Examination of witness (Questions 158
- 177)
TUESDAY 18 APRIL 2000
MR DON
CRUICKSHANK
Chairman
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.
Chairman
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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