the issue of margins and returns. Yes, I am optimistic that the remedies will be effective in the short term.

  291. So if the Competition Commission's proposals are accepted this will go a long way in 10, 20 years' time towards reducing that 86 per cent figure which the Big Four have at the moment.
  (Mr Harley) Certainly our account acquisition figures right now suggest that the market is changing. If we have the same experience that we had in personal current accounts we will see things start to move faster. The profile of the issue is becoming higher and higher. People are more aware of how to make a choice and there is real choice out there and they will take those choices.

Mr Plaskitt

  292. One question to clarify Abbey National's position. When you submitted evidence to the Competition Commission, they report you as saying that price controls will be of little practical benefit. Yet when you wrote to us you said that you support the rapid implementation of the recommendations of the Competition Commission. Could you explain the apparent contradiction?
  (Mr Harley) Yes, the recommendations include a reference to a specific price control. As with all the remedies, it is short term in its nature and it is in that context that we support it, not because we feel that it will be a particularly effective remedy, but because it does help to raise the profile of the issue of interest on those accounts.

  293. So you would support price controls in the short term.
  (Mr Harley) Absolutely. In the long term it is potentially distorting; in the short term it raises the profile very high, the profile of an issue which is interest on those accounts.

  294. How are you defining short and long term in this context?
  (Mr Harley) The Commission defined that. I think they said three years.

Mr Mudie

  295. If you are intent on breaking into the market share of the Big Four, you have suggested portability is what you see as the important factor. What would the other two of you see as the most important factor? You are saying the Competition Commission will help in the short term, but in the long term?
  (Mr Harley) It is the portability of credit records for us and also the transparency of charging. Those are the big issues.

  296. Portability and transparency.
  (Mr Harley) Portability of credit records and the transparency of charging, those are the big issues for us.

  297. Are you happy with the Competition Commission's response on that?
  (Mr Harley) I shall be happy when I see them implemented. The issue is that we have had a recommendation and as far as I can see we have had no response at this date. Until we see how they are going to implement the remedies —
  (Mr Crosby) We should be happy if they are implemented in the way we think they could be. We have already got our own credit record system for making credit records available. We think we can adapt that to any industry standard readily and we think it is really important. From what we hear away from us in the conversations taking place, there is considerable debate going on at the moment between the Big Four and the Competition Commission over the portability of credit referencing. It is really, really important that does not lead that remedy away. We think that is the most important of all the remedies.
  (Mr Targett) Agreed: portability.

  298. What about transparency?
  (Mr Targett) That is important as well. The critical issue for an SME is really access to finance and to me the portability thing is the one which drives that.

Mr Ruffley

  299. Do you think the Chancellor's decision to support price control sets a dangerous precedent?
  (Mr Crosby) It would be very difficult for me to speculate on that.

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