Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the National Australia Bank Limited


  I refer to your Press Notice of 25 March last in which you set out the terms of the Committee's inquiry into banking and in which you invited comments.

  Clydesdale Bank, Yorkshire Bank and Northern Bank are UK subsidiaries of National Australia Bank Limited, 500 Bourke Street, Melbourne, Victoria, Australia. Clydesdale Bank is a Scottish clearing bank with branches throughout Scotland, North West England and in London. Yorkshire Bank has branches throughout Yorkshire and the North of England and in some areas in the Midlands and the South of England, while Northern Bank has branches throughout Northern Ireland. Graham Savage is the CEO of both Clydesdale and Yorkshire Banks while Don Price is the CEO of Northern Bank.

  Clydesdale Bank on behalf of the three UK subsidiaries of National Australia Bank submitted evidence to the Competition Commission to assist its inquiry into SME banking the outcome of which was published in March 2002. In addition we met twice with the Commission and were given every opportunity to put forward our views, which we gave in a frank and positive manner.

  At this stage we have not agreed the behavioural remedies' undertakings with the OFT nor have we had the opportunity of meeting the OFT in this regard, but would mention we do not at this point envisage any problems or delays in agreeing these remedies.

  The Competition Commission's SME report was extensive so we confine our comments to how we see their remedies achieving or leading towards the Government's goal of stimulating innovation and competition in the UK banking market.


1.  Banking Code

  Since inception we have been strong supporters of the Banking Code and have played an active role in its various revisions and the introduction of the Business Banking Code.

  Currently the Codes are under review so as to comply with the recommendations of the Julius Committee that they should be reviewed every two years.

  We believe that the number of outstanding contentious issues between the Codes and various bodies including the Treasury have been substantially reduced. We are aware that two issues: Personal Notification of Interest Rate changes and Credit Card APRs are regarded as important matters to be resolved.

2.  Mortgage Regulation

  You will be aware that the Government has agreed that Mortgages and Mortgage advice are to be regulated by the FSA and generally, we are supportive of this.

  Included within this proposed regulation is the granting of a Legal Mortgage or in Scotland a Standard Security over a home to secure a loan or overdraft to the homeowner's business.

  We do appreciate that the purchase of a home funded by a long-term loan is for most people one of the two most significant financial commitments. We understand that the home loan market is highly competitive and there are a plethora of competing home loan product options and alternatives available and that it is perfectly proper that the consumer has access to good sound advice before taking on a home loan commitment. We do not understand why the same level of protection is necessary for a businessman taking out a much shorter-term loan or an even shorter-term overdraft to assist him in increasing the profits of his business. By including security over homes for business advances within Mortgage Regulation simply increases the bureaucracy and inevitably the cost and the speed of granting advances to small businesses.

  We would be most obliged if you could review this aspect which only affects those banks that service the SME community.

  We trust that you will find our comments helpful and if you wish us to amplify any of the points made or have our view on new or other issues raised in the course of your inquiry please do not hesitate to contact us.

2 May 2002


1.  Negotiation of interest rates and fees

  In our view the owners and directors of small businesses are very well used to negotiating with both their suppliers and their customers in terms of prices, volumes, quality, delivery etc. Such negotiation is part and parcel of their competitive positioning and every day we as bankers are challenged by SME customers to reduce our rates or our fees and may be offered more business if we do so, or be threatened with the loss of that customer's business if we do not accede. Indeed, our promotional literature mentions the possibility of negotiation of rates and fees.

  We regard this as an aspect of competition and were extremely surprised and disappointed to find that the Commission takes the view that this inhibits competition (Sections 2.113-2.118 and Chapter 4). While we note that the remedies do not include any restriction or inhibition on negotiating rates and fees with customers, it is important that this practice which according to the report is common is accepted and recognised by the authorities as competition in practice.

2.  Account Switching

  We remain unconvinced that the remedies to allow faster error free account switching will have the desired effect particularly in the SME market where often the SME customer "banks with the banker and not the Bank". We believe that competitive pricing and product innovation delivered through market outcomes is the most successful way to attract and retain new customers.

  One aspect of account switching which we suggested to the Commission and which they have taken up in their remedies is that of easier switching of security over land and buildings.

  One of the most important considerations for an SME when switching banks is the cost of transferring security over land and buildings from one bank to another. The process in Scotland involves instructing external solicitors to take a standard security over the relevant land and/or buildings. The solicitors will be instructed to carry out an examination of the title deeds and provide the bank with a report on title. In addition, they will arrange for the necessary local authority searches and Land and Charges Register searches to be carried out. Following this they will attend to registration of the completed security with the Land Register, Register of Sasines or Companies House as appropriate.

  The process in England is very similar, although the equivalent security is a Legal Mortgage. This will then be registered with the Land Registry.

  A possible solution is for the banks to agree a common template security document and to agree to assign this security in the case of a customer switching banks. Such a proposal will require the following issues to be addressed. The banks will need to agree both a template document as well as a process for the transfer eg agreeing that a fresh title examination will not be instructed (unless certain criteria exist such as an environmental risk) although updated local authority and other appropriate searches will still be required.

  The security will not be complete until it has been registered and intimated. In this way banks would always have security which would withstand the challenge of a receiver, liquidator or trustee in bankruptcy but which would be relatively easy and cheap to transfer.

  The new bank will need to be comfortable with the report on title provided to the old bank and be satisfied that the solicitors who prepared the report will extend their duty of care to the new bank. A common form of certificate of title could be agreed. This could be completed by separate solicitors acting for each bank in relation to the transfer thereby reducing costs.

  In Northern Ireland, a good security can be obtained by way of an equitable mortgage ie the simple deposit of title deed and by the borrowers oral statement that these deeds are pledged as security for his or her obligations. This equitable mortgage which affords protection against a liquidator or trustee in bankruptcy does not require registration at the Northern Ireland Land Registry. However, changes in the practice of the Northern Ireland Land Registry whereby copies of deeds can be obtained electronically are quickly reducing the value of the NI equitable mortgage and the NI Banks are seeking ways to resolve this in a way as to maintain the effectiveness of the equitable mortgage.

3.  Portable Credit History

  We now understand that the OFT have defined "credit history" as a "statement of an SME customer's credit performance over the preceding five years which, in particular, enables an SME customer to demonstrate to any potential supplier of banking services its adherence to agreed overdraft and lending arrangements".

  Further clarification is needed and we will be taking this up with the OFT. We would be happy to provide (subject to the approval of the customer) and receive factual information, such as amount and terms of facilities approved, monthly extreme balances, sums lodged to the account, average balances, information on whether cheques or other instruments had been returned unpaid and whether covenants or other agreements had been kept. We would much prefer this information to cover the previous three years and not five years as we believe the longer period would be almost irrelevant. We would not welcome any requirement to provide copies of account statements free of charge.

  We are concerned as to whether the provision of portable credit history for a business may have the opposite effect from that intended. For a business which has always operated within agreed credit arrangements and always adhered to lending covenants it would be helpful for a new bank to know this. Notwithstanding, this information would only form part of the new bank's credit assessment process.

  However, if a business had operated from time to time outside its credit limits or had broken a covenant here and there the new bank may or may not decline to take on the business as a customer notwithstanding other aspects of its credit assessment of the customer being acceptable. For example, a business which has gone through a difficult period and hence has had difficult relationships with its bankers, but has changed significantly could be prejudiced by its troubled history being passed on to its new banker. Should a customer choose not to give permission for the old bank to submit such a statement to the new bank, invariably the new bank would see this as very negative information. One effect of this requirement may be that customers who can have their Banks provide an impeccable credit history will be able to move bankers easily whilst others are effectively limited to using the same banker for ever.

  Furthermore, customers who would be able to have their bankers provide an impeccable statement can in the absence of such a statement always persuade a new bank of their status. In our view, such a statement is irrelevant for such customers. The lower quality customers will always have difficulty and a statement of credit history may simply make it more difficult for them.

  Another effect of providing a credit history is that new players may be advantaged against the traditional players as the new players will inevitably cherry pick the higher quality business customers leaving the lower quality business customers with the traditional banks. Their response must be to take whatever action possible to improve the quality of their assets possibly reducing the amount of credit available for SMEs.

  Obviously, we cannot say for certain what the final outcome of this remedy will be but we are concerned that it may not have the hoped for response and indeed may cause unforeseen and unintended difficulties.

4.  Payment of interest on current account at 2.5 per cent below Base Rate

  Neither Clydesdale Bank nor Northern Bank has been required by the Commission to pay interest on SME current accounts at a rate of 2.5 per cent below base rate and prima facie, you may think this matter would not concern us. In fact, this is the aspect that convinces us that the remedies to be introduced will not have the desired effect.

  Firstly, it is extremely easy for SME customers at present to find other suppliers that will pay interest on their short-term surplus balances. Control of present and future cash flow is critical to managing any business and is facilitated by PC spreadsheet programmes. So it should be very easy to project the amount of surplus balances are available for interest bearing deposit. To transfer these surplus balances to and from the business's main current account is also easy—a phone call or an internet transaction. Notwithstanding the simplicity, ease and speed of this process it is clear that many SMEs simply do not care enough to take this action.

  By requiring the four English Clearing Banks to pay interest on SME current accounts will simply have the effect of further discouraging the SMEs who do not bother at present to seek alternate suppliers for his surplus deposits. It will also encourage those who do presently bother with alternate suppliers to simply leave their deposits on current account with their English Clearing Bank.

  In addition the market strength of the four English Banks is such that Banks that do not have high returns on SME banking and are not obliged by the Commission to pay interest on SME current account will inevitably have to respond to market force and pay similar levels of current account interest as the "Big Four". This will also discourage new players to enter this aspect of the market.

  In short, by interfering with product pricing in this way the Commission has raised an artificial barrier which will protect the "Big Four" and will prejudice the interests of other existing players and discourage new entrants to the market.

  The result will be completely the reverse of that intended.

  In addition, we are concerned that an unfortunate principal—Government interference in the pricing of established industries—will be established.

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