Select Committee on Treasury Fifth Report


The Treasury Committee has agreed to the following Report:



In March 2002,[1] the Government published the Competition Commission's report on the supply of banking services to small and medium-sized enterprises (SMEs).[2] In March 2001, our predecessors reported on "Banking and the Consumer".[3] We decided to follow up both reports. During May and June 2002 we took evidence from the four largest clearing groups (Lloyds TSB Group plc, Barclays plc, HSBC Holdings plc, and Royal Bank of Scotland Group plc),[4] and from HBOS plc,[5] Abbey National plc, National Australia Bank, Consumers' Association, Federation of Small Businesses, and UNIFI. We have received written evidence on the subject from a range of interests. In making this Report, we are putting forward some suggestions about how the service to the public and SMEs may be improved. To everyone who has helped with this inquiry, we express our thanks.

  1. In the absence of any commonly accepted definition, the Competition Commission adopted the definition of SMEs as meaning those enterprises having sales revenues of up to 25 million.[6] The Competition Commission concluded that a complex monopoly is operating in the supply of banking services to SMEs which is harmful to the public interest.[7] It therefore recommended:
      • behavioural remedies, consisting of undertakings, by the eight main clearing groups,[8] to include assistance to switching and sharing of branches;
      • a transitional remedy, consisting of a requirement that the four largest clearing groups offer all SMEs operating current accounts in England and Wales an account that pays interest at Bank of England base rate minus 2.5 per cent or a current account free of money transmission charges, or a choice of the two;
      • the four largest clearing groups to notify to the Director General at the Office of Fair Trading (DGFT) any increase in any tariff-based money transmission charge; and
      • additions to the draft British Bankers Association (BBA) Business Banking Code of Practice for SMEs with an annual turnover of 1 million.

  2. The Government endorsed the conclusions of the Competition Commission, and the Director General of Fair Trading has been tasked with implementing remedies it proposed.[9] The Competition Commission suggested that all remedies were put in place within six months.[10] The Chancellor of the Exchequer expressed the wish that the transitional remedy be put in place sooner.[11]
  3. This review has focussed its attention on the following three areas:
      1. access to finance by individuals and SMEs and the choices available to them;
      2. transparency of charges—whether individuals and SMEs can easily understand the choices presented to them;
      3. ease of movement and portability -whether individuals and SMEs can easily switch between accounts.



  4. Business banking is a key requirement for SMEs to flourish, and it is encouraging to note that there is little evidence that SMEs have any real difficulty accessing debt and other forms of bank finance.[12] However, the market is highly concentrated with over 80% of small businesses,[13] and 73% of SMEs,[14] using the four largest clearers. This high concentration was a factor in the referral of the sector to the Competition Commission. The Committee's consideration of their report can be found in paragraphs 31 to 51.

    Financial Exclusion: Basic banking and the "Universal Bank"

  6. In their last report, our predecessors drew attention to the problems of "financial exclusion", where households have no access to a bank account, and welcomed the development of basic bank accounts.[15] In addition to the benefits for the individual, the universal provision of banking services assists the Government to meet its target of making benefit payments direct into bank accounts.[16] We therefore decided to revisit the provision of basic bank accounts to assess the level of progress made since our last report.
  7. All the banks which gave evidence offered basic bank accounts, but despite the four major clearers having a 68% share of the current account market[17] their share of the basic bank account market is less than 14%, based upon evidence from six banks.[18] This difference may be partly explained by the dominance of HBOS (Halifax and Bank of Scotland) in this market sector: the Bank of Scotland having started the first basic bank account before 1985.[19] This "stems a little bit" from their building society origins, and was used in the late 1980s as a way of acquiring customers.[20]
  8. Table 1: The market share of basic bank accounts of selected banks


    Number of basic bank accounts

    Market share of selected banks

    Lloyds TSB






    Royal Bank of Scotland Group






    Total of four largest clearers



    Abbey National









    These figures are based upon six of the banks which gave evidence and therefore does not represent the total number of basic bank accounts in the UK, nor does it represent total market share.

    Source: Oral Evidence [21]

  9. The Financial Services Consumer Panel (FSCP) conducted a limited survey into the availability of basic bank accounts to the public.[22] They found that four of the seven leaflets collected made some mention of basic bank accounts, but just one placed this information prominently in their leaflet. Of the sixteen respondents who each visited a branch to try and open a bank account, none were offered or told anything about basic bank accounts. This survey suggested little had changed since our last report in March 2001, when the NCC criticised the low level of publicity for basic banking accounts: "The banks ... do not seem to be selling them very actively".[23] Whilst the findings of the FSCP survey were challenged because of its low sample size,[24] there appear to be notable differences in the marketing of basic bank accounts. Whilst HSBC engages in one-off local initiatives with community groups and includes details of the basic account in its current accounts brochure, it does not choose to advertise its 'Basic Bank Account' specifically.[25] In contrast, Royal Bank of Scotland Group,[26] Abbey National, HBOS and National Australia Bank specifically market them, with literature available in branches.[27] The Committee notes the banks' verbal commitment to basic bank accounts, but is disappointed by the limited progress made since the last report. The Committee believes the banks need to engage in more pro-active and innovative marketing if they are to be taken seriously on their expressed commitment and to overcome financial exclusion.
  10. Educating young people in financial matters will help them to make responsible financial decisions, and reduce the likelihood of them becoming 'financially excluded'. HSBC and Lloyds TSB both told the Committee that they actively engage with schools to help educate young people about financial matters, and this is also viewed as an opportunity for selling banking services.[28] The Committee welcomes the banks' involvement in educating young people in financial matters including school visits for that purpose, but believes the setting up of accounts should be separated from that exercise. The Committee recommends that young people should be given a breathing space between an educational visit to a school and the offering of a bank account.
  11. The "Universal Bank", operated through Post Offices,[29] is intended to provide banking services to those people not currently served by financial institutions, often because of a poor credit history. The four largest clearing banks have agreed to make financial contributions towards the running of the "Universal Bank". However Barclays expressed the view that it is an off-balance-sheet tax on its shareholders and customers, though this view was not supported by the other witnesses.[30] The "Universal Bank" does not offer credit scoring[31], as a result it may be difficult for people to graduate from the "Universal Bank" account to a full bank account.
  12. The Committee welcomes the commitment of the major banks to the "Universal Bank", but concludes that the "Universal Bank" is primarily an attempt to bolster Post Office business and to preserve access to pensions and benefits where such access would be lost by Post Office closures. Furthermore the Committee is concerned that this duplicates rather than complements the basic bank account. We believe that the limited scope of services is likely to be of interest to a minority of potential banking customers, and will in practice for the most part be used for those unable to access banking services through a commercial service provider. The "Universal Bank" is likely to be a long-term commitment, as it will not be easy for people to graduate to full bank accounts. Consequently the long-term success of the "Universal Bank" may rely upon the continuing strength of the Post Office network.

    Branch Closures and Branch Sharing

  14. Between December 1995 and December 2000, the major British banking groups reduced their branch networks by 19%, from 13,621 to 11,026.[32] Influenced by public pressure, the four largest clearers have since made public commitments not to close a branch if it is the last in town.[33] The Competition Commission Report recommended an investigation into the feasibility of branch sharing, which could provide competition in areas where it would otherwise be limited.[34] However, the four largest clearing banks were less than enthusiastic about this recommendation. Lloyds TSB were "implacably opposed" to it, and the Chairman of Barclays Bank commented "as a general principle, I do not think we should be required to yield our own facilities to a competitor".[35] Abbey National plc was more optimistic about the scheme and could see "no reason why money transmission should not be an extension of what is happening on ATMs".[36]
  15. The Competition Commission Report noted that there existed a number of practical problems, raised by clearing banks, to branch sharing which would need to be overcome.[37] At present, fulfilling obligations under arrangements designed to prevent money-laundering operations relies on the bank knowing its customers, and this is likely to preclude automatic full access to any branch of any bank without prior arrangement. Some branches may be inundated with customers of other banks, overloading the capacity of those branches to deal with the branches' own customers. A trend towards sharing of branches could lead to more branch closures, as banks increasingly relied on their competitors' banks for counter facilities. The British Bankers' Association (BBA) has launched a shared banking services pilot scheme involving ten branches, with the participation of the major four clearing banks, the results of which will be evaluated at the end of 2002.[38] However this is limited to paying in, withdrawals, currency exchange and bill payment services,[39] and does not cover other services, such as account opening and discussions with managers. The Campaign for Community Banking Services was concerned about the limited scale and scope of this pilot scheme.[40] The pilot scheme only allows for the sharing of branches for routine account transactions, and does not provide for greater competition since customers will only be able to open accounts with the bank owning that 'shared' branch.
  16. The branch closures of the late Nineties have already had a damaging effect. A survey by the BBA showed "10% of these small businesses and other organisations said that it was difficult to reach their branch. But they needed to make frequent, and sometimes lengthy, visits and many said that 'time is money'".[41] The Federation of Small Businesses and the Competition Commission both highlighted the importance of branches to SMEs.[42] For a branch to be economically viable, there needs to be a sufficient customer base in the area. However, given the importance of a local branch to SME's, the lack of a local branch is likely to deter SMEs from setting up in the area and increasing the customer base. This 'Catch-22' situation could therefore hinder economies in areas without a bank.
  17. The Committee welcomes the pilot study into branch sharing, and looks forward to receiving the results of this study. However it is disappointed by the lack of enthusiasm shown by the largest clearing banks, and the limited scope of the BBA pilot study. The Committee recommends that, following the pilot study, the BBA publishes a report on the scope for a more comprehensive range of services to be handled in shared branches. In light of this, the Committee may look further at this matter to review progress. In particular we should welcome examples of bank sharing in areas which have lost all banking facilities.
  18. Post Office Ltd has an extensive network of branches which its Chief Executive noted could "help the banks to increase access to their business banking services, particularly in more remote locations." Abbey National, National Australia Bank and HBOS agreed to engage with Post Office Ltd on this issue.[43] The Committee considers the Post Office network may have a contribution to make to increase access to business banking services.


1   Official Report, 14 March 2002, Volume 381, Col 1015. Back

2   The supply of banking services by clearing banks to small and medium-size enterprises, Cm 5319 Back

3   Treasury Committee: Fifth Report, Session 2000-01: Banking and the Consumer: HC 138 Back

4   Competition Commission Report, Table 2.1, Volume 1, Page 14 Back

5   Formed by a merger of Halifax and Bank of Scotland. Back

6   Paragraphs 2.9 - 2.10 of Competition Commission Report Back

7   Paragraph 2.609 of Competition Commission Report Back

8   Barclays plc, Royal Bank of Scotland Group plc, HSBC Holding plc, Lloyds TSB Group plc, Bank of Scotland, National Australia Bank, AIB Group plc, and Bank of Ireland. Back

9   For the Director General's advice on implementing the remedies, see advice published 14th March 2002. Back

10   Competition Commission Report, Paragraph 2.609.  Back

11   Official Report, 14 March 2002, Vol 381, Col 1019 "The Commission suggests that all remedies be put in place within six months. We hope that the Director General of Fair Trading will be able to reach an earlier agreement on the transitional remedy." Back

12   Competition Commission Report - Paragraph 8.22 Back

13   QQ87-88 Back

14   Competition Commission Report, Table 2.1, Volume 1, Page 14 Back

15   Treasury Committee: Fifth Report, Session 2000-01: Banking and the Consumer: HC 138, Paragraphs 18-24 Back

16   DSS2001-04 Public Service Agreement (PSA) Target 8: " 2004, 85% of customers have their benefits paid into their bank account;" Back

17   Competition in UK Banking: A report to the Chancellor of the Exchequer, March 2000, Cruickshank Report, Chart 4.1, page 106  Back

18   See Table 1 below Back

19   Q326  Back

20   Q331 Back

21   QQ327 - 328 ; QQ206 - 207 Back

22   Financial Services Consumer Panel, Basic Banking Research, Spring 2002 Back

23   Treasury Committee: Fifth Report, Session 2000-01: Banking and the Consumer: HC 138, Paragraph 23 Back

24   QQ209 - 210, BBA Press Notice 23rd April 2002: Response to Financial Services Consumer Panel Mystery Shopper Survey. Back

25   Ev 84 Back

26   Ev 84 Back

27   Q332 Back

28   QQ189 - 191 Back

29   Editorial Footnote: See, for example, Official Report, 18th July 2002, Vol 389, Col 437 - 8 W Back

30   Q200 Back

31   Q219 Back

32   BBA: Banking Business: An Abstract of Banking Statistics Volume 18 2001, Table 5.02 Back

33   . QQ271 - 2. Treasury Committee: Fifth Report, Session 2000-01: Banking and the Consumer: HC 138, Q122 & 422.  Back

34   Competition Commission Report, paragraphs 2.545 - 2.549 Back

35   Q255 Back

36   Q422 Back

37   Competition Commission Report, paragraphs 2.546 - 2.548 Back

38   . Ev 123, Appendix 3 Back

39   "You and Shared Banking Services 2 January 2002 to 31 December 2002" BBA Leaflet. Back

40   Competition Commission Report, paragraph 8.349. See also Ev 135, Appendix 7 Back

41   . BBA Report-Jan 2000 "Banking without Branches" ( Back

42   .Competition Commission Report, paragraph 2.70 & Ev 13 Back

43   Q412 Back

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