Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



  240. It is always uppermost on the blurb which comes thudding through the door.
  (Mr Goodwin) That is not actually true. The preponderance often do, but credit cards are often sold on other features such as air miles.

  241. Do you think consumers are aware that despite the fact that you may be offering identical APRs it can lead to very big differences in the interest that they have to pay on your cards? Do you think people realise that?
  (Mr Goodwin) The APR is the APR. It is the period over which they pay interest which will affect the calculation. The APR is governed by a set of rules which are very strict. If there is anything wrong with anyone's marketing, then it should be pursued and there is a variety of channels through which that can be pursued. For our part we are not trying to demur from that. APR is quite tightly controlled and that is how it can be quoted and calculated. In the sort of comparison you are making reference to it is to the other factors which distort it. What I would suggest to customers is that they should not just look at the APR, they should look at all the product features and satisfy themselves how they are going to use the product and any charges or other aspects of conditions will come across. The Banking Code also requires us to expose those and for those to be transparent and they are. It is not just the APR we are looking at.

  242. Do you give those things equal weight? I come back to your promotional blurb. You have 2.9 per cent all over the front page, but on the small print inside—I should love to read out the small print but we do not have time—it is incredibly difficult to understand, it is in tiny, tiny, tiny print. Eventually we get down to when you have to make a payment, how much it should be, how many days after the statement, all sorts of little conditions. You just said APR is one factor, but your blurb keeps pushing the APR and all the other factors are in tiny print.
  (Mr Goodwin) It is not on ours.

  243. It is just one factor. Should you not be giving equal weight in your promotional material to all the factors which together result in how much the customer has to pay?
  (Mr Goodwin) Without commenting on the specific piece of paper, which I have not seen, I am quite content that our literature makes reference to all the facts. We are in a competitive situation in the market and every and any retailer highlights some features rather than others. It is classic retailing to highlight what you think is the best and most attractive feature of your product. The test we have to meet—and I certainly stand ready to be judged by it—is whether someone reading the literature, taking it as a whole, is alerted to the material terms and conditions. It is not just a Banking Code issue: there are absolute legal requirements on us in this respect and that determines what is disclosed in these notices. It quite often determines the wording which is used.

  244. Do you want to comment on the finding in relation to the Lloyds TSB Asset Advance because you come out the dearest with £7.48 as opposed to £5.50 down the table?
  (Mr Ellwood) I would need to do a study of the research in some detail.

  Chairman: We have spoken a lot about the Competition Commission report, but now we will look at the remedies.

Mr Fallon

  245. Mr Ellwood, in your submission you pointed out that we have now ended up as the only country where banks have price controls slapped on them. If those price controls are not mitigated, what do you think the effect on the Big Four's market share of small business lending will actually be?
  (Mr Ellwood) Because there are several new players coming into the market now, over time we may see a slight erosion of market share with the Big Four. I hope we do not, but I suspect we may. It seems very clear that certainly Halifax and Abbey National are very keen to get into this market in a very vigorous way. Curiously the one difference they had in paying interest on current accounts has now created a level playing field as a result of the Competition Commission's decision. I suspect that will not deter them however and I suspect they will still go very vigorously for this market. People who go vigorously for markets with deep pockets tend to gain market share over time. I suspect the market share of the Big Four is likely to go down rather than up.

  246. You say in your submission to us that this will withdraw the only pro-competitive advantage of the new entrants, HBOS and Abbey National.
  (Mr Ellwood) Yes. If you look at the thing they had which the Big Four did not have, it was the payment of interest on current accounts. They were using that as a very clear marketing tool. They did not have other things, they did not have the distribution capability, they did not have the expertise and they probably did not have quite the level of product range. What they did have was the payment of interest and they were using that. What I am saying is that because they were using that and because the outturn of the Commission has said that we all now have to pay interest, it has created a level playing field. Whilst it removes that advantage, because we all now have to pay interest, it does not take away the competitive forces of Halifax and Abbey permanently. Therefore it is my belief that they will gain market share over a period of time, but they have certainly lost an initiative that they started with very recently.

  247. I just want to be clear whether you think the price controls are damaging or they are going to be irrelevant. What is the cost in lost revenue if the price controls are not mitigated?
  (Mr Barrett) One hundred and fifty million as a crude number. I certainly plan to not lose £150 million in revenue. I have an ideological aversion to price control frankly There are unintended consequences which arise when there is unwarranted intervention into a market which is operating perfectly fine. Therefore from the start I am against the whole notion of dictating price. If one wants to prescribe remedies to increase competitiveness and the propensity of new entrants to come in or whatever, there are many, many classic remedies. Price control is extremely retrograde frankly and I thought it was a discredited approach and therefore I am, to be honest, quite upset about it. As a businessman I will do my best to try to find ways either to increase productivity by stealing more business from the other guys, doing more business with existing customers, by coming up with a more valued proposition. I will do everything I can because the CEO who runs that business is not off the hook on the profit targets which he has agreed with me for the next three or four years, so he is going to have to find a way. I think it is wrong.

  248. If price controls are so discredited, why do you think you have ended up with them? Why do you think the Labour Government confirmed them? How did you get into this mess?
  (Mr Barrett) We are an easy target.
  (Mr Ellwood) It is really not going to have a major impact on the SME profit. The amount that an average SME customer will get as a result of this imposition of interest rates will be of the order of 40 or 50 pence per week.

  249. What is the damage to Lloyds?
  (Mr Ellwood) It is about £100 million or thereabouts.

Mr Beard

  250. One proposal has been, to help small and medium-sized enterprises changing banks, that there should be a standard portable credit history which they could take with them between banks. I understand that Lloyds have said that this is not possible because there is no standard format already. I should like to hear the comments of everyone on this but would you also comment on why you could not get together to provide a standard format so that it could be transferred easily?
  (Mr Ellwood) What we are saying is that as far as portable history on SMEs is concerned, it is something we are very happy to work towards; indeed it is part of the Business Banking Code and we are looking at it right now. We have a slightly different view on portable history for individuals. What we do not want to do is dilute —

  251. I was just talking about SMEs.
  (Mr Ellwood) Exactly.
  (Mr Barrett) I support that; not the adjudication, the other bank would not rely on your adjudication anyway. I have no problems with providing the credit, the base data which forms the credit history of the client.
  (Mr Goodwin) We already have something which we term a portable credit history. It is not standard because we developed it on our own. It is a good thing. At the end of the day it does not actually make a lot of difference because one of the issues in switching was not assessing creditworthiness; our own processes do that pretty effectively and we find that our relationship managers can quite quickly determine the credit status of someone. If it is felt helpful, and we think on balance it is, then we are quite happy to do it. As ever, sometimes the devil can be in the detail of what you try to prescribe as the standard one across the industry. Some things are more easily delivered than others. If you want five years' history, that is difficult from today. It will be much easier in five years' time if we know today what is called for. It is an area in which progress can be made.
  (Mr Dalton) We would work toward one as well but we do wonder about the practicality of it. We think that there is already a pretty good portable credit history in the bank statement and if you wanted to change your bank and you walked in with your bank statement showing your overdrafts and the various funds going out of your account, that is pretty good information for your banker. We use that in determining our credit process.

  252. In the light of those answers and in the light of the recommendation, will the four of you get together now to derive a common format so that these portable credit assessments can be made?
  (Mr Goodwin) We do not find it difficult to take business from the people sitting around this table. It requires broader co-operation than just the four of us.

  253. Why could it not start with the four of you as you are in apparent agreement?
  (Mr Goodwin) It is probably a good idea.

  254. I am not asking you whether it is a good idea but whether you are going to do something practical about it to make it an operating possibility?
  (Mr Ellwood) The answer is yes. The Business Banking Code indicated that portable credit history was going to be a feature of that and that would be monitored by the Banking Code Standards Board. Therefore it will happen and it is clearly better if it happens in a uniform way.

  255. Another recommendation of the Commission was for sharing branches, which if it has no relevance anywhere else, would probably have relevance in sparsely populated areas. I think Lloyds have said in their written submission that you were adamantly opposed to this. Could you say why and what is the attitude of the other banks to this?
  (Mr Ellwood) We are implacably opposed to this. It is a bit like saying to Marks & Spencer that they have to give a corner of their shop up to Next. It does not make any economic sense. We also do not think it is credible for new entrants to come into the market without a branch network of their own. If we do have people come into our network on a non-reciprocal basis it is going to damage the service we give to our customers. We do not see ourselves as a public utility in this regard, so we are implacably opposed to that.
  (Mr Barrett) In principle I agree with Mr Ellwood. That is why we have some months to go in discussions with the OFT on these various remedies and a lot of the devil will be in the details. Philosophically, the notion that my shareholders should pay for branches and distribution and others capitalise on that without remuneration for the capital invested in it is not acceptable. It is de facto confiscation of our sovereignty as a commercial enterprise. I would be opposed to being forced to provide that. Having said that, in a different context, in remote areas and branches, we are co-operating with a shared branch ideal to bring banking service access. We have a pilot going on between the four of us in ten branches which we are piloting for a year to see whether we can collaborate in a co-operative sense to provide banking services in a remote community which would otherwise be uneconomic to any one of us and therefore not granted. In that respect, we are co-operating. As a general principle, I do not think we should be required to yield our own facilities to a competitor.

  256. I do not think there is any force implied. You say it is not economic for any one of you. Maybe it is not, but the whole idea is that the four of you or even more would share it. Would it not become economic then?
  (Mr Barrett) We have no need for it at the moment, so we look after our own customers.
  (Mr Goodwin) As one of the important factors of competition we believe, in common with others, that where we locate our retail facilities is important to our customers and that we have a choice to make on where we locate them. Where we locate them, we would hope to attract customers to them. It seems to me to cut fairly dramatically across that if you start saying it does not matter where we have them, everyone else has to come in and use them.
  (Mr Dalton) There are two quite different things here: the issue of banking services in remote communities is one thing. Then the sharing of a branch in Oxford Street in London is quite different. We are working together on a pilot in ten communities to make sure that those communities are served with banking. We are sharing branches in that case. I would agree with my colleagues. I cannot see us sharing our branch on Kensington High Street with NatWest.

  257. I suggested remote areas.
  (Mr Dalton) Remote areas are quite a different matter and we are doing that together now and the pilot is going well and if it is successful and the issues which are related to it are solved, then we would expand it.
  (Mr Barrett) We will hopefully ask the Competition Commission not to get mad at us for colluding.

  258. There is another point on collusion here. They have also recommended that in relation to small and medium-sized enterprises you publish certain interest rates and charges in the interests of transparency, so that when people are transferring they know what they are getting or might get. How would you react to that?
  (Mr Ellwood) Very happy.
  (Mr Barrett) I have no problems with that.

  259. What plans are there to do it?
  (Mr Ellwood) We do it now.
  (Mr Barrett) The Banking Code requires it.

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