Examination of Witnesses (Questions 420
TUESDAY 18 JUNE 2002
420. You do not need to be a code cracker working
on Enigma in Bletchley in the Second World War to crack the code
you used about branch sharing. You are engaging positively in
discussions. I sense a certain amount of resistance to this whole
proposal from the Commission on branch sharing judging from your
responses to Mr Beard. What does engaging positively in discussions
mean? What are you doing about branch sharing as a proposal?
(Mr Crosby) Let me be clear and I hope I was clear
about this. The point is that discussions between the OFT and
the banks have not reached branch sharing to any significant extent
yet because they are bogged down on the implementation of the
other remedies. That is a straightforward observation. I do not
think you should inferI did not intend to suggestwe
are reticent. If it can be made to work, it delivers greater access
to customers cost effectively, then that does increase choice
and choice is a driver of competition in this marketplace and
that will help us.
421. May I ask in connection with rural areas
and providing services to a rural customer market, rather than
waiting for the other remedies to be sorted out, why is this not
on your priority list? There are lots of rural customers who want
better services, they would be delighted to get offerings from
each of your three banks and if you could only do that economically
by branch sharing, what I do not understand is why you are not
more pro-active in saying that there is business here. You are
going to be doing stuff the Big Four are not doing, because they
are reticent. What I do not understand are the obstacles. You
kicked off your remarks, Mr Crosby, by saying you do not quite
know what branch sharing means, you are not sure how it would
work. Give me three problems with it? Give me three obstacles
which make it uneconomical and unattractive for you actively,
on the front foot, to consider branch sharing in the next six
months for rural areas?
(Mr Crosby) In practical terms a lot of branches are
very busy. It is a question of routing customers. There is a lot
of regulation around a lot of what happens in branches. A lot
of the transparency around products and describing those products
to customers under different brands all has to be sorted out.
You will have transfer pricing arrangements. We all run businesses,
but if we are chief executives one of the things we get most sick
and tired of is meaningless debates inside our business on transfer
pricing and costs. That would be a serious obstacle. All things
that with the collective enthusiasm of the industry could be overcome.
In the context of why we are not doing it now, we are investing
a lot of money in building a business here. The only way we can
justify doing that to our shareholders is to start the business
by reaching out to the customers we can reach most easily. I make
no bones about that. The fact of the matter is that we have to
start in the conurbations where it is easier to get a return on
our investment. It is still an investment which will be loss-making
for the first year or so.
422. What would your view be if someone put
it to you that you should be more pro-active, particularly in
the rural areas, on branch sharing?
(Mr Targett) I have not really thought this through
but because of the issue in rural areas with the right access
and access to banking services, on the face of it, it makes sense.
In terms of the detail, we would have to work through it, but
we are not against considering it.
(Mr Harley) Yes; it depends on the terms and conditions.
On money transmission in shared premises that is easy. The issue
would be if there were a wider range of products when it becomes
more complex. For example, if you want to use passbook based accounts
in different branches of different organisations or in shared
branches you would have IT issues in terms of reading those passbooks.
There is no reason why money transmission should not be an extension
of what is happening on ATMs.
423. What is the status of this Commission proposal,
this idea of branch sharing, which as I understand it is ideally
intended to assist rural areas? What deadlines or timescale do
you believe you are working to, if any at all. Just so I understand
what you think the nature of the debate is. A quick answer on
(Mr Harley) For me it has been very low visibility
and I have no awareness of any deadlines.
(Mr Targett) Same. I do not know where it is at.
424. It is just floating out in the ether.
(Mr Crosby) There is no deadline because they are
struggling with the Big Four on the first few issues.
Mr Ruffley: I am not suggesting we conscript
your services or be too interventionist. I am not an interventionist.
I just wanted to advocate a position for rural areas. It is an
important issue in the public interest, but clearly your organisations
have shareholders and businesses to run.
425. As we are on remedies, when you were speaking
first you said this was a difficult market to get into and expand.
We saw the arrogance of the Big Four clearers when they came here
firsthand. I am just surprised at your lack of ambition. Here
is an opportunity to get some real competition that would benefit
customers, increase your market share and you seem to say in the
short term interest rates, fine, comparability and transparency,
fine. Is that genuinely going to get you into this difficult market
in a meaningful way in a period of time which is going to be sensible?
(Mr Targett) The point I was trying to make was that
we own three regional banks in the UK and in most areas we do
not have the representation that the big banks have. The difficulty
is sheer scale and ability to leverage that scale. We do not have
that in the way the Big Four do. Similarly if they came to our
market in Australia, they would suffer the same problem. The way
we will look to penetrate is not through any of these issues,
it has to be through uniqueness of product offering and the way
that we service clients and that is the only way we can compete.
For us price is not the major thing to compete on and we cannot
as a series of small regional banks. That was the point I was
426. None of you would have wanted the Competition
Commission to put anything more radical than that on the table.
(Mr Harley) The key issue is in the execution and
the effect that has on the market, which has been touched on a
number of times. Until we see the remedies in action it will be
very hard to judge whether they are sufficient to make this market
more competitive. Once we see them in action we may have a different
view. For the moment our customer position trends are growing
very nicely, we are growing the business more aggressively and
we hope the remedies will also help to free up the market.
(Mr Crosby) We had a problem two years ago as separate
organisations, in Halifax and Bank of Scotland. Halifax had the
branch distribution in England Wales and brand, but did not have
the business banking products and capability. The Bank of Scotland
conversely had all the capability and ability to support this
business, and it is a difficult business to go into unless you
have the capability, but did not have on the ground branch presence
in England and Wales. Putting those together, which we think gives
us a real opportunity here and we make no apologies for having
quite big ambitions, we are looking to double our market share
in the UK in the next four or five years. We have a specific opportunity
to make a difference here.
427. Do you think your shareholders would think
you unambitious if they were sitting listening to you? Here is
the Competition Commission and a big opportunity to shake this
market up. It seems to me that you are settling for small measures.
(Mr Crosby) Our position is that this is a marketplace
which is ripe to be opened up with an increase in competition.
We just think it has to be us that does it in detail and others,
rather than through regulation.
428. You have not done it in the past.
(Mr Crosby) We would say we have contributed in a
very major way to the shifting of current accounts away from clearers
to others. We are doing the same in credit cards. We do have credentials
429. Mr Crosby, several times today you have
spoken strongly in favour of transparency. I take it you are familiar
with your current campaign based on this leaflet to promote your
current account. It says 10 reasons why you may not have switched
to a Bank of Scotland current account, including, for example,
that you are in love with the bank manager. One of the things
you have on this account to attract customers is that it pays
2 per cent interest on deposits. Is that right.
(Mr Crosby) Yes.
430. That is provided you pay a certain amount
a month into the account. What rate of interest does it pay if
you fall under that minimum requirement?
(Mr Crosby) Zero point two five.
431. In the interests of transparency, should
that figure not feature on this promotional literature?
(Mr Crosby) Yes and if it does not we will remedy
432. It does not.
(Mr Crosby) I have no problem with that at all.
433. It does not appear on it at the moment.
There is a lot of small print but it does not seem to have that
(Mr Crosby) I do not think that will be the only thing
somebody will see who buys our current account but it does not
matter. You are quite right that anything which contains the offer
should contain the other side of the condition.
434. This also promotes an overdraft facility
with a headline rate of 8.9 per cent and you mentioned that one
earlier because you were quite proud of it. It is provided you
have £1,000 a month going into the account. If you fall below
that contribution a month, what is the interest rate on the overdraft?
(Mr Crosby) Eighteen or nineteen.
435. In the interests of transparency, should
that not appear on the leaflet?
(Mr Crosby) The same point is taken.
436. It does not appear on the leaflet at the
moment. I am just trying to explore your commitment to transparency,
that is all. You will agree that you will probably take that leaflet
away and re-write it?
(Mr Crosby) It will be changed at the next reprint.
437. We have been good for printers this morning.
Assuming the Competition Commission's recommendations are fully
implemented, how do you expect the banking industry to have changed
in five years' time as regards personal customers and the SMEs.
May I ask each of you that question?
(Mr Harley) The market share of new entrants will
have increased. Transparency will have improved as well in terms
of product visibility and more value will have been transferred
438. If you give us a ballpark figure, what
will the percentage of customers of the Big Four have been reduced
to from 86 per cent?
(Mr Harley) You could add up the ambitions of those
round the table amongst other things. We are aiming for 5 per
cent of the market from our present. We aim to increase it from
just around 2 to 5 so that is 3 per cent we would essentially
have to take from the Big Four.
(Mr Targett) Being realistic, the Big Four have leverage
and scale, so we will be in there competing, but it will take
time to erode some of that market share. We all have ambitions,
but I suspect that if it is mid-80s now, in five years' time I
doubt it will go much below 80 per cent.
(Mr Crosby) Interest on current accounts for personal
customers will be the order of the day across the industry and
credit card pricing will be more realistic, I hope we will have
flatter interest rates and will have got away from the offer and
follow-up rates which are necessary at the moment to break up
the market. In the SME sector, you will see a reduction in the
Big Four's market share and the big point about that is that it
does not need to be that big a reduction for the Big Four to have
to respond in terms of pricing their services because once their
shares start to move the stock market looks at that and devalues
the earnings they make and long before they substantially lose
their market share they have to respond. So my second point on
SMEs is that in five years' time they may still own 75 per cent
of the SME sector but they will have had to respond to the forces
Chairman: As a Committee we are agreed
with you on the need for that increased competition. We are at
one on that particular issue. This morning we found it very refreshing
to talk to you and accept from you that the Competition Commission's
proposals are a sound basis for discussion, which the Big Four
did not do. That was very interesting this morning and no doubt
the Clerk will be in contact with you and others, seeking further
written information. If you can provide us with anything you have
promised this morning as soon as possible, we shall be delighted.
We are very grateful for your attendance this morning and also
for your coaches in the back row. If the coaches for England and
Brazil do the same on Friday as your coaches did for you, we will
have England as a winner. Thank you very much.