Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 340 - 359)



  340. There is no point in my going over this because you have told us what your answer to that is, inadequate though it undoubtedly is. Can you tell us what profits, the last reported profits, NatWest made.
  (Mr Goodwin) The last reported profits of NatWest were included in the Royal Bank of Scotland Group's profits at our interim which were £2,011 million before tax, before integration costs and before amortisation of goodwill.

  341. Analysts are forecasting just last week that last year's profits for the Big Four will be combined in the region of £20 billion; is that about right?
  (Mr Goodwin) I will take your word for it. I saw the same article but I have not added up the analyst forecasting. I know what the analysts say for ours but I do not know the others.

  342. It is about £50 million given those figures that the analysts are forecasting. That equates to about £50 million every day of the year in terms of profit for the Big Four. That is pretty large, is it not?
  (Mr Goodwin) Compared with what? What would you expect it to be?

  343. They are record profits, are they not?
  (Mr Goodwin) I do not know what the records for the Big Four are.

  344. You do not know?
  (Mr Goodwin) I do not know what the records for the Big Four as currently constituted would be because I have not calculated that figure.

  345. Is it not the case, Mr Goodwin, that, if you did not offer such miserly rates of interest on the current account relative to your rivals, your profits would be lower?
  (Mr Goodwin) I do not accept that we offer miserly rates.

  346. Your profits would be lower, would they not, Mr Goodwin?
  (Mr Goodwin) If you simply paid more interest, your profit would be lower, yes.

  347. Is it not the case that you are making fat cat profits on the back of the customers to whom you pay pathetic rates of interest on the current account?
  (Mr Goodwin) Categorically not.

  348. How can you justify that proposition? You are making record profits.
  (Mr Goodwin) If indeed the Big Four profits are record, our profits will be at a record level simply because the group whose profits they came from has only been formed as of March last year, so, yes, we are making record profits.

  349. And we know why, do we not?
  (Mr Goodwin) We are in a competitive market. Bank profits do fluctuate through a cycle. It is generally recognised that it is a economic cycle and now would be the time when bank profits would be at a higher stage. We do not have to go back very far in time to look, certainly as far as the Royal Bank is concerned. We made something like £10 million profit in 1991. So there is a clear cycle through which the business goes and profitability needs to be viewed every cycle. I think that is something which Mr Cruickshank recognised in the work which he did. So, I think taking a profit at a particular point in time is one point which has to be observed. The other is, what would you expect the return to be in the capital employed in the business? I know that some very interesting analysis which followed the Cruickshank report was undertaken by Professor Kay but he analysed the returns that were being made and used the Cruickshank methodology so that it demonstrated so called excess profits and what it highlighted was that, of the 45 business types represented in the FTSE, 44 of them were making excess profits if you used the Cruickshank formula and that financial institutions were actually 19 on that list. So, to me, that would point to the fact that there may be some flaw in his methodology as to what is and what is not an excess profit. So, when you start to use phrases like "fat cat" and so on, I think we need to have some sense of, what is the bench mark and what is the method of determination? I do not say that simply to mention a number which may sound large is of itself a proof of anything. We are very large financial institutions. We are the third largest bank in Europe, so what would the third largest bank in Europe make on its shareholders' funds? I do not think you will find that many of our shareholders say that the returns are excessive.

  350. You do not think so?
  (Mr Goodwin) I do not think you will find many shareholders saying that.

  351. You should get into the real world. You are paying 40 per cent less than some of your rivals on current account. I think that speaks for itself. Can I move onto the question of the market share current account business of the Big Four at around 70 per cent. It has been suggested that one of the reasons that that has stuck at 70 per cent since Cruickshank is because of the great difficulty customers in the Big Four have in changing banks and switching current accounts. Would you accept that if a customer at your bank wants to switch to a rival, your bank should actually furnish that new bank with the account details of the relevant customer within 10 working days?
  (Mr Goodwin) Absolutely. That is the target to which we work. We do not always achieve it but that is the target.

  352. You do not always achieve it, no, you do not, do you? Abbey National have written to us complaining that NatWest quite often take longer than 10 working days. Why is this?
  (Mr Goodwin) Before we came along here, we took the precaution of speaking with Abbey National and a number of others to establish whether they had any outstanding issues with NatWest and they have confirmed that they do not. That is not to say that there have not been instances in the past. The whole issue of pooling together information for switching is an issue across the industry. The information does not all exist in one place and is not always readily to hand. Actually, switching is a double-edged sword for us. We are trying to grow our business. We need people to switch to us. The proposition that switching is something where there is a barrier I think is more a perception than reality and is one that is diminishing. There have been a couple of quite interesting surveys of late. There was one carried out by the DTI on the issue of switching which highlighted that in fact those who had switched did not, on the whole, find any great difficulty in so doing. It also highlighted that something in the order of 62 per cent of our customers would not think of switching even if it was easy and offered a price advantage to do so. A survey has been conducted for the Competition Commission, albeit only of small businesses, which also highlighted that people did not find switching all that difficult in reality, albeit that there was a perception there. We are totally committed to working with the rest of the industry to make switching easier. It actually suits us because once a customer has decided to leave, you must bear in mind that the issues you are talking about arise at the point in time when the customer comes in and says, "That is it, can I please have a list of my direct debits. I am moving." It does not make sense at that point for us to try and keep that customer by holding back the list. All you are going to do is aggravate a situation which is already past breaking point. The customer has already decided to move. I get complaints from customers about it when we stuff up, along with every other financial institution, the handling of the transfers of direct debits and standing orders between banks. The sooner we get this automated, the better. It will cut down our costs, and I am afraid that will give rise to greater profits under your model; it will enable us to attract customers to the bank more quickly and more effectively and that is good for business for us. I am anxious that we get switching fixed because I need it to be fixed to make it easier to move customers to us, not to stop them leaving. Once a customer has asked for a list of direct debits, they are gone and no purpose is served in dragging your feet to try hoping that the customer will somehow change their mind. They do not change their mind. All you do is aggravate the situation.

  353. That is an obvious point. The point is that it is a deterrent for people in the future, if they know there is hassle associated with changing their account, to not actually even bother to inquire about changing the account. You have not met that point. Are you aware that a large survey of around 1,000 cases was done by Intelligent Finance which demonstrated that, in 57 per cent of cases, NatWest were not able to furnish those details to the new bank within 10 working days—57 per cent. What is the figure if you do not agree with that?
  (Mr Goodwin) I volunteered to you earlier on that we do not always meet the 10 day figure.

  354. What is the percentage?
  (Mr Goodwin) Amongst the people we contacted as well as Abbey National were Halifax and Smile and there are no outstanding issues as far as they are concerned with our handling of switching. So, as to what may have happened, I do not know when the survey was conducted. It could be comparatively recently. Things are changing at NatWest. I do not demur from what I said to you. We want to meet the 10 day guideline; we would like to make it a shorter service level agreement if we could. We want to make switching easier and we want there to be a perception that switching is easier. I am not going to demur from that statement but it does require work across the industry. It is not something that is solely in my power to do. There is an expectation that, by the end of this year, in fact by the autumn of this year, there will have been another step forward in the automation of the process to make this easier, but it is a pan industry exercise.

  355. Mr Crosby, Intelligent Finance, for whom you are speaking today did a survey and, in 57 per cent of cases, NatWest did not make the 10 day transfer deadline. Mr Goodwin is saying that it is not really a problem, there are no complaints. Are you resiling from that figure and your complaint that NatWest dragged their feet?
  (Mr Crosby) I am not going to argue with the figure because that is research we did and—

  356. So you are contradicting Mr Goodwin.
  (Mr Crosby) No, I am saying that the research we did on those specific cases said that 57 per cent of the cases in NatWest were outside 10 days. What I would like to say to you is that that is an industry wide issue, not just—

  357. I know it is an industry wide issue, Mr Goodwin made that point very clearly just now, but he has said that there are no outstanding issues. Do Intelligent Finance have any outstanding issues about NatWest dragging their feet in 57 per cent of cases that your company, for whom you are speaking today—
  (Mr Crosby) I am sorry, I cannot say what the expression "outstanding issues" means in this context. What I would say to you is that I think—

  358. Do you have a problem with the fact that 57 per cent—?
  (Mr Crosby) Excuse me. It is pretty clear that the research we did was right at that time. I am sure that, if I checked through all our records today, there will be a number, it may not be 57 per cent, of accounts in transfer from NatWest which are outside the 10 days. I am sure that will be the case.

  359. Do you think that is acceptable?
  (Mr Crosby) I think the whole industry has to get better at this. It is the self-evident fact that the customer perception of how difficult it is to transfer is the obstacle to effective competition in current accounts. We, as an organisation, have set our stall out to double our share of the current account market in the next two or three years and we have a real interest in ensuring that that happens. As Mr Goodwin said, it is all about this automated system that is coming in at the end of this year. I think that the 10 day period in delivery, for example, might be something, if this system does not work that effectively and that quickly, that might become the subject of regulation. It is that important an issue.

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