Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 80 - 99)



  80. So what would "excessive" be?
  (Mr Dalton) I do not know how excessive could be defined. As a business person you could say no amount of return is excessive. Yahoo and are making returns of some thousands and thousands of percents. Are they excessive? I do not know. Perhaps in the circumstances they are not. I am afraid it is a rather hypothetical issue as to what is excessive and what is not. I really do not think there is a definition of it. There is a stock market where stocks are traded. The market will in a sense deal with those kinds of things.

  81. So making 26 per cent profit on small business lending is not ripping off small businesses.
  (Mr Dalton) I do not think so.

  82. Mr Cruickshank said that much of the source of your excess profit appears to arise from services which are not subject to any severe cyclical effect.
  (Mr Dalton) Yes.

  83. So that is not the loan losses.
  (Mr Dalton) I do not think I agree with that. It is loan losses. In my bank right now the reason our profitability is high in that sector is because the loan losses are a lot less than they were a couple of years ago.
  (Mr Barrett) If it does not frustrate you, may I begin with an observation that I have been through many of these types of inquiries on the other side of the pond and the issues are legit. What surprises me in the UK is that normally the big concern about this very important sector, which is the engine of job creation etcetera in the economy, is the lack of oxygen of credit. Normally the knock on banks is that they are only interested in the big guys and that they do not lend. Here the report concluded that there was no problem whatsoever with respect to the supply of credit to the small and medium-sized enterprises in the UK. I thought that was terrific. I am usually getting beaten up the other way for not doing enough. Then it went on to say in the report ironically that he would judge some of the lending to be insufficiently profitable given the margins and the risk but that we were making it up on the operating services and the cash management and that is true. It is the nature of the business that it is high scale. May I just loop that back to the term "excessive profits"? I do not understand the term to be honest with you; I do not know what it means. Profit could be deemed to be excessive if you can point to egregious behaviour in the marketplace by your abusive behaviour. Beyond that I do not think profits are excessive: they are what they are. If they get very, very high and you have an open market—and by the way, the UK is one of the most contestable open financial services markets in the world—then what happens is that new entrants very quickly come into the market to take advantage of what they see to be easy profits. If you examine the SME market, which is crucially important to the economy, the report absolutely flabbergasted me, because it said that they are getting all the debt capital they need, the banks are making profits doing it, but let us refer it to the Commission because there are only two or three players who are focusing on this market. I just cannot understand why you would want to criticise companies who have focused on something which in a lot of other jurisdictions is considered a problem, done very well at it and then you criticise them for having done very well at it. If the market were that easy to crack and the profits were so excessive, then you would have lots of other contestants. There are many, many people empowered to do unsecured lending, to go in and tackle that market but they are not doing it. Why? It is because the market requires skill, it is risky, you have to have good risk management disciplines in place and as a result of that you get rewarded with operating a much richer array of products and services for the client because we add more value to the small and mid-sized client in terms of advisory services than we do at the top end. If this business was excessively profitable, why are the building societies not climbing into it, why are niche competitors not going into it? Because there is a barrier to entry called competence and there is not much I can do about that. We shall see where the Commission comes out, we shall cooperate with it, but there is no evidence in the report of any egregious behaviour and therefore I cannot relate to the term "excessive" until you can point to what it is relative to: relative to abuse of power or abuse of market position or having our way with the customers. In a highly contestable market that cannot happen.

  84. Mr Cruickshank makes various recommendations for remedying this structural problem we are talking about for small and medium-sized businesses, for instance a monopoly reference, better information, more equity capital rather than loan capital.
  (Mr Barrett) It is a big issue.

  85. Do you believe that this is likely to remedy the situation it is describing? Do any of the recommendations he is making give you any concerns?
  (Mr Barrett) Let me deal with the equities, a very interesting question. As he said, debt was fine but he felt there was insufficient equity and he said it was not a criticism of the banks. He went on to imply that the Government has a role to play in filling this void. I am a little nervous. This is nothing to do with banks, but from a public policy point of view I would be nervous about us drifting back into the notion that Government can pick winners and losers. I would say to you that the UK and Europe in general does not have sufficient pools of equity capital, like you would find in North America, which is an important dynamic in stimulating the economy in North America. I do not have all the answers yet. What Government could do is look at the incentives and disincentives around the formation of private equity capital but I think it should be left to markets. I would not be a big fan of some super private equity firm in the sky hooked onto a Government agency trying to pick winners and losers. I would be concerned about that. Having said that, I would focus on the broader oppression of stimulating equity in terms of externalities which create incentives and remove disincentives, be it capital gains tax, be it regulation, I do not know, rather than pushing it to the Government to do it for the market.

  (Mr Dalton) With respect to the recommendations, yes, the Competition Commission inquiry is under way so that will take its course and I do not begin to predict what the outcome of that will be. In a broader sense, because you asked the question as to whether we think it will make a difference, I firmly believe that my bank will succeed in the market by looking after its customers, by providing them with good products at fair prices in an open and transparent way. I cannot think of anything which I would personally do differently to try to change the behaviour of my bank that may come about in the next few months. I want our bank to be competitive, I want us to get as much business in that market as we possibly can because it is very good business. I want us to look after our customers, I want us to do it in a fair way. I have to be honest and tell you that I cannot see things which I would like to go back to my office today and change because of things I have heard or read.
  (Mr Ellwood) We do not see a high demand for equity from SMEs. The vast majority of our SMEs are very small indeed; for instance three quarters of them have a turnover of less than £100,000 and half of them are sole traders and two thirds of them do not actually borrow at any one time. I should be very concerned if there were some starvation of credit to this sector, but I am actually convinced that there is not and I do not think Mr Cruickshank is making the point that there is. Providing that the SMEs get the level of credit they need for financing their business, that to me is the most important. On this issue of whether there is competition, 90 per cent of SMEs are actually within five miles of at least three suppliers. We do not really see a huge demand for the equity issue.

Mrs Blackman

  86. Could we return to the issue of social exclusion which we touched on a little while ago? Should a recognition be legitimately included that so many people are excluded from basic financial services in your bank's corporate remit when planning policy?
  (Mr Ellwood) It is important to put into context how many people are excluded from financial services and there are different numbers about. The research which the British Bankers' Association did came up with somewhat smaller numbers than the Government and you may say, "They would, wouldn't they?". Their figures indicated that about six to eight per cent of adults did not have a bank account and quite a number of these did not have a bank account out of personal choice; only about two per cent had been refused a bank account. Because of our history in Lloyds TSB we are actually the most inclusive of all the major banks so that 20 per cent of our customers have an income of less than £6,500 per year compared to an industry norm of 10 per cent; so we have more of the people at that end of the spectrum. I do believe we have a responsibility in this area, not just with the £30 million of charitable foundation which we gave out this year, but in terms of the basic bank account provision. We have been piloting a basic bank account at Lloyds TSB in Scotland over recent months and this is such that it meets the criteria set down by the Treasury policy action team. It can be opened by anyone, regardless of their credit history, as long as they have no outstanding county court judgements against them. What they can do with this account is get cash out of ATMs, they can use it for standing orders, for direct debits. They have 24-hour telephone banking to pay bills, get their balance and so on. They also perhaps usefully get a book on how best to manage their money. The intention is that we will roll that account out nationally throughout the whole of the United Kingdom before the end of this year. I do believe that banks and organisations of our size do have this responsibility to the community and we are working very closely with community credit unions, in terms of seconding staff, offering premises, free business banking and so on. There are a number of initiatives like that which we are very happy and indeed very proud to be associated with. One of the problems historically with people not having bank accounts is this issue of identification. It has actually meant that we have sought to be a lot more flexible in the documentation we would accept for people opening an account. Over the course of the last year, as a result of becoming more flexible, we reckon we have opened about 10,000 more accounts than we would have done had we kept to the old method of identification, passport, driving licence, and so on. That has been an issue and the action we have taken now will see some improvement in the future.
  (Mr Dalton) Our bank thinks that it is appropriate for us to provide basic banking services to everyone, once you get past the issues of identification, money laundering and so on. That is the case in the other banking systems which I have worked in, so it is similar in that way. The difference is that in the UK current accounts are inexorably linked with credit. It is not the case in other banking systems. Once you get past that issue and the issue of the cost of operating such accounts, then we do believe, and we have such an account, that everyone should have a bank account to be able to pay their bills, deposit their funds and so. We think that is quite right.

  87. So the credit issue can be solved?
  (Mr Dalton) Yes, it can. It is difficult in our country because of the odd system. In other jurisdictions it is generally that if you have money in the account then you can take it out, but if you do not then you cannot. Very simple. In our country it is not quite that easy because there are different treatments of cheques, different treatments of debit cards and so on, which do allow people to take money out of accounts even though there is no money in them. That is a bit of a problem. We can get around that.

  88. That has been a problem for a very long time. Why has there not been a desire to get round that well before now?
  (Mr Dalton) I can only speak for our bank. We do not have an issue with that and we have had an account which meets those sorts of criteria for a long time. Part of the problem is that access is important and you can use such a card at ATMs and things, but retailers have floor limits below which they will accept cards without authorisations. In other countries there is always positive verification before using a card at a retailer's. Here we do not do that and that causes a problem for people with the cards. I agree with your point and we have such an account and I think it is the right thing to do. In his report Mr Cruickshank said that as far as the issue of basic banking services and social exclusion was concerned, the Government might want to think about it, intervening if it thought necessary in that process and defining a universal service and then tendering it for the lowest subsidy. That is the other question: how many accounts could you operate at a loss like that. That comes into it as well. We agree the basic principle.

  89. You are developing your basic banking service.
  (Mr Dalton) Yes.

  90. What sort of timescale?
  (Mr Dalton) We have an account now which will meet the criteria of basic banking.

  91. Which completely meets the criteria.
  (Mr Dalton) Yes.

  92. Is that the same for you, Mr Ellwood?
  (Mr Ellwood) Yes; absolutely.

  93. But not the same for you, Mr Barrett.
  (Mr Barrett) We shall have full rollout of it by about October of this year. Just to elaborate, it is in our self interest commercially to increase access. Morally it is wrong to exclude any segment of society from basic access to banking services because it is one off, a tiny one but one of the ways which you can break the cycle of poverty by making people more financially literate. Philosophically I am hugely in favour of eliminating social exclusion. Having said that, I sometimes hear quoted comparisons with what they call the CRA in the United States—Community Reinvestment Act. There is a very real misunderstanding over here of what that is all about. You will not find anything like the problems in the UK. That legislation has its roots in the ignoring of the inner cities and particularly certain ethnic groups within those cities, ignoring the provision of any service to them at all, redlining those districts. You will not find that in the UK. The problem in the UK is more how you provide a basic banking service to people of very modest means or who are on social welfare, so that they are able to make deposits, pay bills, etcetera. Collectively we are all working on that and this will be a problem of the past by the end of the year. We will find a way to do it, find a different business model to do it. I believe in it.

  94. May I pursue this issue of withdrawal from certain excluded communities and your relationship with post offices? Would I be right in saying that post offices do not give any non-personal services to customers whose banks have been withdrawn from their communities?
  (Mr Barrett) We are working with them. We are going to start off with individual personal banking and then we are going to look at whether we can enrich the service a bit for small business.

  95. For small business as well.
  (Mr Barrett) Yes.

  96. We have a very interesting paper submitted by the Campaign for Community Banking Services to the Committee. They talk about a particular study commissioned by them which Bristol University undertook, part paid for by Barclays and some of the other major banks. The BBA is now picking up some of these issues and is wanting to take some of the matters forward. They are basically concerned that if the post office becomes the exclusive channel through which financial services are delivered, then there are problems with that because there are no non-personal services at the moment. There are problems with space in very small post offices and they would much prefer to see a wider package with community banks, shared branches and multibank agencies. Is that something you have considered?
  (Mr Barrett) I would consider that. I would, funnily enough; which may surprise my colleagues. I would definitely engage in an industry wide and Government participation. I would participate in whether or not we could not collectively come up with some shared way of doing a better job than everybody banging away on their own agenda. If we keep throwing bricks at each other on this issue we are not going to make progress but yes, it is possible to come up with a more cooperative approach for some of these communities. Certainly in Canada you have only 15 million adults spread over a landmass which goes from county Kerry to Siberia. Trying to find ways of delivering service to remote communities or small population areas is a way of life over there. Having said that, it is why the banks are not so profitable. There are innovative ways. You are seeing numbers of experiments going on. You are seeing small footprints embedded within stores, you are seeing small stand-alone footprints which would be a lower cost model but the problem there is the vault. The vault is a big problem because that is where the big cost is. You are seeing it with post offices, you can see it with cooperatives. Yes, I would actually engage in a debate which tried to bring all of the different projects together as a collective issue for how we could collectively do better and then maybe make it affordable for everybody.


  97. Is that view shared by your colleagues?
  (Mr Barrett) I do not know.
  (Mr Ellwood) To a very large extent that exists in that commercial customers can actually pay in at branches of different banks from the one they bank at. I agree it is very useful; it is a service which is extremely good which we do provide. People can pay in at other banks. We are running a pilot at the post office now about SMEs paying into post offices. It is a little too early to say how successful that is going to be but it is certainly something we should probe.
  (Mr Dalton) To be fair we have not thought about it. We have not been in a situation where we have been closing branches; we have five more than we had last year so this issue has not come up for us.

  98. You have in the past of course.
  (Mr Dalton) Yes; ten years ago. I have not really considered it. We should be happy to be part of any discussions on that as well.

Mr Plaskitt

  99. On 7 April your bank shut 171 branches. Why was that?
  (Mr Barrett) They were not making money, they were not viable, neither were they perceived to be because the customer demand for our service in those locations had dropped to the point where the branches were not sustainable.

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