APPENDIX 1
Memorandum by Barclays Bank plc
1. GENERAL COMMENTS
1.1 The Review from Don Cruickshank is long
and complex and contains many recommendations—some of which
would have a fundamental impact on financial services in this
country. The Review acknowledges that the UK already has one of
the most stable and open financial systems in the world. Barclays
is certain it can be improved further. However, we would caution
against reaching conclusions before there has been an informed
debate. We call for greater consultation, not just with banks,
but all interested parties—the Treasury, Bank of England
and FSA. Before any change is adopted, the Government should
be satisfied that consumers would actually benefit as a result.
1.2 One of the main reasons for commissioning
the report was the Chancellor's concern that small and medium-sized
enterprises may have difficulty accessing debt finance. Therefore,
Barclays is pleased with the Review's conclusion that 95 per cent
of SMEs applying for finance receive it. Moreover, it finds that
the UK typically offers lower cost lending services to SMEs than
other countries surveyed.
1.3 The Cruickshank Review acknowledges
that personal banking is becoming increasingly competitive. While
Barclays welcomes this acknowledgement, we believe that the Review
underestimates the extent of today's competitive environment.
We also believe that it underestimates the significant and on-going
transformation of our industry. Technology, globalisation, and
ageing population, greater self—rather than state—reliance
is radically altering every aspect of banking.
1.4 In relation to Money Transmission, the
Review concluded that a new licensing authority and economic regulator
(PayCom) are required, despite a lack of detailed consultation.
It is our view that the existing regulatory bodies and competition
authorities already provide a suitable mechanism for promoting
competition. The Review failed to provide a proper analysis of
the costs and benefits of PayCom and the risk that it would not
deliver the intended benefits. We believe that it is vital that
any proposal to change the regulatory regime is carefully weighed
against the ability of UK Plc to compete internationally.
1.5 The Cruickshank Review indicates a market
size of 1.3 million businesses. This figure appears to ignore
most sole traders and partnerships. Barclays was not asked to
exclude these businesses from the data it submitted. The total
market of SMEs is in fact 3.7 million businesses. It is not clear
which parts of the analysis are constructed on which parts of
the market and this causes a lot of confusion when reading the
report.
1.6 We do not believe that SMEs pay too
much for their services. According to the calculations we provided
to the Review a typical small business with three employees pays
around £282 per annum in Money Transmission charges, representing
just 0.1 per cent of turnover. Our charges have fallen faster
in real terms than utility charges over the past eight years and
are half the charges paid by SMEs for their telecoms and insurance
costs. We think that represents good value for money.
1.7 We disagree with the Review's contention
that customers focus on price alone when selecting a finance service
provider. The majority of customers place more emphasis on their
relationship with us and the efficiency of day to day service.
We have invested heavily in the quality and training of our relationship
managers to ensure that we offer the support our customers seek
from us.
1.8 The Review finds that when UK banking
is compared with the rest of the world, we offer "reasonable
value for money". Like every business we aim to make a profit.
We are proud of running a successful and profitable business.
Our success enables us to provide employment for many thousands,
invest heavily in improving our service to customers (£545
million in 1999 alone) and make a substantial contribution to
the government purse in taxation. Our profits reward our shareholders.
The vast majority of our shareholders are UK pension funds helping
families retire in financial security.
1.9 Barclays is disappointed that those
banks that are major supporters of British business are given
very little credit for doing so. Collectively banks in the UK
lend over £250 billion to UK industry and commerce
of which Barclays lends more than £30 billion.
1.10 We provided evidence to the Review
team showing that Barclays' returns were not excessive over the
economic cycle, either in absolute terms or when compared to other
members of the FTSE 100. The Review team accepted the methodology
and conclusions.
Taking the main themes of the Cruickshank Review
in turn, we would like to address these in greater detail as follows:
2. REGULATION
2.1 Barclays welcomes the recommendation
that the Government should encourage the FSA in its efforts to
make the regulatory process more transparent in the UK.
2.2 Barclays welcomes improvements that
bring greater clarity, transparency and accountability. These
include the efforts being made by the regulators to enhance disclosure
requirements and the provision of comparative information for
financial services to better inform consumers and to achieve more
effective competition. However, such comparisons should not focus
on price alone but also acknowledge the value adding elements
of the service we provide, including the ability to access our
services through branches as well as other channels such as telephone
banking and the Internet.
2.3 The focus of the Cruickshank Review
is on UK regulation, which we regard as appropriate up to a point.
However, neither regulation nor competition is any longer a domestic
issue and the UK needs to remain competitive in the global marketplace,
amid the technological revolution that is transforming the way
we do business. Currently the UK's financial sector is ranked
first internationally in that context and there is a danger that
certain of the measures proposed might jeopardise the advantage
and success the UK enjoys in this industry. Barclays therefore
urges the Government to broaden the debate to reflect the globalisation
of financial services.
2.4 It is incorrect, we maintain, for the
Review to assume that little will happen in terms of risk disclosure
before the Basel Committee's proposed framework is implemented
in 2002. UK banks have greatly enhanced their risk disclosure
already, particularly in the areas of credit and market risk.
We have also made a significant contribution to the new standard
covering derivatives and other financial instruments, which further
extended disclosures about management and market risk carried
by banks. Furthermore, the banking industry is already participating
in trials to define the proposed disclosure template. The 2002
timescale is necessary as Barclays and other banks will need to
make significant systems changes to support the implementation
of Basel.
2.5 We note the recommendation that bank
supervisors should disclose their assessment of the trigger and
target ratios for individual banks. This is very much an issue
for the FSA but if implemented we believe this may effectively
remove one of the FSA's key regulatory tools.
3. MONEY TRANSMISSION
3.1 The Review is a catalyst for the industry
to step back and review where we are today and how best to meet
the challenges of the future. However, there are many good things
about the Money Transmission experience in the UK, through which
billions of transactions are processed very effectively each year,
emphasising the efficiency and integrity of the current systems.
3.2 Barclays, its customers and consumers
as a whole benefit from competition and we support any cost-effective
initiatives that enhance the competitive arena.
3.3 The Review was critical of the level
of innovation in the UK Money Transmission industry. In contrast
we believe that there are numerous examples of both the UK payments
industry and Barclays leading the world on innovation in Money
Transmission and e-commerce.
3.4 Pricing between consumers and system
members and between the system and system members themselves is
already transparent and the case for any additional consumer level
transparency is not made.
3.5 All payment systems have objective and
publicly disclosed access criteria to guard against systemic risks.
We agree that those access criteria should be set at a de minimis
level (and must not act as an artificial barrier to entry) and
the business model for payment systems must be also appropriate
to support growing e-commerce. We would support a review of access
criteria to ensure that that is the case.
3.6 It is our view that the existing regulatory
bodies and competition authorities already provide a suitable
mechanism for promoting competition and that consequently a new
licensing authority is not required. Furthermore, in competitive
markets we do not believe that economic regulation is the best
way to promote competition.
3.7 The existing regulatory and competition
authorities are already well placed to manage systemic risk and
avoid anti-competitive behaviour. In the event that it can be
shown that there is a need for any enhancements to these present
regulatory protections, the level of change should be as little
as is commensurate with attaining the intended objectives. The
acid test should be to ensure that the end result delivers tangible,
economic benefits for consumers.
3.8 Any additional regulation must be compatible
with international arrangements and guard against an adverse impact
on the competitive position of the UK Money Transmission industry
against EU and global mechanisms.
4. SMES
4.1 We agree with the Cruickshank Review's
acknowledgement that raising debt finance is not a problem for
SMEs. It indicates that the average success rate for obtaining
bank finance is 95 per cent. This is supported by reputable surveys
which show that other problems, unrelated to banking, are regarded
as more pressing by SMEs. These include concerns about adequate
sales turnover, Government regulation and paperwork, lack of skilled
employees, prompt payment of bills by customers and the tax burden
on small businesses.
4.2 Barclays disagrees with the Review's
conclusion that non-bank debt products do not constitute effective
competition. We do not accept the assertion that the expanding
secured lending and leasing markets, and the wide availability
of point of sale finance to businesses buying vehicles, computers
and other equipment, are not competing with traditional bank lending.
The use of these products has grown while traditional bank lending
has fallen. We are acutely aware of the competition we face from
these alternative sources of finance for SMEs. We see this competition
every day in our business and do not believe this received sufficient
acknowledgement or emphasis in the Review. The Cruickshank Review
betrays a lack of understanding of the reality of this market
and the degree to which we believe it is contestable. Today, there
are:
— over 90 secured lenders in the UK;
— over 60 commercial mortgage lenders;
and
— almost 400 core financing products
available to businesses, an increase of a quarter between 1994
and 1998.
4.3 We think the Cruickshank Review's conclusion
that UK SMEs get "reasonable" value for money from their
banks, based on international comparisons, does not fully reflect
the Review's own analysis. Notwithstanding some flaws in the methodology
used by the Review, in three out of seven product comparisons,
the UK was actually ranked cheapest. The UK was ranked second
best for product innovation four times out of seven. When all
the scores are averaged the UK ranked overall first equal with
Australia on price and third on innovation behind the USA and
Canada. We regard these findings as better than "reasonable".
4.4 In the area of equity finance for SMEs
we agree broadly that this is a matter mainly for public policy
and the government. However, the Review fails to address the unwillingness
of most SME owners to part with equity. Nevertheless, Barclays
through its own venture and private equity capital operations
recognises a gap in this market. We also believe we can help by
working in partnership with government and other agencies to meet
the needs of SMEs, who for whatever reason cannot qualify for
direct financial support from ourselves. We have for four years
provided funding for the Merseyside Special Investment Fund, who
provide loan and equity finance to SMEs and we currently seek
to extend this. To this end we are working closely with the "Objective
One Alliance" and seek to fund their collective £140
million Fund programme in Merseyside, Wales, South Yorkshire and
Cornwall.
4.5 SME banking and our support for this
important sector of the economy has been, and remains, a key corporate
priority for Barclays, as further evidenced by our decision to
establish a focused "SME bank within a bank", to operate
from July 2000. We believe this market is contestable. For example,
building societies have been empowered to lend to unincorporated
businesses since 1986. They have branch networks, customers who
start and run businesses and the ability to use credit reference
data.
4.6 We disagree with the suggestion that
switching is not actively encouraged. The Institute of Directors
recently reported that 40 per cent of the businesses it surveyed
had switched at some point. For those businesses that do not switch,
we believe this is because they are satisfied with the service
from their bank. This has been confirmed by research from the
independent Forum of Private Business. Encouraging switchers is
integral to our marketing strategy and our Relationship Managers
are targeted in this regard.
5. BANKING SERVICES
FOR PERSONAL
CUSTOMERS
5.1 There are recommendations on personal
banking which Barclays supports:
— that government should avoid over-regulation
of the industry;
— greater transparency of pricing to
the consumer;
— the LINK recommendations; and
— easier switching of bank accounts.
We agree with the report's finding that the difficulty of switching
is mostly a matter of perception rather than reality. Nevertheless,
this is a matter we are addressing and although the report found
that "only" 14 per cent of those that had switched account
actually experienced problems, we would wish to see this figure
much lower still.
5.2 Barclays disagrees with the premise,
repeated frequently throughout the Review, that consumers naturally
buy the cheapest of any given range of products. This is simply
not true. By way of analogy, the most popular product sold in
a supermarket, or anywhere else, is often not the cheapest but
that which offers value rather than the lowest price. At Barclays
we spend a great deal of time and money trying to add value for
our customers. We provide a wide range of accessible delivery
channels, including a large branch network, extensive telephone
banking, card services and the country's largest Internet banking
service. We add value to the products we offer our customers—for
example immediate access to cheques presented by customers before
they have been cleared, instant transfer throughout Barclays,
interest from day one on deposits to savings accounts, pre-approved
loans, and integrated statements covering all of a customer's
business. We have deliberately chosen a strategy of creating more
value and better service for our customers rather than to strip
things down to a bare, cheap commodity service. The Review implies
that our strategy will not work. It does work very successfully
for our customers.
5.3 In our view the Review did not give
sufficient weight to the needs of our customers, which are undergoing
radical transformation. Customer tastes are becoming increasingly
diverse—over one million of our customers now choose the
immediacy of 24-hour electronic access via the Internet. Over
1.2 million customers have signed up for our telephone banking
service, and we now also offer access to accounts and card details
via mobile phones. Some estimates indicate that 25-30 per cent
of UK current accounts will be accessed by online banking within
three to four years.
5.4 The Cruickshank Review did not give
sufficient weight either to the unparalleled levels of competition
we face. Barclays provided the Review team with figures showing
that between 1994 and 1998 the number of institutions competing
for savings and mortgages each increased by 20 per cent, for personal
loans by 53 per cent and for credit cards by over 100 per cent.
According to the Review's own statistics there have been 21 new
entrants into personal banking in the last five years. We are
also now competing with banks that make a virtue out of the fact
that they do not have a branch network.
5.5 The Review seems to make light of the
fact that the current accounts offered by the main UK banks are
mostly provided free to consumers. By contrast many of the new
entrants into personal banking provide only products that generate
the highest returns, they are selective as to what they offer
and generally this does not include current accounts and their
access through physical branch networks.
6. THE PROVISION
OF BASIC
BANKING SERVICES
6.1 Barclays supports the concept of a basic
bank account for those people who are currently excluded from
the use of financial services and is developing such an account
for launch by October 2000. We recognise the difficulties that
those who are excluded face and the features of the basic account
will serve to alleviate these difficulties and meet their specific
needs.
6.2 The Review suggests a number of minimum
requirements for a basic bank account. The Barclays basic account
will meet all of these requirements but we have chosen not to
offer cashbacks due to resistance from retailers who are reporting
high point of sale rejection rates for on-line cards. The Review
overlooked the fact that cashbacks generate more fraud than any
other kind of transaction.
6.3 Barclays thinks the Review's comments
on the issue of personal identification for account opening are
somewhat harsh. We do, after all, need to convince ourselves that
people who open accounts are who they say they are. We do have
a need to combat the regular, persistent and professional attempts
to defraud us. Having said that, the rules regarding personal
identification have been imposed on us by regulators and by EU
law. Within these restrictions we try to be as flexible as we
can without compromising our legal obligations. However, we believe
the issue of personal identification does require review by the
Government, not least for the reason that the current rules result
in a higher number of technically excluded consumers than might
otherwise be the case. Beyond the issue of personal identification
it is Barclays' view that the FSA has a role to play in addressing
the broader financial education needs of financially excluded
people. We do not believe it is the responsibility of the banks
alone to do this but we are certainly willing to help.
6.4 The Review suggests that benefit payments
should be paid directly into recipients' bank accounts wherever
possible. Barclays' view is that alternatives must also be made
available for those who still wish to receive their benefits in
cash, and so as to ensure they are not further excluded as payments
become automated.
7. EXECUTIVE
PAY
7.1 In order to attract, retain and motivate
the best people, Barclays needs to be able to offer competitive
remuneration packages. Our senior executives therefore receive
remuneration that is reflective of practice in organisations of
a similar size and scale.
7.2 Barclays' new share incentive scheme,
which was approved by 89.2 per cent of shareholders at the Annual
General Meeting in April 2000, has been the subject of some rather
sensationalised reporting in the press. Indeed, some of the figures
quoted in the newspapers would require an increase in the share
price from some £16 today to £180. We believe this scheme
is market competitive and that it combines more leverage with
tougher performance conditions than most of the plans currently
found in the market today.
8. BRANCH CLOSURES
8.1 The banking industry is going through
a period of fundamental change. We find that, with the increased
choice Barclays customers have in dealing with us, we no longer
can maintain the same number of branches we have had in the past.
Barclays has to safeguard the longer term future of our various
stakeholders, including 70,000 staff, by managing its business
as effectively and efficiently as possible and we cannot ignore
the following:
8.2 Two years ago, Barclays had no internet
banking service. Today, 4,000 customers are being recruited every
day and Barclays now has one million customers banking over the
internet.
8.3 Ninety four per cent of UK homes have
a fixed telephone line and over one million Barclays customers
now use telephone banking from their own homes.
8.4 Five years ago almost 60 per cent of
Barclays customers used a branch for day to day banking, but today
that figure has fallen to under 40 per cent. A further 40 per
cent of our customers only use a branch once a month. By contrast
the number of transactions through our cash machines has grown
by over 30 per cent since 1994 to 450 million transactions in
1999.
8.5 To keep abreast of these changes in
the market place, Barclays constantly reviews all the services
we offer, including our branch network. In fact, there are many
places where Barclays has maintained a local presence longer than
our competitors and our decision to close 171 branches in April
2000 was taken only when the level of business could not sustain
them remaining open.
8.6 Barclays still has a large network of
over 1,700 branches and is expanding its cash machine network
providing access points in shops, supermarkets, railway stations
and other convenient locations for customers. Also, Barclays personal
customers are able to access day to day banking service free of
charge at an additional 15,000 post offices in England and Wales.
9. CASH MACHINES
9.1 In July 2000 Barclays announced that
our cash machine network would remain free for cash machine withdrawals
by both our own customers and customers of other banks after 1
January 2001. Barclays was the first of the major banks to abolish
"disloyalty" fees last October, and the first to insist
on on-screen pre-notification of all cash machine charges. The
decision to continue offering free access means the following
in relation to cash withdrawals from existing machines:
— Barclays customers will continue
to be able to use all Barclays cash machines and all non-Barclays
machines in the UK, free of charge by Barclays;
— Barclays customers will continue
to be able to use the overwhelming majority of cash machines in
the UK without being charged by other organisations; and
— those who do not bank with Barclays
will continue to be able to use Barclays cash machines, free of
charge by Barclays.
9.2 The decision to keep our cash machine
network free for cash withdrawals was taken after a year long
debate about the complex issues surrounding cash machine charges.
The debate had led to a great deal of confusion surrounding the
whole issue of cash machine charging. Barclays decided to continue
with free cash withdrawals in order to establish absolute clarity.
Background
9.3 In the spring of 1999, Barclays reviewed
its pricing for cash machine transactions. At the time we made
a charge to our own customers when they used other people's cash
machines—a so-called "disloyalty fee", but we
did not charge other banks' or building societies customers when
they used our network. Barclays believed this situation to be
unsatisfactory, for two main reasons:
— fees for cash withdrawals, charged
either by the operator of the cash machine or by the consumer's
own bank if the consumer was using the machine of another organisation,
were not notified onscreen. By consequence, most consumers knew
neither what nor by whom they were being charged; and
— Barclays customers were in effect
subsidising the use of Barclays machines by the customers of our
competitors.
9.4 We reviewed the options, as a consequence
of which Barclays abolished all disloyalty fees for our customers,
which resulted in our customers being able to use most cash machines
free of charge, regardless of whether or not the machine was owned
by Barclays. Also, we proposed the introduction of a user fee
for customers of other banks for obtaining cash from their bank
accounts via our cash machine network. It was proposed that other
transactions obtained through a cash machine, such as balance
inquiries, would remain free.
Expansion of the Cash Machine Network
9.5 The subsequent decision by Barclays,
and our competitors, to keep all cash machine withdrawals free
of charge will have a knock-on effect on the expansion of the
cash machine network in the UK.
9.6 Barclays' cash machine network is a
great asset for our business, but it is not a profit making one
and would not have been even with the introduction of a user fee.
It costs us approximately £100 million per annum to build,
maintain, improve and expand our cash machine network. The abolition
of disloyalty fees meant a loss of income of £2 million per
month for Barclays from October 1999 and the decision not to introduce
a user fee means that we will not be making good any of this loss.
9.7 Interchange fees that companies charge
each other only cover the cost of cash machine transactions, and
are not sufficient to fund a cash machine expansion policy. This
means that the ability of companies to place cash machines in
the areas where people live and work will ultimately depend on
their ability to provide funding for such machines. A user fee
would have led to increased revenue, which would have been used
to put more cash machines in more convenient places for customers,
including rural areas.
9.8 We are beginning to see new non-financial
services entrants, such as Securicor, installing cash machines
in "convenient" sites such as petrol stations, railway
stations and supermarkets. The fact that user fees on these machines
will be at least £1 demonstrates the return required to allow
investment in cash machines in convenient places for customers.
9.9 There will be an expansion of the cash
machine network but it is unlikely to be by those who have abolished
all their charges.
July 2000
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