Examination of Witness (Question Numbers
104-147)
Sir Donald Cruickshank
30 November 2011
Q104 Chair:
Welcome to the Committee this morning. Thank you very much for
coming through the weather to give us a chance to hear what you
have to say on this very important subject. I'd like to begin
by asking you a simple question: do you think that in the retail
market we can get genuine competition, adequate competition, without
much higher levels of price transparency?
Sir Donald Cruickshank:
Mmm. Oh dear—
Chair: That was a bigger
pause than we had from the Chief Executive of the FSA when we
saw him last week.
Sir Donald Cruickshank:
Can I take one point or assumption you have made in your question,
which is what we mean by effective competition. I think for a
market to work well we need four or five things to be in place.
One is that most of the participants need to be able to trust
most of the people most of the time, and frankly we don't have
that in banking. Whether we should have is another matter, but
we don't have it as we speak. We need to be, as customers, secure
that our property is not going to be expropriated—that is,
lost—and there are definitely issues surrounding that point
with some of the longer term products, annuities and insurances.
That is not what we're talking about today, but nevertheless it
is what banks do as well as provide current accounts. It has to
be easy—and this comes to your question—to get the
information about what is available at what quality. That has
to flow freely and openly. For various reasons we don't have that
in most of the markets that we are talking about here. Arguably,
the only market in which we have that is deposits, by individuals
depositing money where the information about the return and the
terms are easily available.
So there is something about banking products, and
banking markets, which make it difficult for us ever to conclude
that we will have effective competition, as I have just defined.
So the question is: what do we do about these inherent market
failures? We regulate, is what we do, and the question is whether
we can get that regulation to operate in favour of the customer—
that is, pile regulation on top of competition law. But then we
come to the second problem with the banking sector which is prudential
regulation. Up to this point in my answer I could be talking about
telecoms, electricity, healthcare or whatever, but with banking
we have to build in the difficulties that we have in making the
trade-offs between effective competition, service or consumers
and the need of the economy and all citizens to have a systemically
sound banking system.
So the answer to your question is: there are a number
of things we can do but, for the markets we are talking about
here, we are never going to get anything that an economist would
say was effective competition.
Q105 Chair:
So we are going to be defeated?
Sir Donald Cruickshank:
We must battle on, and transparency—
Chair: But you have told
us—like the First World War general—that we must keep
on going up that hill but it is not take-able.
Sir Donald Cruickshank:
We can improve our position. The 2000 report said, essentially,
"Look, as Chairman of this Commission, there is no point
in me digging into the precise terms of credit card penalties
and suggesting changes there, because if I do that the banks will
say, 'Oh okay', and they'll change the credit card penalties and
then do something else which will generate the same level of profitability
and arguably no better service". So I said, "Let's look
at the fundamentals. What is going on here? There is a regulatory
contract between the banking system, those who manage banks, and
the state. The underlying mechanics of banking are part of the
state. We allow agents, called 'banks', and their managers to
do the job for us but the deal is—or should be—you
deliver systemic soundness and you, the banks, are allowed to
make super-normal profits and pay yourselves lots of money".
That's it essentially.
So what we should focus on is how to get that balance
right. We didn't have it in 2000. We made recommendations as to
what we might do about it, which by and large were ignored. We
have the problem again today, which is why, in my paper, I say
nothing much changes.
Q106 Chair:
Just in parentheses—I say "in parentheses", but
it's a very important thing to clarify—you say that the
banks' collective objections, that we're still looking at this
after a great deal of work has been done, they say, are unfounded.
Broadly speaking, you're saying that we are in roughly the same
place on the hill. If we have moved up, we've moved up only a
fraction of the way required to secure competition. Is that right?
Sir Donald Cruickshank:
I think that's right. I note in my submission that, since I did
this, there have been 15 competition investigations into various
aspects of it and—
Q107 Chair:
These are abnormal times for short-term interest rates, but in
normal times do you think supplying customers with the difference
between base rates and the interest rate that they're charged
on their account, with the sum worked out as the difference on
an annual statement, would give them some indication of whether
their current account is competitive?
Sir Donald Cruickshank:
Yes.
Q108 Chair:
Do you think we should encourage banks to go down that road?
Sir Donald Cruickshank:
I have never found encouraging banks to do anything was very effective,
but yes.
Chair: Coerce?
Sir Donald Cruickshank:
Why don't consumers pursue banks for that information themselves,
because they have a right to? Frankly, if you were able to read
the 23-page document you get about the terms of your current account—and
they send you a letter every six months saying how it's changed—and
if you were prepared to make that effort you could find out. However,
why do people not make the effort?
Chair: Actually, you can't
find out. I've asked my bank that exact question and they tell
me, "We don't supply it".
Sir Donald Cruickshank:
Did you accept just one rejection? I'm sure you didn't.
Chair: I wrote them another
letter saying I was shocked and disappointed, to which I was told
I can enter a complaints procedure.
Sir Donald Cruickshank:
Let's not exchange stories about banks because perhaps it tells
too much about ourselves, but the last time that happened to me
I said, "Right, I'm leaving", and I had two of them
around the table in my study within three weeks.
Chair: You and I are unusual
activists.
Sir Donald Cruickshank:
Yes, but it tells a tale. What they're frightened of is losing
customers, particularly current account customers. So the key
to getting more transparency is to make it easier for you and
me and everyone else—
Chair: Yes. Dealing with
switching and dealing with the inertia.
Sir Donald Cruickshank:
Exactly. If we deal with switching and inertia then the banks'
information systems will have to improve to maintain customers,
and we will find it easier to get information about the various
products they sell.
Q109 Mr Mudie: You
may have answered this, Sir Don, but you speak so softly I lose
you at points in the conversation. From the consumer's point of
view, has anything changed for the better since your report came
out?
Sir Donald Cruickshank:
I'm sorry, it's a little time since I've been in front of a Select
Committee, so I apologise, George.
Mr Mudie: We'll see you
in 10 years then, the next time.
Sir Donald Cruickshank:
No, no, this is my last submission. I haven't stayed on top of
the detail over the last decade—I have been doing other
things—but I would aver that things are slightly better.
It is easier to switch. Information surrounding choices on making
deposits and on credit card terms, and so on, is better. But,
as far as I can judge from limited statistics, what we find is
that people are still not switching. Sixty per cent. of them are
still taking the first service that is offered to them instead
of shopping around. So it is a little better but not as much as
we could achieve.
Q110 Mr Mudie: Can
I slip in a question that the Chairman doesn't have on his agenda.
From your look at the retail banks, why are the investment banks
so keen to keep their link up with the retail banks when they
have so little in common, in terms of attitude and objectives?
Sir Donald Cruickshank:
Historically, and I am now talking about the last 10 years since
Bâle II—or is it Basel II around this table?—we
effectively sold the pass internationally then, by allowing the
banks to determine their own capital requirements using their
own risk models. That's a bit of a caricature but that is essentially
what we did. We are now retrieving that but that's essentially
what we did. That enabled the investment arms of the multiple
business banks to multiply enormously the capital that was generated
by the retail arm of that bank and to deploy it in all sorts of
funny ways, trying to make gold out of lead essentially. I think
that is why they've been so keen to keep multi-business banks
in place.
Q111 Mr Mudie:
But you say that in the past tense. Is it still relevant? Is Mr
Diamond aching to get his hands on the retail side of the bank
rather than the investment side?
Sir Donald Cruickshank:
I think even after Bâle III has finally come to determination
that will still be true, even though the quantum and the multiples
of capital that the head of the investment bank will have to deploy
will be significantly less than they have had over the last decade.
I put in my paper—and John Vickers has spelt out—how
over that decade the gross assets and liabilities of the banks
multiplied four-fold, 400%ish, at a time that the economy
grew 35% in nominal terms. That was Bâle II feeding through
right down to bank managers and mortgage dealers, and so on. That
has been retrieved to an extent, but in my view there will still
be a determination among the boards of the major banks not to
be precluded from any line of business that they choose.
Q112 John Thurso:
Sir Don, I want to ask you about market concentration. Can I first
ask you a slightly wider question: we're looking at competition
and the basic assumption is that competition is a good thing,
but what actual outcomes are we looking for as a result of competition?
Sir Donald Cruickshank:
We're looking for a banking system that operates at a lower cost
to the economy as a whole, but enables the rest of the economy
to be more efficient. Remember that banks are intermediaries—that's
all they are. They have access to various flows of money—some
from the state, some from depositors—and they deploy it
in different ways. So what we are after is the total costs of
the banking system being lower for the greater benefit to the
overall economy. Classically, the competitive pressures, if they
are there, will force the players in the market to be more efficient,
to be more innovative, to do things at lower cost and at a higher
service level and to get things right first time instead of second
or third time. So that's what we're looking for in the banking
sector.
Q113 John Thurso:
How might that manifest itself for the individual consumer?
Sir Donald Cruickshank:
It would manifest itself in the lower cost of borrowing. It would
manifest itself in higher rates of interest on deposits. It would
manifest itself in the bank getting more things right first time,
with fewer direct debits going astray. If you want to switch it
would actually happen without any anxiety on your part. If you
are a small business it would manifest itself in being able to
use any branch of any bank to deposit your takings overnight,
so that you were free to bank with any bank you chose. That's
how it would manifest itself.
Q114 John Thurso:
Coming on to market concentration, there has been a considerable
concentration in the market through the crisis. Is there a correlation
between those increased levels of concentration and the lack of
effective competition?
Sir Donald Cruickshank:
In my view, a lot less than is commonly thought. I don't know
what the precise numbers are today, but I would aver that there
is less concentration in the provision of services to retail customers
than there is in supermarkets, sports rights and a few other things
I can think of.
Concentration, number of players, market shares,
are not the issue here: it's the dynamic of the market and the
ease with which customers can move from one supplier to another
which are key,. That is not to say that new entry isn't to be
welcomed. It's not to say that the competition authorities need
to be constantly scrutinising those who occupy a dominant position—I
guess that would be Lloyds and RBS, probably, and maybe Barclays
as well in different markets. So, yes, let's have new entry and
competition scrutiny but, crucially, let us—either directly
via Parliament, or indirectly via regulators—have measures
which will improve what I call "the dynamic", that is,
the ease with which customers can make choices.
Q115 John Thurso:
You are making an interesting point that was made to me very recently
by one of the banks you've just mentioned, which was that, if
you walk up the high street, you will not have difficulty in finding
10 providers of current accounts. That was not the issue; it was
more about the way that the whole sector worked rather than the
number of providers. I think that is essentially what you are
saying as well.
Sir Donald Cruickshank:
My ambition, and it was in 2000 that Gordon Brown let me down—or,
rather, Treasury officials got in his way. Can I rephrase that?
Treasury officials stopped it. Ministers are not always in control.
I would like to be able to say that you walk down that high street
and, because you know something about the bank you see across
the road, you should be able to walk into that bank and say, "Would
you please take my current account from the bank down there",
and they would do the money laundering stuff and they would say,
"Yes, done". At the moment you can't do that.
John Thurso: Would you
see that as the single biggest—
Sir Donald Cruickshank:
I think that is the single biggest thing you could do, and that
takes us to the rather arcane subject of money transmission systems:
who runs them and their incentives in running them the way they
do.
Chair: We are going straight
on to that now, I hope.
Q116 Michael Fallon:
In your paper you say control of the money transmission system
is a major source of the banks' capacity to earn super-normal
profits. Four paragraphs later you say it's the subsidy of cheap
money that helps them make super- normal profits. Which is it?
Sir Donald Cruickshank:
Both.
Michael Fallon: It's both?
Sir Donald Cruickshank:
Yes. The subsidy that goes into the banking system enables the
system as a whole to make super-normal profits, and in most markets
that surplus return at rent would be competed away. Why isn't
it competed away in banking, uniquely? Because it's so difficult
for us, as customers, to get the information and, on that information,
exercise choice at no cost to us.
Q117 Michael Fallon:
How do you measure a super-normal profit?
Sir Donald Cruickshank:
That's a very good question in banking. Superior returns on equity,
which are earned persistently over long periods and are often
associated with pricing that is not cost-reflective, with information
problems, and so on. It is all the characteristics of an uncompetitive
marketplace. When you come down to individual banking markets,
it is very difficult to calculate that number because of the way
the banks manage themselves and because they are in so many lines
of business.
Q118 Chair:
Are you talking about provisioning?
Sir Donald Cruickshank:
No. In order to make the statement, "You are making a super-normal
profit", you need two numbers: you need the profit and you
need the capital deployed to earn that profit. Calculating the
profit is not easy but it's easy-ish. Making a statement about
the capital that needs to be deployed to run that business is
not easy in banking. The bankers find it difficult, so you and
I are going to find it almost impossible.
Michael Fallon: You are
sure that the profits are super-normal?
Sir Donald Cruickshank:
They certainly were then and as far as I can judge without redoing
the calculation—notwithstanding the crisis of the last few
years, and according to my definition, which is persistently over
long periods of time, although they've had one or two mortgages
for instance that were difficult—I would say, "Yes".
Q119 Michael Fallon:
Nationwide in their submission described the UK banking market
as effectively a mature, low growth market. That's not what you're
saying.
Sir Donald Cruickshank:
I am, and the paradox is that in a mature, low growth market they
can make super-normal profits. This is the question that those
who want to do something about this have to crack.
Q120 Michael Fallon:
Why do you think nothing happened when you recommended this 10
years ago?
Sir Donald Cruickshank:
I don't know how many of you have even read bits of my report,
but the most important bit of it is the interim report that spelled
out how the FSA should be set up. That fell to parliamentary timetables
and the unwillingness of Treasury officials to even attempt to
implement it, or even properly to inform Ministers what it was
I was about. I know that's a severe accusation to make of officials
but that is the fact of the matter.
Q121 Chair:
Do you have documentary evidence to support that, Sir Don?
Sir Donald Cruickshank:
I have my own diaries of events. I have a copy of the job description
of an official who was tasked with making sure that the interim
report was not effected. I have a record of meetings with senior
officials.
Chair: It would be very
helpful if you could set out in writing what you can recall of
these events, not as some sort of elaborate post-mortem but designed
to enable us to assist in making sure that as the City is re-regulated
now, as the FSA is reformed, we get it right this time.
Sir Donald Cruickshank:
On page 317—there is no need to put it in the record here,
but it is interesting—it says: "FSA should be responsible
for making the trade-off between regulatory and competition outcomes.
Financial services should not have unnecessary exclusions from
UK competition law".
Q122 Chair:
Should competition be one of the objectives of the regulator?
Sir Donald Cruickshank:
Yes, if there were one regulator. It's not enough to give the
CPMA a competition objective. We also need clarity in the system
about who makes the trade-offs when prudential regulation clashes
with the outcome that a competition regulator would like to see.
Are we coming back to that?
Chair: We are hoping so.
Sir Donald Cruickshank:
Those who are asking simply for a competition objective for the
CPMA have only gone halfway, and I hope John Vickers can go the
whole way on this one. When I was doing it—because, to quote
you, the FSA was "the leviathan"——we could
have integrated this trade-off within the FSA but the Treasury
refused to do it.
The second thing they did was that, in the March
budget Gordon Brown stood up in the House and said, "We will
legislate on money transmission systems". It didn't happen
because Treasury officials persuaded Ministers that some—I
don't know what it's called—Payments Council, meeting under
the auspices of the OFT, could do the job. Total nonsense. So
that didn't happen. Then there were some other second and third
order statements, which are in the Government's response to my
report, which again didn't happen. But these are the two big ones:
they got the FSA wrong and they got money transmission systems
regulation wrong.
Chair: Very helpful evidence.
Q123 Mr Ruffley:
I was struck, Sir Don, on re-reading it, by how insightful your
2000 review was. You've updated us and, whether or not profits
are super- normal, I think we can all agree that the money transmission
system is something that needs to be addressed. You put it rather
well: "Would we allow Google to manage the internet? No,
never. So why do we allow banks acting in concert almost absolute
control over the money transmission systems, over which all financial
transactions take place?" I think that's the nub of it, and
for clarity I just want to return to some of the answers you gave
a few moments ago.
If you were to be advising the current Chancellor
of the Exchequer now, what would you advise him to do regarding
the transmission system?
Sir Donald Cruickshank:
I would advise him to give the CPMA both the competition objective
up front, and also give it powers to license money transmission
systems—a licensing regime, in other words. It would be
a class licence. It wouldn't need to be specific to the different
systems, and in the legislation I would give the CPMA objectives
on using their powers under that licence, and they would have
sanctions, a bit like Ofcom has. It varies over the utilities,
but wherever there is a network there is an authority that licenses
activity and has sanctions: in the internet it's an informal one,
in telecoms it's very formal, but it is the same thing.
In the legislation they would have obligations to
pursue—and I have just listed a few things here—price
transparency; governance; fair, reasonable and non-discriminatory
access to these systems; efficient wholesale pricing; barriers
to switching and fair trading generally. These are the headings
of what would be line items in the legislation. So it would be
a specific capacity of the CPMA to license, scrutinise and sanction
the money transmission system operators.
Q124 Mr Ruffley:
Could you just give an estimate—and you probably need advance
notice of this question—of the costs of putting that new
regime in place? What should be the objective in terms of cost?
Sir Donald Cruickshank:
I ran Oftel—albeit in simpler times—with maybe 30
or 40 people in this area. We are only talking about 10 or 12
licensees ever, because it is one of these situations where if
there is a network everybody has to be a member of it, so that
simplifies things no end.
Q125 Mr Ruffley:
Final question, if I may, Chairman. You've undertaken to give
to the Committee some of the documents you mentioned in connection
with Treasury opposition some years ago—
Sir Donald Cruickshank:
Well, not many documents. I'm prepared to set out not just my
recollection but the facts of the matter, plus recollection of
meetings and notes of meetings, yes.
Mr Ruffley: Sure. I think
we will read them with interest, but could you give us a sense
of what the Treasury objection is institutionally? Whatever it
was a few years ago, it is probably likely to be the same today.
What do think their big problem was with your recommendation?
Sir Donald Cruickshank:
Because by the time I reported on money transmission systems the
FSMA, the Act, had become a fact. Then I had to say there should
be another body that should be legislated for, and the Treasury—like
today, this getting rid of quangos never ends, does it?—just
fell away from the thought of generating the energy and the political
time in the House to create another regulator.
However, this time, because the CPMA is not yet in
place and the legislation is not yet before you, I suspect it
is simple to put no more than two or three clauses into the legislation
to give effect to something that the Treasury just couldn't face
up to in 1999-2000.
Q126 Mr Ruffley:
Do you think this is the number one, most important, change that
is within the power of the Government at the moment to improve
banking competition?
Sir Donald Cruickshank:
For retail banking, and by "retail" I mean current accounts,
deposits, secured lending, unsecured lending and money transmission
systems—these are the five markets I'm talking about, although
there are a lot of other things in the legislation they have to
get right—
Mr Ruffley: But this would
be the big one?
Sir Donald Cruickshank:
For the purposes of what we're talking about today, yes.
Q127 Andrea Leadsom:
Sir Don, I'm delighted that you are talking about this. I just
want to go back to the money transmissions systems again. It seems
to me that this is a complete revolution in retail banking. For
years it has been a puzzle to me why, as a retail customer of
a bank, if you want to change your bank account you have to unset
up all your standing orders and direct debits, go somewhere else
and sort it all out again, running the risk that you won't pay
your mortgage or your credit cards on time, and so on. It has
always seemed bizarre to me. It would make a lot more sense if
your bank account stays with you and you just change your sort
code if you wish to switch provider, and likewise your mortgage
account. Why does that have to be started again from scratch?
So I do think what we're talking about here is an absolute revolution
in retail banking, and I think that in one fell swoop it would
literally change the competition situation in retail banking.
Can you comment on that? Do you think that it can be as radical
as that?
Sir Donald Cruickshank:
My judgment is that it would change how well bank managers slept
at night, and I think that's radical. It would focus on current
accounts. I think straying on to mortgages, in particular, is
difficult. Because the current account is so important to the
bank, because of our inertia, and their opportunities to sell
on other products—some of which we're not talking about
today but insurances and the like—and it is so important
to the bank to have you as a current account customer, breaking
that hold, or rather making it absolutely clear that they had
to serve you well, clearly and faithfully, would make a huge difference.
Q128 Andrea Leadsom:
Would you agree that it would also reduce barriers to entry, because,
at the moment one of the biggest reasons for not going into the
UK retail banking marketplace is simply because of the inertia
of customers? Your possibility of building a new brand is extremely
long term and costly, whereas if customers could instantly change
bank then, presumably, that would persuade new entrants into the
market?
Sir Donald Cruickshank:
The cost of acquisition—to use a marketing phrase—of
a new customer would drop dramatically and it would make effective
marketing more viable. It is astonishing, if you think about it,
that brands as strong as Tesco, Virgin and Marks and Spencer haven't
been able—
Andrea Leadsom: Aren't
there.
Sir Donald Cruickshank:
They are there, but over the course of 12 or 14 years they haven't
been able to make any real inroads here. I may say it took the
FSA 17 years to give Terry Leahy a banking licence, but hopefully
that will change.
Q129 Andrea Leadsom: Do
you think that it would also increase customer confidence in the
banking system if they felt that they could literally move with
their feet—that they could march out the door and go somewhere
else the very next day?
Sir Donald Cruickshank:
Yes. The Chairman gave the example of him personally trying to
get information from the bank. It would make it far more difficult
for the banks to hold and hide information, and they would just
have to be far more forthcoming. On the high street anyway—let's
not talk investment banking—it would improve trust.
Q130 Andrea Leadsom:
In terms of the cost, in your earlier review did you look at the
costs to banks of trying to create a system that would allow the
consumer to take their bank account with them?
Sir Donald Cruickshank:
No. Number portability, which you all enjoy now in telecoms, was
something that I drove through in the 1990s, first on the fixed
line and then mobile. In each case the estimates of the cost were
huge. You could get an engineer sitting in front of a body like
this demonstrating how expensive it was going to be. However,
if you drive it through, that same engineer is delighted to have
the challenge and the costs are trivial. The engineers get at
it, they are legitimised to get at the issue and in today's world
they should be able to deliver it very easily. I would go further:
they should be able to deliver it in ways that are cost saving
for the bank, as well as service improving for us.
Andrea Leadsom: Thank
you.
Q131 Mark Garnier:
Sir Don, I want to turn to new entrants to the banking system.
You state in your written submission that it is telling that we
seem to have had only one new high street bank in the last 100
years, and that was this year. Why do you think that is?
Sir Donald Cruickshank:
It used to be because there was a catch-22 in the FSA's rule book,
which was that in order to become a bank you had to be a bank.
Now, I caricature not much—I can't find the page but the
actual rule is quoted in the report somewhere—and I'm not
sure whether that rule has gone or not. So although Virgin, Tesco
and all the others were branded as being in the banking industry,
the actual licence was held by an organisation that had a bank—RBS
typically—either as a majority shareholder or as a significant
shareholder with a shareholders' agreement. So that was an obstacle.
The capital requirements for a new bank were more onerous than
for an established bank, and that drives the cost of the new bank
up because of the way it works through deposit taking and lending.
Access to money transmission systems was a problem, although I
think that is less so now. Then there is the point that Andrea
made about the costs of acquisition of a new customer looking
cripplingly high.
Q132 Mark Garnier:
One of the areas that I would like to concentrate on is this regulatory
process because I think there are a lot of business cases as to
why it is difficult—for example, you don't arrive with a
readymade branch network. I think we all accept that that is one
of them. But where the FSA can make a difference is important.
We had the FSA in last week and they were saying, rather breezily,
that it was relatively easy for people to get new banking licences,
and there are three ways you can do it: you can acquire another
bank, and do with it what you want; you can set up a new division
of a bank; or you can do it from scratch. Certainly, anecdotal
evidence that I've come across is that it is very difficult to
get a new bank registered from scratch and although the FSA say
it's possible, it takes seven to eight months. But you do have
these endless catch-22 situations, such as you need to capitalise
it before it becomes a bank, which means you then have an expensive
non-operating business. What I want to get to the bottom of is
this: do you think that the FSA in its actions is hindering new
banking companies coming into the market, or do you think they're
doing a fair job of trying to regulate them in a fair way, and
in a way that encourages new banks to come into the marketplace?
Sir Donald Cruickshank:
I find it very difficult to answer that question, because I haven't
been associated with any new bank and I haven't read the updated
rule book in detail. It is an aggregation of small adverse detail
that makes effective entry difficult. There is a big welcome sign
above the door, but there are gates and hurdles and costs before
you get there. So I couldn't give you an authoritative answer
to that.
Q133 Mark Garnier:
But your sense is that it is difficult?
Sir Donald Cruickshank:
My sense is that the welcome sign has gone up but some of the
gates and barriers are still there. But to take you back to a
point I made earlier, new entry would be healthy but I don't think
we should be taking risks with a series of introductions into
the banking sector. Do those of you who are old enough remember
the secondary banking crisis? Personally I don't think new entries
is a big part of the solution, and I would be recommending that
the FSA should still be careful, but hopefully not as blindingly
obstructive as they were. Effectively, the rule book said: "It
is difficult to be satisfied that an applicant, which is not supported
by an established deposit-taking institution, i.e. a bank, should
be licensed to take deposits". I suspect that may have changed
but that is the sort of problem, or versions of it, that I think
banks still face.
Mark Garnier: Thank you
very much.
Q134 Mr Umunna:
Sir Don, can I just ask you about the mutual sector and, first
of all, whether you believe that the consolidation between some
of the mutuals has led to increased competition in the retail
sector?
Sir Donald Cruickshank:
I think the demutualisation process was helpful. The problem was
that the competition authorities and the Government allowed so
many of the effective ones—like Halifax and Woolwich—to
be taken over by the established banks. So it was a lack of proper
competition scrutiny of the takeover of the Woolwich that was
the problem, not demutualisation. So the concentration has resulted
from failures of competition law, or application of competition
law.
Q135 Mr Umunna:
Do you not believe there is a benefit in having that model available
to the customer to go to for its service provision, in the sense
that a mutual is quite different from a bank? Historically they're
well rooted in the communities they serve; there is a form of
democracy, if you like, in the sense that it is member—as
opposed to shareholder—driven, and there are certain benefits
in that. It seems to me that, as a model, it has fallen behind
somewhat.
Sir Donald Cruickshank:
Mutuals are banks; they are licensed banks so the difference is
in the governance. I think mutuals are absolutely fine as long
as they are mutuals. What did "mutual" mean in the 19th
century? It meant that one group of people were depositing and
being lent to, and they were being treated equally. Today a mutual
means that there is a deposit-taking process, which is open to
anyone, and then there are different classes of people to whom
you lend money, including commercial lending by and large. That
drags you away from proper mutuality in the sense I think you're
talking about it; it puts the board and the governance of an organisation
into a different mindset and set of legal obligations to its depositors
from the original mutualisation idea. But I think that can be
accommodated and, as far as I can see, Nationwide and the others
do it rather well.
Q136 Mr Umunna:
What do you think are the main consumer benefits of the diversity
that I'm talking about? Do you think I'm going down the wrong
avenue here and do you not think there is a benefit in having
this increased diversity in the market for the consumer?
Sir Donald Cruickshank:
Diversity is good as long as conditions of mutuality are real
and not just a brand. Then, yes, I welcome it.
Q137 Mr Umunna:
Presumably you'd agree that those mutuals that didn't diversify
into more complex financial products weathered the global financial
crisis reasonably well?
Sir Donald Cruickshank:
They did but then so did some of the mutuals who were in commercial
lending and buy-to-let lending, and so on. There were a few—Dunfermline
springs to mind—but not very many who became insolvent.
Do I have that the right way around? Dunfermline had a liquidity
problem because it was wholesale borrowing rather than the actual
business being insolvent. That's right.
Q138 Mr Umunna:
There is somewhat of a discussion that is brewing as to what to
do with Northern Rock and Bradford and Bingley going forward—and
it may be that the Banking Commission expresses a view on this—but
it's my own strong view that we should give serious consideration
to remutualising them. Do you have a view on that?
Sir Donald Cruickshank:
No. I'm not sure how you would do it. The mechanics of it escape
me as we speak. I would personally be indifferent as to whether
the business of Northern Rock was floated as a separate entity
on the markets, was created as a new mutual or, indeed, was sold
to a new entrant.
Q139 Mr Umunna:
Can I just ask one last question, Chair. I have been reflecting
on how things have changed since you carried out your investigation.
We find ourselves at the moment in a situation where many people
in my constituency, and I think there are about 1.75 million people
in the country, who fall into a lower income demographic and,
as such, do not have access to basic banking services. For example,
one of the things I find in my constituency is that this has driven
people into the hands of loan sharks and dreadful doorstep lenders.
Going forward, what one thing do you think we can do to ensure
that those 1.75 million people do have access to basic banking
services and aren't driven into the hands of these unscrupulous
lenders? In some sense, there is a tendency to drift into discussions
about more complex matters pertaining to the City and the way
it works, and the different parts of macroprudential regulation,
but this is a very basic thing, which is relevant to millions
of people, and it seems to me we haven't got it right.
Sir Donald Cruickshank:
I don't think anything has changed from my chapter on this in
the report. We concluded here that what we call "the basic
banking service" would provide a perfectly acceptable return
to the banks if they provided it. It is something that the CPMA,
if armed with licensing of money transmission systems, could help
with enormously, because that would push the banks towards more
cost-reflective pricing of current accounts, and it would emerge
that basic banking service was a perfectly reasonable thing for
them to be doing. Therefore, the CPMA, armed with these powers,
would be able to investigate and promote sanctions on those banks
that were refusing to offer it. So, buried away deep in this money
transmission system are all sorts of potential public goods, and
making it easier for a basic banking service to be provided to
that 1 million-plus people would be one of them.
Q140 Mr Love:
Can I come back to the question Mr Umunna asked earlier, about
consumer benefit of diversity. I wasn't quite clear, but I thought
you indicated that you felt there was a consumer benefit for real
mutuals. Is that your view—while accepting that some of
the mutual movement got into severe difficulties, including Dunfermline,
and a number of them, as a consequence, have had to merge or be
taken over by other, usually mutual organisations? What can we
do to protect the essence of mutuality that delivers that consumer
benefit?
Sir Donald Cruickshank:
I have to put my hands up and say I'm not at all sure. I would
need to think about that. I just can't think about the process
of the regulatory action that would be needed for new mutuals
to be created, or if we were in some way to hamper the members
of a mutual from becoming a non-mutual, which is what happened.
So I'm afraid I can't be at all helpful on that.
Q141 Mr Love:
Let me ask you a slightly different question. Do you think that
regulators understand mutuals, because often the complaint is
they're very experienced when it comes to ordinary share capital
companies but they don't understand the rationale for mutuals?
Sir Donald Cruickshank:
Again, I couldn't comment. I would challenge your assumption that
regulators understand banks. Frankly, that is part of the problem,
so if it is exacerbated by this extra layer of complexity surrounding
a mutual I can understand why it's an issue. I'm sorry, but I
cannot be helpful on that.
Q142 Mr Love:
I understand, and I'll just ask you one final question. Much of
the mutual movement—and indeed right across the financial
services sector—is suggesting that when it comes to changing
the Financial Services and Markets Act, whereas it used to have
regard to competition, it should now have regard to diversity.
Then perhaps, because they had that as an objective, it would
mean that the regulators focused more on understanding how mutuals
work. Do you think that would help?
Sir Donald Cruickshank:
I'm going to say something quite scurrilous now. Every time Parliament
enters a plea that a regulator, or some independent body, should
have regard to something it may satisfy the Members who are pursuing
that but it means nothing to the regulator—absolutely nothing.
So unless you have the statutory objectives right, the "having
regards to" have a trivial impact on the way they behave.
The regulator can go about his business under the threat of judicial
review, which is what you're always under. Perhaps it is not scurrilous;
I see lots of nodding around the table.
In any legislation with which you're associated,
if you really want something to happen, never let Treasury officials
or anyone else get away with the phrase "have regard to".
Get the statutory objectives right, and if you really want to
pursue something get it in there.
Q143 John Thurso:
Can I just ask one supplementary question. In this country we
have a model where the basic current account is free, and therefore
the cost of banking is hidden in a series of cross-subsidies.
Should we look at charging for current accounts and, if that were
desirable, how does one achieve it since if only one bank chose
not to it would destroy the others?
Sir Donald Cruickshank:
With the current regime, where the banks have a joint complex
monopoly interest in obfuscating the cost of a current account,
because it's so important to them, I don't think a regulator could
tackle this, and get into determination of prices and the transparency
that would be helpful. If we had a licence system for money transmission
systems, and one of the obligations under that licence was cost-reflective
pricing, that would push the banks towards charging the actual
cost of running different sorts of current accounts. When I say
"different sorts", I mean current accounts with different
incidence of direct debits, cheques, deposits and complexities.
You would get something close to free if you were a good customer
and didn't give them any problems, while there would be a high
price for those who gave them systematic issues. But the money
transmission system regulation would promote that and I think
that's the most effective way of doing it. It would still be enormously
difficult, because the cost to the banks of running a current
account depends crucially on how much money you have in it.
Q144 John Thurso:
Can I ask you to comment on how desirable it is? Is it something
that we, and regulators, should pursue as an objective or is it
a distraction from the bigger picture of the money transmission
system that you have been talking about?
Sir Donald Cruickshank:
I think cost-reflective pricing—to use the jargon—is
a good thing for consumers. Those of us who want to use cheques
could pay for it, instead of being told in six years' time we
can't use cheques at all. Nonsense. Those who don't want cheques,
or can find other ways, will have a cheaper bank account. So I
think cost-reflective pricing is good for consumers and in the
long term it would be good for the banks as well. Their resistance
to anything that will erode the inertia surrounding current accounts
will be enormous.
Q145 Chair:
Can I just come back to a point you made earlier? In one of your
answers you threw out a challenge yourself that we need to sort
out how the regulators will reconcile the requirements of prudential
supervision on the one hand, and regulation to stimulate good
business conduct and competition on the other. In a nutshell,
could you say how you think the authorities should answer your
own challenge?
Sir Donald Cruickshank:
They, or the legislation to be precise?
Chair: In this case it
would be legislation in consultation with the Bank of England,
which is why I used the word "authorities".
Sir Donald Cruickshank:
Yes. The legislation needs to be clear about the "how"
and the "who" in relation to trade-offs. That is what
was missing in the last decade. This MOU between the Treasury,
the FSA and the Bank was useless, as it turned out. So giving
the CPMA the competition objective—
Chair: Why was it useless?
I'm not disagreeing with you; I just want you to clarify why it
was useless.
Sir Donald Cruickshank:
There are a number of reasons. It allowed the Treasury to pretend
that the Bank and the FSA together could deal with systemic issues.
It didn't make it clear to the Bank what authorities it would
have operating independently of the Treasury, or what resources
it might reasonably ask for or create to do that job. It ignored
the fact that the FSA was flawed in its strategy objectives and,
therefore, in the way it worked and the way it was led. It was
just sitting there waiting for a problem, in the full knowledge
of Treasury officials that when there was a problem it would end
up on their desks in the Treasury. In a sense, that is what you
would want, but it didn't end up on their desks in a timely way.
It should have been on their desks a lot earlier, if it had been
clear about who was responsible for what.
Chair: I apologise for
diverting you from the question, which was the answer to your
own challenge.
Sir Donald Cruickshank:
The CPMA with the statutory objective to promote competition—we
used more precise wording in 2000, "to minimise the impact
of prudential regulation on effective competition"—is
the way it would have to be framed for banking. But may I say
as a preamble that I do not understand what is being proposed;
the Treasury's consultation document is very weak. To the extent
that I do understand it—that there is a political determination,
in particular, to give the Governor of the Bank these authorities—then
it should be clear that it is the Bank of England, not the PRA,
the FPC, or the CPMA, that has the authority to make the trade-off.
That technically, I guess, would be the Governor and the Court.
However, I would note that the Treasury can instruct the Bank
of England on anything except monetary policy. So there is a line
of accountability right back to the Treasury, but that is a political
issue as to how much you want to leave with the Governor of the
Bank of England and how much you want to formally give to the
Chancellor.
Q146 Chair:
Just to be clear, in the trade-off between prudential regulation
and competition, the Governor, being in charge of the Bank of
England as a whole, should be responsible for deciding how that
trade-off—
Sir Donald Cruickshank:
Making that trade-off, yes.
Chair: With ultimately
the Treasury being responsible because they can instruct the Bank
on everything except the work of the MPC, and even that with an
override?
Sir Donald Cruickshank:
Yes, that needs to be made clear.
Chair: Andrea Leadsom
has one burning question. If she can ask it in one sentence and
you can answer it in one sentence, we will take it.
Q147 Andrea Leadsom:
It is very relevant to what you were saying, Chairman, and it
is simply this: if the CPMA is to have a statutory competition
objective, how will it enforce that? Do you envisage it carrying
out its own investigations and then making recommendations to
a committee of the Bank of England for action?
Sir Donald Cruickshank:
My experience of statutory objectives is that precisely what they
are influences the behaviour of the leadership of the organisation.
That would be the real impact. The technicalities of how trade-offs
are made and whether references are made to the Competition Commission
are secondary. It means that the leader of the organisation has
the statutory objectives in front of him or her when they're thinking
about the judge and the challenge from a consumer's council, or
whoever it is. That is what would happen, and that is what was
missing in the last seven or eight years up to 2007-08.
Chair: Sir Don, your evidence
today has been extremely valuable to us and we are very grateful
that you have come in. Perhaps there will be things that you have
heard today that have stimulated further thoughts on your part.
If you do have any, please, do get in touch with us. We may, in
any case, be coming back to you in writing for points of clarification.
As I say, we are very grateful to you for the work you have put
in on this subject over many years. Thanks for your evidence today.
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