Memorandum by Lloyds TSB Group plc
BANKING IN THE UK
1.1 Lloyds TSB is delighted to respond to
the Treasury Select Committee's request for written evidence in
respect of its investigation into the banking industry, and welcomes
the opportunity to comment on the Cruickshank Report (the Report),
and many of its recommendations, particularly those relating to:
full and open competition (paragraph
28, page xii);
enhanced transparency of product
pricing (paragraph 54, page xx);
removal of regulatory distortion
of competition (paragraph 32, page xiv); and
encouragement of competition at a
European level by Government so that UK suppliers may compete
and expand overseas (paragraph 31, page xiii).
1.2 Lloyds TSB provides a wide range of
good value, competitively-priced services and products. It provides
excellent service to its customers and is continuously seeking
to improve its products offers.
1.3 Lloyds TSB welcomes the Report's acknowledgement
that there are a significant number of new entrants as providers
of financial services, that there is increased competition (paragraph
4.87 and 4.93, pages 131 and 132) in the market, and that "SME
and personal customers get reasonable value for money from UK
banks" (paragraph E70, page 316).
1.4 Lloyds TSB believes that UK banking
is competitive and not hindered by barriers; entry is open, as
evidenced by the number of new entrants in recent years, including
1.5 Lloyds TSB disagrees with the Report's
contention that banks earn excess profits (paragraph C.135, page
Lloyds TSB contends the Report's
analysis that returns above cost of capital constitute evidence
of a competition problem, is overly simplistic. If applied to
all economic sectors, most successful UK companies would be deemed
worthy of investigation.
Much of the Report's analysis was
based on historic accounting standards or conservative valuation
measures, understating the capital base and overstating profitability.
The focus on successful banks adds to an overstatement of profitability.
Much of the profitability analysis
focuses on 1998, a year not representative of the economic cycle.
Indeed, examined over the entire cycle, Lloyds TSB about covered
its cost of equity capital, and similarly successful banks in
Europe and the United States were more profitable.
1.6 Lloyds TSB is also concerned about the
proposals to create a PayCom:
Mr Cruickshank himself acknowledges
that UK payment systems perform well on several criteria, and
some aspects are world class (paragraph 3.48, page 65).
Maintenance of the integrity of the
system is paramount.
Money transmission is not a utility:
the market must be allowed to set prices.
2. THE NEW
This section addresses Chapter 2, The New Policy
Framework, and Recommendations 20-35 in the Executive Summary.
2.1 Rationale for Government Intervention,
The Regulatory Contract (2.5-2.34)
2.1.1 We agree with the analysis in 2.6-2.10,
that the potential for "systemic risk" in banking systems
justifies Government intervention to ensure that fundamentally
solvent "banks are not put at risk from the unexpected failure
of another bank", and "to protect retail depositors'
funds in the event of a bank failure". We equally agree with
the statement in 2.11, that such intervention should not be applied
to insolvent firms, and that not only is a "zero failure"
regime impossible, but attempts to achieve it would be onerous
and therefore stifle innovation and competition.
2.1.2 The Cruickshank Report propounds the
argument that there is a de facto requirement that new
entrants to the banking sector are linked to an established bank,
and that this is a mechanistic stranglehold that limits "the
number of new entrants into a market" (2.19). We would contend
that there are flaws in his argument, partly because the Report
does not support its case with concrete examples, and also because
the partnership agreements between banks and non-banks mentioned
are excellent examples of competitive solutions. Having said this,
we agree that the FSA could give further information on the principles
by which it assesses individual applications (2.22). That a new
entrant may be asked to put up greater capital requirements than
major diversified players (2.23) seems neither illogical nor unfair.
It is a trade-off between allowing new market participants and
maintaining the integrity of financial markets: the mitigation
of "systemic risk" must remain the top priority. The
application of identical capital requirements for all players
would fail to distinguish between relative risks and penalise
better quality operators with potentially dangerous consequences.
2.1.3 We are surprised at the examples given
in 2.26 to argue that the "big four" (Barclays, HSBC,
Lloyds TSB and RBS/NatWest) have privileged positions and that
these "cause problems for new entrants".
Competition has never been as intense, and is
associated with an explosion in number of new entrantsnotably
non banks. For example:
there are currently 28 companies
providing current accounts in the UK, with 10 new entrants since
1989: these are the Halifax, Woolwich, Flemings, Citibank, Virgin,
First-E, Egg, Cahoot/Abbey National, First Direct/HSBC and Smile/Co-op;
there are currently 140 providers
of mortgages in the UK, with 19 new entrants since 1989: GMAC-RFC
Ltd, The Mortgage Business plc, Wesleyan Home Loans Ltd, Direct
Line, Kensington Mortgage Co, Virgin, Scottish Widows Bank, Winterthur
Mortgage and Management Services, Preferred Mortgages, Sainsbury's
Bank, Southern Pacific Mortgages, Platform Home Loans, First Active,
Future Mortgages, Mortgages plc, Egg, Verso Ltd, Standard Life,
and Norwich Union Personal Finance; and
65 companies provide credit cards
to consumers, 12 of which have entered the market since 1989:
MBNA, GM, Marbles/HFC, Centrica/Goldfish, RBS, People's Bank,
The Associates, Sainsbury's, Tesco, Capital One, Egg, and Morgan
Stanley Dean Witter.
2.2 The Impact of Future Developments in Banking
2.2.1 In respect of the EU's Financial Services
Action Plan (2.95), Lloyds TSB strongly agrees that (a) as many
as possible of the remaining barriers in the Single Market should
be removed, and (b) European consumer interests must be safeguarded
if consumers are to be confident in buying goods and services
from suppliers in other Member States.
2.2.2 Lloyds TSB also supports the Commission's
stated priorities (2.96). It has responded to each of the five
Forum Group consultation papers, and is assisting the Commission
in a number of areas including its study on customer redress procedures.
2.3 Developing The New Framework (2.107-2.186)
Executive Summary Recommendations 20-35
2.3.1 Transparency (2.114-2.126, Recommendation
18.104.22.168 Transparency is a good principle
because it enhances clarity in regulatory decisions and provides
evidence of a reliable track record and performance, which leads
to greater confidence in the system.
22.214.171.124 We therefore support the Recommendation,
that "the Government should encourage the FSA in its efforts
to make the regulatory process more transparent". We note
the Report's acknowledgement that the FSA is improving its transparency,
and the acceptance of this recommendation by the Government in
its response of August 2000.
126.96.36.199 We agree that greater disclosure
would reinforce supervisory decisions and actions through market
discipline. It would also allow for better comparison between
different banks. However, there could be difficulties in achieving
these aims of the Cruickshank team unless the information provided
was consistent and comparable across different banks.
188.8.131.52 We support the proposition that
"the Government should examine the costs and benefits of
requiring authorised firms to publish disclosure statements of
their risk exposures and risk strategies, across all activities,
in advance of the implementation of the new Basel Capital Adequacy
framework. The statements should also include details of regulatory
requirements such as capital asset ratios". We welcome the
Government's stated intentions to review and draw together the
many strands of this work, and to publish a proposed way forward
by the end of this year. We also welcome its acknowledgement that
these disclosure issues should be handled with care.
2.4 Institutional incentives (2.127-2.145,
2.4.1 We take no exception to the Recommendation
that the Government should monitor the effect which the Financial
Services and Markets Act (FSMA) will have had on competition,
in two years' time, as consistent with the principle that regulation
should not impede competition. We note the Government's intention
that the FSA will conduct cost benefit analyses on its new regulatory
rules to include their effects on competition.
2.4.2 We agree that the FSA should be independent
of the Government, and of the banking sector, in order properly
to discharge its public interest functions. However, disbarring
officers from member institutions would deplete the expertise
and experience available to the FSA and we therefore note with
interest the Government's statement of "great confidence"
in the current FSA Board.
2.4.3 We have no problem with the suggested
topics for inclusion in the FSA's future annual reports. It would
be in the general interest to have official updates on the state
of competition, the effects of regulation, and transparency, and
we note that the Government has taken these requirements on board.
2.5 Effective competition scrutiny (2.146-2.166,
2.5.1 The Cruickshank Report recommended
that "the financial services sector should not enjoy any
unnecessary exclusion from general competition law". We welcome
the Government's acceptance of this recommendation.
2.5.2 Turning to the following sequence
of Recommendations to the Government, we:
have no issue with new competition
tests to maintain/promote competition, facilitate new entries,
and improve goods and services to consumers;
firmly support level playing fields;
believe that mergers in the financial
services sector should be treated the same as in other sectors:
it would be wrong for an increasing list of merger criteria to
be applied to financial services imposing greater compliance than
on other sectors and reducing clarity and confidence in the merger
control clearance process.
2.5.3 Having said this, we would be interested
in understanding what the Cruickshank Report means by "material
shares" in the contexts of 2.165 and Recommendation 30, that
the Government should "refer all mergers between financial
suppliers to the Competition Commission for investigation if the
merging entities have material shares of the relevant market,
or if each has material shares in related markets. . . .".
2.5.4 We warmly welcome the Government's acknowledgement,
in its response to the Cruickshank Report, that "the fact
that two entities have a material share of a market does not automatically
mean that a merger would have an adverse effect on competition."
We also welcome its decision to allow the current arrangements
on merger control to continue.
2.5.5 As for the European dimension, we support
the recommendation that competition should be encouraged throughout
the Single Market. Lloyds TSBas indeed does the Governmentstrongly
supports the European Commission's wish to remove remaining barriers
2.6 Eliminating regulatory distortions (2.167-2.177,
2.6.1 As for the Recommendations, which
the Government has also accepted, that it "apply competition
scrutiny systematically to all its policies and regulations in
the financial services sector to ensure that they are proportionate
and minimise distortions to competition", and "ensure
banks are not accorded exclusive participation or preferential
treatment in developing government initiatives" without legitimate
reasons for doing so, having special regard to e-commerce developments,
firmly endorse the principle, that
scrutiny should be proportionate to the issue addressed,
as the Report states: indeed, this should be a general rule covering
all areas of governmentor "watchdog"supervisory
wish to see a "level playing
field", and are not seeking preferential treatment; and
contend that if we participate in
government initiatives, we do so on a competitive basis, and,
conversely, banks should not be forced to undertake initiatives,
which have no commercial case without reasonable compensation.
2.6.2 Turning to the areas which the Report
believes merit special attention:
the rules governing the new "t-scheme"
are being worked on by the BBA and APACS, with Lloyds TSB support:
the objectivity of their application will be based on transparent
technical and operational standards; and
the proposal that "the Government
should review the definition of financial services for the purposes
of VAT to ensure that there is no discrimination between in-house
provision by financial suppliers and outsourcing" is logical:
while participating in the Government review of this issue, currently
in process, we recommend that the VAT liability applicable to
outsourced financial services be determined in accordance with
European legislation and decided case law, both of which provide
that the majority of such services are properly exempt from VAT.
2.6.3 Turning to money laundering, we would
the compliance for banks in applying
the terms of the Money Laundering Directive has been high, but
the importance of reducing money launderingespecially in
the City markets, and given the increasing tide of related serious
crimeis and must remain a top priority; and
the banking sector is seeking to
simplify the identification procedure, and a government project
is underway which would enable electronic access to existing identity
records: it will be important to ensure that further details,
when they are released, are available for public discussion.
3. MONEY TRANSMISSION
This section addresses Chapter 3 on Money Transmission,
and Recommendations 36-41 in the Executive Summary. The final
paragraphs (Conclusions) also refer to the corresponding section
in the Government response issued in August 2000.
We entirely agree with the statement in the
Cruickshank Report, that money transmission, or more precisely
its payment system component (see 3.1 below), is "a vital
part of everyday life" as it underpins all economic activity
and so is key to the economic well being of the UK. We also agree
unreservedly with the desired outcomes identified in the sections
of the Cruickshank Report relating to money transmission.
We welcome the Cruickshank Report's acknowledgement
that the system "performs well on a number of criteria .
. . operates to a high level of security, processing large volumes
and values of payments. Some aspects are world class . . . [it]
has also shown itself able to adapt to new circumstances and to
implement change" (paragraph 3.48).
This response does not address issues regarding
plastic card schemes (3.5-3.8) nor the aspects of card scheme
interchange arrangements (3.106-3.118), which have their own governance
and are not under the sole responsibility of UK banks. We trust
that the card schemes will wish to make their own submissions
to the Treasury Select Committee. Lloyds TSB would expect to play
its part in contributing to such submissions.
3.1 Money Transmission and Payment Systems
3.1.1 We are concerned about the analysis
contained in Chapter 3. The Report acknowledges the distinctions
between "money transmission" and "payment systems"
(3.3-3.20). However it confuses the two, and falls short of explaining
that money transmission refers to the end-to-end process of a
payment transaction: it encompasses the entire sequence of activity
in a given transmission of money.
For example, in a cash withdrawal, this involves
the initial ATM transaction at the bank, the resulting back office
operation including reconciliation of debits and credits and,
if the person drawing the cash is the customer of another bank,
there is also an exchange of value and data with one or more third
parties as the paying bank seeksand receivescompensation
for the cash advance from the customer's bank. This entire process
is money transmission. Most of it occurs within the banks involved;
that aspect involving transfer of data and value between the banks
calls on the services of a payment system.
Another example is a cheque transaction, relevant
because cheques are still the main method of payment for business-to-business
transactions. A customer of bank A writes a cheque and gives it
to someone, who is either also a customer of bank A, or the customer
of bank B. The recipient of the cheque pays it in to his or her
bank, which then accounts for it internally and processes it for
payment through its (internal) clearing operation.
If the parties are customers of different banks,
bank Bthe payee's bankseeks compensation from bank
Athe payer's bankthrough the Cheque and Credit Clearing
Company. The money transmission is this entire process; the payment
system involves the process and settlement through the clearing
company. The involvement of a payment system would be nil, if
both customers had the same bank.
The relevance of this distinction is that the
payment systems themselves are a relatively small subset of money
transmission. They are estimated to account for less than 10 per
cent of end-to-end money transmission cost. Their impact on total
costs is thus minor.
The major element of money transmission costs
falls within banks themselves, in their clearing departments,
payments processing operations, branch networks and other distribution
channels, all in competition with each other. Lloyds TSB is constantly
seeking ways of reducing costs and improving its efficiencies,
and benchmarking its operations to seek quality excellence. A
recent example of such innovation is the decision to out-source
Lloyds TSB's internal cheque clearing operations to a new joint
venture with Barclays and Unisys, called Intelligent Processing
Systems Limited (iPSL).
3.2 The benefits of payment intermediaries
and payment schemesNetwork effects
3.2.1 We agree with the "social"
benefits of having payment intermediaries (3.38), and of the value
of the "common contracting framework" which they provide
(3.40). The distinction we have suggested between "money
transmission" and "payment systems" (see 3.1 above)
should, however, be borne in mind when considering the "network
effects" as presented in paragraphs 3.42-3.47.
3.2.2 We agree with the view expressed in
the Report, that "payment systems demonstrate the benefits
that each user gains from the addition of further users"
(3.42), and that an increase in the number of participants can
provide opportunities to enhance the functionality of different
payment systems, and hence the benefit conferred by providing
an efficient switching mechanism.
3.2.3 However, the Cruickshank Report's
example of debit cards, which are more useful the more widespread
their acceptance by retailers, provides an excellent illustration
of the potential confusion between the terms "money transmission"
and "payment systems". As much of the cost and competitor
decision lies within issuing banks, there is immense competition
in card issuing. Not only are an increasing number of banks offering
cards, but there is also a choice of payment systems that banks
can use to support their activitieseg Switch or Connect
for debit cards, and Visa or MasterCard for credit cards.
3.2.4 The Report acknowledges there is increasing
competition between banks for personal customers, and in the servicing
of their money transmission requirements. Money transmission is
characterised by competing providers using a common payment system.
In such cases, the payments systems involve competing third parties
to facilitate end-to-end transactions: this does not confirm the
Report's view, that competition between networks is associated
with inefficiency and lack of innovation (3.45).
3.2.5 Nor is the assertion that the existing
structure stifles innovation, supported by the fact that in the
15 years of co-operative activity under the Association for Payment
Clearing Services (APACS), the UK payment industry has overseen:
efficient and open payment and messaging
services in automated bulk clearing through BACS (where payment
volumes grew by some 240 per cent between 1985 and 1999, and continue
to grow at approximately 11 per cent per annum);
the successful development of real-time
gross settlement through CHAPS in February 1996 (the UK was first
EU country to do so), recognised in 3.49;
the creation of CHAPS Euro on 1 January
1999, despite the fact that the UK was not in the first wave of
the euro zone; the development and creation of the interbank cheque
data exchange network in November 1997; and
the decision to roll out chip cards
More importantly, the UK Payments system has
proved robust in a number of testing situations, notably the Conversion
Weekend of 31.12.98 to 4.1.1999, when the euro was introduced
to institutional, market and wholesale operations, and in the
transition to Year 2000. Given the global status of the London
market, and its premiership within Europe, these were no mean
feats. The work Lloyds TSB contributed to that effort left us
in no doubt of the quality, commitment and flexibility of our
existing institutions, and this was publicly acknowledged by the
Government at the time.
3.3 The need for change: Areas of good and
3.3.1 Areas of good
We welcome the recognition that "the UK
payment system . . . operates to a high level of security, processing
large volumes and values of payments" and that "some
aspects are world class" (3.48). We welcome the statement
that "the UK payment system has also shown itself able to
adapt to new circumstances and to implement change" (3.49).
3.3.2 Anti-competitive restrictions on access
184.108.40.206 The Cruickshank Report argues that
access to payment systems should not be restricted to banks and
other deposit-taking institutions, but be made available to any
institution able to meet access conditions based on explicit criteria
reflecting the risks involved. It is important to note that such
risks will be faced not only by the new entrant, but also by existing
members of the payment system with whom the new entrant will settle.
220.127.116.11 We note the Cruickshank Report accepts
there are legitimate reasons for regulating access to payment
systems and applaud the analysis of risks in high value payment
systems contained in Annex D1. We note the deduction that "there
is very limited scope for opening up these systems to non-banks"
(3.68). We believe that such restrictions on non-banks are justified
on the grounds of credit risk and liquidity, bearing in mind the
exposure of such settlement systems to "systemic risk"
if a member failed anda key concern of the European Commissionthe
need to justify and retain complete consumer confidence in our
financial markets and institutions.
18.104.22.168 We welcome the principle of allowing
access to properly regulated non bank institutions, and, indeed,
we welcome the entry of non-banks and other new players into payments
systems. The fact that rules have been amended where necessary
to enable membership by institutions, which were previously ineligible,
demonstrates the flexible approach taken by APACSeg the
admissions of MBNA Bank and, more recently, the Post Office.
22.214.171.124 As APACS indicated in its own comments,
it did institute objective entry criteria to each of its clearing
companies. The principle of objective entry criteria is contained
in Section 4 of the Child Report, which led to the establishment
of APACS in 1985.
126.96.36.199 It is critical for the protection
of the consumer and for the reputation of the UK financial services
industry that our payment systems demonstrate the utmost integrity.
At present, the Bank of England/Financial Services Authority carry
out, de facto, the "vetting" of potential members
through granting institutions banking licences. This ensures that
the institutions concerned have the balance sheet strength, liquidity
and treasury expertise required both to be deposit-taking institutions
and to participate in high-value payments systems.
188.8.131.52 It is worth observing APACS' comment,
that actual demand for full membership of the clearings has been
less than expected at the time of its creation in 1985. The principal
reason has been that the market for "agency" access
to the clearings (procedures through which non-member organisations
can access the clearings' facilities through member institutions)
has been highly competitive. For many players with relatively
low volumes, "agency" access provides good value because
it allows them access at the same service standards without the
overheads and responsibilities of direct membership. Some financial
institutions have left APACS to take up agency status, for example
The Bradford and Bingley Building Society (left BACS/APACS) and
Credit Lyonnais (left CHAPS/APACS). Others with agency status
chose to continue as such even when their volumes had grown sufficiently
to qualify for direct membership, examples being Bank of Ireland
(agent: Lloyds TSB) and Halifax (agent: Barclays).
184.108.40.206 For all these reasons, we would
challenge the Report's conclusion, that the "membership criteria
of the main UK payment schemes distort competition by restricting
full access to banks . . . [which] restriction cannot be justified
by the risks involved and leads to reduced competition and innovation"
(3.94). We believe access criteria are justified because:
nothing should override the need
for robust, safe high value clearing and settlement systems given
the potential "systemic" risks which may be involved;
issues of access do not merely concern
risk, but also the economics of volume/scale;
as most costs of providing money
transmission services lie within member banks' operations, with
approximately 10 per cent only accounted by the payment systems
themselves, the main pressures for competition will be in the
member institutions; and
as payment systems provide generic
services, the main thrust for product innovation lies not in the
clearings but in member institutions, which are in direct competition.
We cannot over-emphasise the importance of retaining
sound and robust payment systems and markets. This is not only
an issue of security, safety and integrity of City systems, but
also a question of protecting customer transactions, and their
3.3.3 Lack of innovation in the use of existing
payments infrastructure (3.124-3.129)
220.127.116.11 There is always room for improvement,
but the judgement in the Cruickshank Report on the effectiveness
of the governance of UK payment systems surprises us. The pressures
to keep up the track record of innovation, already mentioned,
are likely to override any unreasonable resistance by an individual
bank, and APACS has already indicated its intention to review
its governance. Lloyds TSB fully supports APACS's initiative,
and will participate fully in the review. It has introduced a
voting system for important decisions, and is considering future
governance options through its Future Payment Systems Development
18.104.22.168 Lloyds TSB continues to be an active
participant in developing new forms of payments mechanisms. For
example, it participated in Phase 1 of the WATCH project, designed
to set up an international clearing mechanism for low value, non-time
dependent cross-border payments. This will replace many of our
correspondent banking relationships, and result in a more reliable
and lower cost payments mechanism.
22.214.171.124 We are also keeping under review
the developments on the Continent following the launch of the
Euro. At present, we are members of three Euro clearing systemsCHAPS
Euro (a state-of-the-art real time gross settlement system), EBA
Euro 1 (a multilateral netting system), and the ECB's TARGET system
which links the national Euro real time gross settlement systems.
3.3.4 Adapting to e-commerce (3.136-3.145)
126.96.36.199 In March 2000, APACS announced that
an Electronic Commerce Protection Scheme was being created to
provide a secure end-to-end e-commerce service for business-to-business
payments. This scheme would be a world leader in its field. Its
development committee is chaired by Lloyds TSB.
188.8.131.52 A further announcement, on 23 March
2000, advised that APACS members would be starting work on the
development of an internet-based, secure, same-day payment mechanism.
This high priority development is part of a plan to re-engineer
the UK clearings in the next few years. The Cruickshank review
team was briefed on this Future Payment Systems Development project,
but made no mention of it in its Report. Lloyds TSB would be happy
to provide further details of these plans, if this were felt helpful.
3.3.5 Poor transparency to end users (3.146-3.147)
184.108.40.206 We agree entirely with the Cruickshank
Report that, "for competition in retail markets to work effectively,
customers must know the price they are paying for goods and services".
Indeed, over the last decade we have been working closely with
consumer and industry groups to improve the Banking Code, especially
to do with pricing information provided to our retail customers.
Examples of our recent product literature are available on request.
We provide these to all new customers, and to existing customers
when there is a change in tariff.
220.127.116.11 However, this is distinct from the
issue of price transparency in payment systems. Our experience
indicates that customers may be mainly interested in the overall
price of a transaction, not its individual components. As already
mentioned, the cost of the payments switch component is less than
10 per cent of the total money transmission cost.
3.4 Recommendations in Chapter 3 of the Cruickshank
ReportProposed creation of a new payments system commission
[Also ref: Money Transmission section in the Executive
3.4.1 Turning to the Cruickshank Report's
recommendations, the key one is that "Government should establish
a licensing regime to regulate competition in payment markets"
(3.186). We seriously question the need for, and benefit from,
the introduction of such a regime. We believe a licensing regime
would run counter to the objectives we share with the Cruickshank
Report, for the future of the UK payments system. It would move
away from the overarching goalexpressed throughout the
Reportof an efficient, effective and transparent market.
It would undermine the benefits of the existing system, notably
its ability "to adapt to new circumstances and to implement
3.4.2 A licensing regime would impose a
further regulatory barrier to the development of new payments
systems, which improved technology and cheaper computing and communications
are making increasingly possible. It would also inhibit new entrants
to the 90 per cent of the money transmission value chain lying
outside the central "switch".
3.4.3 A licensing regime is typically used
as a regulatory solution in industries subject to natural monopoly,
such as utilities, or where access to a common resource needs
to be allocated by central government to avoid a "tragedy
of the commons" (eg fishing licences). The UK money transmission
industry presents an entirely different proposition as a major
part of it is global, and increasingly so. It is undergoing fundamental
change driven by technological and e-commerce developments, by
the recently-created euro zone, and other competing pan-European
3.4.4 Given the growth in competing payment
networks, an increase in regulation is likely to encourage banks
to shift to more lightly regulated territories. Bilateral agreements,
while potentially less efficient than open platform payment systems,
may become preferable for industry players if the latter became
highly regulated. Moreover, growth of alternative markets and
the increase in the number of global providers of financial services
will make it easier for market participants to shift their activities.
For example, the Euro Banking Association (EBA) offers an embryonic
Euro-based alternative to the APACS systems in the UK, which could
grow to rival and surpass our domestic arrangements, particularly
if the UK were to adopt the Euro. Under such a scenario, the EBA
could offer an established system to clear Euro payments across
3.4.5 The creation of a new body, "a
legal person . . . granted effective powers to monitor compliance"
(3.186) could add confusion and fragmentation in an industry already
subject to regulation by a number of government bodies. The UK
banking industry is already overseen by the Financial Services
Authority, the Office of Fair Trading, the Bank of England, and
HM Treasury. More recently, the Cabinet's Social Exclusion Unit
has been active in looking at the provision of basic banking services.
These are in addition to bodies (eg Health and
Safety Executive) which regulate all industries, and to the growing
influence and legislation of European Union institutions, whose
focus on payment systems and services has increased considerably
over the past 10 years.
3.4.6 We are, therefore, disappointed that
the Government, in its response to the Cruickshank Report, has
accepted the recommendation to establish a licensing regime, PayCom,
and has stated its determination to tackle what it perceived as
"competition concerns in this area".
Having said this, we welcome the Government's
acknowledgement of the complexities involved in legislating in
this area, and its stated intention to consult fully with the
industry and its current regulatory institutions: a consultation
in which we intend to play a full part.
3.5.1 We agree with the principles underlying
the Cruickshank Report's desired outcomes for UK payment systems.
We support its stated objectives for price transparency, good
governance, non-discriminatory access, efficient pricing and free
trading. We stand by to co-operate in the consultation exercise
which will follow the competition initiatives outlined in the
Chancellor's March 2000 Budget and referred to in the Government's
response to the Cruickshank Report.
3.5.2 We welcome the fact that many competitive
improvements are recognised in the Cruickshank Report. The Government's
response also appreciates the developments which have followed
the publication of the Report, not least the reforms announced
by LINK and the changes in ATM pricing announced by individual
banks, which have not only added to "transparency" but
also represent substantial reductions in the pricing of the related
3.5.3 However, we have fundamental questions
about and reservations on the Report's practical proposals. A
licensing regime, PayCom, would, in our view, move the industry
further away from the objective of securing an efficient market
in financial services and banking. It would stifle innovation,
reduce UK global competitiveness, also create a disproportionate
and unnecessary regulatory burden. Already, banks need to balance
the needs of five different government bodies. A sixth would exacerbate
3.5.4 We entirely support the Government's
intention to address questions of (a) scope, (b) linkages with
existing UK and EU competition law, (c) interaction with banking
supervision and the fundamental objective of financial stability
and (d) interests of free trade, in its preparation of legislative
proposals. We stand by to contribute further comments in the ensuing
3.5.5 UK payment systems have generated
benefits for customers, providing secure reliable transaction
services. They have a proven track record of innovation, and security.
Whilst it is important to ensure systems meet the needs of a rapidly
changing industry, there is always the risk that new regulations
destabilise a system which has demonstrated impressive efficiency,
integrity and flexibility. We would recommend that the improvements
proposed in the Report be pursued through existing institutions,
enhanced as necessary, without the need for a new regulatory structure
and prescriptive regulation.
4. BANKING SERVICES
We welcome the opportunity to comment on the
section of the Cruickshank Report which addresses Banking Services
and External Finance for SMEs (Chapter 5), and Recommendations
49, 52, 53, 54, 55 and 59 in the Executive Summary, while taking
into account the comments on the Government's response of August
Concurrent with this submission, Lloyds TSB
has responded to the Competition Commission's investigation into
the supply of banking services by clearing banks to small and
medium sized enterprises in the UK, following the Chancellor of
the Exchequer's and Secretary of State for Trade and Industry's
decision that the Commission should inquire into the sector.
As a general comment, Lloyds TSB contends that
the Cruickshank Report does not acknowledge a number of the essential
characteristics of SME lending, nor recognise the interrelationships
between them. Much argument in this chapter is, by Mr Cruickshank's
own admission, anecdotal, not substantiated by fact, and does
not convincingly identify serious competition problems in the
SMEs marketplace. We have reservations over the quality of its
analysis and find it regrettable there was such limited dialogue
between the Banking Review Team and Lloyds TSB on these issues.
4.1 Executive Summary
In this response, we wish to highlight the following
key points, that:
there is no simple or widely agreed
definition of what constitutes an "SME", and, therefore,
no straightforward definition of this market;
this is a competitive market, within
which there are many providers;
Lloyds TSB has unrivalled and continuous
expertise in this sector, built up over many years;
Lloyds TSB is, therefore, committed
to the delivery of the highest standards of customer service in
this market; and
Lloyds TSB does not consider itself
to be among the group of providers who Mr Cruickshank contends
overcharge customers and offer them poor service.
4.2 Small and medium sized enterprises (SMEs)
4.2.1 In a crucial technical sense, Lloyds
TSB does not use the term "SME" in the planning
and conduct of its business. Lloyds TSB believes that the definition
of an SME contained in 5.4 of the Cruickshank Report, purely based
on turnover and staff numbers, is greatly over-simplified. To
illustrate this point, it is worth noting that Government departments,
the Office of Fair Trading (OFT), and our competitors each use
subtly or significantly different definitions of an SME. For SMEs
do not display uniform characteristics. Their operations and organisational
structure range from the sole trader, struggling with the demands
of keeping financially afloat and "independent", to
the sophisticated, organised and well managed private trading
entity with years of positive financial track record and on its
way to a successful stock market flotation.
The immense diversity of structure, activity,
financial performance and, therefore, retail demand-side financial
requirements in the SME sectorindeed one could say that
no two SMEs are the sameis not recognised in the Report.
4.3 Lloyds TSB's product offer
4.3.1 Lloyds TSB is very proud of its record
in the SME market. It has historically worked hard to develop
relationships and consistently improve service so that it can
compete effectively against not only its current range of competitors
but also future competitors who may well be encouraged to enter
if benign economic conditions continue.
4.3.2 We have been in the market for many
years, and are not "fair weather" bankers. Our commitment
to the SME sector is exemplified by the loan book losses that
we have periodically incurred. In the 10 years to 1998, Lloyds
TSB wrote off in excess of £9 billion of bad debts, equivalent
to 37 per cent of total profits. In 1989, in the depths of the
last recession, we recorded a pre-tax loss of £560 million.
4.3.3 We believe our customers (our Business
Banking and Commercial Banking units have approximately 570,000
and 16,000 customers respectively) are comfortable with the range
and quality of services we offer them. Our customer satisfaction
survey for March 2000, for instance, showed that 90.7 per cent
of our business banking customers were "satisfied" or
4.3.4 Lloyds TSB has made considerable investments
in finding out what kinds of services business customers want
from their bank, and in refining our products to reflect our customers'
needs. This has involved extensive market research, planning,
product design and staff training (see 4.3.1 above).
4.3.5 Central to both our product offering,
and the successful evolution of our services, is the Lloyds TSB
relationship manager, who, supported by the diverse operations
of the Lloyds TSB Group, provides a high level of experienced
face-to-face business support and advice to the SME customer,
and listens to and processes requests for new and revised products.
A crucial aspect for Lloyds TSB has been the training of its business
banking managers, which in several areas has required on-the-job
and central training programmes over and above those which a personal
banking manager would receive. More specialised areas covered
include business lending, agricultural lending, and courses to
enhance managers' appreciation of "developing businesses"
and "managing/financing growing businesses". Lloyds
TSB continues to develop new training courses for managers involved
A recent Lloyds TSB development designed to
improve performance of new businesses is to offer business customers
a choice between four levels of support service: "business
focus", in which their relationship manager will help the
business analyse financial and planning matters face-to-face;
"business response", where the primary communication
is by telephone but the Lloyds TSB manager is always available
to respond to specific issues and problems; "business express",
involving direct telephone access by businesses to a dedicated
team of Lloyds TSB specialists; and "business partner",
for customers requiring an in-depth, face-to-face relationship
with their Lloyds TSB business manager, who will act as their
consultant and help them unlock the full potential of their business.
4.3.6 With reference to section 5.56 in
the Cruickshank Report, Lloyds TSB agrees that SMEs should have
access to effective redress procedures in the event of need. Lloyds
TSB is a lead participant in, and strongly supportive of, the
Financial Ombudsman Service.
4.3.7 With regard to 5.57, Lloyds TSB also
has a dedicated team for the handling of complaints from SMEs,
as well as for personal retail banking customers. As part of its
customer service and aim to achieve the highest level of customer
satisfaction, Lloyds TSB has complaints handling procedures which
are easy to understand and accessible. Wherever possible, it will
resolve a complaint internally. This has been the case for the
vast majority of personal retail banking customers. If a complaint
cannot be resolved by a branch (or other delivery channel) or
by our central Customer Care department, Lloyds TSB will issue
a letter of deadlock confirming that its complaints procedure
has been exhausted, enabling customers to seek a resolution from
the Financial Ombudsman Service.
Lloyds TSB has taken a keen interest in the
proposals for bringing the Ombudsman schemes together under the
newly-created Financial Ombudsman Service. While the new Ombudsman
proposals include rules for providers' own internal complaint
handling, Lloyds TSB already has its own well developed, publicly
available procedures and already complies in this respect.
4.3.8 Lloyds TSB supports the recommendation
that the FSA devote greater resources to consumer awareness to
enhance their access toand use ofinformation (5.97).
We believe much information is available to SMEs, which may not
make use of it. As a major lender and risk-taker in this market,
Lloyds TSB welcomes greater consumer information because it would
enhance the quality of SME management and, therefore, their performance
and credit quality.
We agree with the Government's view that the
information needs of small businesses are different (and more
complicated) from personal banking customers because the services
they purchase are tailored to their specific needs. Equally, we
concur with the Government's call for the FSA to balance the use
of its resources as it deems fit, and by reference to practical
4.4 Diversity of banking products: some key
4.4.1 Mr Cruickshank says that we "bundle"
our products. We dispute this claim: it is purely an inference
drawn from our total product offering.
4.4.2 Lloyds TSB considers the provision
of current account services to be a single entity in that facilities
to pay in cash and cheques for credit to a current account, the
receipt of direct funds transfers to the account, and the making
of payments to third parties by cash withdrawal/cheque/electronic
transfer form a "package" of facilities all related
to the operation of a current account.
4.5 Profitability and cyclicality
4.5.1 We aim to provide a high value, high
quality service to our customers, consistent with good value for
money. The pricing of our offers is always competitive and takes
very careful consideration of market conditions.
4.5.2 As indicated above, Lloyds TSB has
provided services to SMEs for many years, and is not a "fair
weather" bank. The profitability of our SME operation is
cyclical, and this is exemplified by loan book losses periodically
We trust that these comments help explain the
reasons for the concerns we have expressed with this chapter of
the Cruickshank Report.
5. BANKING SERVICES
Chapter 4 of the Cruickshank Report contains
an analysis of the retail financial services market by product
group, addressing degrees of concentration, pricing and customer
behaviour (4.1-4.47). It then assesses the current level of competition
(4.58-4.85), market dynamics (4.86-4.100), and follows on with
Recommendations (4.101-4.127). This chapter is closely linked
with Annex D4, which covers automatic teller machines (ATMs),
Chapter 7 of the Report, entitled "The provision of a basic
banking service," and Recommendations 63-66 in the Executive
Summary, which also cover Basic Bank Accounts.
Lloyds TSB's response comments on market issues,
and recommendations. It also takes account of the Government response
of August 2000.
Lloyds TSB welcomes many recommendations in
the Cruickshank Report, particularly those recognising that the
retail banking market is increasingly competitive. By the report's
own comparisons, UK consumers get value for money from the UK
banks. In other countries, consumers would have to pay over £100
a year for what they receive for free in the UK. Over 80 per cent
of Lloyds TSB personal customers receive free banking.
5.1 The financial services marketfundamental
5.1.1 As a general observation, Lloyds TSB
does not believe that the Cruickshank Report fully reflects the
fundamental structural and behavioural changes which the UK financial
services industry has experienced in the past decade, nor does
it sufficiently acknowledge the massive market evolution certain
to come in the next five to 10 years. These changes have essentially
been driven by consumer power, and a need by financial services
providers properly to respond to increasingly diverse and discriminating
consumer needs for greater choice in products and services.
5.1.2 Competition has never been so intense,
and is associated with an explosion in number of new entrantsnotably
non-banks. For example:
5.1.3 There are currently 28 companies providing
current accounts in the UK, with ten new entrants since 1989:
these are the Halifax, Woolwich, Flemings, Citibank, Virgin, First-E,
Egg, Cahoot/Abbey National, First Direct/HSBC and Smile/Co-op.
5.1.4 There are currently 140 providers
of mortgages in the UK, with 19 new entrants since 1989: GMACRFC
Ltd, The Mortgage Business plc, Wesleyan Home Loans Ltd, Direct
Line, Kensington Mortgage Co, Virgin, Scottish Widows Bank, Winterthur
Mortgage and Management Services, Preferred Mortgages, Sainsbury's,
Southern Pacific Mortgages, Platform Home Loans, First Active,
Future Mortgages, Mortgages plc, Egg, Verso Ltd, Standard Life
Bank, and Norwich Union Personal Finance.
5.1.5 65 companies provide credit cards
to consumers, 12 of which have entered the market since 1989:
MBNA, GM, Marbles/HFC, British Gas/Centrica/Goldfish card, RBS,
People's Bank, The Associates, Sainsbury's, Tesco, Capital One,
Egg, and Morgan Stanley Dean Witter.
5.1.6 These new entrants, normally without
the overheads of traditional "bricks and mortar" branch
networks, "cherry pick" high income, high margin customers.
They tend not to offer mass market services to all sections of
society, but target low risk/high value "niche" markets
to the exclusion of lower income people.
5.1.7 In 1999, new entrants developed significant
competition in a range of key markets. Whilst, for instance, there
has been steady growth in Lloyds TSB mortgage lending, competition
5.1.8 Lloyds TSB is responding to the demands
of increasing competition by launching a range of innovative products
and services. For example, while in 1985 the industry only offered
standard variable rates on repayment or endowment mortgages, C&G
now offers a broad variety of options, such as "interest-only"
mortgages and no mortgage indemnity guarantee premiums (since
1994). It has also introduced flexible mortgages, capped and fixed
rates. It has greatly improved customer flexibility on prepayments,
and was the first lender to offer a CAT marked mortgage.
5.1.9 Increasingly, many non financial services
companies offer their own financial products, such as credit cards,
in order to extend brand loyalty and tie in customers, eg the
British Gas/Centrica Goldfish card, Sainsbury's and Tesco.
5.1.10 The globalisation of financial markets
and the erosion of trade barriers particularly in Europe, as we
move towards a single market for financial services, have also
resulted in new competitors in the UK, for example First-E and
MBNA. Technology and associated consumer demandfuelled
by the e-commerce phenomenonare adding to the pace of innovation
and competition. There is also a cultural shift evolving towards
a 24-hour society, which has resulted in a huge growth in the
use of new distribution channels. Customers now routinely use
telephone banking, ATMs, internet services and, more recently,
mobile phone and digital TV technology to meet their banking needs.
Over 1,000 customers a day are registering for Lloyds TSB internet
5.1.11 Also underpinning these technological
changes and developments in different delivery channels has been
a continuing huge investment in staff training, both for financial
planning and service-related roles.
5.2 Lloyds TSBbranch network
5.2.1 Lloyds TSB is committed to maintaining
a wide and well balanced network of retail branches, which will
remain its primary distribution channel; indeed, we think our
branch network is vital to the Group's continued prosperity.
5.2.2 The Lloyds TSB branch network gives
its customers access to no fewer than 2,200 branches, and 4,400
Lloyds TSB cashpoint machines. In addition Lloyds TSB customers
may withdraw cash free of charge at 17,500 Post Offices, and can
use cashback facilities at a further 28,000 locations.
5.2.3 However, as a result of changes in
how our customers carry out their day-to-day banking transactions
(see 5.1 above), fewer consumers are using the traditional Lloyds
TSB branch network, particularly in satellite suburbs. In response
to these changes in demand patterns, Lloyds TSB has closed non-viable
branches. The proportion of our branches in rural communities
is on the increase although only 8 per cent of our customers use
our rural branches, which represent 17 per cent of our network.
Like other retailers, banks must also compete with new competitors,
whose overheads are lower and whose commitment to full service
banking for all sections of the community is notably absent.
5.2.4 Where Lloyds TSB closes a bank, its
does so for carefully considered reasons. Our principal focus
isand will remainto close branches only where there
is another one nearby. Whenever we do close a branch, we take
every step to ensure the impact is as little as is possible, and
each case is studied. Indeed we believe we have set the trend
among the big banks in ensuring that customer fallout is minimised.
Lloyds TSB has had a code in place for the past two years under
which eight weeks' notice was given in the event of closures,
and up to 12 weeks' notice if the branch was the "last bank
in town". The new banking code, which comes into effect on
1 January 2001 and to which Lloyds TSB subscribes, follows our
own eight weeks precedent.
As part of our determination to support communities,
we introduced a new commitment, unique in the banking sector,
on 1 May 2000, not to close a branch where Lloyds TSB is the "last
bank in town". We hope that our "last bank in town"
policy will encourage other institutions to continue to serve
communities, which otherwise would be left without a banking presence.
Lloyds TSB accepts and is keen to honour fully
its social responsibilities to the communities in which it operates.
It wishes to continue to support the communities it has served
in the past, wherever possible.
5.3 Charging and Access to ATM Networks
5.3.1 We welcome the recognition in Annex
D4 of the Cruickshank Report that the UK is one of the cheapest
countries in the world in which to undertake ATM transactions.
Lloyds TSB has always ensured that use of its own 4,400 ATMs would
be free to its 16 million customers, and has invested significantly
to develop one of the biggest ATM networks in the UK. Of its 4,400
ATMs, 620 are off-site, eg in supermarkets, railways, and motorway
5.3.2 Lloyds TSB announced in July its intention
to make its ATMs free to all users as from 1 January 2001. At
present, only 4 per cent of Lloyds TSB customers incur "disloyalty"
charges. The vast majority enjoy free cash withdrawal facilities.
Many of those who do incur charges do so by conscious choice,
given the proximity of free machines. As the Cruickshank Report
states in 4.69, "customers will be willing to pay more for
cash withdrawal if, for example, they place a high value on their
5.4 Competitive environment for ATMsLloyds
TSB's participation and influence
5.4.1 Lloyds TSB was the first bank to call
for double charging to be banned: we are delighted the industry
has followed our lead.
5.4.2 In March 2000, Lloyds TSB issued an
ATM Code of Conduct. It confirmed that it would not double-charge
customers, that it would continue not to charge its customers
for using Lloyds TSB machines, and that customers would be given
prior notification of any charges at cashpoints before they withdrew
5.4.3 As already mentioned, Lloyds TSB will
make its ATM services free of charge to non-customers as well
as customers, from 1 January 2001. This decision was taken to
simplify the position from the market's and customers' points
of view. Lloyds TSB will, of course, continue to incur the related
overheads. Lloyds TSB in fact has repeated costs of installation
and on-going running costs in the operation of its ATM estate.
5.5 Lloyds TSBone of the most inclusive
providers of UK financial services
5.5.1 Lloyds TSB is one of the most inclusive
UK financial services companies. It provides more current accounts
than any other provider. It is proud of its rôle in serving
the greatest number of low-income customers of all UK financial
services providers, contrasting with many new entrants and building
societies who "cherry pick" high income savers and mortgage
5.5.2 Indeed, Lloyds TSB, the product of
Lloyds Bank and the former TSB Group, has a deep heritage with
a traditional presence in the old "heavy" industrial
centres in such areas as Wales, Merseyside, the North East, and
in Scotland, where it has traditional links with lower income
5.6 Scope of the Problem of Financial ExclusionPeople
who do not have bank accounts
5.6.1 In order to understand the nature
and root causes of financial exclusion, also how best to extend
financial products to those without bank accounts, Lloyds TSB
participated in the funding of a BBA research project. Elaine
Kempson of the Personal Finance Research Centre undertook the
research, independently, at Bristol University. Her report "Access
to current accounts" was published in August 1998. It demonstrated
that financial exclusion is a complex issue: there is no single
problem or solution. The report concluded that:
6-9 per cent of the adult population
(about 3 million) have neither current nor savings account, a
figure which has been confirmed by the Performance Innovation
Unit report "Counter RevolutionModernising the Post
of these, only 0.3 per cent (about
100,000) had been refused an account or had an account closed
by a bank or building society;
2.6 per cent (just over 1 million)
had not tried to open an account, preferring to transact in cash
and believing banks are "not for them" nor interested
1.9 per cent (around 750,000 mainly
elderly people) had always operated in cash and did not want to
start using a bank account;
about 2.3 per cent of adults (almost
1 million) had previously had an account but had closed it themselves
after getting into debt, choosing to deal in cash to control their
finances and avoid the dangers of lapsing into debt again; and
0.6 per cent of adults (about 250,000,
mainly younger) people had no account, as they had no secure job.
5.7 Lloyds TSB's pilot basic banking accountthe
"Lloyds TSB Bank Account"
5.7.1 In order to meet the needs of some
people on low incomes, Lloyds TSB developed a Basic Bank Account,
allowing customers access to money transmission services, and
to their cash, without the risk of entering inadvertently into
5.7.2 Lloyds TSB launched the Lloyds TSB
Bank Account in Scotland in February this year. This pilot project
gave Lloyds TSB the opportunity to assess the operational practicalities
of running a Basic Bank Account. The experience has enabled us
to plan the rollout of a Basic Bank Account at a national level,
5.7.3 The key components of this account,
which must remain in credit, are:
an ATM card, which can be used at
27,000 machines in the UK, for free;
nominal credit interest;
no bank charges for everyday transactions
such as on current account, direct debits and standing orders;
access to the services of over 2,200
branches in the UK;
24 hour telephone banking through
PhoneBank Express for paying bills and inquiries on account balances;
an £10 overdraft buffer; and
a booklet "Managing your Money",
which explains how to manage a bank account, obtain cash, pay
bills and pay money in, and also describes the workings of telephone
banking, cheque clearing, and complaints procedures.
5.7.4 We note in particular, and fully concur
with, the comment that, if the Government considered it necessary
to intervene to provide universal access to basic banking services,
any such intervention "should seek to bring competition gains,
and not distort competition by engineering permanent cross-subsidies"
(7.24). Similarly, with respect to Recommendation 65 (7.23), Lloyds
TSB agrees with the principle that competition should not be distorted
by "engineering permanent cross subsidies" in seeking
to "define a universal service".
5.7.5 Mr Cruickshank has suggested that
basic bank accounts could be profitable for those offering them.
While this may be true in some cases, as customers progress to
more mainstream financial arrangements, Lloyds TSB's experience
indicates that Basic Bank Accounts are not profitable and are
unlikely to become so.
5.7.6 In offering these accounts, therefore,
Lloyds TSB will need to cross-subsidise the costs of providing
them from other profitable businesses and this is likelyin
timeto distort competition. Indeed it would run precisely
counter to Mr Cruickshank's recommendation (7.24) that any such
intervention by the Government "should seek to bring competition
gains, and not distort competition by engineering permanent cross-subsidies".
5.7.7 We endorse Mr Cruickshank's recommendation
64 (7.23), that the Government should give top priority to developing
a benchmark for basic banking services, and note the Government's
positive intentions in this regard. We look forward to participating
in the consultation process on benchmarking this Autumn.
5.8 Lloyds TSB and Agreements with the Post
5.8.1 In 1997, Lloyds TSB was the first
high street bank to create agency arrangements with the Post Office.
These have been expanded to allow personal customersat
no costto use 17,500 Post Offices throughout the UK for
essential banking transactions such as paying in funds, paying
bills and withdrawing cash. These additional outlets are in addition
to our retail branch presence set out above.
5.8.2 Lloyds TSB hopes this arrangement
will alleviate the effects of branch closures by providing valid
local alternatives for customers, particularly the elderly and
those without access to transport. This arrangement also supports
the viability of the Post Office network, particularly in rural
areas. Between April 1999 and April 2000, the Post Office handled
828,000 transactions for Lloyds TSB customers. This volume is
expected to rise to 2.5 million by the end of the current financial
5.8.3 For such reasons, Lloyds TSB has noted,
with interest, the recent government proposals for the Post Office,
which include provisions for a "Universal Bank". We
have serious commercial concerns as to the practicability and
likely behavioural effects of those proposalsthis particularly
given the proposed involvement of the Post Office, which would
effectively mean that we would fund a direct competitor. However,
Lloyds TSB reserves its judgement and will scrutinise the formal
business plans being prepared by the Post Office and its advisers.
Meanwhile, we have indicated our willingness to work with the
Post Office, the DTI and HM Treasury to consider whether the Universal
Bank presents a practicable and viable solution.
5.8.4 In addition, Lloyds TSB is still unclear
at the time of writing how the proposed rollout of the basic accounts
provided by banks will sit side-by-side with the Post Office's
plans for Universal Banking services. We are currently looking
to the Government to clarify whether it envisages requiring banks
both to introduce basic bank accounts and sign up to the Universal
Bank, or whether it will expect banks to take only one of the
5.8.5 Whatever the outcome, it is imperative
that the Government seeks to apply a level playing field in such
an exercise, and involves all providers of retail financial banking
services including new entrants and non banks in its deliberations
5.8.6 We would equally suggest that the
application of CAT standards should be handled with circumspection
as too rigid an approach may be expected to stifle innovation
and competition between the providers of these services.
5.9 Other measures designed to combat financial
5.9.1 In addition to our Basic Bank Account,
Lloyds TSB has amended its account opening procedures to ensure
maximum flexibility in the acceptance of non standard forms of
identification. Hence, those without passports or driving licences
are no longer impeded from opening accounts. Our internal procedure
follows a number of verification criteria, depending on the customer
category; types of ID include driving licence, official bills
(eg Inland Revenue, Council Tax), and, in certain cases, verifiable
letters of introduction. This flexibility has been made possible
while complying with the money-laundering rules.
5.10 Lloyds TSB comments on other Recommendations
in the Cruickshank Report
Our responses to specific Recommendations in
the Cruickshank Report follow:
Recommendation 47(4.106) 
Lloyds TSB agrees that banking services should
not be designated as regulated activities by the FSA, as competition
is the best way of ensuring the consumer obtains the best deal,
and we note that the Government, in its response, does not intend
extending the scope of the Financial Services and Markets Act
Recommendation 48(4.110) 
Lloyds TSB welcomes all improvements to consumer
information. It would appreciate the opportunity to participate
in the Government's consultation process when it considers establishing
an independent Financial Services Consumer Council covering all
financial services as a result of this recommendation.
Recommendations 48 and 54(4.112, 4.113)
[29 and 30]
Lloyds TSB is a lead participant in, and strongly
supportive of, the UK Banking Financial Ombudsman Service. It
shares, however, the Government's and FSA's stated concerns that
giving the Ombudsman a greater regulatory rôle could lead
to the introduction of regulation without the accountability and
cost benefit checks required of the FSA. As the Government response
suggests, the Ombudsman "is primarily a dispute solver rather
than a . . . regulator", and it is important that this distinction
continues to be adhered to.
As for the recommendation that the new Ombudsman
consult, draw up guidelines, and then use them to determine whether
a "supplier's actions are `fair and reasonable' ", the
Banking Code, which sets standards of good banking practice and
is subject to three yearly review, already embodies such principles.
Further guidelines would duplicate what the Banking Code sets
out to do.
The function of the Ombudsman is to act as independent
arbiter of complaints. If he himself draws up the guidelines,
he may be less able to adopt a dispassionate attitude in the face
of unresolved complaints.
As already stated, Lloyds TSB supports the Banking
Code, drafted in association with the Ombudsman, Consumers Association,
the OFT and the Treasury. We believe the Banking Code Standards
Board [BCSB] auditors, PwC, will enhance compliance with the Banking
Code. We also believe that the Banking Code and BCSB should be
given time to demonstrate enhanced consumer protection.
We continue to take steps to enhance our staff's
understanding of the requirements of the various regulatory codes
to which we subscribe. Meanwhile, we await the Government review
group report toward the end of this year.
We agree that the new Financial Ombudsman Service
should offer voluntary membership to foreign firms offering banking
services to UK consumers from outside the UK, provided that (a)
awards can be similarly enforced on them and (b) membership of
the UK scheme would not "mask" standards less rigorous
than for FSA regulated firms.
We have no objection to the principle that the
FSA should publish comparative tables ranking, among other things,
benchmark services by supplier according to price; grouping non-benchmark
services into categories ranking these, too, by price; and highlighting
material differences between services. The details, would, however,
need to be considered carefully. Some productsfor example
investmentscompete principally on the strength of performance:
benchmarking on the basis of price alone would, in such cases,
Recommendation 53(4.125) 
With respect to the recommendation that the
Ombudsman publish comparative tables of complaints received and
how they are dealt with (5.99), Lloyds TSB has concerns with such
an approach. Care would need to be taken that the proper comparisons
are made, and that they correctly convey the degree of seriousness.
Relatively large providers of financial services, with wider delivery
channels and greater market shares, are likely to face a higher
number of complaints than their smaller competitors. A similar
disadvantage may be experienced by those firms which encourage
complaints to maximise the quality of their services. At the other
extreme, certain suppliers may feel under pressure to conceal
the complaints they receive. Any public comparison should carefully
consider such issues as these, otherwise the position they will
represent is certain to be distorted.
Lloyds TSB is happy to work with the FSA in
its promotion of financial awareness amongst the public. We are
already in discussion with the FSA on this issue, and note that
the Government, in its response, identifies this as one of the
FSA's main tasks.
UK BANKING MARKETS
Annex C of the Cruickshank Report comments upon
the profitability of the UK banking market. The conclusions reached
at paragraph C.135 (page 227) are:
the banking sector is currently
earning significantly more than its cost of capital;
if this continues for any length
of time consumers will be paying materially higher prices than
the major source of excess profit
are personal and SME customers;
the costs of serving these customers
are unlikely to rise in the short term to absorb these excessive
if these excess profits are not
to be made over the short to medium term, prices should fall.
We do not concur with a number of aspects of
the analysis undertaken or the conclusions reached. Our comments
are set out below.
6.1 Excessive emphasis on the cost of capital
6.1.1 In the analysis undertaken in the
Report, we consider that a somewhat mechanistic approach was adopted
which seemed to conclude that a return in excess of the cost of
capital is sufficient evidence of a competition problem. We find
this an overly restrictive and simplistic approach. If applied
to all sectors of the economy, the majority of successful UK companies
would be deemed worthy of investigation. In the past economic
cycle, Lloyds TSB's profits on a current accounting policy basis
have only just exceeded its cost of capital. It has also earned
a lower return on capital than similarly successful banks in Europe
and the United States.
6.1.2 Lloyds TSB believes that an analysis
of profitability should form part of a wider examination of competitive
conditions in the industry, particularly the feasibility of entry,
which the Competition Commission is currently investigating. We
pointed out to the Review Team on a number of occasions that competition,
particularly from new entrants, continues to drive down prices,
margins and thus profitability in a number of key segments of
the market. These segments include mortgages, savings products
and credit cards, with the number of new entrants and the impact
on prices being especially marked in the past two years. This
period falls largely outside the financial period covered by the
6.2 Deficiencies in the accounting methodology
6.2.1 Much analysis by the Review Team was
based on historic accounting data. The statutory accounts of a
bank may understate the true economic capital employed in its
business, since the rules under which statutory accounts are compiled
may preclude balance sheet recognition of certain assets the bank
has established by investment over the years. Moreover, since
accounting rules have changed over the period under review, anomalous
results may be achieved by placing undue reliance on accounts
prepared under the then prevailing accounting rules.
6.2.2 For example, Lloyds TSB has been involved
in major mergers and acquisitions. The goodwill arising from these
was, under prevailing accounting standards, written off against
the capital base of Lloyds TSB. It is this diminished capital
base against which the profitability of Lloyds TSB has been assessed.
Application of current accounting standards would have added some
£3.3 billion, or nearly 45 per cent, to the capital base
of Lloyds TSB at the end of 1998, the benchmark date used for
6.2.3 Other adjustments to the capital base
to reflect conservative valuation measures applied or accounting
standards not in line with international accounting standards,
would have increased the Lloyds TSB capital base by a further
£2.6 billion, or 35 per cent. Application of these adjustments
and of current accounting standards to the average capital employed
by Lloyds TSB in 1999 would halve the reported post tax return
on capital, from 31.1 per cent to 15.5 per cent.
6.2.4 Moreover, none of these adjustments
take into account the value of intangible assets such as brands,
customer databases, bespoke computer software, business processes
and human resource processes such as the value of trained staff.
Lloyds TSB write off all these investment costs against revenue.
6.3 Determination of product profitability
and overall profitability
6.3.1 Lloyds TSB, as with other major banks,
provides an integrated banking and financial services products
offering to its customers, mainly from a common set of distribution
outlets. Many products are supplied jointly by, for instance,
an extensive branch network.
6.3.2 Whilst the allocation of costs and
income between product areas is undertaken on a consistent and
rational basis, it is not an exact science given the joint supply,
especially as far as costs are concerned. In addition, allocation
of capital, other than regulatory capital, which forms a relatively
small part of the overall capital base, cannot be undertaken with
6.3.3 Given the complications inherent in
the preparation of such data, substantial amounts of financial
and statistical data, with copious qualifications and explanations,
were supplied to the Review Team, although it was not possible
to supply all the details requested. We were, therefore, disappointed
that no meaningful attempt was made by the Review Team to discuss
the data, or to seek to understand it fully. This, despite innumerable
offers on our part to take the Review Team through the data.
6.3.4 Hence we have serious concerns as
to the basis on which the Review Team undertook its analysis,
and the substance of the conclusions it reached.
6.4 Sample bias in calculation of returns
6.4.1 It is notable that the Cruickshank
Report excludes heavily loss-making firms which have left the
market from the scope of its analyses. It also seems to exclude
unsuccessful entrants, such as Citibank and a number of other
foreign banks which have tried without material success to enter
British retail banking, and established participants such as the
UK merchant banks who withdrew from the SME lending market due
to lack of profitability.
6.4.2 By focusing on successful firms alone,
the Review is unrepresentative, and overstates the profitability
of the banking sector as a whole.
6.5 Inconsistency over treatment of cyclical
6.5.1 Throughout the course of the Cruickshank
Inquiry, Lloyds TSB stressed the importance of taking account
of the economic cycle when assessing returns in the banking sector
(particularly in the provision of services to SMEs). Following
publication of his Report, Mr Cruickshank asserted that UK customers
were paying excess prices of between £3 billion and £5
billion. It is still not clear to us how these figures were calculated.
Moreover, the Report seems to be inconsistent over its treatment
of the cyclicality of profits, commenting in paragraph 2.49:
"Over the period 1989 to 1998 (with estimates
for 1999) the firms in the sample have on most reasonable assumptions
at least covered their cost of equity. More importantly,
if the trend in returns continues, the high level of profits that
are currently being made will push average returns over the economic
cycle firmly into excess. [Emphasis added]"
6.5.2 In other words, over the economic
cycle, the Report agrees that the banks sampled more or less earned
their cost of capital. The perceived competition problem is based
on the extrapolation of current ("top of the cycle")
profit levels and is, therefore, a deduction based on an incompleteand
unrepresentativesample of the economic cycle.
In summary, Mr Cruickshank has not presented
a convincing case to support the contention that banks are earning
excess profits or that customers are paying billions of pounds
through excessive pricing.
1 References throughout this paper are to the Cruickshank
Report, except where otherwise indicated. Back
Lloyds TSB customers have free access to branches, ATMs, staff,
cheque books, debit cards, standing orders, direct debits, inter
account transfers, BACS payments, telephone banking, bill payments,
cash exchange statements, financial advice and Post Office banking
services. For equivalent banking services in Spain, customers
pay approximately £114 pa, £64 in Germany and £68
in the USA. Back
Source: The British Banking Association, Money Matters, Money
Net, Money Advice, Mortgage 2000, PwC research document entitled
The Cruickshank Review: Market Dynamics and Profitability Drivers. Back
Source, ibid. The British Banking Association, Money Matters,
Source, ibid. The British Banking Association, Money Matters,