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Session 2006 - 07
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European Standing Committee Debates

Competition: Retail Banking



The Committee consisted of the following Members:

Chairman: Sir Nicholas Winterton
Balls, Ed (Economic Secretary to the Treasury)
Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Cunningham, Tony (Workington) (Lab)
Dobson, Frank (Holborn and St. Pancras) (Lab)
Evennett, Mr. David (Bexleyheath and Crayford) (Con)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Hoban, Mr. Mark (Fareham) (Con)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
Mullin, Mr. Chris (Sunderland, South) (Lab)
Neill, Robert (Bromley and Chislehurst) (Con)
Reed, Mr. Andy (Loughborough) (Lab/Co-op)
Wright, Mr. Iain (Hartlepool) (Lab)
Emily Commander, Committee Clerk
† attended the Committee

European Standing Committee

Monday 14 May 2007

[Sir Nicholas Winterton in the Chair]

Competition: Retail Banking

[Relevant documents: European Union Document No. 6238/07 and Addendum 1 and Corrigendum 1.]
4.30 pm
The Chairman: I call the Minister—the Economic Secretary, currently—to make an opening statement. I remind him that the statement should be largely factual and explanatory; I shall deprecate it if it lasts for more than 10 minutes. To those who are desperately keen to get in on the matter, I say that interventions are not taken and will not be permitted during the opening statement.
The Economic Secretary to the Treasury (Ed Balls): Thank you for your helpful guidance, Sir Nicholas. It is a privilege to serve once again under your chairmanship. Tomorrow, I shall again be engaged in discussion of the Finance Bill with my colleagues on both sides of the House. Although those discussions are going well and are ably chaired, they are not chaired with quite the degree of panache with which my first Finance Bill was chaired by your good self in 2005. I look forward to reliving some of those highlights during our discussions this afternoon.
We have before us a scrutiny document on an important study of competition in retail banking by the European Commission. I shall give some context to the work and briefly highlight its key conclusions before we start a detailed discussion. I am sure that hon. Members on both sides of the House agree that delivering a single market in financial services is an important part of our wider commitment to economic reform in Europe, as well as critical to the success of London and the UK financial services industry, which is the largest, most developed such industry in the European Union.
As hon. Members know, creating a legislative framework for financial services in the EU has been a key UK priority under the financial services action plan that was agreed by the European Council in Lisbon in March 2000, from which 42 measures have been taken forward in the past six years. Legislation needs to be well designed, properly implemented and effectively enforced. That enforcement includes ensuring that markets work effectively, which is also part of the wider drive for a single market in financial services. That is the task of competition policy. Recently, the Commission set out its future strategy for financial services in its White Paper, “Financial Services Policy 2005-2010”, and in its recent Green Paper on retail financial services. Both documents highlight the importance of using competition policy to take forward the agenda.
The Commission has competition policy tools that are designed to ensure free competition in the single market. I remind the Committee that in 2004, in developing our strategy for the next steps of financial services integration, we said that EU legislation should generally be a last resort, and that alternative approaches to policy making, such as competition policy, should be considered first. We therefore welcome the increasing use by the Commission of competition policy as a tool to develop the single market further.
In using such tools and against that background, the Commission decided in 2005 to open sector inquiries into two important areas of the financial services industry: retail banking and business insurance. The report of the inquiry into retail banking is the subject of today’s debate. The inquiries are important developments; they make significant contributions to the Commission’s future strategy, as outlined in the White Paper, which named as key priorities the extension into all policy making of better regulation principles, and the strengthening of competition among providers. The inquiries also represent an important element of the Commission’s modernised approach to competition policy.
I shall go into a bit more detail about the report that we will discuss today. Based on regulation (EC) No. 1/2003, the Commission decided in June 2005 to open an inquiry into the retail banking sector, particularly in relation to cross-border competition. The Commission investigated two complementary aspects, with inquiries into the European payment cards market, and into the markets for current accounts and related services. Those are two core areas of retail banking.
Interim reports were published on 12 April and 17 July 2006. The findings from both inquiries were considered together and a final report was published on 31 January 2007, which was then submitted through the usual channels and procedures for scrutiny. The evidence base for the inquiry was provided by detailed pan-European market surveys of issuing and acquiring banks in the payment cards market and banks providing retail banking services to consumers and small and medium-sized enterprises. Both market surveys were based on evidence provided by 250 banks relating to their activities from 2000 onwards.
As Members will have seen in their study of the report, the Commission focused on those two aspects and identified symptoms suggesting that competition may not function properly in certain areas. In particular, it highlighted four key issues it needed to follow up with the national competition authorities: the design and operation of payment systems, including card payment systems such as MasterCard and Visa; credit registers, which provide credit data to banks providing core retail banking products to ensure that they take the correct lending decisions based on a customer’s credit status; co-operation between banks in areas such as setting standards, infrastructure and the operation of payment systems; and the setting of banks’ prices and policies, including product tying. As I noted in the explanatory memorandum, the two most pertinent issues for the UK were payment systems and the setting of banks’ prices and policies.
We hope that the Commission and other member states and their national competition authorities will use the information provided by the inquiry to address any issues that are identified. We have seen that recently. This week, the Commission ordered France to end its grant of exclusive rights to provide tax-free saving to only three of its banks. The sectoral inquiry is already starting to affect behaviour in the European Union and to advance the single market in financial services.
Having made those introductory remarks, I look forward to debating the issues raised by the report.
The Chairman: We now come to what I consider to be the most interesting part of our proceedings. Hon. Members may question the Minister until half-past 5. I remind hon. Members that questions should be brief and asked one at a time. With the attendance we have this afternoon, there is likely to be ample opportunity for all Members to ask several questions.
Ed Balls: If they wish.
The Chairman: Absolutely.
Mr. Mark Hoban (Fareham) (Con): Sir Nicholas, it is a pleasure to serve under your chairmanship this afternoon.
May I ask the Economic Secretary about remarks made on page 10—using the numbering that has been added manually to the document bundle—in which the Commission implies that the biggest barrier to entering the banking market tends to be behavioural? What assessment has the hon. Gentleman made of the regulatory or governmental barriers to new entrants in the markets across the EU generally? I have at the back of my mind the actions of the Italian bank regulator during the proposed acquisition of the Antonveneta bank.
Ed Balls: Let me give a bit more detail of the analysis that underlined the Commission’s report. The Commission identified four areas of concern, which I spelled out a moment ago. On credit registers, the Commission emphasised the importance of reliable credit data, which are crucial to lenders in taking informed credit decisions and lending responsibly. The Commission was critical of the operation of credit registers in some member states, although not in the UK, for their unfair access conditions and incomplete data sharing. The report noted, for example, that in some member states, a lender may be required to hold a banking licence or to have a physical presence in a member state to access the credit register. The report was also critical of high joining and transaction fees for credit registers. Those are examples of how decisions on access to credit registers in states other than the UK can be a barrier to entry and to the effective operation of the single market.
The hon. Gentleman mentioned the decision made by the Italian bank regulator. To put it in a broader context, Abbey National, which would be seen as a UK bank by most of its customers, is in fact owned by a Spanish banking group and is lead regulated by the Spanish banking regulator. We have clearly shown that it is perfectly possible for what are traditionally seen as UK retail banking institutions to be owned and regulated by conglomerates or banking organisations located and regulated in other member states. It is fair to say that that is the exception to the rule so far. In too many other member states, whether for political or regulatory reasons, barriers continue to make such takeovers difficult.
There are signs of change, however. The merger on the table between Barclays and ABN Amro in the Netherlands proposes that the organisation should be headquartered in the Netherlands but lead regulated by the UK Financial Services Authority. That is only one of the proposed options—an alternative bid is before shareholders—and it would be wrong of me to comment further on the deal in question, but it is an indication that further developments might be occurring.
However, I fully understand the hon. Gentleman’s remarks. In the past, cross-border mergers and acquisitions have been actively discouraged by the public comments of regulators. We have found that to be a generally unhelpful stance on the part of other member states.
Dr. Vincent Cable (Twickenham) (LD): I shall start with a simple factual question before coming to the policies. As we are discussing the single market in retail banking apart from takeovers, can the Minister give us a rough approximation of the share of UK retail banking activities accounted for by retail transactions involving European visitors and businesses? What are we talking about in terms of the single market at present?
Ed Balls: I shall notch up the first of what could be a number of factual points that I will set out to Committee members in writing as soon as possible after this debate. I cannot give the hon. Gentleman the precise number. It depends slightly on whether he is talking about European consumers other than UK citizens coming into the United Kingdom or UK citizens banking at institutions owned or regulated outside the United Kingdom.
If it is the latter, as I said, the example of Abbey National shows that a large number of UK consumers are actively participating in the European single market for retail financial services. I can get him the precise number of consumers banking through Abbey National, a Spanish-owned bank. As for the number of non-UK European citizens who access our ATMs and bureau de change facilities annually, I have to disappoint the hon. Gentleman by admitting that that is not a fact that I have brought with me—indeed, it is not a fact that is currently at my disposal. However, as he knows, it is perfectly easy these days for a UK citizen to get money out of an ATM in Paris, Milan, Frankfurt or Lisbon, and it is similarly easy for European citizens who are not resident in the UK to access their bank accounts through our financial services and payments infrastructure. As for the precise number doing so annually, I am happy to write to him regarding that matter.
The Chairman: Does the hon. Member for Twickenham wish to come back on that? He said that his question was an opening question. If he would like to continue, I am happy to call him again.
Dr. Cable: I wanted to pursue the Minister on a related but different policy question. The European study refers to what it calls the free banking/cross-subsidisation model, which is common in Europe, and it means free current accounts. As the Minister knows, that system is coming under a great deal of assault from consumer groups in Britain, who are unhappy with what they call unfair charges. Do the Government, as opposed to the competition authorities, have a view as to whether they want to maintain that system or change it?
Ed Balls: The answer to that is no. I have consistently set out our position, including in replies to many letters from Members of this House from all parties on behalf of their constituents, in recent weeks and months. I know that this issue has been discussed at length and it has caused a great deal of concern. The Government’s view is that it is not for us to have an opinion on the particular pricing model adopted by any individual institution. The key thing is to ensure that the market is operating in an open, fair and competitive manner.
As the hon. Gentleman will know, a few weeks ago, the Office of Fair Trading, having announced an initial investigation into default charges, widened that investigation into the broader issue of charging for current accounts. That investigation is ongoing. I hope, therefore, that he will understand that my approach to that inquiry is to allow the OFT to do its work independently of the Executive, without Ministers commenting on its work. However, I would say one thing further: it is important that there is the widest range of choice and the greatest transparency, and that consumers are properly informed and properly understand the way in which products are being sold.
Basic bank accounts are a banking product available to and targeted at people on lower incomes who otherwise may be unbanked. We continue to work with the industry to pursue our goal of reducing the number of people without bank accounts—incidentally, that figure has fallen from 2.8 million households to 2 million over the last three or so years—and it is important for our financial inclusion agenda that basic bank accounts remain free or without charges for use by those consumers. More widely in the economy, I do not think that it is for Government to have a view. This matter, as the hon. Gentleman knows, is currently being investigated by the OFT.
Mr. Hoban: May I pursue the Economic Secretary’s last point, that basic bank accounts are free? Presumably, on that basis he is happy for an element of cross-subsidisation to exist between one group of customers and another.
Ed Balls: The hon. Gentleman knows that banking is a highly profitable industry. He also knows that while I have occupied the role of Economic Secretary, which Sir Nicholas referred to earlier, I have made the case that a strong and profitable banking industry is vital to the economy. Such an industry is necessary for banks to play their important role in our economy and our society, not only by mediating payments and transactions but in allowing people to save, to diversify their savings and to understand how to access a wide range of savings products and other financial services.
Banks have a wider social responsibility because of the particular and important role that they play. Part of that responsibility is to try to ensure that as many people as possible are included in the mainstream financial system and can access banking products that make sense for them. Provision of basic bank accounts is part of that financial inclusion agenda; it is part of the banks’ wider responsibility. Banks that are profitable can play that wider role.
I do not know the particular pricing model of any particular institution, and it is not for me to know exactly how charging structures operate. However, if the hon. Gentleman is asking whether I think that basic bank accounts might be cross-subsidised by profits from individual commercial banks, my answer is that that would not surprise me, and that it would be highly desirable.
Dr. Cable: The Economic Secretary just referred to the high profitability of the sector, which is fine. Doe he recall that when the Government themselves commissioned a similar report seven years ago—the Cruickshank report—the word “excessive” was used to describe that profitability, largely on the basis that there were aspects of the industry, such as network monopoly, that could not be dealt with by competition and required regulatory activity, which the Government never implemented? Will the Minister say whether the Government have finally drawn a line under that report and will he confirm that they do not intend at any stage to introduce a Paycom mechanism to deal with those monopoly practices?
Ed Balls: The hon. Gentleman knows that there were different aspects to the Cruickshank review, a number of which have been implemented. I shall remind him of them. First, there was concern about the operation of charging for use of ATMs. As a result of the Cruickshank work, the availability of free, non-charging cash machines increased and has continued to increase, and one area in which we are working closely with the banking industry is in trying to ensure that there are more free ATMs in poorer communities across the country.
Secondly, there was concern about lack of effective competition in the small business banking sector. That led, before the introduction of full independence for our competition authorities, to a Government referral to the Competition Commission. The result was a finding that lack of competition was indeed causing higher prices for small firms, and a number of remedies were recommended.
The operation of the payment system was the third matter. As the hon. Gentleman knows, following the establishment by the Government of a payments system taskforce in the autumn of last year, the work on that was completed and a number of changes were made to regularise and in some cases speed up the system as it affects consumers. The new monitoring taskforce is intended to ensure promotion of competition and fairness for consumers.
I can therefore assure the hon. Gentleman that the Cruickshank review has been implemented and that where competition was found to be a problem action has been taken. Both we and the independent competition authorities that we have established will continue to take action.
Dr. Cable: I thank the Economic Secretary for summarising the history. On the specific matter of the report, is he satisfied that Cruickshank’s description of the British retail banking sector as taking excessive profits is no longer valid, if it ever was?
Ed Balls: With respect for the hon. Gentleman, I was not recounting the history, but correcting him on his version of it. I pointed out that his allegation that the Cruickshank report had not been implemented is not founded. I am happy to discuss the history further if that would benefit the Committee.
The answer to the question is that the Government are of course not satisfied that the market is operating in the best way. Indeed, the document highlights some of the areas in which the UK has issues to address. I am happy to tell the hon. Gentleman about the work that we are doing to address those issues. I mentioned the work of the payment systems taskforce and the new Payments Council, which will continue to look at issues in the UK payments system. While the majority of the recommendations on the payments system call for action at the European level, we are continuing to look at the issue in the UK.
The issue of credit registers is not problematic in the UK. On product tying, the document uses the UK as an example of best practice. It highlights the work undertaken by the Competition Commission in response to Cruickshank on the tying of products such as loans and current accounts for small and medium-sized enterprises.
The hon. Gentleman will know that the Competition Commission is reviewing the situation to see whether the Government have made the progress that they intended following its report. Page 77 of the document states that in the UK as well as in
“France, Spain...and Cyprus, more than a quarter of banks’ current account fee income derives from excess borrowing fees”,
which is precisely why the OFT announced on 29 March that it would be widening its look at default charges. Prima facie, there is an issue to be investigated on which there is agreement between the European Commission and the OFT. It is not for me to comment on that inquiry, but I believe that we have a robust competition process that allows us to investigate problems when they arise.
On consumer switching and mobility, the European Commission recognises the important role that switching codes can play in reducing obstacles to switching. Mr. Mike Young is currently reviewing the UK banking code, and in my evidence I raised the issue of switching processes that would encourage consumer mobility.
The hon. Gentleman might also be interested to know that on 6 March the Competition Commission published proposed remedies for competition issues concerning the personal current account in Northern Ireland. The commission expects to publish its final decisions in May. In my evidence to the banking code review, I encouraged it to learn lessons from the Northern Ireland experience for the rest of the UK.
We are not complacent. I shall not say that there are no competition issues but, when it falls to UK authorities such as the OFT and the Competition Commission, action is being taken. The Government are encouraging the banking code review to address some of the issues, but it is not for me to prejudge the outcomes of those investigations—we have independent competition authorities for that reason.
Mr. Hoban: May I ask the Minister about a comment on page 13 of the report, in paragraph 25? It states:
“In the UK, Ireland and Finland, the existence of bilateral clearing arrangements between local banks make market entry more difficult.”
He spoke correctly about the openness of UK markets when it comes to corporate transactions, citing the examples of Santander and Abbey. However, there would appear to be some structural issues in the UK market that might prevent new entrants from gaining access, particularly on the clearing side. Will the Minister comment on the European Commission’s findings in that area?
Ed Balls: As the hon. Gentleman says, the issue of co-operation between banks and the potential, in payments systems or more broadly, to erect barriers to entry was a particular focus of the Commission’s report. In one area, the report noticed in particular that savings and co-operative banks have traditionally had close ties, often running their own payment infrastructures or having joint risk management and protection schemes for deposits. In some cases, the report found across the Union that the regional principle is applied. In other words, a defined geographical area is reserved for the activities of an individual retail bank. The European Commission identified member states such as Germany, France, Austria, Italy and Spain as having issues in that regard that they needed to take a close look at.
In the case of the UK, as I said, that issue has been effectively addressed in recent years through the work of the payments system taskforce. We reached an agreement in November last year that satisfied banks, business and consumer groups on a new model of governance for payment systems, and a codification—in some cases, a speeding up—of payments. We are addressing the issues that the Commission raised, but the new UK Payments Council exists to ensure that if barriers arise, they can be identified. The OFT and the Competition Commission will keep the matter under review.
Dr. Cable: The report makes a strong case for debt pooling of credit registers. There is one major element of debt in the UK that is not pooled, which is student debt. Are the Government considering whether that should be added to the stock of pooled debt data in order to achieve some of the advantages that are being described?
Ed Balls: I think that we may be about to notch up the second issue on which I may need to write to the Committee to give more detail. I do not know the detailed answer to that question, and I do not know exactly how pooling arrangements work in terms of student credit risk. That issue does not fall within my responsibilities, but I am happy to look at it and to give a more detailed response to the hon. Gentleman and to members of the Committee.
The Chairman: May I say that honesty is much appreciated by members of the Committee as well as the Chair? It does the Minister a great deal of credit.
Mr. Hoban: May I return to the Minister’s earlier answer, which addressed many issues, but not quite the one that I raised? Can he confirm whether the payments council covers bilateral clearing arrangements?
Ed Balls: I believe that the reference in paragraph 25 is not correct, and that in 2003, there was a change in this area that has been of benefit to banks and consumers. Bilateral clearing arrangements ceased to exist in the UK cards market in 2003-04, when the market moved from Switch to Maestro. In retrospect, I regret that we did not highlight that point in our explanatory memorandum, although perhaps the reason why we did not do so is that it has just been brought to our attention, and that of the Committee, by the hon. Gentleman.
Dr. Cable: May I ask the Economic Secretary about product tie-ins, which he has already mentioned? He made the point, which the report reinforces, that in the UK there is little direct tie-in between one product and another. Does he acknowledge that that is problematic in relation to mortgages? I guess that mortgages would be classified as a retail product for the purposes of the report, but they are not covered by any form of insurance for the vast majority of borrowers—and the percentage is declining. What is the Government’s view on the matter and how do they propose to address it?
Ed Balls: The hon. Gentleman is, if I understand him correctly, saying that there is not a product tie-in between a mortgage and life assurance. That is an individual decision for consumers. First, although such matters are for the Financial Services Authority as the regulator of the mortgage market, rather than myself, simultaneously it is important that there is competition and choice for individuals obtaining life assurance products when taking out a mortgage. Therefore, although it is open to any mortgage provider to try to sell a life assurance product to somebody getting a mortgage, for that to be explicitly tied—made an obligation on the consumer—would be a retrograde step from the consumer’s point of view.
Secondly, given the complexity and long-term nature of the particular kind of life assurance products that the hon. Gentleman is talking about, the fact that the costs can run for many years and that the terms and conditions can be important in determining whether a product is a good buy for the consumer, it is important that this area is regulated by the Financial Services Authority and that customers are treated fairly by mortgage providers as a matter of principle.
Thirdly, as part of our wider financial capability and advice agenda, we should be encouraging consumers to think carefully about obtaining life assurance. In particular, they should think carefully about the risks of not doing so. The hon. Gentleman raises an important point, but if he is suggesting that product tie-in might be a solution, I would be cautious about that from the consumers’ point of view.
As the hon. Gentleman will know, the Competition Commission is currently investigating payment protection insurance, including mortgage payment protection insurance, following a reference by the Office of Fair Trading. I want to be clear, without wanting to make any comment about mortgage payment protection insurance, that the broader issue of payment protection insurance has raised a number of concerns among consumer organisations that, on the basis of my reading of the evidence, have some strength and validity. The risks of mis-selling are real. The complexity of the mortgage life assurance product is substantial and long term. However, although we need to ensure that this area is properly regulated and people are encouraged to make the right choices, I would not want to encourage explicit ties.
Mr. Hoban: May I refer back to the comments that the hon. Member for Twickenham made about data sharing? He beat me to the punch on student loans, but other data, particularly relating to credit cards obtained prior to the introduction to the Data Protection Act 1998—some quite old credit cards—are not shared well between credit card providers, banks and so on, and a change in UK law is needed to enable them to be shared. Is the Economic Secretary aware of where the Department of Trade and Industry is at in reviewing that matter? He will understand as much as anyone else that if we are able to provide much wider information on individuals, looking back at historic credit card information, there is a better chance of banks and others making better quality lending decisions.
Ed Balls: Following your kind comments from the Chair a moment ago, Sir Nicholas, I am slightly surprised that the hon. Gentleman should suggest that I fudged my answer on data sharing. It was not a fudge; it was very clear in its lack of clarity. I was unable to provide clarity on the issue to the Committee and was absolutely clear in admitting it. I did not mean to fudge the issue; I just said that I did not know the answer. I will write to the hon. Gentleman.
The Chairman: Order. If the Minister is going to respond to the hon. Member for Twickenham, copies of the letter should be sent to all members of the Committee.
Ed Balls: I am grateful for your intervention, Sir Nicholas, on a number of grounds. I am hoping to be able to respond to the hon. Member for Fareham in due course. When I was addressing the hon. Member for Twickenham, I was careful to say that I would ensure that my letter to him was made available to all members of the Committee. That letter will now contain two items. Given that he was the first person to raise an issue that I could not answer, I will put his name at the top of the letter, but I will make sure that every member of the Committee receives a copy.
I can give the Committee an answer on historical data sharing. The DTI has consulted on the issue, as the hon. Member for Fareham said, and will be announcing its intentions in due course. Unfortunately, it has not told me its intentions, and I and other hon. Members look forward to its announcement in due course.
Mr. Hoban: I would hate the Committee to think that I thought the Minister fudged his answer to the hon. Member for Twickenham, as it was very clear that he did not know the answer, and his honesty was commendable.
To change the subject, the European Central Bank is setting up arrangements for a single European payments area, which at present is limited to countries that are members of the euro. I would not want the Minister to think that I am in favour of our joining the euro, but is there any way in which UK citizens wishing to make payments in euros can access the single European payments area?
Ed Balls: I think we may be operating under a misapprehension. As I understand it, the single European payments area is a proposal that is currently being considered. It is an industry project, which is designed to be pan-European in its reach. It would apply to euro payments made across the European Union, not only in countries that are members of the euro. Although the UK is outside the eurozone, the UK-based market for euro-denominated goods and services would be covered.
Like the European Commission, the Government support an industry-led single European payments area, as long as it delivers real benefits in payment services to consumers and businesses. UK banks are already heavily involved in that initiative, and we see commercial opportunities developing. It is very important that this initiative, as in other areas of payment services, is genuinely market-led and involves industry participants. That approach has guided our thinking across the payment services area and also underpins our approach to the payment services directive. It is important to have a pro-competition single European payments area, but it will apply for euro-denominated transactions in securities in the City of London, too.
Dr. Cable: The Minister has already referred to the fact that the Government took up the issue of small business lending with the competition authorities. It was described at the time as a complex monopoly. Are the Government satisfied that after five years of intervention by the competition authorities we no longer have a complex monopoly in small business lending?
Ed Balls: A number of measures were implemented. Those measures are currently being reviewed by the Competition Commission. It would not be appropriate for me as a Minister to comment on its views or pre-empt its judgments, but most commentators say that there has been some progress, but there is further progress to be made.
The Chairman: If no more members of the Committee wish to ask questions we will proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 6238/07 and Addendum 1, Sector inquiry under Article 17 of Regulation (EC) No. 1/2003 on retail banking (Final Report); supports the Government's view that the use of competition policy, via this sector inquiry, is an integral part of developing the Single Market in financial services; and further supports the Government’s hope that the Commission, Member States and National Competition Authorities will use the information provided by the inquiry to address any issues identified.—[Ed Balls.]
5.16 pm
Mr. Hoban: I have some relatively brief remarks to make about the report and the Government’s response to it. We all agree, few in numbers though we are, that this is quite an important debate. We need to look at the barriers to the reduction in transaction costs, recognising that high transaction costs have an impact on families and businesses that are undertaking transactions. By reducing costs, we can increase the volume of transactions and boost economic growth. To achieve that reduction in costs, we need to look at both the demand and the supply sides of the markets in relation to that. The report helpfully looks at various barriers.
If I step back from the detail of the report, there are at least four things that need to be in place to ensure that the markets work effectively. The first is the sense of proportionate regulation, and striking the right balance between providing sufficient consumer protection through regulation to give consumers confidence about transacting in different markets, and ensuring that the cost of regulations does not make products prohibitively expensive or reduce the number of market participants, with the risk that there is insufficient competition.
The second factor is the need to minimise the barriers to entry. We need to ensure that market participants are fit and proper. The Minister referred to the potential takeover of ABN Amro. Obviously there will be a regulatory aspect to that, which is right and proper, but there are issues here. Time and time again, the report points out other barriers across the EU which restrict entry into those markets. It is also fair to say that for the market to work efficiently, both consumers and financial services companies need to have good, reliable information on which to base their decisions. We have touched on one aspect of that already in the context of what the Commission referred to as credit registers, but there is also the information to which consumers need access. Consumers can be bombarded with lots of information as part of the sales process. Often there is so much of it that it hides the very bit of information that they need to help them make the right decision.
The fourth point that I would make on the conditions needed for the market to work efficiently is the need to minimise the barriers to switching so that people can move from provider to provider and do not feel locked into one product provider. That is touched on in the report. Those are the factors that the Commission has used to look at various issues across the EU retail banking market.
Let me comment on some of the areas that the report covers. An interesting table on page 93 shows the cost of account management in various EU member states. Given the current debate on bank charges and default charges, it is interesting to note that the account management charges that UK consumers incur are among the lowest in the EU in the homogeneity of charges. Some might feel that that is because we are operating in a cartel, but the charges for account management appear to be relatively low.
The Minister highlighted the fact, which is pointed out in the report, that UK banks derive a significant proportion of their revenue from default charges. That brings me to an issue that has been alluded to: the review that the OFT has undertaken into current account charges. I welcome the move by the OFT to look at current account charges in the round, because by focusing only on default charges on current accounts, it had failed to give a broad perspective on the charging mechanism. This will ensure that the debate about whether we are going to lose “free” banking in the UK will take place in the context of some solid economic analysis, and I welcome that.
There is a great deal of concern about how changes to the charges will impact on consumers—who will suffer and who will gain. The Minister was right to reassure the Committee that the basic bank account would remain free. In one way or another, such accounts are subsidised by customers with other types of account, and in looking at transparency in charging, we need to recognise that if basic bank accounts are to continue, there will have to be instances of cross-subsidisation at some level in the overall structure of the bank’s profits.
Also on charging, we should bear in mind the lessons to be learned from the changes in the credit card market. When the OFT looked at the default charges for credit cards, it suggested a maximum of £12 as a default charge. The vast majority of banks have suddenly, miraculously, moved to £12. By increasing transparency, all banks appear to have moved to having a cap on default charges for credit cards without there necessarily being any way in which they differentiate themselves from each other.
It is important that customers should be able to look at the different products on the market in order to compare them and to understand which is the best deal. However, given the highly differentiated nature of the market, it is difficult to do that. The existence of sites like uSwitch makes it easier for customers to make such decisions, and to decide whether their current current account offers them the best deal. The availability of information is just one part of the process. If customers want to move their bank account, they need to feel that the cost of switching does not act as a disincentive—I mean the cost not only in financial terms, but in terms of the time that is taken up by moving from one account to another.
The Commission’s report shows the low level of switching between accounts in the United Kingdom. It is hard to understand whether that is down to consumer satisfaction with the existing bank offerings, whether it is just inertia or whether the barriers to switching are quite high. The British Bankers Association has said that the perception of switching is quite a high barrier and that people who have switched once are much more happier to switch their accounts again because they realise that it is easier that they had first thought. However, those who have not switched regard the barriers as high. Has the Minister looked at some of the barriers to switching? It is something that is being considered in the current review of the banking code, but has the hon. Gentleman evidence that particular reference has been made to switching?
The report also covers credit registers. It is an area where we have some strengths, although there are two weaknesses, one being the Student Loans Company debt. To enlighten the Minister further, I inform him that there is conflict among his ministerial colleagues. My sense is that the Department of Trade and Industry is keen for that information to be shared with other financial institutions, but that the Student Loans Company is less keen. It can share default information from the student loan book, but it is not willing to share a wider range of information. Banks and other institutions would like to understand, for example, how a much a student has borrowed to get a better picture of their overall level of debt to enable them to make better judgments. There is a conflict between the role of tackling financial exclusion and indebtedness. Perhaps he would like to bring his colleagues together on that issue, because I am sure that it has been raised with him before by those financial services institutions with which I have discussed data sharing.
As for barriers to entry, the Minister was right to highlight the openness of the UK market when he cited the specific example of Santander acquiring Abbey National, but there is clearly not a level playing field throughout Europe. In one of his earlier answers, the hon. Gentleman referred to the level of co-operation between co-operative banks and savings banks when territorial deals have been struck about which bank operates in which territory. It concerns me that the existing barriers will prevent or discourage more UK retail banking institutions from moving into European markets. They will enable charges in those territories that are so protected to be higher to the disadvantage of consumers and businesses.
Perhaps the Minister can enlighten the Committee about where the locus of activities comes from to remove some of the barriers. Can the Commission take action to remove the barriers? Does it need to take action in the context of specific transactions that are being thwarted by the barriers? If the report is to have any value, some action needs to flow from it. I am keen to understand what powers the Commission will have over the barriers to entry and what action it is prepared to take to remove some of them.
A lot of work has been done in the UK and at European level about credit cards, particularly the interchange fees that are charged. I am not clear from the Commission’s report what further action will be taken at either a UK or a European level to tackle interchange fees. Two things came across in the report. First, a phrase used in the summary was that interchange fees magnify the profits of issuers. That implied that some form of excess profit is being made, if that is the right phrase.
The second is a rebuttal of some operators’ claims that if the interchange fees were reduced, cardholder fees would increase. The Commission’s report suggests that there is no correlation between the levels of interchange fees and cardholder fees, but I should be grateful for the Minister’s comments on that issue, as it affects many consumers and people in the business world.
The report gives a strong feeling that there are significant barriers to a reduction in transaction costs, as well as barriers to entry and issues about the structure of individual markets. Product ties—links between mortgages and current accounts, for instance—have been discussed. I do not get a sense from the report of what the Commission’s next move will be. It discusses examining particular powers under the treaty. The Minister is right to make the case against more legislation, and I fear that that would lead to unintended consequences. However, the report does not give a sense of what enforcement action the Commission will take in lieu of legislation to bring about the solution that we all want—a reduction in transaction costs for businesses and consumers and the completion of a single market in financial services.
5.31 pm
Dr. Cable: Many of my concerns were raised in questions, so I shall not take too much of the Committee’s time. It is a good report in many ways, and there is some good research in it. It is a somewhat oblique way of looking at the British banking industry, because, as the Minister said in his introductory answers, we are dealing with two specific issues. One is bank takeovers, which have so far affected one English bank, Abbey, and might affect Barclays, but do not otherwise directly affect British consumers just yet. The only other issue that impinges on us—I asked the Minister about it, and no doubt he will give me a full answer in due course—is how many individuals conduct their accounts across borders. I suspect that the number is rather small, but I await his answer with interest.
On the report’s substance and policy, I think that we all have a somewhat ambiguous attitude to banking. On one hand, banks are buccaneering companies in the City that help to make it successful with foreign exchange earnings and all the rest of it; on the other, we have a sense of the British consumer feeling that they are being ripped off by the retail banking sector. Reconciling the two different perspectives is often difficult. I find that the banks with which I deal often get testy at criticism of their retail banking operations. I think that they expect to be seen as business heroes delivering for Britain.
In terms of the big picture, I sought when reading the report to reconcile it with the analysis done seven years ago in the Cruickshank report—a very professional and thorough piece of work commissioned by the Chancellor. Although the Minister rightly summarised a variety of action points that have been taken, I remain dissatisfied with two elements.
The first is that the Cruickshank report analysed what it regarded as “excess profits”. I know that that is a loaded phrase with all kinds of radical, rather Trotskyite implications, but Cruickshank was the chairman of the stock exchange and would not use such phrases recklessly. He believed that there were excess profits and in his analysis calculated the rate of return that one would expect an industry to earn over a long period based on its level of risk. Based on the banking industry’s level of risk, he concluded that in their retail operations, the big commercial banks were earning profits of up to £5 billion a year more than one would expect from a simple economic calculation of that kind. As far as I am aware, that order of magnitude remains to this day. The banks are very sensitive to that criticism; they get very angry when one talks to them about it. However, the criticism remains.
In European Commission’s report, I looked for some guidance as to what had happened in the ensuing seven years. The report looked at the profitability of banks, but in relation to income, not in relation to capital employed, which is how one would need to look at it. It seems that there is a question about what has happened since Cruickshank’s report and whether his conclusions are still valid or not.
I have a second concern. The Minister is quite right that there has been a lot of specific initiatives, such as those in relation to cashpoints and most recently the inquiry by the OFT into current account charging for overdrafts; we have also had inquiries into credit cards and so on. However, much of that process has been piecemeal in character. Arguably, banks that have faced difficulties in one aspect of their business have simply shifted their profits into other activities. What the Cruickshank report asked for and ultimately did not get was the overview provided by a regulator. Cruickshank advocated the concept of a body such as Paycom, which would not have been concerned simply with regulating the payments mechanism, but would have examined the retail banking sector as a whole. That appointment never happened. As a result, we have had a series of piecemeal initiatives, all of them potentially productive, but none of them has given us an answer as to whether the sector is delivering better value for money for customers.
Apart from those general points, I would like to make three specific points. The first is in relation to the mobility of accounts. The hon. Member for Fareham is absolutely right that this is a critical issue, because if competition means anything we must be able to switch from one account to another fluidly. That does not happen. There is a table on page 91 of the bundle, which gives the length of time that people stay with their banks. In the UK, the average is more than 10 years. It is often said that people stay with their banks longer than they stay with their marriage partners. I do not know whether that is true, because I do not know the average length of a marriage in the UK. Speaking for myself, I have been happily married for more than 30 years, so I am perhaps not a good model in this instance. However, I have been with the same bank for more than 40 years, so I suppose that the general proposition is still true.
In many ways, the reason why we stay with our banks, even though they are often infuriating and make us deal with these talking Daleks whenever we try to transact business, is that the practical problems of changing and dealing with regular payments and all the associated inconvenience keep people with their banks, even if the service is highly inefficient. As a result, the market does not work. I therefore welcome the initiatives being made to investigate mobility.
Mr. Hoban: Does the hon. Gentleman not think that some things are built into the system that discourage mobility? If he were to apply for a loan, one of the questions on the form would be how long has he been with his bank. I think that that encourages the sense that the longer one is with a bank the better one’s credit rating is, and to move regularly from bank to bank might have a negative impact on one’s credit rating.
Dr. Cable: The hon. Gentleman is absolutely correct. Indeed, that is one of the mechanisms that the banks build into the system to keep their customers. Sheer inertia and the practical problems associated with mobility are also influential. I would hope that the investigations into the banking code produce good answers to the kind of problems that he has described, which are artificially imposed on mobility.
Secondly, in questions I asked about debt pooling. A good theoretical and practical case is made in the report for maximising debt pooling, both to promote competition and to strengthen the consumer. I hope that the Government will consider how they can contribute to that process in respect of those debts that they have information on.
Thirdly and finally, I would like briefly to develop the point that I made about product tying. The Minister is right that it would be anti-competitive to encourage banks to tie products together. I cited the example of payment protection insurance in relation to mortgages. None the less, we have a problem. As a result of good competition policy, banks are being discouraged—in some cases, prevented—from linking large loans to insurance. However, we are entering a period in which, for wider economic reasons, growing numbers of people will have difficulty servicing their mortgages. There is already evidence of growing default rates, albeit at a fairly low level. Changes that were made in the mid-1980s mean that there is now no safety net other than insurance. It is no longer possible to go to social security, so without insurance there is no protection.
The question is whether there are other ways in which the Government can promote insurance without encouraging a lapse into old habits of product tying. There might be ways of doing that by talking to the industry and by creation of stakeholder-type products that would encourage people to insure themselves. An unintended consequence of good competition policy might in practice have been a backwards step, with people taking out very large loans for which they are completely uninsured.
5.42 pm
Ed Balls: The debate has been wide-ranging, and I am happy to respond to the points that have been made. I mentioned almost all of the issues that are particularly pertinent to UK follow-up to the report in my opening remarks and during questions.
The Government recognise the importance of interchange fees, which were not discussed during questions, but which were raised by the hon. Member for Fareham in his speech. The Commission’s report suggests that multilateral interchange fees contribute significantly to card issuer profits and might be set at unjustifiably high levels, and it states that anti-trust enforcement action may be appropriate. The hon. Gentleman will be aware that such enforcement activity is already under way: the Commission is investigating MasterCard’s European cross-border interchange fees, and a decision is awaited. In the UK, the OFT, as well as co-operating with the Commission and with national competition authorities, is investigating the UK interchange fee arrangements of MasterCard and Visa. I cannot comment on the details of those investigations, but there is clear activity, and I hope that that reassures the hon. Gentleman that the report is leading to action.
In my introductory remarks I referred to the Commission’s already having taken action in recent weeks in France, where it is has ordered an end to the exclusive right of three banks to offer tax-free savings accounts. It took the position that that restriction limits competition and violates business freedoms. The hon. Gentleman will also be aware from pages 16, 17 and 18 of the report that a number of steps are proposed at the European level—not just in enforcement and in the single euro payment area, but on credit registers, which the Commission is currently examining in relation to the European mortgage market. It is also considering price setting and policy in relation to mobility.
A range of activities are happening at the European level, and I have referred to a number of issues in the UK on which action is either under way or under consideration. I shall not recap now, except to address the specific points mentioned by hon. Members.
I have said that I shall write to the hon. Member for Twickenham, with a copy to all members of the Committee, on the issue of financial inclusion and student debt. I shall speak to colleagues at the Department for Education and Skills, who have the lead on the issue, to make sure that we respond to the point made by the hon. Member for Fareham on data sharing.
As I said in my opening remarks, switching arrangements are currently being investigated in Northern Ireland and the Competition Commission is consulting on proposed remedies there. In my evidence to the banking code review, I encouraged it to look at the lessons that could be learned from the Northern Ireland experience so that we could promote greater financial understanding and transparency and make consumers aware of the choices available to them.
The hon. Member for Twickenham referred more broadly to profitability in the banking industry, but there was a certain amount of confusion in his remarks. The Cruickshank report recommended having a payments system regulator, but that is quite different from having a regulator for the banking industry and banking profits more broadly. We have taken the Cruickshank recommendations forward through the work of the payments taskforce and the new standing committee that looks at the payments system, which I mentioned earlier.
Inevitably, arrangements are not as streamlined in banking and other industries as they are in telecommunications, for example, where there is a single, price-regulating regulator, or in the gas and electricity industries. Our approach until now, which I think is the right one, is that the banking industry does not need to be regulated as a utility and that the normal process of competition law and the competition agencies should prevail instead. That, of course, is what is happening across a range of areas, and I hope that that will address the issue of mobility.
I am disappointed on the hon. Gentleman’s behalf that, to him, the banking industry representatives to whom he has talked on the telephone resemble talking Daleks. I do not know what particular misfortune overcame him—perhaps when he told them that his name was Dr. Cable, they replied, “Dr. Who?”
The hon. Member for Fareham mentioned the importance of competition authorities bearing down on barriers to entry and of having the right regulatory balance. He also mentioned the uSwitch website, although I do not know whether he was referring to a new website encouraging Conservative party members and Members of Parliament to switch to the Labour party, given the impending election of a new Labour leader. The time for such a uSwitch website may indeed have come; we shall see.
We have discussed how a single market in financial services and particularly retail financial services can deliver a better deal for consumers and a stronger European economy by creating a more competitive and efficient cross-border environment for banking. I hope that hon. Members will agree that the Commission report and the pro-competition and market-led approach and thinking that underpin it make a positive contribution to those objectives.
Question put and agreed to.
Resolved,
That the Committee takes note of European Union Document No. 6238/07 and Addendum 1, Sector inquiry under Article 17 of Regulation (EC) No. 1/2003 on retail banking (Final Report); supports the Government’s view that the use of competition policy, via this sector inquiry, is an integral part of developing the Single Market in financial services; and further supports the Government’s hope that the Commission, Member States and National Competition Authorities will use the information provided by the inquiry to address any issues identified.
Committee rose at eleven minutes to Six o’clock.
 
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