Session 2010-11
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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 612-iv

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Treasury Committee

Competition and Choice in Banking

Tuesday 7 December 2010

Eric Daniels, Helen Weir and Patrick Foley

Stephen hester and bRIAN hARTZER

bENNY HIGGINS

Evidence heard in Public Questions 148 - 433

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 7 December 2010

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Andrea Leadsom

Mr Andrew Love

Mr George Mudie

Jesse Norman

David Rutley

John Thurso

Mr Chuka Umunna

________________

Examination of Witnesses

Witnesses: Eric Daniels, Group Chief Executive, Helen Weir, Group Executive Director, and Patrick Foley, Chief Economist, Lloyds Banking Group, gave evidence.

Q148 Chair: Order, order. Welcome to this hearing of the Treasury Select Committee. We have quite a number of questions to get through and I am hoping my colleagues will help by asking brief questions and certainly brief, direct answers would also be valuable.

I would like to ask initially a question to Helen Weir. You told the commission that the vast majority of your customers do not pay anything for their current account services. What proportion of customers do end up paying for their current account services?

Helen Weir: Approximately 30% of our customers will pay fees associated with overdraft because they make use of an overdraft. So about 30% of our customers use an overdraft. About 70% of customers don’t go into overdraft at all, therefore effectively they have credit balances in the account.

Q149 Chair: When you use the word "paying" do you exclude the money that in a normal year they make of net interest credit?

Helen Weir: In that particular context I was talking specifically about fees and overdraft interest. Clearly there is-

Chair: So they do pay?

Helen Weir: -an interest foregone. For a typical customer with an overdraft balance-about 70% of our customers will have an overdraft balance of less than £1,000- they will typically pay, in foregone interest, about £5 a year currently.

Q150 Chair: That is at the moment, what about in a typical year?

Helen Weir: Yes, and if the base rates went back to 3.5% they’d pay about £35 a year of foregone interest.

Q151 Chair: What is the overall cost of running a typical account?

Helen Weir: The cost of a current account is quite significant, as you’ll appreciate. There are a number of services that go along with that. Typically the cost of the branch network, the cost of providing ATMs, cheque facilities, the debit cards, so there are a number of services that go along with the current account. I think a number of people have looked at the current account market, a number of regulators, and found that overall customers in the UK get a good deal compared with other countries.

Q152 Chair: That was not what I was asking, though, all I am asking is what proportion this 35 is of the total cost?

Helen Weir: Sorry. That would barely cover our costs of running a current account.

Q153 Chair: We are still not really getting to the answer to the question. Why don’t I try asking it a different way? The OFT report said that the total revenues on personal current accounts was £8.3 billion in a normal year, that was 2006. That is a figure you are familiar with?

Helen Weir: Only from the OFT report, obviously, I don’t see-

Q154 Chair: And the OFT report showed that net credit interest was half that, almost exactly 4.1 billion. Are those figures similar to your own bank’s?

Helen Weir: The foregone credit interest would be approximately half of the total income on personal current accounts. The typical amount a customer pays for their current account, including foregone interest, is approximately the same as a cup of coffee a week, which is significantly lower than, for instance-

Q155 Chair: Let us have another go at going around these numbers. There is £4 billion coming in on net credit interest according to the OFT, out of £8.3 billion of total revenues coming in on PCAs, personal current accounts. You are saying that your ratio is roughly the same as those overall figures for the industry. But you have just told me that in a normal year you only collect £35 of net credit interest, so therefore the figure that you should be giving me for the total cost is £70, twice the £35.

Helen Weir: I’m sorry; I didn’t follow your logic. Could you please repeat that, my apologies?

Q156 Chair: Well, let us start again, I will have one more go and if we do not get anywhere you will have to write to us or come back again. There is £8.3 billion coming into the industry, about half of that is derived from net credit interest, £4.1 billion, you have told me that your ratios are pretty much the same as the ratios between those two numbers for the industry. You have told me this morning that you, in a normal year, only obtain at your bank, on average, £35 from each current account?

Helen Weir: £35 from a customer that is in credit. That’s the foregone interest was the £35.

Chair: That is the foregone interest?

Helen Weir: Yes.

Q157 Chair: So what is your equivalent figure for the net credit interest figure given by the OFT in their report, the £4.1 billion?

Helen Weir: It’s approximately equivalent to our broad market share, so that’s between 25% and 30% of that number.

Q158 Chair: What does each customer on average pay? What is represented by that for each customer, roughly?

Helen Weir: Of the foregone interest?

Q159 Chair: Yes. How much is each customer on average paying in interest foregone on his current account, on average at Lloyds?

Helen Weir: It depends on obviously what the interest rates prevailing in the market are.

Chair: In a normal year.

Helen Weir: In a normal year that £35 that I was talking about.

Q160 Chair: That is the £35 figure? So we are back where we started.

Helen Weir: That’s the foregone interest for customers in credit.

Q161 Chair: In which case the figure for the total value of personal current account revenues, on average per account at your bank, is £70 a year?

Helen Weir: You’re talking about all customers, sorry?

Eric Daniels: Yes, including all charges.

Helen Weir: Including all the charges.

Chair: Yes.

Helen Weir: Yes, not just customers in debit, sorry.

Q162 Chair: It is £70. Are you making profits on a standalone basis from your current accounts?

Helen Weir: Our current accounts are profitable but not excessively so. So there are no abnormal profits. We’re getting a hurdle benchmark rate of return on the capital that’s employed in that business. So it’s not excessive on that product.

Chair: I think we may have to come back to you for further information on some of these numbers.

Helen Weir: Absolutely.

Chair: Because I think there still is some confusion between us, even though I am using the figures that are published by the OFT. We might come back to it later in the hearing. Jesse Norman.

Q163 Jesse Norman: Thank you, Mr Chairman. Can I just ask you to remind me, Ms Weir, how many current account customers you have?

Helen Weir: We have about 24 million current account customers, including 5 million social banking customers.

Q164 Jesse Norman: So if you have a market share equivalent of net credit interest you would have about 25% or 30% of that, say £1.25 billion of net credit interest?

Helen Weir: There or thereabouts, yes.

Q165 Jesse Norman: There or thereabouts across 24 million customers, so that is the way of working out what the average amount is?

Helen Weir: Yes, but don’t forget not all of those customers will be customers in credit.

Q166 Jesse Norman: No, but if we were trying to work out what the total amount of money derived per customer, for someone who is in credit or not?

Helen Weir: For foregone interest, yes.

Q167 Jesse Norman: Then there would be charges on top of that?

Helen Weir: For customers who are in overdraft there will be account charges which will vary depending on their usage of the overdraft and also interest.

Q168 Jesse Norman: What is the aggregate amount of additional charges that you raise on those 24 million customers?

Helen Weir: The income on current account splits broadly 50/50 foregone interest and charges and fees.

Q169 Jesse Norman: Right, so it is roughly about £2.5 billion in total from those 24 million customers.

Helen Weir: Thereabouts. There or thereabouts.

Eric Daniels: But I would clarify that would be in a normal year. We’re hardly in a normal year.

Q170 Jesse Norman: No, no, absolutely. I am just trying to get a sense of this. That is helpful we may come back to that.

Can I ask, given that the true cost of current accounts is not visible to 70% of your customers who you use "free" banking, how are the different firms competing against each other in this part of the market?

Helen Weir: I think on a current account there are a variety of different ways in which firms compete. For most customers the cost or otherwise of the current account is not the most important thing, it’s the availability of branches, the availability of ATMs that they can use, the other services that we provide, the service they have in branch and a variety of other things of that type are the main areas that cause customers to choose. If you look at the factors that customers take into account when they’re looking at the choice of current account providers, price is relatively low down because it is a relatively inexpensive product. As I say, the average cost to a customer is approximately the same as a cup of coffee each week, so significantly less than many other things that they use.

Q171 Jesse Norman: Do you think there is a case for separating out the payment transmission in order to allow more, as it were, current account portability?

Helen Weir: A different question. I think in terms of account portability, I’m not sure about separating out payment transmission, I think there are a number of ways in which portability can be improved or switching can be improved. That said, I think the experience of customers today in terms of switching has been significantly improved already. We have a switching service where we have individuals who are allocated to particular customers who will switch all the direct debits as a named contact. Typically the greatest problems arise with non-financial services companies in terms of switching; so switching direct debits from utilities and other third party services.

Q172 Jesse Norman: But you are committed to making that happen, effectively?

Helen Weir: Absolutely committed to making that happen.

Jesse Norman: Thanks.

Helen Weir: Just, if I may, on the point of portability, there are a variety of forms that portability can also take. There’s the very-an absolute portability where sort code and account number and so forth all get ported, but there are a number of other results or a number of other approaches that could be taken which would have a similar kind of result. So I think there are a variety of different options there. The first that I talked about is probably the most expensive and that’s a cost that probably would ultimately be borne by the customer but I think there are a number of other approaches to account portability that could be used. We are very committed to improving the account switching.

Q173 Jesse Norman: Thank you very much. We are very short of time, just a very quick question for Mr Daniels. It has been suggested to this Committee that it might be helpful as a regulation of the banking sector if executives were paid in subordinated debt rather than in equity, is that a view you would support?

Eric Daniels: Subordinated debt rather than equity. I think that was the suggestion from Lord Myners and from others. I think that what is important is that the idea that executives should be paid at the market, in other words it should be a market based set of pay, first, second I think that the concept of deferral so that we can recognise whether there was a additional risk taken over a more extended period is important. The actual instrument, whether it’s debt or equity, I think is a lot less important. I think the principles are-

Q174 Jesse Norman: But you recognise the point the Governor of the Bank of England made to us, which is that there is an implicit subsidy in having an equity compensation scheme because it encourages people to ratchet up the debt in the balance sheet knowing that they can take-

Eric Daniels: No, I’m not quite sure I agree that. I think that there are pros and cons to each kind of instrument and there’s not a one-line answer. What the thinking had been among many banks was that, and many companies-it is not simply banks-that by having more equity in the compensation programmes that it would align the executive with the shareholder so that they would be more aligned. That had been the prevailing thought, whether it was an industrial company or a bank.

Q175 Chair: Just before I pass on questioning to John Thurso, back to Helen Weir for a moment. You have been prepared to tell us what you are deriving in revenues from current accounts, why not tell each individual customer what they are getting?

Helen Weir: Well we are as of next year going to be disclosing on the statement the amount that each customer is paying in terms of the various items that they are incurring in terms of charges, interest and so forth.

Q176 Chair: So that they can arrive at a bottom line for the revenues you are deriving from their account?

Helen Weir: They won’t have all the information but they will know what they’re paying.

Q177 Chair: What information are you withholding?

Helen Weir: They won’t understand the cost of funds. They won’t have that information but beyond that, yes.

Q178 Chair: In that case we will then be able to introduce some price-based competition into current accounts, will we not?

Helen Weir: I would argue that it is a very price-competitive market right now. Santander is offering £100 to get customers to switch. There’s a lot of competition going on in that market already.

Q179 Chair: Yes, that is because there is inertia once clients are obtained. It has nothing to do with ongoing competition. People cannot tell what price they are buying a product at in any subsequent year, can they?

Helen Weir: I think most customers would have a pretty good idea of what they’re paying for their current banking, certainly our research-

Q180 Chair: How much do you pay?

Helen Weir: In terms of my foregone interest, quite a bit of money.

Q181 Chair: But you do not know?

Helen Weir: No.

Chair: But you are expecting most customers to have a pretty good idea and you are the Chief Executive and you do not know. I think that is, if I may say so, a ludicrous remark. The overwhelming majority of people do not have a clue and that is one of the reasons why we are engaging in this investigation.

Helen Weir: And that’s one of the reasons also why we’re committed to making that information available on our statements next year.

Q182 John Thurso: Thank you, Chairman. Mr Daniels, I wanted to ask you a couple of questions about the comments you made in the article in the FT on 25 November, but can I first ask regarding the parts of the group that have to be sold off to meet the requirements of the European Commissioner. Did you consider the possibility of taking the Bank of Scotland and hiving that off, not Halifax but just the Bank of Scotland? If not, why not?

Eric Daniels: Yes, what we did when we were negotiating with the European Commission was we presented a series of alternatives to them and then worked together with them collaboratively to try and arrive at a solution.

Q183 John Thurso: Was that one of the alternatives?

Eric Daniels: What we presented to them was, again, a variety of alternatives.

Q184 John Thurso: Was the possibility of the Bank of Scotland becoming a discreet identity one of those alternatives?

Eric Daniels: I don’t believe that was an alternative considered.

Q185 John Thurso: Why is it that is so important whereas the TSB branches in Scotland you are happy to-or prepared to see go?

Eric Daniels: I would hardly term the divestiture as happy.

John Thurso: Yes, I did correct myself.

Eric Daniels: But what I would say is that one of the things that’s terribly important to us is the brand identification by our customers. The Bank of Scotland is a very powerful brand in Scotland, it’s a 300-year-old name and the customer identification with it is very strong, and we thought that that in fact was a brand that had more resonance with the Scottish customers than the TSB brand.

Q186 John Thurso: Coming back to what you said, you responded to Clare Spottiswoode’s suggestion that the Independent Banking Commission might reverse the whole merger, really by saying the present Government should honour the promises of the last Government. Why do you think that is particularly important?

Eric Daniels: Well, I didn’t respond specifically to Mrs Spottiswoode’s comment, I basically said it is what it is. It was an introductory remark that she had in the public hearing. In terms of how I feel about the current arrangement, very clearly what happened during the economic crisis or the banking crisis was that there was a thought that HBOS could in fact go down. It was in very, very bad shape, as we all know. I think the prevailing thought was at the time that were it to happen-and this was on the heels of Northern Rock having gone down and having seen the disruption that could cause-that it was a far preferable thing if a bank were able to take it over and have continuity of service and not have the pretty dramatic implications of a bank being either brought into Government ownership, or falling.

On that basis the Secretary of State introduced a new criterion which basically said that the concerns about stability were paramount and then Parliament in fact agreed with that and passed that.

John Thurso: Reluctantly, I was on that statutory instrument.

Eric Daniels: I beg your pardon?

John Thurso: Very reluctantly.

Eric Daniels: I can understand that, but nevertheless it was passed by Parliament. So on that basis we went ahead with the deal. Now this never was meant to give us a permanent waiver for competition, on the contrary all the rules around competition still prevail, whether it’s market abuse or use of size and so on. Those are still very much-we are subject to them, as is every other bank, and there has been to date no issue with the competition authorities.

Q187 John Thurso: Looking at that point of competition, if the independent commission were to come back and say that there is sufficient evidence to say that Lloyds Banking Group is too big and in the interests of competition it should be further reduced in size, what would your response be to that?

Eric Daniels: I think that’s a hypothetical question. We are just, at the moment, giving evidence to the International-Independent Banking Commission, excuse me, and I think it’s very premature to judge an outcome. What I will say is that this is an enormously competitive market and I’m not sure that dividing banks up further will give any better outcome. As you suggested, we are already divesting a fair number of branches and current account share, and that will lead to the creation of the seventh largest bank in the UK. I think every independent study has shown that UK consumers get a top quartile, or at worst a second quartile, value deal and that concentration does not lead to lack of competition. In other words, the UK, as many other concentrated markets, are very competitive. I think if we look at the discounting that happens, that is one of the signs that the OECD uses to determine how competitive a market is, and this is a market that discounts very heavily indeed.

John Thurso: Thank you.

Q188 Mark Garnier: Thank you, Chair. Carrying on from this point, Mr Daniels, just looking at these numbers. You have personal current accounts; you have a 30% market share leader; savings account 13%, number two in the market; mortgages 28%, number one in the market; unsecured personal loans 25%, number one in the market; credit cards 29%, number one in the market. Do you know what your investment products market share and market position is?

Eric Daniels: We would certainly be among the top three, I don’t know exactly.

Q189 Mark Garnier: Maybe not number one. SME business?

Eric Daniels: SME we would be among the top three again, but not number one.

Q190 Mark Garnier: So definitely not number on in either of those two?

Eric Daniels: I don’t believe so.

Q191 Mark Garnier: It would be very helpful if you would get back to us on that. Talking about putting a lid on competition is just a nonsense really; you have this monumental dominant market share on just about every area. How can you possibly justify being the biggest bank in everything or nearly the biggest bank in everything?

Eric Daniels: Well, in the first place I’d be very happy to get back to you with our market position on both SMEs as well as investment products so we’ll write to you separately. But again, I think as I was saying before, this is a very highly competitive market and-

Q192 Mark Garnier: How? How is it competitive?

Eric Daniels: Well, if I may? We really have five different markets, if you will. If you take the mortgage market, for example, there are about 60 competitors. Over half of mortgages are basically sourced through brokers, through IFAs. So what happens is the IFA industry, which is very large and, again, accounts for over 50%-

Q193 Mark Garnier: The IFA industry is about to be-

Eric Daniels: Excuse me, I’m sorry.

Mark Garnier: The IFA industry is about to be constricted as a result of RDR so presumably you see RDR as now being anti-competitive?

Eric Daniels: I’m not quite sure what form the RDR will take yet but if I just may continue for a second.

Mark Garnier: Yes, sorry.

Eric Daniels: The independent broker determines which is the best deal for the customer, and in fact mortgages are very, very competitive. There are, again, 60 different providers. If-

Q194 Mark Garnier: Sorry, I do apologise for cutting across you, but if you have 30% of the personal current account market, one of the great advantages of having this big ownership of the current account market is that you have access to 30% of the market. You have 28% of the mortgage market, those numbers are pretty much identical and you are both dominant market share. How can you possibly say that it is IFAs that are going out and sourcing these things when you can get in touch directly with 30% of the market through those current accounts and go straight to them and sell them a mortgage product? What is the correlation between current account customers-the correlation coefficient I want-and mortgage customers?

Eric Daniels: It’s very low; it’s at less than 25%. What is very typical in this marketplace, and again I know it’s a lengthy answer but this is a complex subject, there are five different markets. It’s personal loans, mortgages, current accounts, savings and credit cards. Each one has different competitors, each one behaves differently. The cross-over among them is very, very small. So I think that if we were to look at a typical consumer it would be very normal for them to have a mortgage with one bank, a credit card with yet another and a current account with a third institution. That’s very normal behaviour.

If we look at the comparisons, if you look at Europe and other international comparisons, the concentration of a customer’s wallet-in other words the number of products they buy from an individual institution-is much higher in Europe than it is in the UK because customers shop around for different banks, different products.

Q195 Mark Garnier: Can I ask you what the correlation is then between personal current accounts and investment products?

Eric Daniels: Personal current accounts and investment, I’d have to look it up, I don’t have it to hand.

Mark Garnier: Could you get back to us on that.

Eric Daniels: Be happy to.

Q196 Mark Garnier: The other thing is, on SMEs, you are not at all sure what your market share is on the SME?

Eric Daniels: Our SME market share is approximately 20%, somewhere in that neighbourhood.

Q197 Mark Garnier: 20%, and you are one of the biggest players?

Eric Daniels: We would be among the top three certainly. RBS and Barclays would be larger probably.

Q198 Mark Garnier: In my mail bag the vast majority of complaints I get from SMEs about having trouble finding loans, comes from Lloyd Bank customers. Do you think that is because you are offering the worst product or do you think it is because you are one of the biggest players therefore I am going to get a selection more from Lloyd Bank customers than anybody else?

Eric Daniels: I’m very surprised at that statistic because in our own research we find that the great majority of our customers are satisfied. We have made a commitment to our customers, approximately two years ago, that any customer with a creditworthy proposition will, in fact, be funded. We will extend the credit.

Q199 Mark Garnier: To what extent has that creditworthiness changed then in the last three years? Because there are a great many people who are your customers who were getting credit prior to the collapse and are not getting credit now and it’s stifling business.

Eric Daniels: I beg your pardon but I don’t believe that’s the case.

Mark Garnier: Well, I can certainly bring them around to come and meet you, if you would like to meet some of these people.

Eric Daniels: I would very much appreciate that-

Mark Garnier: We will see what we can do.

Eric Daniels: -because we have not changed our credit criteria or our pricing over the last three years.

Mark Garnier: You would be amazed at some of the stories I can tell you and I will happily pass them on to you.

Eric Daniels: Please do, because again I would say that we have not changed, on the contrary, we last year helped 100,000 new customers start up businesses. We are very, very mindful that we have a role to play in the recovery of the economy.

Q200 Mark Garnier: Just one last question. I have a current account cross-selling conversion rates by product, I just want to know if you are finding that in the case of Lloyds Banking Group this agrees with how you are finding things. So the cross savings between current accounts and savings account is 88% and credit cards 53%, cash is 42%, unsecured personal loan 42% and, as you say, mortgage about 27%. Are you finding that that is the case in Lloyds Bank? Are you finding that roughly 88% of people who have current accounts are opening a savings account with you as well?

Eric Daniels: I don’t believe that’s the case. Helen, would you-

Helen Weir: No, those numbers sound very high to me.

Q201 Mark Garnier: Again, it would be incredibly helpful if you could come back with the cross-selling from personal current account into your other products, it would be very helpful if you could do that.

Helen Weir: Absolutely, we can come back.

Eric Daniels: Again what we can tell you is that-and we will be happy to write to you-the concentration of purchasing from an individual institution is less in the UK than it is in most other places, and that’s because customers do shop around and each one of the markets behaves differently with different competitors. So the mortgage market has 60 different competitors, the current account has about 30, and there are about 80 competitors in the savings market. So you have a very wide variety of players that are offering different products. The number of mortgage products is absolutely phenomenal in this marketplace so customers have real choice, and there is real value by any independent standard.

Mark Garnier: Try saying that to a 30 year old trying to get their first mortgage. Thank you.

Eric Daniels: If I may respond to that. In fact in the UK, first mortgage purchasers are generally in their early 30s,. In the Continent and other places they are generally in their late 30s, early 40s. We make better availability on better terms, easier terms, for first time buyers than virtually any other marketplace.

Mark Garnier: I believe in the 1980s first time buyers were around 22, 23, but thank you very much.

Q202 Michael Fallon: Mr Foley, you are an economist, would British banking be more competitive or less competitive if you did not retain control of the money transmission system?

Patrick Foley: Well, I don’t think we have control, I don’t think the banks have control of the money transmission system. There’s free entry and exit from the money transmission system so I don’t think it would make any difference to what is a very competitive marketplace.

Q203 Michael Fallon: But Don Cruickshank told us last week that control of the money transmission systems was the major source of banks’ market power.

Patrick Foley: I don’t think he’s correct, and I think to be fair to Mr Cruickshank it was 10 years ago he did his review and a lot has changed in the money transmission system and the way it’s governed since that time.

Q204 Michael Fallon: It was last week he sent us a submission saying, "I wouldn’t allow Google to manage the internet, we wouldn’t allow BT to re-establish control over the numbering system or terms of access to its dominant network, why do we allow banks" he said, last week not 10 years ago, "acting in concert almost absolute control over the money transmission systems over which all financial transactions take place."

Patrick Foley: I understand he said it last week, but I have read his evidence and what he pointed out, I think, on a number of occasions to the Committee was his review was done 10 years ago and he had not been close to the banking system since then. As I say, I think the money transmission system and its governance has changed quite a bit in that time.

Q205 Michael Fallon: Yes, but you still have an influence over it, do you not?

Patrick Foley: No, I think the banks generally own the system or have access to the system but there’s no barriers to-

Q206 Michael Fallon: Well, do they own it or have access to it?

Patrick Foley: They have access to the system but there’s no-

Q207 Michael Fallon: They do not own it? Who do you think owns it?

Patrick Foley: I’m not sure of the ownership structure of the system, to be frank, but there are no barriers to new-

Q208 Michael Fallon: But you are the Chief Economist at the bank, you must know who owns the money transmission system?

Patrick Foley: Well, I am the Chief Economist, I am not an expert on the governance of all the systems.

Q209 Michael Fallon: Well, who did you think owned it?

Patrick Foley: That is not the point, the point is do companies-do new entrants have entry of-are able to enter or exit the money transmission system, and can the existing players stop them? The existing players cannot stop them entering and, indeed, the OFT in their barriers to entry study said that the money transmission system was not a barrier to entry.

Q210 Michael Fallon: How many have entered over the last 20 years?

Patrick Foley: That is nothing to do with the money transmission system, I think that is to do with a very competitive UK marketplace. It doesn’t make it an attractive marketplace for some entrants to come in.

Michael Fallon: Thank you.

Q211 Chair: You said in evidence just a moment ago, Mr Foley, that a lot has changed in 10 years since Cruickshank wrote his report. In fact what he said to us in evidence, and I have it in front of me-written evidence-"Nothing much has happened. So not surprisingly nothing much has changed." Quite the opposite to the impression that you have just given.

Patrick Foley: No, well I think that’s his observation from outside the industry, but he hasn’t been close to the industry for 10 years, since he wrote his review.

Q212 Chair: Yes, but a moment ago you said that he himself was, in evidence, suggesting that a lot has changed in 10 years.

Patrick Foley: No, no, please don’t misunderstand me, all I was saying was he said he had not been close to the industry since he did his review 10 years ago and therefore was not in a good position, in my view, to judge how much the industry had changed.

Q213 Chair: So your primary criticism of Cruickshank is that he is just not up to speed, out of date and-

Patrick Foley: No, it’s not intended as a criticism at all, it’s just he has not been a close observer-

Q214 Chair: What weight should we attach to Mr Cruickshank’s evidence?

Patrick Foley: I think Mr Cruickshank was very close to the banking system 10 years ago, he wrote a very interesting report at that time, but the industry has changed a lot since that time and therefore what he concluded in his report 10 years ago is not particularly relevant to the industry today.

Q215 Michael Fallon: But he told us last week, "A regulator armed with independent authority over money transmission systems would make a huge difference, certainly in retail markets where the current account market is key." Why is he wrong?

Patrick Foley: I don’t see what difference that regulator would make. I mean there is free entry and exit to the money transmission system so I’m not quite sure what difference a regulator would make.

Q216 Andrea Leadsom: Thank you. Mr Daniels, would you say that your retail banking activities are profitable? Would you say it is generally a profitable business?

Eric Daniels: Yes, it is.

Q217 Andrea Leadsom: So why then would you argue so strongly that it is highly competitive and that there is free entry and exit of players?

Eric Daniels: I’m not sure that profitability is associated with competitiveness or lack of competitiveness. What we’re seeing is, in fact, that over the past 10 years there has been huge movement in terms of market shares, for example. What we have seen is, for example, Nationwide triple their market share over the past decade. We’ve seen Virgin enter the market, we’ve seen Tesco enter the market and we’ve also seen a fair number of foreign banks in the credit card markets, for example, NBNA, Cap One and others enter this market, so it is highly competitive and customers get very good value from it.

Q218 Andrea Leadsom: But evidence from the FSA suggested that there have been very few new entrants to the UK retail market. You are saying on the one hand it’s competitive, on the other hand it is profitable, on the next hand there is free entry and exit of market players. Anybody with any grounding in economics would expect then, for more new entrants into that market. Why do you think that that is not the case?

Eric Daniels: I’m sorry, anyone would expect?

Andrea Leadsom: That there would be many new players coming into the market. Why do you think that is not the case?

Eric Daniels: Again, I do believe we are seeing a fair number of new players entering into the market. As little as three years ago there were 164 mortgage providers in this marketplace, today there are around 60. So you see an awful lot of entry and exit into the marketplace.

Q219 Andrea Leadsom: Into the mortgage market, yes, but we are specifically talking about the UK retail banking market here and, as I understand it, there has only been one new banking licence granted in the last three years, I think was the evidence we had recently from the FSA.

Eric Daniels: That was with Metro Bank. But what I am referring to, when you refer to the retail market, again I think there are five separate markets starting with current accounts, savings, mortgages, credit cards and personal loans. If you look there are a large number of competitors across each one of those markets, as I said, and I think you’re probably thinking of the personal current account market. There are 30 providers of personal current accounts in the market today, so it’s very competitive.

Q220 Andrea Leadsom: So then why do you have such a huge market share? Why is there so much concentration-I think it is over 60% in the top five, or is it three players in the personal current account market. There are 73% share amongst the four largest players. It does not to me, with my knowledge of economics, sound like a mature highly competitive low margin business that you are suggesting it is. It sounds to me as though there is something in at least the PCA market that means that four banks are able to generate this enormous market share to make monopoly profits and to keep out new entrants.

Eric Daniels: Well, I beg to differ. I think if you look at the concentration in the UK market it, in fact, is less than many markets. If you look at Australia, or you look at Canada or France, for example, you would find even greater concentrations. The US and Germany are often looked at as markets that are more fragmented and would display more of the kind of behaviours that you had suggested. In fact they are every bit as concentrated if you look by region. So if you looked in California, for example, and you looked at the concentration levels there, they would in fact be higher than the UK.

So it depends on which region you look at. I think the facts are that if you have a market where you have several different competitors and there’s high concentration but there’s high contestability-in other words players will seek to gain share and therefore will fight very hard on service, on advertising, on trying to reach out to customers-that that leads to very good customer outcomes and that’s, in fact, what we’re seeing in the UK market where you are seeing first quartile value in most cases for banking products.

Q221 Andrea Leadsom: But, excuse me, sir, that is not borne out by the experience because customer inertia, the likelihood of individuals moving their bank accounts is very low, is it not? There isn’t an enormous amount of switching going on.

Eric Daniels: No, no, that’s not in fact the case. That’s one of the pieces, I think, of perceived wisdom that is not true. If you look-

Q222 Chair: Are people changing their bank accounts the whole time, are they? Every year-

Eric Daniels: People in fact are changing their bank accounts-

Chair: And the figures we have been given on the rigidity in the market is-

Andrea Leadsom: Enormous customer inertia.

Eric Daniels: If I may answer the question. If you look at the switching behaviours of PCA customers, personal current account customers, it is somewhere between 7% to 11% of the customer base every year. Within Lloyds we have to attract in a million new current accounts every year to make up for the attrition that we experience. So 7% to 11% is very high. That’s about the international norm. If you look at the switching behaviours in mortgages and in savings accounts, in fact the UK switching is much higher than the international norm. So customers in fact do shop, they are well informed and they are very willing to switch.

Q223 Andrea Leadsom: Can you tell me, how long does it take if I want to move my current account today from your bank to another bank? How long would that take, roughly?

Eric Daniels: I’d ask Helen to answer.

Helen Weir: It will very much depend on your third party direct debit providers, that is the critical path time. Sometimes they can take up to two months to transfer the direct debits. Typically within the banking system most of the change could happen within two to four weeks.

Q224 Andrea Leadsom: So if I am paying my utilities monthly I instantly have one massive problem to transferring my bank account. One of the things that-

Helen Weir: Sorry, could I just pick up on that?

Andrea Leadsom: Yes.

Helen Weir: No, as I say we offer a switching service which means we manage that through for our customers.

Q225 Andrea Leadsom: So you would pay my gas bill even though there is no direct debit set up?

Helen Weir: We will work with the providers to make sure the direct debit gets moved, even when the utility directs it to the wrong place.

Q226 Andrea Leadsom: For the convenience of the customers, would you support the idea that if the customer wanted to take their bank account number with them that they might be allowed to do so?

Helen Weir: I’m happy to pick that up. I think there are a number of different forms that account portability-which I think is what you’re referring to-can take. One is where the sort code and the account number go with the customer, that is probably the most expensive to implement but it is a viable form of account portability.

Q227 Andrea Leadsom: So you would allow any customer that wanted to to take their sort code and account number with them?

Helen Weir: That is a form of account portability.

Q228 Andrea Leadsom: But would you allow that to happen? If I said to you I want to move my bank account from you, take it to Barclays and I want to take my account number and sort code with me, would you let me do that?

Helen Weir: At the moment I couldn’t do that because of the way the system is set up, the sort code is very specific to a particular banking institution as I am sure you are aware. There are various ways though which switching can be made easier without going the full way.

Q229 Andrea Leadsom: I want to specifically deal with the idea of account portability, it is a very particular point that Sir Don Cruickshank raised which was very interesting. Going back to the point about who owns the money transmission system, if I want to change my account number and my sort code, what is stopping me? Is it not the case that it is the fact that the banks own the money transmission system and it is the banks who have decided that I cannot do that? Just to give you an analogy, Sir Don Cruickshank, when he was leading Oftel, saw through legislation to make telecoms companies allow number portability which previously was absolutely impossible and never happened before and so on. Is there any technological reason why that could not be the case in the banking system?

Eric Daniels: If I may, and this is again one of those that is very hard to give a one line answer. The purpose of a sort code is so that in fact the money can find its way to the appropriate bank and to the appropriate branch and then to the appropriate account number. So there is a unique sort code that allows the transmission to be successful. If you in fact have a homogenous sort code for example then it would cause an enormous ripple in the money transmission system, money wouldn’t go to the right place.

Andrea Leadsom: As it currently is, yes.

Eric Daniels: So what we would have to do is to completely redesign and rethink how a money transmission that’s been around for many, many years, how it would operate. Again, that’s not something that can done from one day to the next.

Andrea Leadsom: As Oftel did, yes.

Eric Daniels: No, telephone numbers are completely different. Telephone numbers are independent of whatever switch. Technology has changed all that but the sort codes are not, they are very specific identifiers. So, again, this is not something where I would venture an answer in two minutes or two hours. I think it requires much more profound study.

Q230 Andrea Leadsom: But would you agree that the technology exists to be able to do that?

Eric Daniels: I think if we were willing to completely rethink how money transmission systems work, it’s not beyond the wit of man to figure out a different system, but I’m not sure that you would ever be able to justify that investment. As Helen suggested, I think there are much better ways to improve portability.

Q231 Chair: Just to be clear, you are flatly contradicting-and happy I presume on the record flatly to contradict-the OFT, who in their conclusions on this issue say, "We have found significant challenges in attracting personal and SME customers through a combination of low levels of switching", and they go on to other things.

Eric Daniels: Through a combination of?

Chair: "Low levels of switching, high levels of brand loyalty and consumer’s preference for providers for a branch network."

Eric Daniels: I would absolutely disagree with that conclusion.

Q232 Chair: They just got it completely wrong?

Eric Daniels: I believe that the OFT in their same report, said that 80% of customers in personal current accounts are satisfied. That’s their research-

Chair: They are also ignorant of how much they are paying.

Eric Daniels: Of the 20% that are not, about a third to a half of them switch every year. Certainly in the SME market what we’re seeing is switching of somewhere around 20% per year. Part of that is because you have, again, in SMEs a very high morbidity rate, and so what you find is a lot of people exiting the market and a lot of people entering the market and that gives them new choice, as well as switching among the existing players.

So I think that the switching behaviours are much higher than I think the report would lead you to believe.

Q233 Mr Umunna: Thank you, Chair. Mr Daniels, could you just-very succinctly if you can for the record-confirm for our benefit the size of the Government’s stake in your group?

Eric Daniels: It’s approximately 40%.

Q234 Mr Umunna: Do you think it would be fair to say that without the assistance and support given by the UK Government over the last two or so years, your business, as it is today, may not exist?

Eric Daniels: I think there are two things that have to be understood. That in the first place I think all banks have received assistance from the central banks and from Government, so this is not unique to Lloyds.

Mr Umunna: I am not suggesting it is.

Eric Daniels: And that very clearly when the liquidity markets froze that all banks were very grateful for the assistance that was given. So I think that would be the point that I would make.

Q235 Mr Umunna: Could you therefore explain how you can possibly justify charging-I am talking about the UK Government providing support but really its UK taxpayers-those UK taxpayers who bank with you a 19.3% charge for an authorised overdraft facility, which is more than 38 times the Bank of England’s base rate.

Eric Daniels: What I would tell you-and I’d ask Helen to give you a better explanation in terms of our overdraft charging mechanisms-that by and large overdrafts are a very low return product. They’re not something that we make a lot of money from. We use the product as a service to our customers, but it’s not necessarily something that we would greatly enjoy. In other words, it’s not a high return product. But, Helen, perhaps you can give a fuller explanation.

Q236 Mr Umunna: One moment, Mr Daniels, I asked you how you could possibly justify charging 38 times the Bank of England’s base rate, are you saying to me you think that is justifiable?

Eric Daniels: If I may, and again I’ll refer the question to Helen, the Bank of England base rate has nothing to do with our cost of funds and that’s something that’s commonly not understood. The actual cost of funds that we have is considerably higher. We can’t borrow money from the Bank of England at that rate, nor can anyone else. So that’s-

Chair: But just take 3% off the figure and you get to your cost of funds. So you move down the yield curve.

Mr Umunna: So let us say it is not 19% but 16%.

Q237 Chair: So now if we re-pose the question, can you justify 16%?

Eric Daniels: And again, if I may, we then have to deduct the losses. This is the highest loss product of any that we issue. So every time we extend an overdraft we in fact incur losses at some point down the road. In addition to that you have administration costs, so the total return on overdrafts is, in fact, not very good. Helen?

Helen Weir: No, that’s exactly right. The typical losses on our overdraft product are somewhere of the order of between 11% and 13%. So when you take that and you take the cost of money and you take the cost of provision of the branch network and the servicing of that you can-

Q238 Mr Umunna: So are you saying that if you look at the income you get from levying overdraft charges across the board, you are not making a profit from them?

Helen Weir: Overall on the current account product-Eric has already said that overdraft is not a significantly profitable instrument for us. Likewise, the current account is not a significantly profitable-

Q239 Mr Umunna: But that was not the question I asked. The question I asked is if you look across the board of the income you get from levying overdraft charges, authorised overdraft charges, are you saying that you are not making a profit?

Helen Weir: It will very much depend on how a customer uses a particular overdraft. We do make some profit on overdraft but-

Mr Umunna: Well, hang on-

Helen Weir: No, I am answering your question. We do make a profit on overdrafts but I’m saying also that it is not a product that delivers excessive returns.

Q240 Mr Umunna: Right, but you are still making a profit through charging these exorbitant interest rates to people up and down this country?

Helen Weir: We are making a profit. I think we’ve outlined already the numerous costs against which the income we get from those customers has to cover, including-

Q241 Mr Umunna: Does that factor in the, I think it is, £5 a month charge that you levy on top of the interest?

Helen Weir: For customers who use their overdraft. We also have the costs of capital which we have to hold against these overdrafts because we are required through the capital regime to do that. So there are significant costs also of-

Q242 Mr Umunna: Can you understand why customers may be feel that they are being ripped off by you?

Helen Weir: I’m concerned that’s how customers feel and I do believe that it’s important that we are transparent with our charging so customers understand what they’re getting. However, back to my original point, the average customer pays-and that’s including foregone interest-less than a cup of coffee per week for their banking. For that they get access with our group to over 3,000 branches, a wide ATM network, money transmission service, use of debit card and so forth. If you compare that with things like mobile, with Sky and a number of other things that’s good value.

Q243 Mr Umunna: You keep using this cup of coffee comparison as if-a cup of coffee, if you get coffee here, about £2, something like that. It is still about £100 a year at least which is actually quite a lot of money to many of my constituents. The rates and the charges that I was just citing there are, of course, Lloyds rates and you are responsible for Halifax as well. I think I am right in that, am I?

Helen Weir: That’s correct, yes.

Q244 Mr Umunna: And obviously about this time last year-I am a Halifax customer-you changed your overdraft pricing structure from charging interest at a rate of 19% to this £1 a day daily fee. So a £1 daily fee, for example, on an overdraft of £250 would be equivalent to like 146% APR. How have your customers reacted to this new overdraft pricing structure?

Helen Weir: The response from our customers has been very good. We widely researched the charging structure before we implemented it. Customers told us they liked it because they felt they understood it. It was very clear-back to the earlier point-they understand what they were going to get charged for. The level of complaints that we have seen has fallen very significantly.

Q245 Mr Umunna: Have you done any analysis of how many customers-we have had read reports in the media that tens of thousands of customers left as a result of you introducing this new pricing structure. Can you tell us how many left as a result of you levying the new charge?

Helen Weir: I can’t tell you off the top of my head although I could make that information available; I can write to you afterwards if you wish. We know that some customers did leave as a result of it. We also know that quite a few customers also changed their behaviour in terms of how they operated their account. But overall our satisfaction levels with the account have gone up.

Q246 Mr Umunna: Right, but presumably if you are carrying out a survey, a satisfaction survey, you are not really going to be getting opinions of the people who have left, are you?

Helen Weir: No, that’s correct.

Q247 Mr Umunna: Right, so in truth you do not really know the satisfaction or not that there was when you introduced this new pricing structure, because all those people who left as a result of you introducing it, you do not know their views?

Helen Weir: Well, I’m assuming that the people who left would not have been happy with that charging structure.

Q248 Mr Umunna: Yes, and you also are not able to tell me off the top of your head how many people left as a result of that pricing structure?

Helen Weir: Yes.

Q249 Mr Umunna: So, in fairness, you do not really know how satisfied people really were when you were introducing the new structure?

Helen Weir: What I know is we lost relatively few customers and the vast majority of our customers are happy with the product. We’ve seen an improvement in customer satisfaction and a very, very significant reduction in complaints.

Mr Umunna: Thank you.

Q250 Chair: Can I just be clear, are these overdraft facilities profitable or loss-making?

Helen Weir: I’ve said that they were profitable.

Q251 Chair: So when Mr Daniel’s told us that the high interest type of overdraft facility was not profitable, and that you do not particularly enjoy providing it-

Eric Daniels: No, what I said is it is not a particularly high return. I believe those were my words. So I didn’t deny profitability at all. It is profitable but I don’t think they give us the kind of returns that we get from other products.

Chair: Okay, that is fair enough. I think we have nailed this.

Q252 John Thurso: Can I just follow up on this question? I have fondly been borrowing large amounts of money from the Bank of Scotland for a very long time thinking that I am a profitable customer. Is there a difference, just to get clear, between the overdraft you have been talking about which are typically small in size and then carry costs for not a great return, and the larger overdraft that might be arranged with an SME or a larger customer? Is what you are saying that the lack of profitability is down to the complexity of small overdrafts rather than big, or are you just saying that overdrafts is a not very profitable area of business?

Eric Daniels: I think it’s important to distinguish between corporates, including SMEs, and individuals. They are much different markets. What happens is in the case of an SME or a corporate, what we do is we arrange a facility, so we tell the entity that they can borrow up to a certain amount and that the pricing on it is prearranged. That is a much different equation. It generally tends to be individual lending and it’s not the more formulaic lending that you would have to an individual using credit scoring and models. So they tend to be much different.

Q253 John Thurso: Somebody comes to see me once a year, for which I am extremely grateful, and we decide how much I need to borrow and that facility is put in place, a fee is charged, it is perfectly straightforward and an amount over Libor is paid. But what you are talking about is not that kind of arranged personal overdraft-

Eric Daniels: That’s correct.

John Thurso: -you are talking about relatively small overdrafts, which are required by people who are probably on quite low incomes and who are dipping in and out as a result of small cash flow movements. That is what we are really talking about here.

Eric Daniels: If I may characterise it somewhat differently. Yes, they are completely distinct but what we find is that the overdraft is a service or a facility for our customers so that when a customer doesn’t think about how many debits are coming into the account because they have standing orders-for gas, electricity, the supermarket, whatever-and they don’t manage their account as prudently as they would wish to, we extend the facility of allowing them to not have their payment rejected, with all the issues that are related to that, so it’s a service, it’s a facility. It happens to be a very costly one and results in a lot of losses, which is the reason why we’re not enamoured with the product, although we do view it as a key service to our customers and that’s the reason why we offer it.

Q254 John Thurso: But you are still making money on it, though. It is a low return product, that is what you have been saying, just to be clear?

Eric Daniels: Correct.

Q255 Mr Mudie: There are talks reported by the BBC between banks and the Government on bonuses. Is this a fact that talks are going on?

Eric Daniels: I have not spoken to Government to-

Mr Mudie: Sorry?

Eric Daniels: I have not spoken to Government regarding bonuses.

Q256 Mr Mudie: To your knowledge are talks going on?

Eric Daniels: I beg your pardon?

Mr Mudie: To your knowledge, if you a re saying you a re not involved, are you aware of talks going on?

Eric Daniels: I think it would be perfectly reasonable to believe that they are. The banks speak with Government on a wide variety of issues with fair frequency, I imagine it must be happening.

Q257 Mr Mudie: Would you be willing to participate in these talks if you were invited, if part of the talks was the question of limiting bonuses to your staff?

Eric Daniels: I’m sorry, would I be pleased to speak to Government about bonuses? Is that the question?

Q258 Mr Mudie: Well, I said would you be pleased to attend and would you be willing to look favourably on limiting bonuses to your staff?

Eric Daniels: Well, I think that there are a couple of things. Yes, I would be pleased to have any conversation, but in the case of Lloyds I think that we have to be very clear, we are not an investment bank. We are a commercial bank. The average salary of our employees is about £25,000 a year. The average bonus payout is somewhere around £1,000 per employee so we are not in fact an investment bank, we are a commercial bank. We serve customers, that’s what we do.

Q259 Mr Mudie: So I presume you will no t have anyone employed by your bank earning more than you?

Eric Daniels: No, that would not be the case. We have specialists and, as you would expect, people who have very specialised skills that are much in demand for the market, have, in fact, a different market comparator so we could very easily have people making more than I am.

Q260 Mr Mudie: How many?

Eric Daniels: I don’t know off hand.

Q261 Mr Mudie: Mr Daniels, you a re the Chief Executive and you do n o t know how many people in your bank are earning more than you? I find that hard to believe.

Eric Daniels: I wouldn’t be able to give you a number off the top of my head.

Q262 Mr Mudie: You would n o t wish to , or you would n o t be able to?

Eric Daniels: I would not venture a guess.

Q263 Mr Mudie: Well, I wi ll be happy for you not venturing a guess but can you send the information through to the Committee in writing?

Eric Daniels: I’d be happy to.

Q264 Mr Mudie: Lovely. Seeing we own 41% of the bank, I see from your-and I accept that you a re not accepting bonuses, I hope I a m not putting words into your mouth, but that i s my understanding?

Eric Daniels: I beg your pardon?

Mr Mudie: You a re not accepting bonuses, was it last year and is it this year?

Eric Daniels: For the bonuses that would normally be paid out in 2010 I did not accept it and in 2009 I did not receive a bonus either.

Q265 M r Mudie: Oh good. Well, I see your shares, could you just tell me these shares, I had the figures somewhere, yes, December 2008 you had 423,000, in February 26 you had 607,000 shares listed in the accounts . Are these shares you have bought or were these shares given by the bank?

Eric Daniels: No, those are shares that have all been purchased.

Mr Mudie: Have?

Eric Daniels: All been purchased.

Q266 Mr Mudie: You ha ve purchased them yourself and you have to list them?

Eric Daniels: That’s correct.

Q267 Mr Mudie: Now, in the same accounts , these have moved to 2.5 million . Is this a restructuring of the shares ? Because it seems strange that you go from 423,000 to 2.5 million at December 2009. Even you could n o t have bought that number of shares.

Eric Daniels: Yes, Mr Mudie, in fact I did. What happened is-

Mr Mudie: 2.5 million?

Eric Daniels: If you recall, Mr Mudie, we had a rights offering, a very significant capital raising in December of last year, November/December of last year, and then each one of our shareholders had the right to exercise their rights and purchase additional shares, which is, in fact, what I did.

Q268 Mr Mudie: How many other shares do you have that you have purchased, including share options?

Eric Daniels: I really have not a clue.

Mr Mudie: I a m sorry?

Eric Daniels: I don’t have a clue off hand. You’re giving me more information than I had at my fingertips, so you’re better informed than I am about my personal finances.

Mr Mudie: You must have a fair number if you do n o t know how many you have.

Eric Daniels: I don’t know off hand.

Q269 Mr Mudie: D o you n o t know the share options you received last year?

Eric Daniels: No, but I’d be happy to provide them. They’re in fact in our directors’ report on remuneration and they’re included in every annual report so it’s public information.

Q270 Mr Mudie: Just a minor point, again speaking as somebody who contributes to your bank through tax. Why do you get cash to pay your tax planning and, in particular, in 2008 in the annual accounts you ha ve got an education allowance?

Eric Daniels: When I came to the UK they were costed in making the move. Part of the contract, and it was simply part of the compensation, were a number of features, including some tax planning. That’s not at all unusual. It was one of those things where, instead of including it in my salary, which would then have meant that my pension and all the rest of those would be higher, the bank chose to allocate a certain amount of my compensation to those allowances. It’s pretty much normal.

Q271 Mr Mudie: But that has continued in each year, 2009?

Eric Daniels: By and large my contract has been largely unmodified, save for the normal increases that happen periodically.

Q272 Mr Mudie: I notice in the question, but I am not sure whether you are preoccupied with tax allowances, you left the education allowances out. I am not sure about the education allowances. How much were they, and what were-

Eric Daniels: I don’t recall what the education allowance is. Certainly I’d be happy to write to you if it’s important.

Q273 Mr Mudie: The difference between the two figures year-on-year is £30,000, so they would be considerable.

Eric Daniels: I don’t know offhand, but again it was part of the Director’s remuneration report. It’s easy to look up and it’s public information. I no longer receive that allowance.

Q274 Mr Mudie: You certainly seem vague for a major Chief Executive.

Eric Daniels: Well, perhaps I spend more time worrying about the bank than I do about my personal affairs.

Mr Mudie: If I was on a £1 million salary, I would probably be the same.

Q275 Mr Love: You drew the distinction earlier on between an investment bank and Lloyds, which you have characterised as a commercial bank. In those circumstances, I think you were drawing the distinction that you do not have the excessive salaries that have been complained about. Would that mean that you would be perfectly happy to disclose according to the Walker principles?

Eric Daniels: I believe that what Mr Walker recommended was that there be disclosure among several tranches of compensation, but I also believe that Mr Walker has recommended that not be done unilaterally, for fear that the UK would stand out from other countries. So we are much less affected. We have many fewer employees who would be in those tranches, although we do have some. But I think that the recommendation from Mr Walker at the moment is that the UK should not act unilaterally, and I believe that’s right.

Q276 Mr Love: What is wrong with Lloyds acting unilaterally? After all, you are telling us that what that would show is how few among your senior executives are in these pay packets. Would that not be of benefit? Would that not reassure your customers that excessive salaries were not being paid?

Eric Daniels: I don’t think that our customers are particularly concerned. They’re concerned must more about value; about good service; about convenience. Those are the things that matter to them, and that’s what we strive to do.

Q277 Mr Love: I a m q uite surprised at you saying that your customers are not concerned at the level of-and I can no t trace it directly back to customers of Lloyds Bank, but I think there is a very strong perception and there is real concern out there among the public about the level of bankers’ remuneration, especially in the context of what has happened over the last few years. Do you not think that Lloyds have a responsibility to try to address those concerns?

Eric Daniels: What we believe in Lloyds is that we are very much a part of this society and in fact we take pride in terms of being good corporate citizens, whether it is our carbon footprint; whether it is the amount that we donate to charity through our foundations; whether it’s the activities of our employees for worthy causes in their communities. So we are very proud of our corporate citizenship. We are very attuned to the debate that is going on regarding the role of banks in society and the role of bankers in society, so I would say that we are responsive and we’re certainly listening to what is happening, with what our customers feel as well as the broader public.

Q278 Mr Love: Let me ask you: you drew attention-quite rightly in my view-to the fact that you pay bonuses to some of your less well-remunerated staff. What is the total level of your bonuses last year and this year, and how does that compare with dividend payments in those two years?

Eric Daniels: It is no secret that we did not pay any dividends over the last two years. We are prohibited from paying dividends until January 2012 through our agreement with Europe. So any bonuses that were paid-if we did pay bonuses-would be infinite in comparison to the dividend.

Q279 Mr Love: I would like to move to a completely different subject: about the disposal of your 600 branches. I wondered whether you had had any discussions, as yet, with UKFI, particularly in relation to achieving their objective of enhancing competition as a result of that disposal?

Eric Daniels: We certainly meet with UKFI on a regular basis and we certainly talk about not only the financial condition of the business but also some of our clients, going forward, as we would with any large shareholder. So we continue to have ongoing discussions with them.

Q280 Mr Love: During those discussions have they expressed any preference about selling to a new entrant? Has there been any discussion about whether it is just a case of getting the highest price possible, or is there any discussion about bias towards new entrants into the marketplace to enhance competition?

Eric Daniels: It would be totally inappropriate for UKFI to have a view on who a potential buyer could be. Their role as shareholder is to maximise the value for the taxpayer.

Q281 Mr Love: There is some talk about a public interest test on the sale of the 600 branches. How do you view that? Should there be a public interest test that UKFI should ensure is complied with in this disposal?

Eric Daniels: I’m not sure what the shape of that public interest has to be, so I would find it very difficult to answer the question.

Q282 David Rutley: Could I just ask one question, going back to the profitability or the low returns on PCAs, which is what I think you have given evidence on. You will be familiar with the 2008 market study by the OFT on PCAs, and it says the OFT estimated banks earned £8.3 billion in revenues from personal accounts in 2006, equivalent to £152 per active current account. It broke it down by saying that these profits were generated by five sources: net credit interest, the difference between interest paid on credit balances to consumers and income derived by the bank from those funds; net debit interest, interest paid by consumers minus the cost to the bank of lending these funds; insufficient funds charges; package fees and ancillary charges. All that comes together in 2006 to £8.3 billion for all the banks. This seems a rather profitable business, and I am rather concerned when I also see that the OFT believe that the PCA revenues are bigger than savings and credit cards combined. So if the PCA generates more cash for you guys than savings and credit card products, why are you telling us that you are doing us all a favour providing PCAs?

Eric Daniels: I’ll ask Helen to comment as well, but I think that you’re looking at only one component of the profit and loss statement. In other words, you’re looking at the revenues that are coming in. Against those revenues we have losses on the overdrafts, which we have mentioned before. We have branches, we have ATMs; we have thousands and thousands of employees who serve the PCA market. So I think that if you were to look at the net-in other words, you take the revenues, less the costs, less the losses-then the return against the PCAs tends to be at the lower end of the range of the banking products that we do offer.

Q283 David Rutley: Finally, Chair, I would like to just clear this up, because it is suggesting here that savings and credit cards together generate less revenue than active bank accounts, and I understand that you are saying that when you net off the cost of ATMs-but there must also be similar costs for savings and credit cards?

Eric Daniels: Yes and no. For a credit card, for example, most credit card providers don’t use branches, so-I think there are something like 60 credit card providers, perhaps 30 to 60, I’m not sure which, but there are a fair number of credit card providers-the majority of them don’t have branch networks so, in other words, their cost dynamics are much different. They tend to use the mail; they tend to use direct marketing rather than branch sales, so that changes their dynamics.

Q284 David Rutley: Is it true of savings products as well?

Eric Daniels: There are approximately 80 savings competitors in the marketplace. Many of them are direct.

David Rutley: I think what we would find useful, Chair, is if we could have a written breakdown of some of the evidence you have given about the profitability and the margins on PCAs for your bank, if you could provide that.

Eric Daniels: We would be happy to give you what information is available.

Q285 Chair: Thank you very much. Before you go, Mr Daniels, could you give us a view on when you think the Government’s shareholding should be sold?

Eric Daniels: I don’t have a particular view on that. That is very much up to UKFI and the Government.

Q286 Chair: At what price?

Eric Daniels: The price currently is above the break-even point for Government. So, in other words, the taxpayer is in the money.

Q287 When the taxpayer gets substantially "in the money", do you think that Government should consider divesting itself or some or all of that holding?

Eric Daniels: That’s very much a decision for Government.

Q288 Chair: Does the company have no view on this at all?

Eric Daniels: No, I think the company’s view is that the management’s purpose is to serve our shareholders well; to serve all of our stakeholders, and that’s really our job. Any one of our shareholders, whether it is some of the more traditional names that you would expect, such as Standard Life, L&G and fidelities, or UKFI, have the absolute ability to be able to buy and sell when they wish to.

Q289 Chair: But your preferred position must be zero Government holdings, must it not?

Eric Daniels: Certainly, I think that the presence of any abnormally large shareholder impacts the stock and impacts the other shareholders, so-

Chair: Yes, but I am talking about a Government shareholder here.

Eric Daniels: So it would be-

Q290 Chair: What about the presence of a government shareholder? Does that not have particular significance?

Eric Daniels: It would be my desire to have a much more evenly balanced shareholder base.

Q291 Chair: Therefore, how quickly do you think the Government should get its holding down to something that you are describing as a more even shareholder base?

Eric Daniels: Again, Mr Tyrie, I think that’s a decision for Government.

Chair: We have had a few witnesses recently who have played a straight bat and certainly that was one. Andrea Leadsom had one quick point that she wanted to come in on.

Q292 Andrea Leadsom: Yes, bearing in mind the substantial size of the Government shareholding, how long do you think it will take, once the Government decides to divest, to sell all of those shares and place those shares in the marketplace? What is your professional view of that?

Eric Daniels: I think there are various models. There is one, for example, a city in the US had the Government sell down in a relatively short period by having a fairly large sale and then a scheduled sell down over time. So it could in fact be done very quickly. There are other types of sale where there are large holders, for example large pension funds that might be interested in purchasing blocks, so I think it is something that will depend at the time the Government wish to sell. They will have to decide whether they wish to sell down all or some and the rapidity with which they wish to do it, but that is-

Q293 Andrea Leadsom: Are you on the lookout for buyers yourselves? Do you see that as part of your role?

Eric Daniels: It is not my shareholding so it would be inappropriate for me-

Chair: Andy Love had a very quick question.

Q294 Mr Love: It is going back. I am sorry to do it, but I think we need to press you on this matter. It is about the public interest test. The consumers’ organisation will be suggesting that that public interest test should look at what the effect will be on competition of any sale, and whether it will enhance competition. If that was a public interest test, would it be something that Lloyds could support?

Eric Daniels: As you know, one of the conditions of the European accord was in fact to sell to a party that had no more than 14% current account market share. So I believe there is already some thought toward trying to create a new competitor in the marketplace.

Chair: Thank you very much for coming before us. I know that for bankers before the Treasury Select Committee it is often not an easy ride. I have to say, we have heard some very interesting evidence, and some surprising evidence: the idea that customers have a pretty good idea how much they are paying for their current accounts will be met with something of a loss of credulity among many of them, particularly, if I may say so, since the Group Executive Director herself did not know how much she was paying.

Thank you very much for coming before us today.

Eric Daniels: Thank you.

Chair: We will now take a five minute break.

Examination of Witnesses

Witnesses: Stephen Hester, Chief Executive, RBS Group and Brian Hartzer, Chief Executive, UK Retail, Wealth & Ulster, RBS Group, gave evidence.

Q295 Chair: Thank you very much for coming before us this morning. Before taking further issues on competition, I would like to ask you about the report into the collapse, which is technically not a report, in any case; it is a series of findings by the FSA. Just to clarify, am I right in thinking that you have not seen it?

Stephen Hester: That’s correct.

Q296 Chair: Have you asked for it?

Stephen Hester: No, I don’t think we have asked for it-

Q297 Chair: Do you not think it would be a good idea? Because there must be some thoughts in there that might be relevant to making sure that we do not have any repetitions.

Stephen Hester: I would believe that the matters that they looked into were largely based on information they received from RBS. Obviously they would have formed their own judgements. In other words, they had access to our committee minutes and all the different things in there.

Chair: I am sorry, could you speak up?

Stephen Hester: Yes. The subject matter that they looked into was clearly stuff that I have done very little else other than think about when I was brought in to try and rescue the bank, and so I think that we feel within the bank-and I feel-that I have a strong command over the things that were done right and wrong, and why.

Q298 Chair: Still, do you not think it would be worth taking a look?

Stephen Hester: I suppose that in my order of priorities I don’t put it very high.

Q299 Chair: Given that it is of such limited value, as you see it now, to the commercial future of the company, are there any corporate reasons why you would not be happy for the FSA to make more of this material public?

Stephen Hester: It’s hard for me to answer that because without knowing specifically what is in it, I don’t know if there are any issues of-

Q300 Chair: That is why I began by asking whether you wanted to take a look at it, to which you said-I am summarising and I hope I am not putting words in your mouth-it will be of such residual value, given that you have been working on these issues intensively, that you might get around to it or you might not.

Stephen Hester: But my honest answer to you is: I don’t know whether there’s anything in it that exposes us to any kind of risk, or anything like that. I don’t know the answer to that, but what I do feel-

Q301 Chair: Under FISMA rules, you are in a very strong position to decide what can be put into the public domain, as I am sure you know, and perhaps it might help if I suggest that you do look at this and come back to us in writing with an answer to the question I have just asked. That you ask for it, come to a view and come back to the Committee.

Stephen Hester: Sure.

Q302 Chair: Could I ask what discussions you held with UKFI about the disposal of 318 branches to Santander?

Stephen Hester: We would have at regular times when we see any of our shareholders. We obviously see UKFI more because they’re a larger shareholder, but we generally would update people on how we were going about selling it and the conditions that bounded the sales process, and then obviously they saw the press release when we issued it.

Q303 Chair: Do I take it from the answer to that question that your relationship with UKFI is exactly the same as it would be with any other shareholder?

Stephen Hester: I think that the relationship, because of the size of shareholding, would mean much more frequent contact and probably at a greater level of detail as a result of the times-

Q304 Chair: But is it a fact that the Government is irrelevant?

Stephen Hester: -and secondarily, there inevitably are parts of the conversation that could be thought to be non-strict shareholder matters, but UKFI’s explicit charter, as I understand it, is to behave as an engaged commercial shareholder, and I feel that one of the successes of the process has been that they have largely stuck to that charter and that the focus of their conversations with us are on matters of strategy and execution that are designed to get the taxpayer its money back successfully, as opposed to the other interests. Of course we have many engagements with Government and regulators, not just UKFI, when many of the other public interest matters are raised.

Q305 Chair: I want to concentrate on UKFI. Have you had any meetings with the Chancellor of the Exchequer to discuss Government holding at which the Government’s holding have been discussed?

Stephen Hester: Not that I can recall.

Chair: But surely you would be able to recall whether or not you have discussed your holding with the incoming Chancellor of the Exchequer?

Stephen Hester: I’m trying to remember the meetings I’ve had with the Chancellor of the Exchequer. The majority of them are-

Q306 Chair: How many meetings have you had with the Chancellor of the Exchequer?

Stephen Hester: In his current capacity, I’m going to guess four or five, but they tend to be group meetings. I think I might have met him once, other than-

Q307 Chair: Just to be clear, have you discussed the Government’s holdings at none of these meetings?

Stephen Hester: There hasn’t been a specific agenda item that had any depth in terms of what the Government should do with its shareholding in a specific meeting I’ve had with the Chancellor. Of course, I don’t think that means that he has or hasn’t spent a lot of time on it, he just hasn’t with me.

Q308 Chair: Are you keen for the Government to shed the holding or do you not have a view? Are you completely indifferent or would you rather that they hung on to it?

Stephen Hester: I think that clearly, as a matter of our priorities, our priorities are to manage the company and indeed our legal duties for all shareholders regardless of who they are, big or small. We must treat them all equally, and we’re trying to do our best and focus on that. However, I guess I would be guilty of misleading you if I didn’t say I had an opinion that goes beyond how we’re explaining our duties.

Q309 Chair: What is that?

Stephen Hester: My opinion is that the successful sale of the Government shares in RBS, and in particular the beginning of the successful sales-since I think there will likely be more than one-will be a very important positive for both the nation and RBS. I think that because it would create money for the public purse, which I think is better used for schools, hospitals and roads, than being invested in RBS on an ongoing basis, which I would think is a-

Q310 Chair: Although that was a very well constructed and well balanced reply, the answer is-if I may interrupt, because I think I have the kernel of the reply-you would like the Government to get shot of these holdings at the earliest convenient time, looked at from the corporate perspective.

Stephen Hester: I think it would be a symbol of Britain’s recovery; it would help the public purse; it would be a symbol of RBS’ recovery and it would help all sides.

Q311 Chair: Thinking back to that disposal of 318 branches to Santander: did you discuss that with the Chancellor?

Stephen Hester: No.

Q312 Chair: Do you think it has increased competition?

Stephen Hester: I am on pretty clear record that it was far from obvious to me why the EU sanctions, as a whole, were applied, but nevertheless they were and we had no legal choice but to accept them. With respect to breaking ourselves up in this regard in the SME and branch area, there were clear Competition Authority requirements on that process, and there are clear EU requirements on how we ran the process. So we have sold it to someone who came within those requirements. However, what I would observe to you is that while I regard the market in these areas as strongly competitive-and I’m sure we’ll go into that as our meeting continues-some of the competition expressed itself in people cherry-picking with specialist business models in specialist areas. The lists of people that want to come into the UK in a mainstream banking full service way-which is what we are offering-is short to negligible. I always thought that this would be sold to an in-market player and that there wouldn’t be demand, other than at knockdown prices, which would be a straight giveaway from the taxpayer to other people to subsidise them, because people from the outside don’t want to accept lower returns that are being made and don’t see the commercial advantage.

Q313 Chair: So it is the trade-off between the lower returns the Government would get on a sale to a genuine competitor and a sale to Santander, which has not increased competition. Do I have that right?

Stephen Hester: I think Santander will prove to be a stronger competitor because they have significant cost synergies as well as expertise, and when they put those things together I think they’ll compete very strongly with us. But my observation to you was that there was not, and is not, a queue of people trying to enter the UK market-

Chair: No, I heard that. Yes.

Stephen Hester: -other than what I’ll call "cherry pickers" who are coming in with specialised business models or from different angles-you’re seeing Tesco this afternoon. So there are a series of people coming from different angles, but in terms of a "Let’s do the same", there aren’t people who want to do that.

Chair: Okay, we have that onboard.

Q314 Michael Fallon: In your submission you say, "Larger, more diversified companies-banks-have the ability to achieve greater synergies and create economies of scale". Was that the position RBS was at just before the crash?

Stephen Hester: I believe strongly that we shouldn’t get ourselves into a position where only one business model is the right one, and this is a monopoly of wisdom. I think part of the importance of modern market economies is that different people can try different things, with different amounts of success, until you see what goes. So I certainly wouldn’t advocate that the RBS business model, or any other one, would be the right one or the sole one that should compete, and it isn’t. However, in the remaining core businesses we have after our huge restructuring-and part of the thing I did when I came in was to look around and say, "Where do we have businesses where we’re not advantaged?"-in the businesses that are part of our core, going forward, we do believe that the scale that we have allows us to compete more successfully and to offer customers a better solution and, therefore, to be better ourselves for the different constituencies we serve. Clearly, you could not say that in a sweeping way before the RBS that I inherited , which is why we have had to undertake what is probably the biggest corporate restructuring ever seen in the world, which we’re in the middle of.

Q315 Michael Fallon: We had some very banks in this country, relative to the size of our economy. I just need to be clear whether you thought RBS at the point it crashed was too big, because your submission says that banks should be very big. Was it too big or not?

Stephen Hester: Forgive me, you have the piece of paper in front of you and I don’t. I don’t think-

Michael Fallon: This is your submission.

Stephen Hester: I don’t think that we do say that big banks are the only model that should exist. I think what we would have said is that in some business areas, size can give economies that allow you to be more successful in your offering to shareholders and customers. I do personally believe that size is a red herring and that both large banks and small banks can be well run or badly run, can be risky or not risky, and then one has to look elsewhere than size to find the answers to some of the questions.

Q316 Michael Fallon: This paragraph does not mention competition or new entry or anything like that. It says, "Larger, more diversified companies have the ability to achieve greater synergies and create economies of scale. This enables banks to provide services at lower cost to the consumer". You do believe that size is the best way of delivering value to the consumer.

Stephen Hester: No. I don’t think we-

Michael Fallon: That is what you say.

Stephen Hester: No, with respect, I think we’re saying an advantage of size, if it is size in particular marketplaces, as opposed to size thinly spread everywhere, can be those sorts of economies that allow you to offer customers more. So that is an advantage. It doesn’t mean to say there are no disadvantages and it doesn’t mean to say that if you’re small you can’t come at it from different ways, but I do believe that our scale, when properly configured and used-which it wasn’t in all cases before; we hope it will be in the future-can be an advantage to our customers and our shareholders, and we try hard to do that by economies of scale.

Q317 Michael Fallon: So it was not the sheer size of RBS before the crash that was the problem, it was the configuration. Is that what you are telling us?

Stephen Hester: Obviously, it’s a very long subject as to what was wrong at RBS and needed to be corrected, and we’re very hard at work doing that, but I would say that one of the key issues was leverage, which is not size but the amount of debt you have relative to your equity. You can have a high leverage whether you’re big or small. You saw that with Northern Rock, that was much smaller, and you saw that with Bradford & Bingley and so on. So one of the key issues was on the funding side, on the leverage side. Another of the issues was on the lending side, and we’ve seen you can make spectacularly bad lending decisions regardless of your size. And there was a third, where I do think there are areas in which RBS had diversified that it was not going to be a successful manager of, and that was a managerial mistake. But again, small institutes: Dunfermline Building Society diversified into commercial property lending and that was a mistake. So again, I don’t think any of these are, per se, about size.

Q318 Michael Fallon: But Hector Sants told us that there would be benefits from reduced concentration in certain parts of the retail market. Do you agree with that?

Stephen Hester: The retail market in the UK is not particularly concentrated by global standards, certainly if you compare like-sized countries or regions of countries, and we do not see evidence that you can walk down a High Street with 10 banks that has particularly greater competition than one with five. We do think there is a lot of competition, which obviously we’re happy to talk about.

Q319 Michael Fallon: So what is the level of concentration that would impact negatively on consumer outcomes in competition?

Stephen Hester: I think that’s hard to answer academically, because clearly we see markets in many industries around the world with different levels of concentration and different consumer outcomes. The supermarket industry would be an interesting one, which has obviously been much pored over by competition authorities in the UK where, to date, they’ve found good consumer outcomes, obviously from a much more concentrated market than banking.

Q320 Michael Fallon: But that is with a second tier of competition underneath the main players that does not exist in banking, does it?

Stephen Hester: Your previous testimony pointed to 60-odd credit card providers or 80-odd savings providers. There are obviously plenty of second-tier players in banking.

Q321 Andrea Leadsom: Mr Hartzer, how long does it take to move a personal current account from RBS to another bank?

Brian Hartzer: The advice that we give customers is that it will take somewhere between four to six weeks from start to finish, but we try to do that a lot faster. We’ve brought in things like a switching service and we’ve made a number of changes, both as an industry and as RBS, to try to speed that process up. In our view, switching is a good thing. If we can improve our market position and make it easier for people to switch then we think in the long run we’ll be winners out of that.

Q322 Andrea Leadsom: Anecdotally, I have had letters from constituents saying that when they switch banks it is never quite clear who is facilitating the switching, whether it is the bank they are leaving or the bank they are going to, and the banks seem to argue among themselves about whose job it is to make sure the direct debits are set up, and so on. What is your attitude in RBS? Is it your responsibility to facilitate the move?

Brian Hartzer: Certainly we try to help customers do it. The switching service is about getting authority from the customer, but there are certain bits where the bank that is technically managing the direct debits or the standing orders has to implement some of those changes on authority for the customer. But we do everything in our power to make it easier for the customer to get that authority through to the people that have to provide it.

Q323 Andrea Leadsom: How many PCA customers do you lose and gain every year? What is the turnover?

Brian Hartzer: We’re seeing switching at the moment at about 9% of accounts, which is, I should say, about 50% higher than my previous market, which was Australia. So we think this is a pretty active switching market. We opened a little over 1 million new PCA accounts last year; about one quarter of those were people switching banks to us.

Q324 Andrea Leadsom: What is the extent of cross-selling with your PCA customers? What product penetration, in terms of other sales, are you successful with selling to those customers?

Brian Hartzer: Cross-selling is certainly an important part of what we’re trying to do because in the end-and as Stephen said, there are banks that have quite reasonably different strategies on this-our strategy is to try to be a full service provider, and to differentiate ourselves by having good strong relationships with customers that mean they trust us and want to bring more of their business to us over time. I would love to say we were incredibly successful at that, but one of the things that we need to do at RBS is get better at that. At the moment about just under 40% of our customers only have one product with us, and so we think that’s a pretty big opportunity, and about one-third of customers have two products with us. So that’s something that we’re continuing to work on.

Q325 Andrea Leadsom: So would you say that your retail customer business is profitable?

Brian Hartzer: Overall the business is profitable, yes.

Q326 Andrea Leadsom: Overall, okay. Bearing in mind the evidence of the level of concentration-73% of PCA accounts are held among four banks-would you accept that it seems when you take into account the OFT’s assessment that there is very little switching and that there is a great deal of customer inertia, it looks as though there are barriers to entry and it is not a highly competitive marketplace?

Brian Hartzer: I wouldn’t accept that it’s not a highly competitive marketplace. As I said, I came from Australia where the market was more concentrated than here. I can tell you, even in Australia, we fought very hard among ourselves to try to gain market share and found that to be a very competitive market. Here we have more competitors. There are six major players on the High Street at a minimum that we compete against, plus a number of smaller players and new entrants.

As I said, switching is 50% higher than it was in my previous market, and we’ve seen the industry and ourselves make a number of changes to reduce the barriers to switch. It’s interesting; if you look at the OFT study that just came out on switching, even that study says that 80% of people don’t switch fundamentally because they’re satisfied with their bank. That may not be popular and what the popular press likes to talk about, but that is what the OFT study says. And it’s what our own research suggests as well: that the reputation of the industry may be under-challenged but, at an individual customer level, they generally have a pretty high level of satisfaction with the staff member that they deal with in our bank.

Q327 Andrea Leadsom: So why do you think that there has only been one new bank licence awarded in the last three or four years, according to the FSA? Why are there no new players coming in if it is a lucrative and competitive market?

Stephen Hester: I think the fact that it is profitable doesn’t necessarily mean that the returns are so high as to attract lots of new entrants. I think, as Stephen said, our view is that over the cycle this is a business that is very capital-intensive, investors want to earn a reasonable return on that capital and over the cycle, the returns on capital are adequate but not so exciting as to want to bring new competitors in. I think the other thing I would add, perhaps, is certainly that the more regulation that gets applied, and the more complicated that complying with that regulation gets, that obviously becomes a bit of a challenge for people as well.

Q328 Andrea Leadsom: So do you think regulation itself could be a barrier to new entrants?

Brian Hartzer: I think you have to take all these things in the round, and when you add up the capital requirements to compete in the business, the level of returns that are available over the cycle, and in some cases some of the regulatory issues, and so forth mean that one needs a reasonable amount of capital and cost. If you want to do a full service bank, that’s a challenge, although as Stephen said, there are still a number of opportunities for people to come in and cherry pick particular aspects, and we’ve seen that continue to happen. That puts a challenge on the model for a full service bank like us.

Q329 Andrea Leadsom: Mr Hester, one last question: would you support the idea of giving customers the opportunity of taking their bank account number and sort code with them? Clearly that requires big technological change, but would you consider that that might allow more switching and less customer inertia than is already the case?

Stephen Hester: I think that generally we support competition, the ability of customers to move, and transparency in banking. All of these can be moved forward and, indeed, part of Brian’s strategy is to do so. Of course there are sometimes specific measures when the benefit can be outweighed by the disbenefit. I’m not a great technical boffin but, to date, my understanding is that the specific issue around sort codes would be so chaotic as to have such massive disbenefits that the incremental ease of switching wouldn’t be worth it, but certainly we’re always willing to look at issues like that because we would like our customers to be with us for positive reasons not for negative reasons.

Chair: Yes. Can you get your boffins to write a paper for us on that?

Stephen Hester: Happy to.

Q330 John Thurso: Mr Hartzer, you and I have discussed the concept of free banking. Lord Turner told us that he thought it was a barrier to entry for new businesses. Before I ask you to comment on that, is the nub of the problem not that whatever anybody in any bank thinks about the concept of free banking, unless every single bank is going to move to a priced model, it only takes one outlier to stay a free banker for it to be impossible for all the rest to move?

Brian Hartzer: I think the first thing I would say is that we agree with the statement that, in a sense, banking has never been free. It’s extremely expensive to run a full service model. In our case we have a branch network with over 2,000 branches. Our technology is very complicated; we have tens of thousands of people delivering service every day. So banking has never been free. The challenge, of course, is how you recover the costs in various ways. The model in the UK evolved over time, to something that was relatively unsustainable, which is why over a year ago we took the first step in dramatically reducing overdraft fees, because there was a cross-subsidy model that had developed.

We are very much in favour of things that bring more transparency and that send the right signals to customers. Charging already exists in many ways for packaged accounts, and so on. There are a variety of different ways that banks can recover the costs. Certainly at the moment with interest rates being very low, what had traditionally been an important source of revenue is at least temporarily not there.

As to the question of how the market changes, I’m not sure I would accept that everybody has to change something in order for it to change, because we see a number of competitors already charge for current accounts. There are various models that are out there. But I think it is certainly the case that it is a competitive market and that any change that we make around something like pricing is going to have regard to what we think the competitor response might be, and how we deal with the retention of our customers.

Q331 John Thurso: It seems to me instinctively, if I have transparency on the product I am buying-take buying a car, if somebody bungs in the Road Fund Licence it is pretty obvious I am getting that. I can see it is part of the marketing. But then they tell me that I also get free petrol, insurance, repairs and all sorts of other things. I know that there are costs in that and I do not know what I am paying for, which bit of it, and that is the problem we have looking at the personal account. Would you not instinctively prefer a system that was more transparent so that people could pay more easily for the things they actually want to use, and you could recover costs for the bits that cost you more?

Brian Hartzer: We’re all in favour of transparency, and that is why we’ve made a number of the changes we have. Transparency is an important part of the customer charter that we launched about six months ago.

One subtlety I’d put on the example you raise is that in our case we have a very large cost base that different customers use in different ways, and so the actual costs for any individual customer can vary among different customers and it can vary over time. What I have said again in another market is that transparency, taken to the extent of trying to charge for every individual transaction according to those particular costs, brings with it some disbenefits as well, in that customers sometimes start to say, "This is all getting a bit hard". So the balance that we need to strike is an appropriate level of transparency so people get the right signals and can compare and contrast things, while also not getting to the point where we’re asking people to have to think too hard.

Q332 John Thurso: In the last session-I do not know if you had arrived and heard it-Eric Daniels told us that basically the whole question of overdrafts was barely profitable, and it was very low return business. Is that the case for RBS as well? Do you make money from overdraft provision?

Brian Hartzer: Well, it’s interesting. I’m glad you raised it, because I think this is obviously an issue that has gained a lot of attention and it’s a very important one. Certainly when I arrived 18 months ago, it was very obvious that the market had developed in a way here where there was a real lack of transparency and tremendous complexity in the way that those fees were charged, and that is part of why we led the way on reducing the number of types of fees that were charged, and dramatically reducing-in one case one of the fees went from £38 to £5. So I think that we in the industry have moved a long way on that issue.

What I would say is that you must separate the two issues, quite importantly, between an unarranged overdraft and an arranged overdraft. An unarranged overdraft is one where someone accidentally goes overdrawn, and in our case we have a buffer, for example, of £6, where if somebody goes overdrawn a bit they don’t pay a fee. We have tried to simplify those fees for those people. The second bit is the arranged overdraft. That is not there for people to use as a long-term borrowing tool. It’s there to give people some flexibility in their cash flow. When you consider that in both cases the overdraft is a component of a broader banking relationship, being the current account which gets advantage of the branch network, the ATMs, the phone, online banking, people and all that, and when you actually allocate the cost to that, and have regard to the fact that the loss rates on overdraft are pretty high, and if you add in the cost of capital and reasonable amount of cost, then in our case we would say on a standalone basis that overdrafts are a loss product.

Q333 John Thurso: You have obviously grouped in that loss figure both arranged and unarranged, and-

Brian Hartzer: But we would say both would be a loss-

John Thurso:-so, with an arranged overdraft with a client of some substance you’re doing them a favour?

Brian Hartzer: We’re not saying we’re doing them a favour. We’re saying that we don’t think it’s the right way to think about it, in a sense, to look at just that single product, because those customers are availing themselves of a broader product suite. So when we take all that into account, if you were to simply slice off the piece of the relationship that was that overdraft, on average, strictly speaking, we would say that would be a losing proposition. However, we continue to offer it because our hope is-and it varies by client, and so forth-that in a broader relationship with the current account, the way the customer is in credit, out of credit, on balance we would hope over time that we would make a reasonable return.

Q334 John Thurso: Sorry to keep coming back to this, because I think there are quite a lot of us who are a bit surprised to discover that we have been subsidising the banks through our overdrafts. It seems almost incomprehensible that the overdraft product, which is a core British product for many people, is not profitable. I can understand if you said to me that it is low margin, but that it is not profitable I find extremely surprising.

Brian Hartzer: I can see why, if people focus purely on the interest rate, they might think, "Okay, well, that’s all there is to it". But the overdraft only exists because we have a branch network and a current account functionality, online banking, and all those other things. So the overdraft on its own, as a thing, can’t exist without the other things, and therefore when we allocate the costs associated with the behaviour of the people who have the overdrafts, as we do to other things-which by the way is more of an art than a science-on the basis of our best allocation of costs our view would be that, looking at it on a thin slice like that, it’s unprofitable.

Q335 John Thurso: Okay. I would like to ask you one last question, which is: what is profitable?

Brian Hartzer: What is profitable?

John Thurso: Well, if you have this loss leader that you obviously do a great deal of in order to attract people, what are the bits that make the money?

Brian Hartzer: First of all, profitability tends to slosh around in a bank from one thing to another, depending on where interest rates are and how people behave, and so forth. At the moment, as interest rates have fallen, what has happened is that the profitability of deposits has become probably break-even at best and in some cases a loss, and the margins on mortgages and some loan products are wider, so in a sense are contributing to a larger portion of our profitability. If rates rise that situation could very easily reverse, and it’s one of the things that-for someone like me-makes the banking industry kind of interesting, which is that profit dynamics are constantly in flux.

Q336 John Thurso: Just to pursue this, can I ask, Mr Hester-that is a fascinating conversation about the current state of retail banking, which sounds like it is very hard work and there is not much money in it-does that make it difficult for you to make a go of RBS?

Stephen Hester: The lens through which we set about restructuring RBS was that the businesses that we wanted to keep and invest in were ones that if we felt we did a good job we would-across a cycle-cover our shareholders’ cost of capital, and we simplified that and set a 15% return on equity target. It is our belief that, if Brian and his team are successful in their restructuring of our retail activities, which is very extensive in its own right, that our retail activities in the UK can indeed-across a cycle-cover their costs of capital. But that is partly by us becoming more efficient and reducing costs; it’s partly by the biggest reinvestment programme we’ve ever had in the retail bank and technology and so on. So we believe that, managed well, it will be a good business for our customers and our shareholders.

Q337 John Thurso: One quick question because I don’t have too much time, which is this: when you are talking about the cost of capital, are you talking about the cost that you have had to go and acquire it in the market, that is, Libor, or are you talking about the cost of capital as in equity? In other words, is the loss he is making after 15% equity return cost or whatever Libor might be?

Stephen Hester: It depends on which bit of the conversation we were talking about, but-

John Thurso: Brian has just said that when you take the cost of capital into account, overdrafts and so on are broadly loss making. Is the cost of that capital the equity burden or the 15% return on equity?

Stephen Hester: When we’re talking about profits we’re always talking after the cost of us getting money as well as our other costs, so the costs of us getting money is where we-

Q338 John Thurso: What is your cost of capital at RBS?

Stephen Hester: And if we’re talking about economic profit, as opposed to absolute profit, then we would be talking also after a notional charge on our equity that would be the hurdle rate that we’ve set across cycles: 15%.

John Thurso: What is your cost of capital at RBS?

Stephen Hester: It’s an academic subject but we think it’s-

John Thurso: I don’t know; When I was Chair of the PLC and I was asked that question I could answer it with a direct number.

Stephen Hester: Sure, if you let me finish.

John Thurso: All right.

Stephen Hester: Thank you. We calculate it in a range between 12% and 14%, and so that is why we round-

John Thurso: That is the number that Brian-

Stephen Hester: -to 15% and what I’m saying to you is we believe that, if we manage our retail bank well and are successful with customers, we can hurdle across cycles at that level, which will mean sometimes we make a lot less than that, as we did last year and the year before; sometimes we’ll do better. And that’s our management challenge.

Chair: The assertion that overdrafts are not making much money even though the spread is huge will, as John suggested, surprise quite a lot of people. In your answer, Mr Hartzer, near the end of your series of answers you said that it is an art not a science; that is, the allocation of the fixed costs across the provision of other services from the mortgage side. I recognise that there are problems of commercial confidentiality here, but I think it would be extremely helpful if you could set out a credible illustrative example for us in written form of how you are performing this art because we do need to get to the bottom of this subject. This is one of the key subjects in the whole issue of competition in retail banking.

Q339 Mr Love: Perhaps I can try to, in a small way, get to the bottom of unauthorised overdraft charges and that is what I wanted to focus on. According to the OFT a third of current account revenues are from unarranged overdraft charges. Let me just start with a simple question. Would you accept that is probably, on balance, where it is with RBS?

Brian Hartzer: I would say-well, let me just think about it. I’m reluctant to give you a specific number without going away and checking it but-

Mr Love: Broadly speaking.

Brian Hartzer: I’m just trying to think how to break down the piece. Of the revenue that we get at the moment on current accounts, I would say that number would probably be in the ballpark.

Q340 Mr Love: Let me then go on to ask you what is it-you mentioned that you had now entered a buffer of £6. For somebody that goes over that buffer, what is the charge for an unauthorised overdraft?

Brian Hartzer: The new charge that we’ve just announced would be £6 per day and then they would pay £6 for returned items; so that is cheques that we don’t honour.

Q341 Mr Love: For each of-

Brian Hartzer: Yes, although there’s a limit on the number of items that we would charge on.

Q342 Mr Love: And how much does that cost the bank to administer?

Brian Hartzer: I don’t know the answer.

Q343 Mr Love: And what is the cost structure for someone who has an unauthorised overdraft?

Brian Hartzer: Again, I don’t know the exact answer on that but we’d be happy to try to give you some sense of it.

Q344 Mr Love: Well, would you accept that there is a big gap between the two?

Brian Hartzer: Well, again, that comes down to a question of how we allocate the broader costs of running the current account and the fixed costs associated with that.

Q345 Mr Love: Ever since the court case in relation to unauthorised overdrafts, the OFT have been in discussions with the British Bankers Association and British banks. Has that made any material difference to the charging structure that you operate?

Brian Hartzer: Well, a year ago, not long after I started, we reduced the unpaid item fee from £38 to £5 and we did that because we thought the old pricing model was unsustainable. We believe that further transparency and simplicity is in everybody’s interests and have continued to try to lead the industry on that.

Q346 Mr Love: Would you consider that consumers-I mean there is a very large number of them, as we know, that were backing the court case-are happier now or do they remain, in your view, unhappy at the lack of transparency and, if I can put it that way, the amount of small print there is in relation to what people are charged for unauthorised overdrafts?

Brian Hartzer: Again, if you look at the changes that we’ve made as part of our commitment to transparency, which is part of the customer charter, we certainly find through our research that customers are much happier with the simplicity. In a sense, what we say is, with respect to unarranged overdrafts, the only thing you need to know about pricing for RBS and NatWest is £6. There’s a £6 buffer. There’s a £6 fee. That’s all you need to know. There’s no more fine print than that. And for an arranged overdraft, there’s no fee. There’s simply an interest rate. So I guess our view would be that that’s a positive development for the industry and for customers and we are supportive of everybody in the industry trying to take steps to improve transparency and simplicity.

Q347 Mr Love: I think the OFT does accept that there has been an increase in transparency, but there are still claims that this is unfair. The British Bankers Association and, I suspect, RBS have been resistant to a change that would allow the OFT to investigate whether these charges were unfair. Would that be something that you would reconsider in order to clear the air in this particular part of the banking world?

Brian Hartzer: Well, I guess from our standpoint, as I said, I don’t know what more we can do to simplify our fees other than reduce them to one simple fee, which we’ve done and reduced it dramatically. As relates to what other banks are doing, that’s a matter for them and, as relates to the investigation, there was, I think, a very extensive court case that was resolved as you described. I don’t know about you but I don’t particularly have a lot of appetite for going through that again.

Q348 Mr Love: I do not think anyone has, and I think it needs to be subject to negotiation. What I am trying to do is-for many they still characterise unauthorised overdraft charges as being a penalty charge. Would you accept that definition?

Brian Hartzer: No, I don’t think I would accept it and, again, we’re providing a service for people who haven’t taken the time to arrange an overdraft. We also give customers the ability to opt out if they don’t want us to honour any of their accidental overspend. To me, that’s a pretty reasonable capability that we’re giving people in managing their money. I don’t think it’s unreasonable to charge them for it and I think what we’ve done is try to simplify that charge, make it easier to understand and encourage people who think they’re going to avail of it to set up an arranged overdraft.

Q349 Mr Love: Can I just ask you, finally, Mr Hester, in a sense the same question that I asked a moment or two ago? There is still considerable consumer unhappiness in relation to this. While I think everyone accepts that there has been some clarity, simplicity and greater transparency entered into this, there is still the accusation that there is a massive difference between the penalty charge and the cost to the banks of unauthorised overdrafts. Would you be sympathetic to allowing the OFT to investigate whether these charges could be defined as being unfair?

Stephen Hester: Obviously, I think it’s up to the OFT what they do and don’t investigate. But from my own point of view, I would like to use this as a point of competitive difference and I don’t want to have lawyers telling us what we can or can’t do. I’d like Brian to be able to compete and win customers on the basis of having reduced fees, made them simpler and reap the benefits of that. The whole reason we bring in people like Brian to change our business is to make it better and to make it better for customers. And if other people don’t follow, great; we’ll get more customers. So, personally, I’d much rather the competitive work its way towards us on this than a bunch of lawyers spend time doing it.

Q350 Chair: There is a strong plea for competition. Did you think that the HBOS merger was uncompetitive?

Stephen Hester: I had the-I won’t call it "privilege". I was right in the middle-as you know, I was just asked to joint RBS at the point that was coming on and we were so engaged in trying to rescue RBS that I didn’t spend a lot of time debating that one to myself, I’m afraid.

Q351 Chair: Okay, but you have had plenty of time to think about it and you are now in direct competition. How do you feel about it now and would you like to see it broken up?

Stephen Hester: I think that, from a public policy standpoint, obviously that’s something that the competition authorities and yourselves and so on must think about and I have complete trust in you on that.

Q352 Chair: But I am asking your view, Mr Hester.

Stephen Hester: From our view, we believe that we can compete successfully in the market as we see it, for all its warts and so on. That doesn’t mean to say that the market isn’t capable of improvement, but we are not here saying that somehow we are under an unfair cosh of competition against us.

Q353 Chair: Fine, but what I am asking you is whether HBOS is one of the warts.

Stephen Hester: Yes. I’m afraid I don’t think it’s right to be drawn on that, in a personal opinion.

Q354 Chair: So you might have a view, but we are not going to get it.

Stephen Hester: Yes.

Mr Love: That’s fair enough.

Chair: Well, I am not sure it is fair enough, but it is certainly clear enough.

Q355 Mark Garnier: I just want to read you a small piece from Tesco’s written submission, "The established banks routinely share current account data on income and expenditure, as well as wider product holdings, through a closed user group which only those with a sufficiently large current account base, as determined by the bank members themselves, can access." What is all that about then?

Brian Hartzer: Well, obviously, part of our approach in retail banking is we’re trying to help people with the broad range of their financial needs. That’s our strategy. As we’ve discussed earlier, there are other banks that take more niche strategies. So one thing that helps us in providing competitive credit for customers is the value of the relationship, which is embedded in some of the data that we get. So certainly when we make a credit decision about somebody we try to take into account what we know about their behaviour and that helps us. What I would also observe is that, if the suggestion is that that data should be shared, I find it rather interesting coming from Tesco that talks about how important it is that they have data on everybody’s shopping, which they use in their promotions.

Q356 Mark Garnier: Do you not worry; we have Tesco coming in next. I want to deal with you guys first. The important point here is what Tesco is suggesting is that the big banks are sharing this information among each other to do exactly what you just said, which is to make swift and much better decisions as to whether or not you can lend money.

Brian Hartzer: Okay, I understand your question a bit better now. So there are credit bureaux that are third party companies, which we provide data to and which we get data from, which is one of the elements that we use when we’re making credit decisions. Those databases are available to any credit provider who chooses to pay to access them.

Q357 Mark Garnier: Yes, but this is the whole point that Tesco are saying and this is quite an important point. If they are correct on this, we are talking about a cartel among the big banks, which is essentially squeezing out the little banks because what it is-and I will read it again just so you are absolutely clear, "The established banks routinely share current account data on income and expenditure, as well as wider product holdings, through a closed user group, which only those with a sufficiently large current account base, as determined by the bank members themselves, can access."

Brian Hartzer: I don’t believe that’s accurate. My understanding is there are credit bureaux that are available to any credit provider who chooses to pay for that data. We certainly-

Q358 Mark Garnier: I just want to be absolutely categorically clear. You are saying that this does not happen; there is no cross-sharing of information among a closed group of the bigger banks. I would like to know what your next stage is. With an accusation like this from someone like Tesco, how are you going to deal with that?

Brian Hartzer: My understanding in what they were saying there, when I read that, was I thought they were-and I might be wrong on this. My understanding of what they were saying was that they were alluding to the fact that a major bank has data that it’s able to use in its decisions, within itself, across different product categories. It is true that we provide data to credit bureaux but my understanding is that credit bureau data is available to anyone who chooses to buy the data and is a suitably authorised lender. As far as I know there is-I don’t know why we would frankly share some of that data with direct competitors. So I’m absolutely unaware of anything like that happening.

Q359 Mark Garnier: Very simply, because that is the whole point of a cartel. If you can do this among yourselves then you can exclude other smaller players coming into the marketplace, thereby keeping those things-

Brian Hartzer: The only sharing of individual customer data that I’m aware of is through the third party credit bureaux, which are available to any lender.

Mark Garnier: To absolutely anybody. Yes, okay. I think I might leave that one because I suspect that this could go down quite an interesting route somewhere else and I’ll check this with Tesco who come in next. But what I do want to talk about is what you thought I was talking about earlier, which is this cross-selling, in effect, among yourselves.

Q360 Chair: Mr Garnier, before we go on to cross-selling-I am very sorry to interrupt, Mark-but just to be clear what you said on that previous point is that you gave us a categorical denial. I would just like to be clear. Are you categorically denying what they had told us in evidence and saying that this is completely wrong?

Brian Hartzer: As far as I’m aware, there is no-it’s possible there’s something I’m not aware of but, as far as I’m aware, there is no sharing of credit data among the big banks other than via the credit bureaux who make that data available to people who-

Chair: I just felt that it was important.

Q361 Mark Garnier: Just following on from that, Mr Hester; you have not denied it.

Stephen Hester: Why would I? We’re colleagues. Why would I saying anything different? I’d just parrot what my colleague says.

Q362 Mark Garnier: I am sure you would be delighted to step forward and reinforce your colleague’s absolutely categoric-

Stephen Hester: I have no greater awareness and, as far as I was aware, Tesco’s great claim to fame in trying to penetrate financial services markets is their incredible database, which is no doubt proprietary to them, with the tens of millions of people who shop with them, which they intend to use to attack our market. I think that’s terrific. That’s their competitive edge. Let them use it. It will keep us on our toes, but it seems to me it’s much more likely to be the other way around in terms of benefit of access to data. That’s why they’re coming into the market, to use that.

Q363 Mark Garnier: You have not categorically denied though.

Stephen Hester: Whatever Brian’s words are, I want to use the same. Consider it repeated.

Brian Hartzer: If it’s helpful, we’re happy to go back and write to the Committee and verify that statement.

Q364 Mark Garnier: I think it is important. It is quite a big accusation they have made.

Stephen Hester: We will make sure that we’re not mistaken and we’ll write to you in any event on it.

Q365 Mark Garnier: Fantastic. Then getting back, just very quickly, to this cross-selling thing, are you regularly using information that you have on current account data to cross-sell, for example, things like savings accounts? I completely take your point about credit checks for one to get a credit card and that simply makes sense. But if you suddenly see a whole lot of money coming into someone’s current account many, many witnesses have come before here and people have totally said you bank a bit of money for a daughter’s wedding or something and suddenly you have a salesman phoning up out of the blue saying, "I see you have £15,000 or £20,000. Would you like to buy a savings product?" Are you using that information regularly to cross-sell?

Brian Hartzer: Yes, we do. Our objective, as I said earlier, is to broaden our relationship with customers and part of that is being able to figure out how we help them in other ways. Certainly, the information that they provide in the case of leaving lazy balances-if you like to call it that-in a current account, that’s an obvious thing we can talk to a customer about how we can help them with a better savings offer.

Chair: We are beginning to run slightly behind schedule; so quick questions and quick answers, please.

Q366 Mr Umunna: Can I just perhaps point out to you a report that appeared in the Evening Standard in May about a group of investment bankers who correctly bet on the outcome of the election and then celebrated their huge pay-out by running up a £60,000 bar bill? They were consuming these vast quantities of drink, Cristal and the rest of it, chanting, "Down with Brown, down with Brown". Would you accept, Mr Hester, that the investment banking fraternity is not exactly known to be shy in coming forward about the huge amounts that are earned in the sector?

Stephen Hester: I think anyone who would behave like that in any walk of life I would consider to be stupid.

Q367 Mr Umunna: Okay, but would you accept that there is not necessarily a culture in the investment banking fraternity of being shy about the amount that one earns?

Stephen Hester: I do think that, among high-earning professions, in all sorts of professions, it can often lead to behaviour that many of us might find distasteful when dramatized. And some of these are cultural issues that many of us who have the debatable joy of managing high-octane cultures work very, very hard on trying to reduce the bad bits of the culture and move forward. Obviously, successful banks have more success in doing that and then sometimes one doesn’t have perfect success.

Q368 Mr Umunna: Thank you and I appreciate the honesty of your response on that. Could you tell us the number of high-end employees, including executive board members, whose total expected remuneration in respect of the reported years are in the range of £1 million to £2.5 million and in the range of £2.5 million to £5 million and then the £5 million band thereafter? Would you be able to give us that information?

Stephen Hester: I guess my view on this would be that, if the whole industry were to be in a position where-I think what you’re referring to is the Walker Report.

Mr Umunna: Yes, I am.

Stephen Hester: If the Walker Report were to be implemented for the whole industry, I’m not arguing against it. I have no great problem with the issue of transparency and would have no difficulty. What I don’t want to do is unilaterally give a whole bunch of people, if you like, a field day just on RBS alone. So you will not hear me being one of the bankers that is making a great campaign on this subject. I don’t have a problem with transparency, but I’m not going to put RBS, solo, at a disadvantage.

Q369 Mr Umunna: And that is understandable. When you say "whole industry", do you mean domestic, European or international? How would you define that?

Stephen Hester: I think that, generally, one wants to look at the context in which a business or an industry operates. So there are some businesses and industries or parts of businesses that operate on a closed domestic basis. Obviously, a very large amount of RBS is-what we’re mostly here today to talk about-the retail bank. I think you can make lots of rules that are UK-specific and it doesn’t matter so long as they apply to all the UK players because there isn’t a lot of leakage.

If you’re talking about bits of industries-and this is true of advertising and technologies of banking where the market is a fluid global one-then I think you have to have regard, if you like, for the marketplace against which you’re competing and then it would be desirable that the rules of your marketplace reflect the marketplace, i.e. they’re global. So that’s why generally we try and put a lot of effort into the international discussions that try to establish level playing fields. But, as I think I was quoted in some newspaper the other day, generally my stance since coming into RBS nearly two years ago has been to try and increase global standards as opposed to the other way round.

Q370 Mr Umunna: Obviously, the focus tends to be on the investment banking divisions of the large groups because that is where huge sums are earned. Obviously. Sir David Walker has changed his position on this somewhat. Do you think if we adopted a disclosure scheme unilaterally-in terms of unilaterally as the UK-it would put us at a huge disadvantage if that was not followed by our European partners?

Stephen Hester: I think there are a series of grey areas and I have to say, for me, in all the different areas that you could be discriminated against as an institution, this wouldn’t rank very high up my list of hot buttons. If you said to me, "You can be discriminated against on capital or tax or on disclosure", I’d pick disclosure all day, every day, but of course we’d rather not be discriminated against on any subject and it would be better for the UK if there is a level playing field against which we can successfully compete within the context of high standards.

Q371 Mr Umunna: Could I just finish by asking you how much in the last financial year did the highest paid employee at RBS earn?

Stephen Hester: I think I’d revert to the previous one. I’d be very happy to disclose that as soon as that’s what everyone else discloses, but it’s not-

Mr Umunna: So you would be happy to provide to the-

Stephen Hester: If that was a basis of disclosure that everyone made. I’m not afraid of disclosure. I just don’t want to handicap RBS asymmetrically.

Q372 Mr Umunna: Do you know the figure for the highest paid person in your organisation?

Stephen Hester: Near enough; yes, I do.

Q373 Mr Umunna: But you would not be prepared to disclose it in this forum here?

Stephen Hester: No.

Mr Umunna: Okay. Thank you.

Q374 Chair: Are you aware whether UKFI has the authority to require disclosure?

Stephen Hester: I think that UKFI has, in this context-as opposed to obviously the Government, which has any authority it likes through the law-making process-the authority that any shareholder does. So I assume that-

Chair: So the answer is no?

Stephen Hester: Well, I assume they could fire the board or insist on the board doing it.

Q375 Chair: It has been put to us that they do.

Stephen Hester: My guess is, through the mechanism of insisting that the board does or firing it, probably they can exercise their majority right. I don’t know whether that would be consistent with their charter, but my guess is that would be the route.

Q376 Jesse Norman: Thank you, Mr Hartzer and Mr Hester, for your very interesting responses and concise ones. Can I just ask, picking up on the point of bonuses: what is going to happen at the moment? Because we are looking at a situation in March or April where very large numbers will start to come out; there will be enormous public reaction. It has all the makings of an impending train crash. Are there steps in progress to try to head that off? Is that something that you are engaged in or interested in?

Stephen Hester: On one level, this topic is difficult but on another level I’m glad you raised it because it gives me the opportunity to point out-and I think it is very apposite to this Committee’s remit and what you’re talking about today-that the vast majority of people who work in financial services and in banking do not work in investment banking. In the case of RBS, we employ more or less 150,000 people around the world; something around 10% of whom are in the investment banking unit and 90% of whom are not. I think it is most unfortunate when this subject colours all debate, all argument, and we don’t have a recognition of the 90% of our people, i.e. well over 100,000 people, who have a different characteristic and profile in terms of the jobs that they do, the markets that those jobs operate in and so on.

Q377 Jesse Norman: On that, would you support the idea of separating out the disclosure of the bonus pot, so people could see that the vast majority of your employees do not-

Stephen Hester: Personally, I think that the "bonus" word is a red herring. To me, what I’m interested in is the total cost of an employee from whatever source that cost comes and I think it’s wrong to just focus on bonuses. And so my focus is on the total cost of employees against what they do for us and for our customers and our shareholders, and we do disclose, every single quarter-I think we’re the only bank in the UK that does this-the total cost of our employees by business segment across all our banks. So I don’t think any of our competitors give you that level of disclosure. Forgive me if I’m traducing them, but we do.

Q378 Jesse Norman: Thank you. You have mentioned that it would be helpful to schools, hospitals and roads if, as it were, the Government were able to sell down shares in RBS. The other area, obviously, where RBS is very big that bears on this-and it is something that I feel very strongly about and many of my colleagues do-is the private finance initiative. I mean is that an area where you think there would be some scope to take a lead in reducing costs and trying to support the taxpayer?

Stephen Hester: Here is one of the rich ironies of debate around the financial system. I recall meetings on this subject about a year ago when the evils of securitisation were being widely debated and pilloried in the newspapers and, of course, all the regulatory action has been to make securitisation very uncomfortable for banks to do-much more capital, much more risk, and so on and so forth. And, of course, financing PFI is exactly that; it’s securitisation.

Securitisation is not limited to people in caravans in far states of the United States. Basic things like North Sea oil projects, financing schools and hospitals through PFI-this is securitisation as well. Indeed the mortgage market-we can argue it was a bad thing house prices were able to rise as much as they were, because securitisation stepped in and funded that gap. So we just have to think through these ironic topics. Now, I believe that securitisation as a technique is a valid technique. Like many pieces of technology, it can be misused, but that doesn’t mean it doesn’t have good uses. I think PFI is a good use and I very much hope that, as the financial crisis recedes and the new rule-making is made, securitisation isn’t obliterated as a tool to help things like PFI by the new regulatory rules or by the markets.

Q379 Jesse Norman: But you would be supportive of the instinct to try to take some costs out of the situation, if we could, and support the taxpayer?

Stephen Hester: Well, I’m suspicious of artificial subsidy in saying, "Well, PFI should be subsidised into something else". I’m naturally suspicious of those things, but I do think that if we can get markets functioning well, that’s desirable for the economy and I think legitimate finance for PFI-based on, if you like, transparency of who’s providing what-is a positive financing tool.

Q380 Jesse Norman: A very quick final question of Mr Hartzer: obviously, one of the reasons for the large UK bail-out of Ireland was the situation of exposure to Ireland through Ulster Bank; am I right in thinking that you are the Chief Executive of that part of RBS?

Brian Hartzer: I have responsibility for Ireland-

Q381 Jesse Norman: Since we have not covered it, could you just tell us how matters progressing in terms of taking control of that loan book, making sure that you are comfortable that the taxpayer interest is served, preventing the repetition of any kind of further bailout?

Brian Hartzer: Yes. Well, obviously the situation in Ireland has been quite regrettable and been a serious issue for the group. The way we’ve dealt with it is as we’ve done all of our restructuring. We’ve separated the bad loans or the parts of the business that we don’t think are sustainable into our non-core division. And in the case of Ireland that’s primarily about development lending for property development and so forth.

Q382 Jesse Norman: And that is roughly how much of the £43 billion?

Brian Hartzer: £10 billion.

Q383 Jesse Norman: Right, okay, so it is a substantial amount of money.

Stephen Hester: I would say there’s about 40% of the total size of the Irish balance sheet that, if we’d been having our time again-of course we weren’t at the bank at the time-we wouldn’t have done and that’s the bit that we’re putting on one side and running off.

Q384 Jesse Norman: That is very helpful. 40% is a huge number of £43 billion.

Stephen Hester: But let’s be very, very clear: that doesn’t mean to say that’s the amount of money we’ll lose.

Jesse Norman: No, no, no. I understand that.

Stephen Hester: Those are loans, whether good or bad, that we would-

Q385 Chair: That is where they are making some impairment.

Stephen Hester: And a subset of that there is impairment. We’re losing significant amounts of money, but they’re nowhere near multiples of that, if you see what I mean. And I think it’s very important to be clear that there are no investment bankers anywhere in sight in Ireland. This is bog-standard lending that went wrong from small banks. But in the case of our bank in Ireland, obviously, we’re not getting any help from Irish Government, but it’s part of RBS, which of course was propped up by the UK Government and which is why we’re trying to change all these things.

Q386 Jesse Norman: Just for the avoidance of doubt, the loan book is something like £43 billion, 16%, sorry, 40%-

Stephen Hester: Our total assets in Ireland are 50.

Jesse Norman: Sorry?

Stephen Hester: Our total assets in Ireland are more like 50.

Jesse Norman: Right. So £20 billion at risk, as it were-

Stephen Hester: No, not at risk; in our non-core. So, in other words, we think that the sustainable size of our Irish bank should be much more closely proportionate to the sustainable amount of deposits that we can raise to finance it. And the Irish banking system, in common with the British banking system-Bradford & Bingley, Nationwide, Northern Rock, RBS, Lloyds-borrowed more than there were deposits and the nation borrowed more than it deposited. Ireland has the same problem in spades that the UK has and so we’re having to shrink back to a sustainable size and restructure that bank, in Ireland dramatically, in many parts of the world equally dramatically.

Q387 Jesse Norman: And that would be about a £30 billion balance sheet at the moment?

Stephen Hester: Our target end state would be, order of magnitude, 30 to low 30s.

Jesse Norman: That is very helpful. Thank you.

Chair: That was a very helpful, open reply. Thank you very much, Mr Hester.

Q388 Mr Mudie: Going back to Chuka Umunna’s question, are you the best paid person in your bank?

Stephen Hester: No.

Q389 Mr Mudie: Are you prepared to tell us how many people earn more than you in your bank? Now, before you say "no", Eric Daniels was vague about it, but promised to write to us and give us details. Now, are you going to be even better than Eric Daniels and tell us?

Stephen Hester: My intent would be to stick to the same disclosure that is made available by all banks. If all banks disclose that information, I’d be delighted to do it. I have no objection to it. I don’t want to be the only bank that does it.

Q390 Mr Mudie: No, but I could understand if we were asking for posts and even the Walker formula, the bands and so on, but simply to disclose how many people are earning in excess of the Chief Executive does not seem to me something you needn’t necessarily to disclose.

Stephen Hester: I tried to be pretty clear earlier on that in the list of things I get upset about this isn’t one.

Mr Mudie: You tell us and we will just keep it to ourselves.

Stephen Hester: But one of my jobs is to try to help RBS recover and, to give people extra things to beat us up on that they can’t beat anyone else on, I just don’t see how that helps my job. My job, by the way, is to help the state get its money back.

Q391 Mr Mudie: As an old trade union official, I think you are in a lovely position where you are able to say, "Well, I’d give you this, if only those Americans would do the same", and you know that the Americans have no intention of doing it. So your shielding behind the Americans, are you not?

Stephen Hester: Well, let me-

Mr Mudie: I think that is a bigger fear, across the regulatory field that we are all taking shelter behind "we’ll do it, if they do it".

Stephen Hester: Well, I’m very glad that you ask the point and thank you. I feel very strongly that one of the big reforms that the financial services industry needed to make, perhaps still needs-I believe this of all companies, by the way, not just banks-is high levels of transparency. And under my leadership, RBS has moved to be the most transparent bank in the UK and probably in the world in terms of its frequency and quantum and detail of financial reporting.

My view is that, unless it’s commercially sensitive, if it’s important to you understanding the bank’s risks being a shareholder-either from a risk perspective or a shareholder’s perspective-we should tell you it and we do and, by the way, that’s 300 pages, at least, four times a year. So we have been absolutely unafraid and I think it is right to take a lead on areas of transparency where we think it helps the business in terms of people’s ability to assess our risks and shareholders’ ability to assess whether they’re going to get their money back or make profit on their investment. Where I’m not so excited about it is if I don’t think it does any of those things and then, fine, if we all publish then let’s all publish.

Mr Mudie: Yes, okay.

Chair: Thank you very much indeed for coming to give evidence this morning. I know there are colleagues who still want to come in, but we want to keep roughly to schedule. You have been asked to supply quite a lot of written material and we will look forward to receiving that. Of course, it needs to be said that if we feel we do not have the answers we were hoping from the written material, we will have to ask you to come back again, but with a bit of luck we will get what we need. Thank you very much, both of you, for coming and for being so clear.

Examination of Witness

Witness: Benny Higgins, Chief Executive, Tesco, gave evidence.

Q392 Chair: I am very grateful to you for coming in. I do not know how much of the earlier evidence you heard, but we have just had a rather interesting exchange with respect to some of your evidence. If I can just read the relevant passage, you said, "The established banks routinely share current account data on income and expenditure, as well as wider product holdings, through a closed user group." Could you tell us what is this "closed user group"?

Benny Higgins: Yes, I can indeed, Chairman. Unequivocally, there is a closed user group made up of the large banks and some of the other banks. The eligibility condition is that you need to have one million current accounts and it’s used primarily to assess affordability because clearly, in order to assess affordability, you need to know the income and expenditure of the customer involved. So it certainly is a closed user group and that is the eligibility.

Q393 Chair: Have the OFT looked at it?

Benny Higgins: I’m not aware of that. They may or may not have.

Q394 Chair: Have you brought it to their attention?

Benny Higgins: I haven’t personally but I’m sure they’re aware of it, but we certainly can do that.

Q395 Chair: Bearing in mind that you are a would-be market entrant, do you not think this is something you might want to have high on their agenda?

Benny Higgins: Yes, no, absolutely, I agree.

Q396 Chair: So I am rather surprised that you have not raised it with them.

Benny Higgins: They are aware, certainly, but we certainly will pursue it further.

Q397 Chair: What should be done about it?

Benny Higgins: I think that it’s not about sharing proprietary marketing information, which would be, I think, inappropriate for competitive purposes. What it’s about is understanding affordability and that is, I think, for the greater good. And so I think anyone who is lending in the UK should have access to that affordability data.

Q398 Chair: Do you think it is reasonable and possible for consumers to be told how much they are being charged on their current accounts, the real charge, including the interest foregone?

Benny Higgins: Well, what’s quite interesting is that I think it’s the great Scottish enlightenment thinker, David Hume, who said that a wise man proportions his belief to the evidence. Well, let’s look at the evidence as far as your question is concerned. The OFT found that, in 2006, £8.3 billion of revenue came from consumers to the banks in respect of personal current accounts. That number rose to £9 billion in 2009. The split of that revenue was: 50% came from unarranged borrowing, whether it be fees or rates-mainly from fees-and the balance came from a variety of other sources. I wonder if anybody in this room knows how much they contributed to the £9 billion. So it seems to me that-

Chair: Sorry, I wonder how much-

Benny Higgins: How many people in this room would be able to say, even as a wild guess, how much they contributed to the £9 billion in 2009. So what I would say-

Q399 Chair: I asked a senior executive of Lloyds that question this morning and she was unable to do so.

Benny Higgins: I think you’ll find that very few people are able to do so and I think it strikes at the heart of the issues around competition within current accounts. The issue is around transparency-transparency and also the perceived and real obstacles to switching.

Q400 Chair: And are you going to provide that transparency unilaterally?

Benny Higgins: Within Tesco Bank?

Chair: Yes.

Benny Higgins: Yes. Well, we plan to launch current accounts and at the moment we’re working through the way in which we should present current accounts to customers. We’ll follow the ideology that has always been true within the core Tesco business. We follow the customer. We’re setting out to be simple, to be transparent and very straightforward. That’s certainly our focus.

Q401 Chair: So can we expect customers to be told what they are really being charged including interest foregone when banking at Tesco?

Benny Higgins: Absolutely, yes, we operate in a competitive environment. I hope that it won’t be too long before the initiatives that have been driven by the OFT will in fact drive much greater transparency across the businesses.

Q402 Mark Garnier: Barriers to entry in terms of the regulatory process: we had Hector Sants and Lord Turner in a couple of weeks ago and I was getting stuck into them on this particular point. They absolutely categorically denied that the regulatory authorisation process is a barrier to entry. How are you finding it? Do you agree that it is no problem?

Benny Higgins: If you don’t mind I’d like to broaden the question to say what are the barriers to entry.

Mark Garnier: Yes, of course.

Benny Higgins: In fact, I think a much more useful expression is "what are the barriers to success?" "Barriers to entry" sound like a very, if you like, black and white outcome, but "barriers to success" discourage new entrants. If we were to identify the number of issues that would act as potential barriers to success, I would list them as follows.

Firstly, financial services is a business where it is necessary to invest in a huge amount of infrastructure, whether it be IT and specialist skills. It does mean that it’s unlikely that a new entrant can be very successful and be very small, whereas in other businesses it’s possible to be small and well-formed and successful. So there has to be an aspiration for some scale. The second is around regulatory issues. Quite rightly, the capital requirements are much greater than they have been before and they will act as a discouraging factor for potential new entrants. The regulatory process itself, I wouldn’t say, is a discouraging feature in respect of how the regulations-

Mark Garnier: You wouldn’t say.

Benny Higgins: I wouldn’t-in the way it’s pursued. However, the FSA themselves have acknowledged that the level of intensity of regulation is greater than it’s been, and that brings with it cost because for every pick-up in the intensity of regulation and contact there is greater effort required within a business for compliance. So that is certainly an issue. However, I would say that the two biggest issues that could easily discourage a new entrant are, one, the lack of switching in current accounts. Now, it’s not just about current accounts because the nature of the current account in financial services transcends the products itself. What the current account acts as is a fulcrum for all of the other products that banks sell. So for example, 88% of savings products will be sold by the bank that has the current account. So it goes beyond just current accounts.

Mark Garnier: I do know some of my colleagues are going to pick up on exactly those points a bit later and I just really want to-

Benny Higgins: Okay and, just finally, I think one thing I would like to explore is the economic model where there is fierce competition from new business, supported by incumbent banks, by profitability of their existing business. Therefore, any new entrant has to confront the challenge that they’re entering a market where new business is fought on slim terms, but actually the profitability of incumbents is supported by their existing business.

Q403 Mark Garnier: Just drilling down, as I say, into this regulatory issue and the process. As I say, those other points you have raised will be covered so do not feel I am skirting round what are very important points. But there are a number of people who, anecdotally and otherwise, have made comments that, for example, if you are about set up a new bank, you have to put a huge amount of regulatory capital into that organisation and then have it sitting there doing absolutely nothing for the next nine months while you go through the process. I mean for someone like Tesco where you have a strong balance sheet, that is probably not a problem. But, again, with your experience having gone through this process, do you think that is a fair criticism of the regulatory process?

Benny Higgins: I wouldn’t say it’s a fair criticism of the process. I think it’s a fair reflection of the need to have large amounts of capital to be in financial services and that itself will act as a discouragement. But I don’t think that we should consider it a criticism of the regulatory process.

Q404 Mark Garnier: You do not see it as a Catch-22 where investors will not invest into a business where you are not getting return on your equity for potentially up to a year? You do not see that as a-

Benny Higgins: I don’t think that is a leading issue. I think the leading issue is the matters I’ve already listed.

Q405 Mark Garnier: No, no, that is a fair comment. Just one last question, because you actually seem to be a relatively happy customer. "Every little helps", it seems, where the FSA is concerned. Would you give them a good reference, if you like? If somebody was to ask you how the FSA has treated you going through this regulatory process would you say, "Yes, they’re fine. There’s no problem with that. They’re doing okay"?

Benny Higgins: We go through an annual appraisal of the FSA to the FSA and it’s not so long ago we did. We have a very good relationship, a very open and co-operative relationship, with the FSA. There are times when single issues may seem to be handled in a disproportionate way, but actually we have a very strong relationship with the FSA and can’t complain about the way in which they have handled our process of going through change of control. We announced the acquisition of the other half of the business from RBS in the summer of 2008 and we completed the process in December 2008, which required us to go through a change of control process and we thought it was handled very professionally on both sides.

Q406 Andrea Leadsom: Mr Higgins, we have had some very interesting complete conflicts of opinion this morning where we have had both Lloyds HBOS and RBS claiming that the PCA market is highly competitive, that there is very little cross-selling, that the cross-penetration is not high, that there are no barriers to new entrants and, indeed, that they fall over backwards to accommodate the switching of personal current accounts. I think you are hinting at the fact that that is not the case in your opinion. And your view would be shared by Sir Donald Cruickshank who gave evidence to this Committee saying that he believes that the barriers are those of new accounts, new current accounts. And indeed that would appear to be shared by the OFT, who think that there is not enough competition, that switching is very low, that there is great customer inertia. So just by way of the background there, there are these enormous conflicts that have come out today.

What is your opinion? Sir Donald Cruickshank told us that the banking industry should be stripped of its control over the shared network infrastructure. Do you agree with that; in other words, that they should not any longer be allowed to own and manage money transmission services on their own to their own rules?

Benny Higgins: I don’t think that is the issue. I would rather go back to some of the points you made earlier. Let’s address the question: is the market for current accounts competitive? Well, if we go back to first principles: what would make a market competitive? A market would be competitive if there was a sufficient number of suppliers offering a sufficient range of choice to customers in an environment where the customers are well informed through transparency and full availability of information and where there are no perceived or real barriers to switching. If we address the PCA market against that level of criteria, I think it becomes very clear that we don’t need to hint at a conclusion. It’s an unequivocal conclusion that the market is not competitive.

We shouldn’t look at the market shares. They’re actually not the issue here. What we have to ask ourselves is: what is it about the customers’ behaviour? What is it about the companies who serve those customers’ behaviour that tell us the answer? And if we look there we find that the FSA did a study only, I think, last year where 39% of customers said that all banks’ products were pretty much the same: the same price for the same outcome. Now, that’s palpably untrue. It’s untrue for individual banks, never mind across different banks. So there is a lack of transparency. We already have discussed in brief the amount of income that flows to the banks in respect of current accounts, but that’s not something that customers are aware of, so there is a distinct lack of transparency and disclosure of information.

Q407 Andrea Leadsom: So would you highlight transparency-in other words, the customer knowing what their current account costs them or, conversely, what the profitability of their current account is to their bank? Is that the one key thing that would make the difference?

Benny Higgins: There are two that will make the key difference. One is full disclosure. Now, there is an OFT initiative to do so. I just hope that in three or four years’ time progress has been made and it’s just not a bunch of initiatives that never come to fruition. But there are initiatives that will bring greater transparency to this particular question.

The other is the question of how easy it is to switch, perceived and real. Again, we can look at OFT data where a quarter of customers who switched said they wouldn’t do it again. A third of customers who switched said they wouldn’t recommend it to a friend or member of their family. So unequivocally, I think what we have here is evidence that there is an absence of proper transparency and disclosure and there is a perception-and indeed there is a reality. A quarter of customers who do so also say they encountered some difficulty during the process. It’s not all the bank’s fault because the direct debit originators are involved, but there needs to be creative energy and momentum to solve the problem. Until these two factors are resolved, you cannot describe the market as competitive.

Q408 Andrea Leadsom: Yes, and I completely agree with you there, and certainly have had a lot of letters from constituents who have had a complete nightmare trying to switch accounts from one provider to another. In particular, what they have highlighted is that it is the argument between the bank they are leaving and the bank they are going to as to who should do what that causes the hold up. Certainly, both of our earlier witnesses were suggesting it takes four to six weeks to switch accounts, which is an extraordinarily long time. Sir Donald Cruickshank suggested to us that the key to changing this was to have a new licensing regime for money transmission systems-CHAPS and BACS and so on-that would require that banks allowed complete account portability, rather akin to what he achieved when he was leading Oftel with telecoms-taking your phone number with you. What he was suggesting is that you should able to take your bank account with you.

So, in other words, it would be for the banks to find a way to enable you to take your bank account number and your sort code with you so that you did not have to re-establish your direct debits and your standing orders and so on. Could you comment on, one, technologically is that possible-obviously it is not today, but is it possible? Secondly, would that then solve the problem? I just want to be very clear: this would be consumer choice, because a number of people have commented, "Well, that smacks of Big Brother: an account number cradle to grave". Obviously, it is about consumer choice. You can change your bank account number if you want to but, equally, you do not have to. So with that in mind, could you comment on that, please?

Benny Higgins: Many things are possible at a price. What I would find it very hard to gauge is just how expensive that particular initiative would be. My best guess is it would be very expensive and so, while I think it should be explored because it certainly has the embryo of a very good idea, it has to be fully costed and understood what the implications are. But, beyond that, the real question is: is there a real energy to make switching straightforward, whether that’s a solution or some other one is?

Q409 Andrea Leadsom: So when you say, "Is there a real energy?" do you mean your suspicion-I do not want to put words in your mouth but is your suspicion that the banks will collude to avoid this happening because it would, at a stroke, remove barriers to entry for new market participants?

Benny Higgins: No, I’m just simply saying that this is not a trivial problem to solve. It will require a great deal of focus and momentum and I’m saying no more than that.

Q410 Andrea Leadsom: Okay, but then, if those obstacles were overcome, do you think that that would create a radical difference in the competitiveness of the retail banking sector?

Benny Higgins: If you look at other aspects of financial services where there is greater transparency, where there is a much easier switching process, you see much higher activity around switching. The number that is quoted for current accounts is usually around 7%. In fact, I saw some data the other day that suggested, if you take out secondary accounts, the real underlying switching is probably more like 3%. It’s very, very low.

However, if you look at credit cards, for example, the UK Cards Association has just published some numbers showing that in the last 12 months no less than 27% of customers have either taken a new card or a first card and, indeed, 14% of them closed the card that they had. So in a market where there is an ease of switching, where there is transparency around what you get charged and what you get, customers will be more active. Customers will switch. One of the tests in competition, I would suggest, would be: is there evidence of customers having a product which, if they were to look at what they were charged and what they got, don’t move despite the fact that there are alternatives there that would serve them much better? Against that test, I think current accounts fail.

Q411 Jesse Norman: We have heard one very interesting piece of testimony already that you may have noticed, Mr Higgins, which is that RBS were apparently not concerned about the anti-competitive effects of the Lloyds HBOS merger, which suggests either that they regard Lloyds HBOS as a staggeringly uncompetitive organisation as a whole, or that they are very self-confident about their own ability to compete. I want to ask you about two things. The first is: do you not think it is possible that switching could make banks more profitable, for two reasons? One is that it siphons away customers off whom the banks are earning relatively little money, whereas we know in fact they are earning an enormous amount of money on the overdraft and charge side. The second is because it siphons off the grumpiest customers who might be expressing their voice within the institution for more transparency and lower charges.

Benny Higgins: Well, first of all, I think the issue is: should the personal current account market and, beyond that, the retail banking market be more competitive and what would be the characteristics of a competitive market, regardless of the profitability today or tomorrow? But if I could give you a statistic I think to illustrate-

Q412 Jesse Norman: Sorry, we can rephrase my question. It is whether or not switching might in fact make the market less competitive for the reasons I have described.

Benny Higgins: A lot more switching is an unlikely characteristic with a market that’s less competitive. The freedom to switch between suppliers is a necessary component of competitive markets and, as I said earlier, I think disclosure, full information being available and there being the minimum number of barriers to switching is what you need to have a competitive market. But if I could illustrate a point, in savings, for example-and I quoted a point earlier-88% of savings are with the current account provider. If we were to take the £1 trillion that sit on deposit in the UK-now, there are a range of different products ranging from instant access through to fixed term deposits-and we were to ask the question, "How much more would transfer from the banks’ profitability to the households that make those deposits if all of those customers placed their deposits at the average of the top 10 for that particular segment?", by my calculation you get to £10 billion annually, quite easily.

Q413 Jesse Norman: So that is £10 billion that the customer is paying that they should not be paying if they were just offered only of the average of the top 10 products across those market segments?

Benny Higgins: They’re foregoing interest. Now, in any market you don’t get perfect mobility where people make the perfect choice. There are many reasons for placing money, around trust and so on with different institutions, but what we’re talking here about are very similar products.

Jesse Norman: Right, so is £10 billion what you would call a very high level of friction and suggests that there are institutional inertial factors that are preventing the markets from operating?

Mr Higgins: And I would suggest it’s lack of information.

Q414 Jesse Norman: Okay. That is very interesting. Can we just go into more detail about what you are proposing to do on areas where you think there should be more transparency? So take, for example, the personal current account where we know that free banking, as such, does not properly exist. Would your view therefore be that the banks should charge the correct price for that service or that they should disclose how much in income the person’s foregoing by using it?

Mr Higgins: I would suggest that if there was proper disclosure of information and there wasn’t a perception that switching was difficult, then actual behaviour of markets would bring about the right level of pricing and the accompanying profits.

Q415 Jesse Norman: But for the avoidance of doubt, there would therefore be a bit of paper where someone would say, "In opening this account, you are essentially agreeing to pay us £100 to £150 a year", or whatever the true embedded price is for that kind of account, "which you will be paid in the form of foregone interest earned". That is the kind of disclosure you have in mind, is it?

Mr Higgins: Yes. The difficulty is some of the income that flows from the customer to the bank is partly dependent on the behaviour in a particular period of time and so it wouldn’t always be this; you know, it wouldn’t be possible to this accurately predict. But I think what is important is that disclosure of the cost is very clear. Now, as I’ve said already, the OFT have initiatives to pursue this. It is, in my opinion, very important that the execution of it is such that it resolves the issues as far as possible.

Q416 Chair: Jesse’s question is: how can that be best made transparent? And we need an answer to that.

Mr Higgins: Well, the answer is that we need to show, I think, with a sufficient frequency, how much is being paid by consumers to banks.

Q417 Chair: So do you mean how much interest foregone?

Mr Higgins: Well, some basis of interest foregone. I mean, I wouldn’t like to over-simplify the disclosure. What we have at the moment is it’s quite difficult for people to understand the combination of the charges, fees, interest foregone. I mean, it’s best, I think, illustrated by the concept-we still talk about free banking all the time. I would go further and say that free banking is a myth. In-credit free banking is a myth, because as I said earlier that £9 billion that was received by the banks in revenue from customers-it’s the only source-50% of that was around in-credit balances.

Q418 Jesse Norman: That is very interesting. It was, and we have heard that already, but just for the avoidance of doubt, the kind of schedule you have in mind is one which would allow a Which? or someone similar to rank 50 bank accounts, show what the interest foregone would be, show what the costs would be and show, as it were, the additional cost of a marginal mortgage product or some savings product; it would be that kind of thing. So someone could look down and go, "Okay, I see. This is really uncompetitive. I need to be going with Harry" and say where they would, for example, with an ISA or some of these other-

Mr Higgins: Yes, I mean, in the first instance, you would know how much you pay today and you would be able to look at what you would pay if you made an alternative choice.

Q419 Chair: Why do you not write down in some detail how you think the industry should be required to go about this, rather than persisting with questions now? It is not an easy subject. It is quite complicated, but it is a very important one.

Mr Higgins: I agree, Chairman. I wouldn’t understate the complexity of it, but there has to be a considered effort to make sure that the breakdown-

Q420 Jesse Norman: The key point about this is by all means sketch two or three different alternatives, but please work them out so we can actually see what it would look like, because it is only the working out that one gets a real sense of the complexity of it.

Mr Higgins: No, the expression of transparency is easier than the execution, but it’s important that we are focused and creative in doing so.

Jesse Norman: That is helpful.

Q421 Mr Mudie: Just taking your report, can you tell us just-because it touches on where you do not do current accounts and mortgages-are you wishing to do?

Mr Higgins: We’ve already made public our desire to launch more-

Mr Mudie: Could you speak up a bit, please?

Mr Higgins: Sorry, apologies. It is we’ve expressed our plan that we will launch mortgages in the middle of next year.

Q422 Mr Mudie: Which one?

Mr Higgins: Mortgages, mortgages.

Mr Mudie: Mortgages?

Mr Higgins: Yes.

Q423 Mr Mudie: What about current accounts?

Mr Higgins: We don’t have a very fixed date yet. The reason why we’re able to do mortgages first is because, as we’ve been migrating our business away from RBS systems, which was part of the joint venture organisation, it’s the new platform that we will be in a position to launch current accounts from. In terms of mortgages, it’s a separate kind of platform, because mortgages are run differently. But mortgages will be first and that will be in the middle of the year.

Q424 Mr Mudie: No, but just in the context of the discussion here, nothing is preventing you in principle, apart from your timetable. You are doing the mortgages first and then you are going to do current accounts. There is nothing stopping you doing those two things, is there?

Mr Higgins: No. I mean, at the end of the day it’s rarely that something stops you doing it. I think the conversation that we’ve had so far would say that there are issues that make it difficult to go into the current account market. We’re certainly very determined that when we do, we will do so in a way that is consistent with the Tesco values and the Tesco business.

Q425 Mr Mudie: No, I understand that, but we are looking at what is stopping people like yourself come in quickly and get established and get running and giving competition. You see, the transparency side, I go on confused.com and all that if I am looking at insurance and things like that, and I will have everything listed and they will compare each of the providers, and I will be able to look down the list and think, "Well, this is important. This looks good". Now, why can you not do that on retail banks then for current accounts?

Mr Higgins: It’s just at the moment, it’s more difficult to have a simple comparison that’s supported by the disclosures that banks make around current accounts.

Q426 Mr Mudie: Right, but you were at RBS, and you were at one other bank in a senior capacity, HBOS. Now, you were in retail there. Is it impossible for anyone to do it outside those banks? It is not even a question of disclosure. They are withholding information that would permit a comparison; is that what you are saying?

Mr Higgins: No, I’m not. What I’m saying-and first of all, I’m here exclusively to discuss Tesco Bank today, that’s who I represent, Tesco Bank-I’m happy to make comments on the industry in general. I’ve made a number of comments already which I think are genuine-

Q427 Mr Mudie: Now, Benny, you have been very good, and you have been the most important witness we have had. They have all been defensive. You are actually somebody who has been trying it, gone along the road, seen the difficulties. Well, let me put it: if I wanted to set up or Martin Lewis wanted to do something in terms of current accounts, "Come on my website and I will show you the most competitive in terms of current accounts", could he do that with the information that is in the public arena?

Mr Higgins: I think it would be quite difficult at the moment.

Q428 Mr Mudie: Not impossible, but quite difficult.

Mr Higgins: Nothing is impossible if there’s enough energy and focus.

Q429 Mr Mudie: Right, okay. Now, Mark-and I think you have been exceedingly generous to the FSA-he asked you a question about how you got on with the FSA and you said you have had some wonderful reviews from them. Your evidence-

Mr Higgins: No, I’m sorry, I didn’t say that. What I said is we appraise them of how our relationship is working and it was very-

Q430 Mr Mudie: Yes, but we are more concerned about how your initial dealings were with the FSA, and they sound to be as fraught as we fear they will be, that they would be and are. I mean, I just read about someone taking up a post in the City who waited two years to be told he was not fit to take a job with the FSA. We are picking up long delays and-

Mr Higgins: Well, all I can do, I’m afraid, is express how we experienced the changes. You have to remember that the business that was initially Tesco Personal Finance, now Tesco Bank, was established in 1997, and it did have its own banking licence as a joint venture with Royal Bank. When Tesco acquired the other half, what was required was a change of control through the FSA, and it does require a very detailed regulatory business plan. We went through that process in the summer and autumn of 2008 and all I can say is our experience was very good.

Mr Mudie: Your experience was very good.

Mr Higgins: Yes.

Q431 Mr Mudie: I am struggling to find it, but you are less happy with them in your description in your paper on various aspects.

Mr Higgins: Well, let me just make sure that there is no doubt about this. What I have said is that intensity of regulation is greater than it was. The FSA have acknowledged that. I think it’s an appropriate response to the last few years. When one gets a change in intensity, change inevitably brings some teething issues. Change also means that there’s more activity, so what I would say is that there can be more clarity, but from our perspective we have a good relationship and we are systematically working through the things that we need to do.

One thing I would say is you do need the right expertise to be working on this. You need the right access to capital. This is not a straightforward business to enter. I listed earlier what I thought were the headline potential barriers to success and, therefore, potentially issues which would discourage new entrants. None of them are barriers to entry. It’s why I would prefer the expression "barrier to success", because nobody’s getting told they can’t enter. It’s just that there are issues that you have to overcome and one of them is the regulatory burden-I’m not saying it’s inappropriate-the regulatory capital burden, which is becoming bigger. It’s important that regulation is robust and proportionate. I think that is very important.

Q432 Mr Mudie: Did you read or see our session with Don Cruickshank?

Mr Higgins: I have seen it. I read it some time ago, but I can’t remember it in detail.

Q433 Mr Mudie: His evidence was astounding in terms of how difficult it is to set up a bank in the UK now. Did you come across those passages?

Mr Higgins: Yes, I mean, we are in the process of creating what we hope is a very successful bank that will serve Tesco customers well. I mean, I should say one of the things I hoped to be able to cover was that what we aim to do is to serve Tesco customers well by being a very prudent, traditional bank, but by applying modern methods. If we can do that, we will, I think, make a big contribution to the financial welfare of Tesco customers.

Chair: That is very, very helpful evidence you have supplied us with, not always in accordance with the evidence we have heard earlier this morning. That is why we take evidence from a variety of witnesses. Thank you very much for coming this morning-we have appreciated it-and for waiting out until the end.

Mr Higgins: Thank you.

Chair: Thank you.