Select Committee on Treasury Minutes of Evidence

Examination of witness (Questions 158 - 177)




  158. My apologies that you have had to wait so long.
  (Mr Cruickshank) I was entranced; concession after concession.

  159. I started off by asking them whether they accepted your central conclusion that the personal services and small businesses were not getting a good deal from the banking payment system. They did not accept that. I should be interested in your comments on that. Then I should be interested in your general comments on what you have heard because it has been quite a long and interesting session.
  (Mr Cruickshank) May I go right back to your introductory question which was on the statement that there are excess profits of the order of £3 to £5 billion being generated from personal small business banking markets in the UK? I am in no doubt that that statement is true. Remember that these represent but half of the profit centres of the banks represented here: other markets, UK corporate markets, activities which are non-banking or outside the UK, what they are doing with lending to Russia. The other markets, which comprise half of the profits of the top 11 companies in the London Stock Exchange banking sector, are generated from what by and large are extremely competitive markets. There are Barclays' attempts to break into investment banking over the 1990s and so on when significant losses were made. I am focusing on UK personal and small business customers and there I am in no doubt that the excessive profits over the cycle, taking into account all the points about default rates and interest rate trends which were made in the evidence here, are true. The reason has been that there has been lack of competition. I set out to address a question, not looking backwards but looking forwards: is that going to continue and what interventions are appropriate? I concluded that the two major competition problems are the governance and the management and access to networks. We have heard quite a lot about that today. Secondly, the way in which small businesses are served. I have advised Government that competition is developing in the provision of services to personal customers and that with some initiatives in the areas of information and making it marginally easier for someone, say like a post office, to become a bank and not have to negotiate with the banks, the prospects for UK personal consumers are reasonably good, as was said a number of times in evidence. We are not starting here with a set of firms, a level of efficiency which is bad by world standards.

  160. It is improving a reasonably good situation. Is that what you are saying?
  (Mr Cruickshank) For personal retail customers the number of initiatives required are relatively modest. For small business significant changes may be required in the structure of the market and I am absolutely clear, as we have heard from the discussion on the ATMs and cash machines today, absolutely clear, that appropriate regulation of these networks is required. None of what you have heard today about 38p or 30p was even acknowledged three months ago, far less prices of 50p, transparency and the like being promoted as things they would have done anyway, sorry about the last 20 years. I am in no doubt that that is what appropriate regulation promotes and across the networks which the banks control it is very necessary and the Government have accepted that.

  161. We put questions about excessive profits but there was a general view that there was no such thing as excessive profits. Perhaps you would like to define it for our benefit.
  (Mr Cruickshank) We have heard some very interesting presentation of bank strategies today, particularly to my left and right, with HSBC quietly in the middle. These firms are profit maximising and that does not mean being short-termist all the time, it means taking care with one's brand, one's reputation, taking initiatives which are attractive to consumers which will win consumers. You heard a whole number of initiatives voiced today which are absolutely what Lloyds have been doing for the last ten years, pushing forward to profit maximise with a high degree of concern about brand and reputation and being prepared to pay for that. They are profit maximising firms; that is what their fiduciary duty is. These are directors of PLCs with shareholders and pension funds which rely on their performance. They are not going to answer the question: what is excessive? My view is that in any market in which firms taken as a whole, not every individual firm but firms taken as a whole, consistently earn materially more than the cost of capital of operating, that market at first blush is not sufficiently competitive. There must be barriers to entry there, economic or regulatory in this case, which are not allowing the full pressures of competition to come into play. That is by and large what I found in the underlying network market in the small business market but changing rapidly for personal consumers, notwithstanding some of the results of that competition in terms of branch closures and the like being unfortunate and difficult for individual customers here and there.

Mr Cousins

  162. Picking up one thing which Mr Barrett said, he said he was a bargain. Would you agree with him?
  (Mr Cruickshank) Luckily I am not asked to agree with him. It is a matter increasingly for his shareholders and for the remuneration committee of Barclays PLC who increasingly are operating transparently and this applies to PLCs as a whole not just Barclays. They are operating transparently, reporting in a way we have never seen before in annual accounts and having to be accountable, including to your good selves. I have no view on Mr Barrett's value.

  163. The LINK network is managed in this extraordinary club of 34 people all of whom have one vote. Do you think the governance of the LINK network is correct, robust enough to face up to the rigours of competition?
  (Mr Cruickshank) I made four key recommendations about the operation of the network which were about transparency, pricing, etcetera, all the things which have been conceded already by banks. My expectation is that, given that framework within which LINK wishes to operate, an organisation like LINK will probably demutualise and those banks who think they can make money from operating networks will stay and those banks who want to serve personal customers and, crucially, can be secure that if they are not a member of LINK they are going to get a fair deal, a lot of the smaller banks, new entrants indeed some of the larger banks, may choose not to invest in the operation of underlying networks. That would be my expectation about how this market will evolve and that will make it easier for the organisation, LINK, owned probably by a different set of shareholders, to invest and innovate and serve customers better, their customers being all the banks who rely on them. That would be my expectation.

  164. How quickly do you think we should move towards a situation in which LINK demutualises, ceases to be a club and becomes a proper providing mechanism?
  (Mr Cruickshank) That is an issue for the 38 banks concerned. The public policy issues surrounding ATM charges have by and large been addressed. We are down to 8p. It is a lot closer than I ever got with BT, I can tell you. The public policy issues have been addressed, the issue as to whether LINK is better as a mutual organisation or whether some banks wish to withdraw, secure in the knowledge that the fee for using it will be fair, is for the 38 banks to decide.

  165. There has been a lot of discussion about the distribution of bank branches. There has been very little discussion about the distribution of ATM machines. Do you think the LINK network should undertake some responsibilities for achieving a fair and sensible distribution of cash machines?
  (Mr Cruickshank) I think it has already made the most significant concession which is to allow non-banks to put cash machines where they will and to connect them to the network on the same price basis as banks' ATMs. What that promotes is an opportunity for anyone who thinks that they can make money from operation of probably more sophisticated ATMs. We talk about ATMs as though they just disgorge cash. ATMs can do lots of other things as well. That is as far as Government should intervene. We will then see with a fair pricing structure and transparency a distribution of ATMs around the country in a way which suits customers best. It may be that some retailers would choose to subsidise provision of ATMs. It may be that some retailers will charge a pound in an out-of-the-way place for an ATM but will then say if you buy a cup of coffee they will give back 50p. There will be all sorts of innovation surrounding the distribution of ATMs around the country once that crucial break which says you do not have to be a bank to run an ATM has been conceded. That has already been conceded.

Mr Fallon

  166. May I press you on the follow up and implementation to your report? The Chancellor told this House that he would legislate on the payment system to ensure that is opened up to new competition, yet you were reported as being concerned the following day that the Treasury had said that legislation was in fact only one option. What do you understand to be the position about implementing your report?
  (Mr Cruickshank) I am absolutely clear that the Chancellor has made it quite clear that he will legislate to set up the regulator for money transfer systems and that is from the horse's mouth. I believe the process of consultation with the banks has started.

  167. You were quoted in the Financial Times as describing the Treasury as likely to avoid primary legislation or a Treasury spokesman said that.
  (Mr Cruickshank) No, I did not say that. I wrote an article. There is a whole piece in the report about the old regulatory contract, the way in which Government, regulator and banks have worked together—colluded is perhaps too strong a word—to create on the one hand systemic soundness, which is absolutely crucial, but on the other hand a market for personal customers and small business in particular, which is not as efficient as it might be. I was predicting that in response to this set of recommendations the process which we have seen historically of banks giving concessions and then arguing no more needs to be done has started. I think we shall see it frankly on the payment systems, the banks will point to the concessions they have already made on the operation of ATM networks or whatever, and will say they have done that much there is no need to further burden us with regulation here. That article was just pointing out that that process had started and it was tweaking tails to be honest. It had the desired result which is that the Chancellor makes it quite clear that he will legislate to set up the regulator for money transfer systems.

  168. You are quite clear that for the payment system we need legislation and for the network system we need regulation.
  (Mr Cruickshank) The appropriate regulation of these networks would require something beyond the operation of the competition law, that is a set of ex ante rules which would require primary legislation.

Mr Beard

  169. The National Savings account could potentially be a banking service provided by the Government for low income earners. Was that ever considered in your deliberations?
  (Mr Cruickshank) An argument which I took to the banks once we had some initial information back from them was that my hypothesis was that they could make money out of providing a basic banking service of the type described by Mr Ellwood. In the seven or eight months since I said that, in parallel with the efforts of the Policy Action Team 14, you heard the response today, that that basic banking account for the three million or so adults without a bank account will be made available by a number of these banks over the course of this year. I believe that that is an indication of them seeing it as a profitable opportunity in itself. I do not believe that there will be a need for Government intervention, certainly no tax payers' money required in this area.

Mr Plaskitt

  170. You said that they are all profit maximisers and we certainly had that confirmed in the course of the evidence we took this morning. However, an interesting divergence emerged because two of them are able to go on being profit maximisers while making commitments about their branch network, whereas Barclays were pretty clear that they are just going to go on closing them. I should be interested in your observations on that disparity.
  (Mr Cruickshank) Mr Barrett conceded, by way of reference to a letter I had written to him, that Barclays have been probably the worst performing, certainly of the three in front of you, over the last few years. Therefore I would presume he has the most to make up by way of, as he said, increasing efficiency levels, reducing costs to the level of Lloyds. I presume on Mr Barrett's own admission that he still needs to do many things which the others have already done. That restructuring of his branch network, which the others conceded they had done in the past but are now not going to bother doing, probably was something which Barclays might well have paid attention to in the past and the particular timing, in the light of this report and concerns about other issues, is probably very unfortunate in respect of Barclays. I said profit maximising when an appropriate judgement has been made about the value of brand and reputation. Profit maximising does not mean taking every penny if it is offered to you on Monday morning.

  171. National Westminster were not represented today, but since 1988 they have closed a larger percentage of their branches than any of the three who were here today: 45 per cent.
  (Mr Cruickshank) It is no coincidence that Barclays and NatWest are the two banks who made efforts to become really big, investment, full service banks in the 1990s and I suspect that much of the management energy and capital were deployed in ways which certainly Lloyds and HSBC since it took over Midland, have not replicated.

  172. Is the branch network issue something we have just got to leave to the marketplace and that is that?
  (Mr Cruickshank) I think so. There is no market failure here in the provision of basic banking like access to these cash networks, opportunity to get cash, have your benefit payment paid into an account, cheques paid in and the like. There is no market failure here. There are a number of problems, one of which is that while banks, not just these three but the 11 together, probably break even on the provision of current accounts, that is the basic bank account, there are those of us who are very expensive for them who visit branches a lot and write cheques a lot who never leave any money in their current account and there are others who are very careful. What we shall see at the same time as branch closures is distribution channels changing because that way prices become more reflective of costs notwithstanding Mr Barrett's anxiety to portray them as being two separate things.

  173. They said interesting things about customer pressure, did they not? Two of them were saying customer pressure is leading them to conclude that they should not close smaller branches, whereas Barclays said exactly the opposite. Is that how you understood it?
  (Mr Cruickshank) I have hypothesised on the basis of what Mr Barrett was saying today, no other information, as to why Barclays might be in a different position from the others. If I were the other two I would not be sitting here in front of you saying I was going to be closing branches.

Mrs Blackman

  174. There was what I think I could describe as a bit of a moan from Mr Barrett about some of the newer arrivals in the marketplace, he mentioned Egg, in terms of their expectation in taking on the issue of social exclusion. Did you pick that up?
  (Mr Cruickshank) I think he was making the point that there was no obligation on new entrants to replicate the branch network, which is quite right. I think he was saying that was appropriate. Who is going to provide these basic bank accounts and how profitable will they be on Monday morning but also in terms of moving more people onto more sophisticated services as their income changes or career develops, I do not know. Certainly we heard these three companies today saying they were going to provide that service; I suspect others will, in which case we are probably looking at that being a competitive supplier.

  175. Was there a different reaction to your report from the larger banks as compared with the smaller ones?
  (Mr Cruickshank) The smaller banks to varying degrees welcomed it. The chief executive of one bank, the Woolwich in fact, publicly welcomed it. I suspect that was more because of the soundness of the recommendations about the underlying money transmission where I have argued the small banks are disadvantaged against the big banks and new banks disadvantaged against old banks. Secondly, I had advised Government very strongly not to intervene by way of product regulation or defining a number of the products we have been talking about today as regulated activities of the FSA. I had said stand back from this. There are issues such as basic bank accounts which will probably get resolved by the developing competition. That was welcomed by many of the smaller banks. The recommendations in the report are essentially aimed at promoting competition which means that the Big Four, as they have historically been called, with their relatively high degree of market power, are the firms at which most of the recommendations are aimed. They are likely to be the most resistant.

  176. Are you confident that smaller banks will also come forward with benchmark services in the competitive environment?
  (Mr Cruickshank) If the whole structure of regulation, particularly banking supervision, is objective and allows entry at the rate we have seen recently, but not necessarily from firms who have been banks or are subsidiaries of insurance companies, if that progresses, then while I do not see every new entrant doing everything, they will focus on areas of competence and expertise, as we are beginning to see already. I am in no doubt that there need not be any market failure in the provision of banking services to personal customers if the banking supervision framework is managed appropriately, as it seems to be. My criticism is an historical one, not a current one.


  177. Just to sum up, from what the banks said today, what was new in it? You said they were moving your way. Was it firstly the 50p surcharge on cash machines announced by Lloyds TSB and secondly the fact that they all in different ways came out in favour of a basic banking account? Were they the two issues where they were moving your way?
  (Mr Cruickshank) It is interesting that all the announcements or concessions as it were were in the area of providing effective, better, fairer access to the underlying networks. Whether it was the governance of these networks was a point accepted, ATM pricing, the basic banking service, no redlining, deals with the Post Office which might be fairer than they have traditionally been, efficiency of the payment schemes was acknowledged as a problem, pilots are being done of allowing small business to use the branches of banks with whom they do not have their direct account, the whole lot of that was very helpful for both personal and small business consumers, moving in the direction advocated in the report. The important thing now is not to say that is that, let us move onto something else. The important thing now is to push forward with the appropriate regulation of these underlying networks so that innovation and efficiency continues to be promoted.

  Chairman: Thank you very much; that is a good note on which to bring the hearing to a conclusion.

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