Examination of Witnesses (Questions 283
TUESDAY 18 JUNE 2002
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
(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
(Mr Harley) I agree with their conclusion that this
is an attractive market for new entrants because the returns are
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 millionthat
does not mean it is not profitablein 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
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
(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.
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.
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
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.
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