Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 420 - 438)



  420. You do not need to be a code cracker working on Enigma in Bletchley in the Second World War to crack the code you used about branch sharing. You are engaging positively in discussions. I sense a certain amount of resistance to this whole proposal from the Commission on branch sharing judging from your responses to Mr Beard. What does engaging positively in discussions mean? What are you doing about branch sharing as a proposal?
  (Mr Crosby) Let me be clear and I hope I was clear about this. The point is that discussions between the OFT and the banks have not reached branch sharing to any significant extent yet because they are bogged down on the implementation of the other remedies. That is a straightforward observation. I do not think you should infer—I did not intend to suggest—we are reticent. If it can be made to work, it delivers greater access to customers cost effectively, then that does increase choice and choice is a driver of competition in this marketplace and that will help us.

  421. May I ask in connection with rural areas and providing services to a rural customer market, rather than waiting for the other remedies to be sorted out, why is this not on your priority list? There are lots of rural customers who want better services, they would be delighted to get offerings from each of your three banks and if you could only do that economically by branch sharing, what I do not understand is why you are not more pro-active in saying that there is business here. You are going to be doing stuff the Big Four are not doing, because they are reticent. What I do not understand are the obstacles. You kicked off your remarks, Mr Crosby, by saying you do not quite know what branch sharing means, you are not sure how it would work. Give me three problems with it? Give me three obstacles which make it uneconomical and unattractive for you actively, on the front foot, to consider branch sharing in the next six months for rural areas?
  (Mr Crosby) In practical terms a lot of branches are very busy. It is a question of routing customers. There is a lot of regulation around a lot of what happens in branches. A lot of the transparency around products and describing those products to customers under different brands all has to be sorted out. You will have transfer pricing arrangements. We all run businesses, but if we are chief executives one of the things we get most sick and tired of is meaningless debates inside our business on transfer pricing and costs. That would be a serious obstacle. All things that with the collective enthusiasm of the industry could be overcome. In the context of why we are not doing it now, we are investing a lot of money in building a business here. The only way we can justify doing that to our shareholders is to start the business by reaching out to the customers we can reach most easily. I make no bones about that. The fact of the matter is that we have to start in the conurbations where it is easier to get a return on our investment. It is still an investment which will be loss-making for the first year or so.

  422. What would your view be if someone put it to you that you should be more pro-active, particularly in the rural areas, on branch sharing?
  (Mr Targett) I have not really thought this through but because of the issue in rural areas with the right access and access to banking services, on the face of it, it makes sense. In terms of the detail, we would have to work through it, but we are not against considering it.
  (Mr Harley) Yes; it depends on the terms and conditions. On money transmission in shared premises that is easy. The issue would be if there were a wider range of products when it becomes more complex. For example, if you want to use passbook based accounts in different branches of different organisations or in shared branches you would have IT issues in terms of reading those passbooks. There is no reason why money transmission should not be an extension of what is happening on ATMs.

  423. What is the status of this Commission proposal, this idea of branch sharing, which as I understand it is ideally intended to assist rural areas? What deadlines or timescale do you believe you are working to, if any at all. Just so I understand what you think the nature of the debate is. A quick answer on that.
  (Mr Harley) For me it has been very low visibility and I have no awareness of any deadlines.
  (Mr Targett) Same. I do not know where it is at.

  424. It is just floating out in the ether.
  (Mr Crosby) There is no deadline because they are struggling with the Big Four on the first few issues.

  Mr Ruffley: I am not suggesting we conscript your services or be too interventionist. I am not an interventionist. I just wanted to advocate a position for rural areas. It is an important issue in the public interest, but clearly your organisations have shareholders and businesses to run.

Mr Mudie

  425. As we are on remedies, when you were speaking first you said this was a difficult market to get into and expand. We saw the arrogance of the Big Four clearers when they came here firsthand. I am just surprised at your lack of ambition. Here is an opportunity to get some real competition that would benefit customers, increase your market share and you seem to say in the short term interest rates, fine, comparability and transparency, fine. Is that genuinely going to get you into this difficult market in a meaningful way in a period of time which is going to be sensible?
  (Mr Targett) The point I was trying to make was that we own three regional banks in the UK and in most areas we do not have the representation that the big banks have. The difficulty is sheer scale and ability to leverage that scale. We do not have that in the way the Big Four do. Similarly if they came to our market in Australia, they would suffer the same problem. The way we will look to penetrate is not through any of these issues, it has to be through uniqueness of product offering and the way that we service clients and that is the only way we can compete. For us price is not the major thing to compete on and we cannot as a series of small regional banks. That was the point I was making.

  426. None of you would have wanted the Competition Commission to put anything more radical than that on the table.
  (Mr Harley) The key issue is in the execution and the effect that has on the market, which has been touched on a number of times. Until we see the remedies in action it will be very hard to judge whether they are sufficient to make this market more competitive. Once we see them in action we may have a different view. For the moment our customer position trends are growing very nicely, we are growing the business more aggressively and we hope the remedies will also help to free up the market.
  (Mr Crosby) We had a problem two years ago as separate organisations, in Halifax and Bank of Scotland. Halifax had the branch distribution in England Wales and brand, but did not have the business banking products and capability. The Bank of Scotland conversely had all the capability and ability to support this business, and it is a difficult business to go into unless you have the capability, but did not have on the ground branch presence in England and Wales. Putting those together, which we think gives us a real opportunity here and we make no apologies for having quite big ambitions, we are looking to double our market share in the UK in the next four or five years. We have a specific opportunity to make a difference here.

  427. Do you think your shareholders would think you unambitious if they were sitting listening to you? Here is the Competition Commission and a big opportunity to shake this market up. It seems to me that you are settling for small measures.
  (Mr Crosby) Our position is that this is a marketplace which is ripe to be opened up with an increase in competition. We just think it has to be us that does it in detail and others, rather than through regulation.

  428. You have not done it in the past.
  (Mr Crosby) We would say we have contributed in a very major way to the shifting of current accounts away from clearers to others. We are doing the same in credit cards. We do have credentials here.

Mr Plaskitt

  429. Mr Crosby, several times today you have spoken strongly in favour of transparency. I take it you are familiar with your current campaign based on this leaflet to promote your current account. It says 10 reasons why you may not have switched to a Bank of Scotland current account, including, for example, that you are in love with the bank manager. One of the things you have on this account to attract customers is that it pays 2 per cent interest on deposits. Is that right.
  (Mr Crosby) Yes.

  430. That is provided you pay a certain amount a month into the account. What rate of interest does it pay if you fall under that minimum requirement?
  (Mr Crosby) Zero point two five.

  431. In the interests of transparency, should that figure not feature on this promotional literature?
  (Mr Crosby) Yes and if it does not we will remedy it.

  432. It does not.
  (Mr Crosby) I have no problem with that at all.

  433. It does not appear on it at the moment. There is a lot of small print but it does not seem to have that on it.
  (Mr Crosby) I do not think that will be the only thing somebody will see who buys our current account but it does not matter. You are quite right that anything which contains the offer should contain the other side of the condition.

  434. This also promotes an overdraft facility with a headline rate of 8.9 per cent and you mentioned that one earlier because you were quite proud of it. It is provided you have £1,000 a month going into the account. If you fall below that contribution a month, what is the interest rate on the overdraft?
  (Mr Crosby) Eighteen or nineteen.

  435. In the interests of transparency, should that not appear on the leaflet?
  (Mr Crosby) The same point is taken.

  436. It does not appear on the leaflet at the moment. I am just trying to explore your commitment to transparency, that is all. You will agree that you will probably take that leaflet away and re-write it?
  (Mr Crosby) It will be changed at the next reprint.


  437. We have been good for printers this morning. Assuming the Competition Commission's recommendations are fully implemented, how do you expect the banking industry to have changed in five years' time as regards personal customers and the SMEs. May I ask each of you that question?
  (Mr Harley) The market share of new entrants will have increased. Transparency will have improved as well in terms of product visibility and more value will have been transferred to customers.

  438. If you give us a ballpark figure, what will the percentage of customers of the Big Four have been reduced to from 86 per cent?
  (Mr Harley) You could add up the ambitions of those round the table amongst other things. We are aiming for 5 per cent of the market from our present. We aim to increase it from just around 2 to 5 so that is 3 per cent we would essentially have to take from the Big Four.
  (Mr Targett) Being realistic, the Big Four have leverage and scale, so we will be in there competing, but it will take time to erode some of that market share. We all have ambitions, but I suspect that if it is mid-80s now, in five years' time I doubt it will go much below 80 per cent.
  (Mr Crosby) Interest on current accounts for personal customers will be the order of the day across the industry and credit card pricing will be more realistic, I hope we will have flatter interest rates and will have got away from the offer and follow-up rates which are necessary at the moment to break up the market. In the SME sector, you will see a reduction in the Big Four's market share and the big point about that is that it does not need to be that big a reduction for the Big Four to have to respond in terms of pricing their services because once their shares start to move the stock market looks at that and devalues the earnings they make and long before they substantially lose their market share they have to respond. So my second point on SMEs is that in five years' time they may still own 75 per cent of the SME sector but they will have had to respond to the forces of competition.

  Chairman: As a Committee we are agreed with you on the need for that increased competition. We are at one on that particular issue. This morning we found it very refreshing to talk to you and accept from you that the Competition Commission's proposals are a sound basis for discussion, which the Big Four did not do. That was very interesting this morning and no doubt the Clerk will be in contact with you and others, seeking further written information. If you can provide us with anything you have promised this morning as soon as possible, we shall be delighted. We are very grateful for your attendance this morning and also for your coaches in the back row. If the coaches for England and Brazil do the same on Friday as your coaches did for you, we will have England as a winner. Thank you very much.

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