Examination of witnesses (Questions 1
- 19)
TUESDAY 18 APRIL
2000
MR MATTHEW
BARRETT, MR
BILL DALTON
and MR PETER
ELLWOOD
Chairman
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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