Select Committee on Treasury Minutes of Evidence

Memorandum submitted by Lloyds TSB Group


  1.1  Lloyds TSB employs over 81,000 people worldwide and is one of the leading UK-based financial services groups, whose businesses provide a comprehensive range of banking and financial services in the UK and overseas. Our UK Retail Banking, Mortgages, and Insurance and Investments divisions provide a full range of banking and financial services to 16 million customers. With more than 2,300 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester (C&G), the Group provides comprehensive geographic coverage in England, Scotland and Wales.

  1.2  The Lloyds TSB Group is pleased to provide a written submission to the House of Commons Treasury Committee as part of its inquiry into Banking. This submission builds on the memorandum submitted to the committee in September 2000, as part of its inquiry in the previous Parliament, which culminated in the report, Banking and the Consumer. In this memorandum, we have sought to outline steps taken by the Lloyds TSB Group and the industry in response to the committee's recommendations as set out in its fifth Report 2000-01.


  2.1  In March 2001, the Treasury Committee published its report, Banking and the Consumer, that made a number of constructive recommendations, many of which, we are able to report, have been implemented by Lloyds TSB.


  2.2  The Committee urged the banks to commit themselves to a shorter deadline than 10 working days within which to provide account details to a new bank, that this should be stipulated in the Banking Code and that there should also be penalties for non compliance.

  2.3  The current edition of the Banking Code was published in January 2001, however, the Banking Code Guidance for Subscribers which has been updated more recently, stipulates a five working day commitment and Lloyds TSB was instrumental in bringing about that change. Lloyds TSB also continues to be the only bank to commit to a 72 hour (three working day) deadline, with payment of £50 compensation in the event that we fail to meet that deadline. (To date, we have a 100 per cent record in meeting this commitment.)

  2.4  Research published by the Banking Code Standards Board in July 2000, highlighted that 96 per cent of mystery shoppers found it quick and easy to move their bank or building society account.

  2.5  In January this year, the Consumers' Association in their magazine Which?, published a survey into the switching of financial products and found that 73 per cent of people switched accounts with ease and stated:

    "The conclusion is clear—for most people, switching any kind of financial product is an easy process, and one that could save you money. Quite simply, if you're unhappy with any aspect if your products, you should seriously consider switching."


  3.1  Lloyds TSB has strongly supported the Banking Code since its inception in 1991. As a signatory to the Banking Code, Lloyds TSB fully endorses the provisions of the Code and is committed to ensuring that measures are fully implemented across our business. In many areas, Lloyds TSB's commitment to the Code extends beyond the minimum standards outlined in the Code, eg three day standard for account switching.

  3.2  Lloyds TSB has played a leading part in establishing the Business Banking Code and we have also been working with the British Bankers' Association (BBA) on the role of the Banking Code Standards Board. We also contributed to the Banking Services Consumer Codes Review Group (DeAnne Julius Review) in December 2000. The effectiveness and the profile of the Code continues to be enhanced, initially by the creation of the Banking Code Standards Board and more recently as a result of the DeAnne Julius Report and the decision to carry out regular biennial reviews under an independent chairman.

  3.3  At Lloyds TSB we believe that voluntary codes, rather than statutory regulation benefit consumers by being more flexible, thus allowing more frequent updating and improvement. Indeed, The DeAnne Julius Report stated that:

    "There is broad consensus that service standards in banking can be effectively dealt with by self-regulation. Indeed, our consultation exercise revealed that many feel the Banking Code, while not perfect, is an exemplar of self-regulation. The Banking Code has evolved over time in light of changing market conditions and customer needs."[1]

  3.4  In the current review of the Banking Code, we recognise the need to further improve transparency, particularly in respect of notification of interest rates, although this must be done proportionately and in a way that does not confuse customers.

  3.5  We understand that the Committee would also appreciate views on The DeAnne Julius Review, which we have covered separately in part B.[2]


  4.1  The Committee also concluded that banks paid lower rates of interest on older accounts and that the Banking Code Standards Board should enforce the provisions about superseded accounts in the Banking Code, rigorously.

  4.2  A superseded account is defined as an account that is:

    —  No longer opened by customers (this could be because the bank or building society has withdrawn it or for some other reason); or

    —  Not actively marketed or promoted to customers; and

    —  Not a fixed rate account.

  4.3  The Banking Code clearly sets out that when an account is defined as "superseded", the bank will either:

    —  Keep the interest rate on the superseded account at the same level as an account with similar features from the current range, or

    —  Switch the superseded account to an account with similar features from the current range.

  4.4  Lloyds TSB fully endorses the Banking Code and with specific respect to superseded accounts implements all of the provisions as outlined in the Banking Code in full.


  5.1  The Committee recommended that banks and building societies providing banking services should include in their annual reports, information on the number and distribution of their retail outlets, both via ATM and branches.

  5.2  Since the merger of Lloyds Bank and TSB Group in 1995, the number of branches in the retail network, the number of Lloyds TSB operated ATMs and also the number of ATMs available for use by our customers free of charge has been included in the Annual Report and Accounts. Figures contained in the Lloyds TSB Group Annual Report and Accounts 2001 provides the following information:

    —  More than 2,300 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester.

    —  4,350 cash machines—one of the largest cash machine networks in the UK

    —  Customers additionally have access to a further 32,400 cash machines via LINK in the UK.

  5.3  In our submission to the committee in September 2000, we outlined in detail the Group's commitment to maintaining a wide and well-balanced network of retail branches (section 5.2). Lloyds TSB continues to invest in its branch and ATM network, which provides comprehensive geographic coverage in England, Scotland and Wales. In May 2000 we became the first bank to pledge not to close a branch where we were the "last bank in town" and we continue to be the only bank with that commitment.

  5.4  Since December 2000, we have only closed eight branches. We have also merged 71 branches, many of which are literally side by side or no more than half a mile apart. By merging, what were originally Lloyds Bank branches and TSB branches, we are able to remain in local communities.


  6.1  Lloyds TSB remains committed to supporting the Universal Banking Services scheme and was one of the initial 11 (now 10 post merger of RBS and Natwest) banks to sign the Memorandum of Understanding.

  6.2  We are on track to meet the Government's deadline of 31 May for signing the Deed. We hoped to be able to sign before now, had it not been for contractual changes, which are still being introduced by the Post Office. We have been at the forefront of negotiations and have met every deadline. We look forward to working with the Department of Trade and Industry and Department of Work and Pensions regarding the practical implementation of automated benefits. Following our concerns regarding the number of benefits recipients likely to be in either basic bank account or the Post Office Card Account, we are comforted that the Government has pledged that all benefit recipients will have free choice about which account they prefer.


  7.1  The Committee welcomed developments in the provision of basic bank accounts in its recommendations and urged the banks to market these accounts more actively than they had been, and look at the scope for upgrading basic accounts to accounts with borrowing facilities.

  7.2  Lloyds TSB outlined its extensive financial inclusion programme in its written submission to the Committee (section 5.5-5.9.1). We continue to promote financial inclusion and as part of a wider package of support measures, including inter alia support for community credit unions, we made our pilot basic bank account available nationally in October 2000. We have now opened over 100,000 basic bank accounts.

  7.3  As we explained in our last submission (5.7.4—5.7.8), our experience of the accounts indicates that basic bank accounts are not profitable. Of the 100,000 accounts opened so far: 21 per cent have nil balances; 28 per cent balances under £100; and 69 per cent balances under £1,000. Since the Cruickshank report cited £1,000 as the balance to break even costs, which was during a period of higher interest rates, these accounts are in practice being cross-subsidised by other customers.

  7.4  Lloyds TSB is, however, one of the most inclusive UK financial services companies. Even prior to the launch of its basic bank account, it has provided more current accounts to low income customers than any other high street bank.

  7.5  We have sought to market the Lloyds TSB Bank Account ie: basic bank account, in a way, which will reach those who are currently unfamiliar with banks. In 2001, we undertook a mailing to all community credit unions in the UK enclosing posters and literature promoting the Bank Account and outlining details for opening the account. We have also undertaken direct marketing to all individual members of two community credit unions, Burnley and St Machar, in Aberdeen and there are further plans to repeat this exercise with other credit unions this year. We also encourage referrals from Portsmouth Area Regeneration Trust (PART) a community based financial institution developed by Lloyds TSB in partnership with Portsmouth Housing Association and Salford University, which was launched in July 2000.

  7.6  With the introduction of automated benefits (ACT) in 2003 the Department for Work and Pensions (DWP) will undertake a huge communication campaign. Every benefit recipient will receive an individual letter explaining the changes to the payment of benefits and describing the options available to the recipient, including basic bank account. Lloyds TSB with other banks has already provided DWP with a draft leaflet which can be used in Post Offices and Benefit Payment Offices, which will describe what is on offer and how individuals can access an account.

  7.7  In response to the recommendation regarding a transition to accounts with borrowing facilities, take up to date has been low. However, it may be too early to judge since Bank Account has only been available nationally since October 2000. We also have a range of leaflets available to assist customers not familiar with financial services products such as banking made easy which offers practical advice on using a bank account and help with financial problems offering information and advice to help customers manage their money.


  8.1  The Committee also raised the issue of account opening ID verification for the financially excluded. The ID account opening process is twofold. Firstly, in accordance with money laundering guidelines, customers must be able to prove that they live where they do and secondly, customers must be able to prove ID, ie they are who they claim to be. This is in response to the FSA guidelines about "know your customer".

  8.2  As outlined in our September 2000 submission (section 5.9.1), Lloyds TSB introduced new procedures for ID verification intended to increase flexibility in the forms of ID that the Bank is able to accept. As a result of this procedure, in the first three months of this year alone, we have been able to confirm the ID/address of over 8,000 people who do not hold standard forms of ID.

  8.3  ID verification is currently being hampered by denied access to the Electoral Register for address verification, following the "Robertson" judgement made by the High Court earlier this year. Local councils have been advised by the Department of Transport, Local Government and the Regions (DTLR) that sale of the Register of Electors to commercial organisations is potentially in breach of the Human Rights Act, 1998.

  8.4  Banks and credit reference agencies rely on the Electoral Register for address verification, required under money laundering regulations. There are clearly, therefore, implications for banks if access to this most reliable data source is denied. Customers wishing to open a bank account may find it harder to confirm their address and the financially excluded in particular, may find it difficult to satisfy banks' address verification criteria.

  8.5  The Treasury and FSA have been supportive of industry concerns on this issue and we await the DTLR's policy proposals on this issue.

  8.6  At the end of April, the Financial Services Authority Consumer Panel published research suggesting that the banking system is failing to address the needs of low income customers and that there was lack of access to basic bank accounts. We are concerned about the robustness of the data as the report was based on only 16 applicants. However, Lloyds TSB will work to ensure that the issues raised in the Financial Services Authority Consumer Panel's report are addressed.

  8.7  In contrast, The National Association of Citizens Advice Bureau (NACAB) also undertook a mystery shopping survey in Yorkshire on availability of basic bank accounts. Lloyds TSB was praised for:

    —  having staff who were aware of the basic bank account;

    —  having the clearest and easiest leaflet for customer;

    —  being flexible in accepting proof of identity.

  8.8  We are committed to ensuring that our branch staff are aware of our basic bank account product and also our special procedures for account opening ID verification.


  9.1  All customers of Lloyds TSB have access to 4,350 Lloyds TSB cashpoints free of charge and in addition, have access to a further 32,400 cash machines via the LINK network in the UK free of charge.

  9.2  Under the provisions stipulated in the Banking Code, Lloyds TSB will give all customers details of any charges we make for using cash machines when the card is issued. When using a card at a cash machine, a message on the screen tells all customers, before they commit to making a withdrawal, the amount (if any) the customer will be charged for the transaction and who is making the charge.

  9.3  At a time when the banks have withdrawn charges for cash machines, it is difficult to understand why it is acceptable for the Post Office to charge customers £1.25 per withdrawal. The unviability of cash machines in small or remote locations equally applies to banks as to Post Offices.


  10.1  The Committee's fifth Report concluded that banks appeared reluctant to invest in modern technology to speed up cheque clearing, but found that cheques are likely to remain an important part of the financial system.

  10.2  Lloyds TSB provided extensive comments on the money transmission system in its response to the committee in September 2000 (section 3) and we would therefore direct the committee to that summary of money transmission and the clearing cycle.

  10.3  The last 10 years have witnessed a behavioural shift in the personal sector as customers increasingly use debit and credit cards for retail payments instead of cheques. During this time, cheque payments have fallen by 34 per cent to 2.64 billion. Since 2000, cheque volumes have fallen by another 5.8 per cent and are expected to fall a further 41 per cent by 2009.

  10.4  The Cruickshank Report recognised the decline in usage (Section 3.217):

    "The regulatory framework would not by itself require a faster clearing cycle. Cheques are in decline, and the investment required may not be justified by the potential gains"

  10.5  Since our last submission, we have also introduced a number of new initiatives intended to directly benefit customers of Lloyds TSB:

    —  In April 2001, Lloyds TSB Scotland began a three month pilot which allows customers paying in cheques at branches of Lloyds TSB Scotland to request "instant cheque access". Under the terms of the pilot, the value of the cheque is credited to the payee's account instantly and the customer has immediate access to the funds. Although the period of the pilot has been extended, demand for the service has, however, been very low and there are huge implications for potential fraud which are currently being assessed.

    —  In addition, from late 2001, customers of Lloyds TSB paying in a cheque drawn on another Lloyds TSB account, have benefited from the Bank's on-line real time banking system, which enables the cheques to clear immediately.

    —  As indicated earlier, customers are increasingly choosing to use more convenient forms of payment such as electronic or online payments. On-line/internet payments generated via Phonebank, Phonebank Express and the internet, for transactions between Lloyds TSB bank accounts, allow an immediate clearing of funds.

  10.6  The average personal customer only pays in one cheque per month but issues four per month. Therefore, the advantage of an immediate credit is far outweighed by a greater number of cheques being debited immediately from an account. Indeed many customers, particularly those on low incomes, actually rely on the delay in cheques being debited from their account, to help their cashflow.

  10.7  Therefore, the main beneficiaries of a shortened clearing cycle would not be personal customers but those companies who receive large numbers of cheques such as utilities companies and retailers.

  10.8  In terms of value, a Lloyds TSB customer paying in a cheque drawn on another bank will start to earn interest on day three with the cheque issuer continuing to earn interest on days one and two. There is not, therefore, a "float" on which the banks earns interest.


  11.1  The Committee welcomed an undertaking by MasterCard/Europay to investigate the Consumers' Association claims that credit cards statements were being sent out some days after the date on them.

  11.2  Lloyds TSB provides a 25 day interest free period from the date statements are issued on credit cards which offer an interest free period (this can be up to 56 days for purchases.) Our Asset Advance Card is designed specifically for borrowers and therefore does not have an interest free period, but a lower standard APR.

  11.3  Lloyds TSB outsource some aspects of their credit card operations including mailing of statements to customers. The despatch of statements is subject to strict service level agreements and we are confident that there is no delay in sending out statements to our customers.


  12.1  As outlined in our submission to the Committee in September 2000, Lloyds TSB welcomes any changes that lead to an improvement in consumer information.

  12.2  Lloyds TSB responded to the Treasury Consultation document, Standards for Retail Financial Products, issued in January 2001. Through the British Bankers' Association (BBA), Lloyds TSB has also been in discussion with the Treasury about the proposed CAT standard for a basic bank account and look forward to receiving further details when available.

  12.3  In October 2001, The Financial Services Authority (FSA) launched the first of its comparative tables intended to compare similar products available from various providers. The FSA currently has tables available for pensions, unit trust ISAs, investment bonds and endowments.

  12.4  These tables provide a useful comparison, which enable customers to quickly search the available products and pick out the most appropriate products for their needs so that they are able to obtain more information, but their limitations must be considered. The tables compare and rank product providers based only on charges taken—just one factor that should be taken into consideration and not always the key driver in recommending a particular product or product provider.

  12.5  There are many other equally important factors that should be taken into consideration including investment choice, investment performance, other product features and financial strength when choosing a suitable product.


  13.1  We understand the Committee would also welcome a summary of the Group's response to the Banking Services Consumer Codes Review Group (DeAnne Julius Review) report, Cracking the Codes for Banking Consumers, published last year.

  13.2  Lloyds TSB welcomes the DeAnne Julius report, which found that "there is much to commend in the current system of self-regulation through voluntary codes."

  13.3  The conclusion that voluntary regulation through consumer codes is an effective means of managing industry services standards, without stifling innovation and inhibiting competition is particularly to be welcomed. The report represents a vote of confidence both for the revised Banking Code and the establishment of the new monitoring regime under the Banking Code Standards Board.

  13.4  We are committed to the concept that good compliance is good for business and that there are substantial benefits in the retail business in ensuring that what is good for the customer is good for the organisation.


  14.1  Lloyds TSB has already implemented many of the recommendations. On account switching Lloyds TSB has gone beyond the DeAnne Julius recommendations as explained earlier in part C. We have been extensively involved in both drafting the new guidelines for those in financial difficulties and the creation of the Business Banking Code.

  14.2  We agree that biennial code reviews by the industry and led by an independent reviewer will enhance the credibility of the code.

  14.3  We are, however, not convinced that the recommendations regarding portable credit history provide substantial benefit to personal customers. There is no standard format for assessing creditworthiness and the customer could be misled to believing that credit with one bank means automatic right to credit at another. We note that the Consumers Association also has concerns regarding credit ratings and the need for banks to make their own credit assessment.

  14.4  In terms of better customer information, we welcome all attempts to make customers more informed and financially aware, although it is perhaps important to remember that customers already have access to a wealth of information and it is therefore necessary to avoid duplication and overload and ensure information is meaningful.

  14.5  Finally, we are concerned that the publication of monitoring visit reports is in contradiction to the Review Group's comments that "regulation must therefore be justified by demonstrating that the benefits it delivers outweigh the costs it creates." The proposals would undermine the principles of a voluntary code and are also at odds with the FSA which has opted not to publish the reports out of consideration to costs and proportionality.

  14.6  At Lloyds TSB, we always seek to achieve the highest standards of service and we maintain that customer satisfaction, media comment and the current monitoring, disciplinary and enforcement regimes are incentive enough for any firm to take code compliance seriously.

  14.7  Overall we welcome the review findings and were pleased to be able to support a number of new initiatives designed to further enhance the consumer codes and their regimes.



  15.1  Lloyds TSB is the leading bank for new business start-ups with around one in five choosing to open accounts with the Group—in the last year alone, we helped 100,000 small businesses get started. We recognise that the health of small and medium sized firms is crucial to the success of the economy and the employment of many people. Lloyds TSB supports about 550,000 SMEs, who in turn employ some 2.5 million people in the UK. We are aware that the banking services we provide are an important influence on their future growth and success.

  15.2  Lloyds TSB Business Banking customers have access to a variety of tailored business services ranging from traditional banking products through factoring, insurance and investments to non-financial solutions to their business problems. These include Debtor Management services providing legal support to help customers recover debts and Prospect Finder providing customers with a tailored list of potential customers for their business.


  15.3  Lloyds TSB is currently involved in bi-lateral discussions with the Office of Fair Trading (OFT) on the remedies proposed by the Commission. The Committee will appreciate that it would be inappropriate to comment in any detail on the proposed remedies whilst discussions are ongoing and we have therefore provided a limited outline of the Lloyds TSB Group's initial response to the Competition Commission report.


  16.1  The Competition Commission's, Report on the supply of banking services by clearing banks to small and medium-sized enterprises within the UK was published on 14 March 2002. The Commission found that a complex monopoly exists in this market and that as a result, SMEs in England and Wales are overcharged for their banking services.

  16.2  We are disappointed with the findings of the report and disagree with its conclusions. We know from practical experience how competitive the SME market is, as our managers compete day in day out on the high street for SME business. Furthermore, the Competition Commissions own SME survey showed that 84 per cent of customers are generally satisfied with service quality. It also concluded that the "cost and availability of lending are in general not a problem."

  16.3  We welcome some of the recommendations, many of which have already been addressed by Lloyds TSB and the industry in the new Business Banking Code or will be addressed in due course following the negotiations with the OFT.

  16.4  The Commission's main criticisms foundered on switching, barriers to entry and bank profit's being too high.


  17.1  The Competition Commission acknowledged that it "saw no evidence" that the banks caused unnecessary delays in switching and accepted that once a customer decides to move it is in the bank's interest not to delay matters. Indeed, the Commission said that apart from the perception that switching is complex, one of the main reasons for low switching was the importance of an SME relationship with a bank manager who understands its business.

  17.2  We have worked with the industry, through the British Bankers Association (BBA) to address this issue. The Business Banking Code published in March 2002 stipulates a five-day switching commitment for transfer of information on standing orders and direct debits and an aim to complete the process within five weeks. (Unless borrowing is involved).

  17.3  The Banking Code also addresses transparency and access to information, containing details of where and how our business banking customers can obtain information on interest rates and bank charges. The code also covers portable credit history.


  18.1  Lloyds TSB does not accept that it makes excess profits. The market is highly competitive and profits are cyclical. The report only looked at profits for the three years between 1998 and 2000, which are unrepresentative of a full cycle. Clearly bad debts are higher and revenues lower in times of recession.

  18.2  We do not also accept the methodology for calculating the profitability. There are numerous factors which will change the level of profitability in a market, from measurement of capital to the treatment of intangible assets. The Competition Commission chose to take the highest figure.

  18.3  In fact, using the Commission's own methodology there are 15 other sectors which make much higher returns than banks such as: cars on 185 per cent; transport 99 per cent and the media 62 per cent.


  19.1  Lloyds TSB has already addressed some of the perceived barriers to entry such as switching, portable credit history and greater transparency. However we robustly oppose the principle of price control and the idea that we should share our branches

  19.2  In terms of price control, we are not aware of any other OECD country with price control in financial services. The introduction of interest on current accounts is likely to reduce competition by withdrawing the only pro-competitive advantage of the new entrants HBOS and Abbey National. It will also undermine the incentive to switch, if a customer actually wants interest on current account.

  19.3  The banks will have to demonstrate to the Office of Fair Trading that things have "improved" before price regulation can be relaxed. The concern is, that by introducing price controls which in turn reduce competition and damage the prospect for new entry, that the regulation will remain indefinitely.

  19.4  We are also adamantly opposed to the idea that we should share our branches on a non-reciprocal basis with those without a local presence. Our branch network is an asset in which we have invested heavily over many years and is a fixed cost to the bank. It is not just the premises, but our technology, operational systems and trained staff.

  19.5  If one applied the same principle to any retailer with a branch network, one could equally say that Marks & Spencers should give a corner of its store to Next because the latter has not invested in a local store itself. Our branch network is not a public network and we are not a utility.

  19.6  This remedy also has potential unintended consequences for both the banks and its customers. Some banks may rush to close branches in areas where other providers are not present to avoid servicing non-customers, particularly if the branch is not allowed to sufficiently cover costs. We are also concerned that our existing customers could be disadvantaged because we have to serve customers of other banks.

  19.7  In light of the drive by the Post Office to improve its profitability, one could also argue that sharing bank branches is a further threat to the future viability of the Post Office. The Post Office has stopped its exclusive contract with Girobank and wants to work with other banks to offer business banking services over its counter, as it does with personal customers. If, however, banks are forced to accept SME customers there will be even more competition to the Post Office's new revenue stream.


  20.1  In conclusion, we do not accept the Competition Commission report findings and fail to see how some of the remedies will enhance competition.

May 2002

1   DeAnne Julius Committee, Cracking the Code for Banking Customers (The Julius Report), May 2001, p 14; section 3.8. Back

2   Ev 56. Back

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