Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 1 - 19)




  1. Good morning. Would you like to introduce yourselves?
  (Mr Barrett) I am Matt Barrett. I am Chief Executive Officer of Barclays.
  (Mr Dalton) Bill Dalton, Chief Executive of HSBC Bank PLC.
  (Mr Ellwood) Peter Ellwood, Chief Executive of Lloyds TSB Group.

  2. Thank you very much for coming. I have in front of me the press release produced on the Cruickshank report, presumably with the agreement of Don Cruickshank. What it says here in the first paragraph is "... in general, neither personal nor small business customers are getting a fair deal from banks. They are paying up to £3 to £5 billion a year too much for their banking services. This amounts to between £40 and £400 for most households in the country; more for small businesses". Do you agree that "neither personal nor small business customers are getting a fair deal from banks"?
  (Mr Barrett) As a relative newcomer to the UK scene my observations would be that the market is intensely competitive, that the pricing compares favourably, in fact Mr Cruickshank in his report said that competition was alive and well in the UK, price competition is increasing in the UK and it compares favourably to any benchmarks which have been looked at internationally. I am still trying to figure out where the £5 billion comes from and exactly how it was arrived at. There was an element of the report which confused me which defined excessive profits as being those above the cost of capital. Given that definition, we would rank forty-fourth in the FTSE in terms of profitability and therefore if our profits were excessive, I am not quite sure what adjective you would use for the rest of the economy. I should argue that this a highly priced competitive market in the personal sector, which the report acknowledges, and in the small business sector it is also found on international benchmarks to be reasonable. He then went on to say that we were first in the world with relation to Australia, we were in the top two or three in the world in terms of innovation, etcetera. I actually found those elements of the report encouraging.

  3. You take the nice bits and you reject the nasty bits, is that basically what you are saying?
  (Mr Barrett) There are certain inconsistencies in the report which I have not resolved yet.

  4. In other words, you do not accept the report.
  (Mr Barrett) There are elements of the report which I accept, as you usually find in reports of this nature, and elements which I do not.

  5. Basically you do think that people generally and small businesses are getting a fair deal from the banks.
  (Mr Barrett) Yes, I do.
  (Mr Dalton) I do as well. The report in itself indicated in parts that evidence suggests that overall SME businesses and personal customers in the UK get reasonable value for money from UK banks. That was stated in the report. I could certainly tell you that overall that is the case. No, I do not agree with the statement.

  6. You do not agree with the report.
  (Mr Dalton) I guess I agree with certain aspects of the report and I disagree with certain aspects of the report.

  7. You like the nice bits but not the nasty bits.
  (Mr Dalton) Yes, that is probably correct.
  (Mr Ellwood) Mr Cruickshank does indeed say in his report that personal customers and small and medium-sized businesses (SMEs) get reasonable value for money from UK banks and there is a large number of suppliers, something of the order of 120 suppliers of savings accounts, 65 suppliers of credit cards, 140 suppliers of mortgages. If one is to accept the assumption that people are not getting value for money or a fair deal then that has to assume that excess profit is being made in the banking sector. We do not accept that excess profits are being made, certainly in my company. Banking is a cyclical industry and over the ten years to 1998 Lloyds TSB earned a return on equity of just under 13 per cent. That is less than the top quartile of USA banks and the top quartile of European banks. If companies are encouraged to earn more than the cost of equity, which is about 12 per cent on Mr Cruickshank's figures, they will then be attracted to come into the market and therefore increase the level of competition. I thought it was quite interesting to see recently in the Financial Times a list of the 500 largest British companies which has 45 different sectors within that 500 list; 41 of those 45 earned more than 12 per cent and financial services is about nineteenth, in the middle of the pack. We are earning good returns at the present time; part of that is due to greater efficiency, that we have reduced the absolute cost of running Lloyds TSB by £400 million since 1995 and improved the level of cost efficiency from 60 per cent to 42 per cent. I do believe that personal and SME customers get good value for money.

  8. You do not think there is anything in Mr Cruickshank's observation that there are real problems with the way banks control the networks which allow money to flow round the economy, whether it be cheques, debit and credit cards or electronic transfers big and small.
  (Mr Ellwood) I do think Mr Cruickshank makes a very good point there. He talks about the governance of money transmission. I am very happy for that to be explored and if it is thought fit to make that wider or open then that may be a positive step. Having said that, we think that the money transmission system is one of the most efficient in the world. It is extremely effective and sees an enormous amount of volume going through it. The integrity of the system for me would be paramount but we are very, very open about examining issues of governance. I thought that was a good point which came out of the report.

  9. Mr Dalton, what do you say to Mr Cruickshank's observation?
  (Mr Dalton) I would share that view. Mr Cruickshank said the UK payment system is very good in a number of aspects, but we would certainly support opening up membership, we would support differentiation between owners and members and we would certainly support changes to the clearing system to speed up the clearing cycle as much as possibly could be.
  (Mr Barrett) I would agree with what has been said. I have a kneejerk reaction to increased regulation frankly; not surprisingly, as we are heavily regulated as it is, the spectre of yet another regulator does not thrill me. The system has about 28 players in it. You have to balance ease of access into the system with competency, stability, the integrity of the system. Thirty million transactions are processed a day to a value of about £42 trillion a year and therefore the regulatory environment always has to balance freefall in terms of entry and the competence and stability of the system. I was coming at it more from the reputation which the UK has worldwide for having one of the best and safest and most efficient payment systems in the world and therefore I was coming at it a bit more than my colleagues on the basis that "If it ain't broke don't fix it". That does not mean it cannot be moved. It does not mean there should be any artificial barriers to people coming in. As far as I know no financial institution has ever been denied access to the payment system but I think that, to be fair to the report, it is an opening shot which will be responded to by the regulators as well as the industry and we shall see how the debate unfolds. I should be less than honest if I did not say to you that I hope it unfolds and it does not need more regulation.

Mr Fallon

  10. Can we turn to the need for more efficiency in the payment system itself? The Cruickshank report found that it often seems to reflect the nineteenth century more than the twenty-first and bears witness to the work habits of a nineteenth century bank clerk. Why does it still take three to four days to clear a cheque?
  (Mr Barrett) The clearing system can be improved. With respect, since I have come here, there seems to be unwarranted awe of the US banking system. If you deposit a cheque in the city of New York it will take seven days to clear to Chicago. The UK system would not be best in class in the clearing area—in fact Canada would be. However, there is a need for more technology and a bit more innovation. There has been a fair amount of change in the payment system here but I should like to see less bureaucracy and faster speed in transforming it, using new technology.

  11. Let us ask Mr Dalton. You are clearing cheques still from 9.30 to 3.30, you are closed for bank holidays, you do not clear on a Saturday; it is a cosy Victorian cartel.
  (Mr Dalton) I could not agree with that, but I would agree that the current system can be improved and we would support improvements. It now takes about three or four days to clear a cheque; part of the reason for that is that the cheques are still physically moved and that is quite a job for us right across the country. The important part in that process right now, although it would be good if we could speed it up, is that customers receive a credit for funds deposited the same day that the customer who has given them the cheque is debited. There is no money floating around the system. If I deposit a cheque drawn on the bank on Monday, then the person who gave me that cheque is not charged until Wednesday for the funds and that is the day I get credit. That is important. It would be good if we could speed it up to two days instead of three but the physical movement of cheques is still a problem.

  12. You make profits from slowing it down, do you not?
  (Mr Dalton) No, the bank does not benefit from the float there. The fact is that if you deposit a cheque on Monday, you receive credit for that cheque the minute the person who gave you that cheque pays for it. There is no money floating in the system; it is a same day credit and debit.

  13. It is pretty rare for any personal business customer to receive interest before the third working day, is it not?
  (Mr Dalton) Yes, but the person who gave you the cheque is not being charged for it before the third working day either. There are no funds floating around.

  14. Are you happy with this system?
  (Mr Dalton) It would be nice if we could give everyone credit on the second day or even the first day, but the point I am trying to make is that whoever gets credit on day three and interest on day three, no-one has paid for that until day three either.

  15. Do you not accept Cruickshank's conclusion that there are significant costs to businesses and customers of the slow payment system?
  (Mr Dalton) I do not know what costs he is referring to.

  16. He says in paragraph 3.133, "Clearing delays make it hard for retail and business customers to manage their financial affairs effectively. This results in higher bank charges from unauthorised overdrafts and foregone interest revenues". You make money out of that as well, do you not?
  (Mr Dalton) Yes, we make money out of overdraft charges; we do. The point Mr Cruickshank was perhaps trying to make is that credit is not given until the third day for funds and therefore they are not cleared or usable until the third day and that would be improved if that were day one or day two. There are some things in the works right now to try to shorten that cycle. The physical movement of the cheques will have to be taken into account when that is done.

  17. Let us try Mr Ellwood and see whether he is less complacent about this. If an internet current account provider wants to transfer money electronically, that still takes three to four days, does it not, even if he is transferring money to another internet supplier?
  (Mr Ellwood) To another internet supplier, yes. He can move money within his own range of accounts immediately. The thing on the cheque clearance is that the main reason for the physical cheque having to be sent to the bank on which it is written is to enable the signature to be checked. There is not actually a float which benefits the bank. The person writing the cheque does get debited on the same day that the payee of the cheque gets the value for it. Truncation has been looked at significantly over the last few years. What we have seen is that the level of cheques in the UK is reducing, the level of consumer demand for same-day clearance, certainly from our postbag, is not particularly high. The cost of going ahead with the equipment, certainly in the case of my bank, would be significantly in excess of £100 million. That is one of the reasons why it has not happened historically. There is this possible myth about a float but the debit and the credit occur on the same day.

  18. What percentage of signatures are checked?
  (Mr Ellwood) A smaller percentage now than was the case; certainly small figures, £20, £30, £50 maybe £100, are not checked but there is a huge number of cheques going through and therefore it is necessary to move these cheques around the system.

  19. Do you accept Cruickshank's conclusion of the British system that all customers get the same slow service?
  (Mr Ellwood) They get a service that when we do reviews and ask customers what they are concerned about in banking, they do not come up with the three-day clearing cycle. It is not high on their agenda.

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