APPENDIX 5
Memorandum by UNIFI
SUMMARY
The financial services sector is at present
undergoing rapid and far reaching restructuring. Many of these
changes may serve to reduce access, choice and competition.
UNIFI recognises the need for greater intervention
in the matter of mergers in the banking sector.
Competition needs to be defined in a broad way
which includes a social dimension, including access to services
and the delivery of better value services.
UNIFI does not support major mergers that cannot
be shown to be in the interests of all the key stakeholders: employees,
customers and communities, as well as shareholders.
Many of the "new" banks are closely
related to the "old" banks, either as joint ventures
with supermarkets or as internet portals for established institutions.
Greater consideration needs to be given to the
consequences of branch closures.
Although new forms of financial provision can
present exciting opportunities, some of the technological developments
said to offset the effect of branch closures may not adequately
serve some customers' needs.
UNIFI endorses a review of the Financial Services
and Markets Act. Such a review should allow for all affected parties
to contribute.
INTRODUCTION
1. UNIFI is a TUC affiliated trade union
representing some 165,000 workers across the finance sector. The
Union represents staff in all grades and all occupations, not
only in the major English and Scottish banks, but also in investment
banks, the Bank of England, insurance companies, building societies,
finance houses and business services companies. UNIFI can be contacted
via Ed Sweeney, General Secretary, UNIFI, Sheffield House, 1b
Amity Grove, London SW20 0LG.
2. The financial services sector is at present
undergoing rapid and far reaching restructuring. Many of these
changes, such as mergers and the curtailment of branch networks,
have an impact upon competition and access to services within
the sector, often with a reduction of rights, choice and services
to customers of all kinds. There are structural changes within
the finance sector that are reducing access, choice and competition.
3. UNIFI is most concerned with the impact
of mergers in the sector, the continued social exclusion from
financial services of certain sectors of society, the issue of
access to new technology and the benefits and choice new technology
presents, and the concentration of the financial services market.
4. UNIFI would welcome the opportunity to
give oral evidence on the issue of competition in the finance
sector.
GENERAL COMMENTS
5. In February 1999 the Banking, Insurance
and Finance Union (BIFU)—one of the founding unions of UNIFI—made
a submission to Don Cruickshank's Banking Review on its initial
consultation. UNIFI welcomes the opportunity to submit evidence
on this occasion, especially given that there has been intensification
of merger activity of late which has the potential to reduce competition,
choice and customer service in the sector.
6. UNIFI acknowledges the important role
of effective competition in promoting economic growth and improving
customer service. However, concentration on competition should
not be so narrow as to detract from a proper consideration of
other key issues.
7. UNIFI has warned that staff and customers
could lose out if competition in the sector is further eroded.
We would in particular note with concern the impact of mergers
in the sector, the reduction of access, choice and service as
a result of branch closures and staff reductions, and the needs
of the socially and financially excluded.
8. Though there have been claims of increased
competition in the finance sector of late, this does not appear
to have improved the position of customers. An example of this
is the average interest paid on instant access accounts. The average
savings rates have declined while the average mortgage rates have
increased in the last year. In 1999, the average savings rate
on an instant access account was 2.6 per cent. This has fallen
to 2.15 per cent in 2001, increasing on average the profit to
banks from 5.1 per cent to 5.59 per cent (The Mail, p 31,
11 January 2001). In 2001 average mortgage rates were 7.74 per
cent, but they were 7.7 per cent in 1999.
9. UNIFI suggests that at a structural level
customers are getting a raw deal (there are less banks, with fewer
branches, with less staff to serve them), and that the product
of this reduction in choice is a poorer deal for customers (less
choice, reduced service, longer waiting times and smaller returns).
10. Some of the recommendations in the Cruickshank
Review have already been accepted by the Government, eg a monopoly
reference of SME banking services. UNIFI would like to see action
taken on a number of the other recommendations made in the report,
in particular relating to the issues of mergers and social exclusion.
COMPETITION AND
MERGER SCRUTINY
11. UNIFI would highlight the need for intervention
in the matter of mergers to sustain competition in the sector.
We also note that though it is alleged that there are new avenues
of competition in the sector, such as new supermarket banks and
internet banking, these are very often closely linked to the established
banks and are not a substitute for regulation of the market.
12. The erosion of competition via mergers
was something the Cruickshank Review noted clearly, and it states
that banks should be exposed to full competition law without special
exemptions. In addition, the Report also states that further action
is necessary to prevent anti-competitive mergers.
13. There is already a body of independent
research[9]
that shows that mergers often do not deliver shareholder or customer
benefit but instead are motivated by corporate and city manoeuvring.
14. Competition needs to be defined in a
broad way, which includes a social dimension (including access
to services and the delivery of better value services) not just
an economic one.
15. The Cruickshank Review noted that in
general neither personal, nor small business, customers are getting
a fair deal from banks. Citing ineffective competition as the
main reason Cruickshank concluded: "further action is necessary
in particular to prevent anti-competitive mergers . . . relatively
few mergers among the top 10 banks in the UK could presently be
argued to be in the public interest."
16. Moreover, it also states that "Banks
should be obliged to demonstrate the public interest merits of
any merger", and even more interestingly states that there
is a need to "refer all mergers between financial suppliers
to the Competition Commission for investigation if the merging
entities have material share of the market" but there may
need to be definition of financial supplier and material share.
(Section 30 part (a) p.xiii).
17. The Report also states that the monopoly
investigation in respect of SMEs could recommend "elimination
of any restrictive covenants on the disposal or closure of branches
and the release or transfer of skilled staff" (para 5.82,
page 164).
18. Competition and choice are being reduced
through mergers. However, it should not be assumed either that
new banks will offer new choices. Though the customer apparently
has choice in financial matters, in reality that choice is being
eroded as banks merge and new banks are developed. But often the
"new" banks are closely related to the "old"
banks. For example, the banking sections of Tesco are linked to
the Royal Bank of Scotland, Sainsbury Bank is linked to Bank of
Scotland, Asda to Lloyds TSB and Safeway to Abbey National. As
is noted later, many of the new internet banks are just internet
portals for the already established and dominant big banks.
19. There is therefore a need for greater
intervention in merger and competition issues. UNIFI has called
for a referral to the Competition Commission in respect of the
proposed bids for Abbey National by Lloyds TSB and Bank of Scotland
on the grounds of the impact on jobs, branches and customer service.
We also expressed concerns in respect of the takeover of NatWest.
20. UNIFI does not support major mergers
that cannot be shown to be in the interests of all the key stakeholders:
employees, customers and communities, as well as shareholders.
ACCESS TO
FINANCIAL SERVICES/FINANCIAL
EXCLUSION
21. The Cruickshank Review also promoted
the provision of basic banking services, and this is welcome and
something that UNIFI has promoted for some time. We have also
recently seen a number of major banks commit themselves to providing
basic bank accounts by the end of the year, no doubt as a result
of political pressure.
22. The Government have now produced plans
to develop this, and these are welcomed, though UNIFI notes the
initial opposition of the British Bankers Association to the scheme
proposed by the Government.
23. UNIFI would also draw attention to the
issue of the reduction of banking branch networks, and the assumption
that new technology will increase access to and choice of financial
providers. Though new forms of financial provision can present
exciting opportunities and channels for delivery are changing,
some of the technological developments said to offset the effect
of branch closures may not yet adequately serve some customers
needs. For example, the substitution of internet banking for rural
branches is still some way off.
24. Branch networks have continued to shrink.
Though it is claimed that there is more choice, there are now
less branches and less staff through which to access those services.
HSBC for example reduced its branch network by nearly 20 per cent
between 1989 and 1999, NatWest by 43 per cent over the same period,
and Barclays by 28 per cent. Overall, the bank and building society
branch network has fallen from 21,300 to 14,780 between 1988 and
1998, a drop of 30 per cent.
25. Consideration needs to be given to the
consequences of branch closures beyond improving the bank's balance
sheet. To quote an Office of Fair Trading report published in
January 1999: " to the extent that banks present social benefits,
there could be an argument for some public policy response to
bank closures".
26. The re-organisation of the bank branch
structure has not extended access and choice for all. New technological
services are frequently not available to the already financially
excluded.
E-COMMERCE
27. The Cruickshank Review calls for special
regard to be given to e-commerce developments. There are particular
concerns about digital signatures, the VAT treatment of financial
services and money laundering requirements.
28. UNIFI suggests that the development
of technology in the finance sector is not at present a solution
to either the problem of competition or social exclusion.
29. It is often stated that entry barriers
to the industry are falling and that new internet banking facilities
offer the customer more and more choice. However, as already indicated,
many of these new banks are merely off-shoots of already established
financial companies, or are internet arms of the big banks. Moreover,
the new banks in the sector, such as the supermarket banks, are
also very closely linked to the "big-four" banks. For
example, the internet bank Egg is a subsidiary of an already established
financial supplier, Prudential, IF is part of the Halifax Group,
and Smile is part of the Co-op Bank. New technology does not intrinsically
create new banks, but can create new avenues by which the large
banks can further dominate the market.
30. These new technology banks also exclude
many members of society, both by cherry picking the customers
from which they can make a profit, and by using delivery channels
that are only available to a relatively affluent (and young) section
of society. Internet and phone banking by definition rely on access
to new technology, and can therefore exclude many people.
REVIEW OF
FINANCIAL SERVICES
AND MARKETS
ACT
31. UNIFI would endorse a review of the
Financial Services and Markets Act. Such a review should allow
for all affected parties to contribute. We should welcome the
provision of better information enabling informed choice and greater
understanding. More needs to be done to bridge the information
gap between the industry and much of the population. However,
information needs to be appropriate. Education also has
a role to play here.
PAYMENT SYSTEM
32. UNIFI also welcomes the suggestion in
the Cruickshank Report of the establishment of a payment systems
commission. The report suggests that competition law at present
allows for abuse by firms or groups of firms. The report therefore
suggests the creation of rules covering network industries such
as payment systems. These are to be developed via an independent
commission that will be established by legislation, with a view
to delivering price transparency, good governance, non-discriminatory
access, and fair trading.
CONCLUSION
33. There is a great danger that there is
developing a concentration of power, resources and ownership in
the finance industry, that will have detrimental effects upon
employees, customers and communities. Competition would be good
for the finance industry, but UNIFI would suggest that intervention
is needed to preserve what competition there is and to ensure
and increase competition for the future.
January 2001
9 See, for example, On the Performance of Bank
Mergers-Some Propositions and Policy Implications by Professor
Hans Schenk. Back
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