Examination of Witnesses (Question Numbers
148-294)
Eric Daniels, Helen Weir and Patrick Foley
7 December 2010
Q148 Chair:
Order, order. Welcome to this hearing of the Treasury Select Committee.
We have quite a number of questions to get through and I am hoping
my colleagues will help by asking brief questions and certainly
brief, direct answers would also be valuable.
I would like to ask initially a question to Helen
Weir. You told the commission that the vast majority of your customers
do not pay anything for their current account services. What proportion
of customers do end up paying for their current account services?
Helen Weir: Approximately
30% of our customers will pay fees associated with overdraft because
they make use of an overdraft. So about 30% of our customers use
an overdraft. About 70% of customers don't go into overdraft at
all, therefore effectively they have credit balances in the account.
Q149 Chair:
When you use the word "paying" do you exclude the money
that in a normal year they make of net interest credit?
Helen Weir: In
that particular context I was talking specifically about fees
and overdraft interest. Clearly there is—
Chair: So they do pay?
Helen Weir: —an
interest foregone. For a typical customer with an overdraft balance—about
70% of our customers will have an overdraft balance of less than
£1,000— they will typically pay, in foregone interest,
about £5 a year currently.
Q150 Chair:
That is at the moment, what about in a typical year?
Helen Weir: Yes,
and if the base rates went back to 3.5% they'd pay about £35
a year of foregone interest.
Q151 Chair:
What is the overall cost of running a typical account?
Helen Weir: The
cost of a current account is quite significant, as you'll appreciate.
There are a number of services that go along with that. Typically
the cost of the branch network, the cost of providing ATMs, cheque
facilities, the debit cards, so there are a number of services
that go along with the current account. I think a number of people
have looked at the current account market, a number of regulators,
and found that overall customers in the UK get a good deal compared
with other countries.
Q152 Chair:
That was not what I was asking, though, all I am asking is what
proportion this 35 is of the total cost?
Helen Weir: Sorry.
That would barely cover our costs of running a current account.
Q153 Chair:
We are still not really getting to the answer to the question.
Why don't I try asking it a different way? The OFT report said
that the total revenues on personal current accounts was £8.3
billion in a normal year, that was 2006. That is a figure you
are familiar with?
Helen Weir: Only
from the OFT report, obviously, I don't see—
Q154 Chair:
And the OFT report showed that net credit interest was half that,
almost exactly 4.1 billion. Are those figures similar to your
own bank's?
Helen Weir: The
foregone credit interest would be approximately half of the total
income on personal current accounts. The typical amount a customer
pays for their current account, including foregone interest, is
approximately the same as a cup of coffee a week, which is significantly
lower than, for instance—
Q155 Chair:
Let us have another go at going around these numbers. There is
£4 billion coming in on net credit interest according to
the OFT, out of £8.3 billion of total revenues coming in
on PCAs, personal current accounts. You are saying that your ratio
is roughly the same as those overall figures for the industry.
But you have just told me that in a normal year you only collect
£35 of net credit interest, so therefore the figure that
you should be giving me for the total cost is £70, twice
the £35.
Helen Weir: I'm
sorry; I didn't follow your logic. Could you please repeat that,
my apologies?
Q156 Chair:
Well, let us start again, I will have one more go and if we do
not get anywhere you will have to write to us or come back again.
There is £8.3 billion coming into the industry, about half
of that is derived from net credit interest, £4.1 billion,
you have told me that your ratios are pretty much the same as
the ratios between those two numbers for the industry. You have
told me this morning that you, in a normal year, only obtain at
your bank, on average, £35 from each current account?
Helen Weir: £35
from a customer that is in credit. That's the foregone interest
was the £35.
Chair: That is the foregone
interest?
Helen Weir: Yes.
Q157 Chair:
So what is your equivalent figure for the net credit interest
figure given by the OFT in their report, the £4.1 billion?
Helen Weir: It's
approximately equivalent to our broad market share, so that's
between 25% and 30% of that number.
Q158 Chair:
What does each customer on average pay? What is represented by
that for each customer, roughly?
Helen Weir: Of
the foregone interest?
Q159 Chair:
Yes. How much is each customer on average paying in interest foregone
on his current account, on average at Lloyds?
Helen Weir: It
depends on obviously what the interest rates prevailing in the
market are.
Chair: In a normal year.
Helen Weir: In
a normal year that £35 that I was talking about.
Q160 Chair:
That is the £35 figure? So we are back where we started.
Helen Weir: That's
the foregone interest for customers in credit.
Q161 Chair:
In which case the figure for the total value of personal current
account revenues, on average per account at your bank, is £70
a year?
Helen Weir: You're
talking about all customers, sorry?
Eric Daniels: Yes,
including all charges.
Helen Weir: Including
all the charges.
Chair: Yes.
Helen Weir: Yes,
not just customers in debit, sorry.
Q162 Chair:
It is £70. Are you making profits on a standalone basis from
your current accounts?
Helen Weir: Our
current accounts are profitable but not excessively so. So there
are no abnormal profits. We're getting a hurdle benchmark rate
of return on the capital that's employed in that business. So
it's not excessive on that product.
Chair: I think we may
have to come back to you for further information on some of these
numbers.
Helen Weir: Absolutely.
Chair: Because I think
there still is some confusion between us, even though I am using
the figures that are published by the OFT. We might come back
to it later in the hearing. Jesse Norman.
Q163 Jesse Norman:
Thank you, Mr Chairman. Can I just ask you to remind me, Ms Weir,
how many current account customers you have?
Helen Weir: We
have about 24 million current account customers, including 5 million
social banking customers.
Q164 Jesse Norman:
So if you have a market share equivalent of net credit interest
you would have about 25% or 30% of that, say £1.25 billion
of net credit interest?
Helen Weir: There
or thereabouts, yes.
Q165 Jesse Norman:
There or thereabouts across 24 million customers, so that is the
way of working out what the average amount is?
Helen Weir: Yes,
but don't forget not all of those customers will be customers
in credit.
Q166 Jesse Norman:
No, but if we were trying to work out what the total amount of
money derived per customer, for someone who is in credit or not?
Helen Weir: For
foregone interest, yes.
Q167 Jesse Norman:
Then there would be charges on top of that?
Helen Weir: For
customers who are in overdraft there will be account charges which
will vary depending on their usage of the overdraft and also interest.
Q168 Jesse Norman:
What is the aggregate amount of additional charges that you raise
on those 24 million customers?
Helen Weir: The
income on current account splits broadly 50/50 foregone interest
and charges and fees.
Q169 Jesse Norman:
Right, so it is roughly about £2.5 billion in total from
those 24 million customers.
Helen Weir: Thereabouts.
There or thereabouts.
Eric Daniels: But
I would clarify that would be in a normal year. We're hardly in
a normal year.
Q170 Jesse Norman:
No, no, absolutely. I am just trying to get a sense of this. That
is helpful we may come back to that.
Can I ask, given that the true cost of current accounts
is not visible to 70% of your customers who you use "free"
banking, how are the different firms competing against each other
in this part of the market?
Helen Weir: I think
on a current account there are a variety of different ways in
which firms compete. For most customers the cost or otherwise
of the current account is not the most important thing, it's the
availability of branches, the availability of ATMs that they can
use, the other services that we provide, the service they have
in branch and a variety of other things of that type are the main
areas that cause customers to choose. If you look at the factors
that customers take into account when they're looking at the choice
of current account providers, price is relatively low down because
it is a relatively inexpensive product. As I say, the average
cost to a customer is approximately the same as a cup of coffee
each week, so significantly less than many other things that they
use.
Q171 Jesse Norman:
Do you think there is a case for separating out the payment transmission
in order to allow more, as it were, current account portability?
Helen Weir: A different
question. I think in terms of account portability, I'm not sure
about separating out payment transmission, I think there are a
number of ways in which portability can be improved or switching
can be improved. That said, I think the experience of customers
today in terms of switching has been significantly improved already.
We have a switching service where we have individuals who are
allocated to particular customers who will switch all the direct
debits as a named contact. Typically the greatest problems arise
with non-financial services companies in terms of switching; so
switching direct debits from utilities and other third party services.
Q172 Jesse Norman:
But you are committed to making that happen, effectively?
Helen Weir: Absolutely
committed to making that happen.
Jesse Norman: Thanks.
Helen Weir: Just,
if I may, on the point of portability, there are a variety of
forms that portability can also take. There's the very—an
absolute portability where sort code and account number and so
forth all get ported, but there are a number of other results
or a number of other approaches that could be taken which would
have a similar kind of result. So I think there are a variety
of different options there. The first that I talked about is probably
the most expensive and that's a cost that probably would ultimately
be borne by the customer but I think there are a number of other
approaches to account portability that could be used. We are very
committed to improving the account switching.
Q173 Jesse Norman:
Thank you very much. We are very short of time, just a very quick
question for Mr Daniels. It has been suggested to this Committee
that it might be helpful as a regulation of the banking sector
if executives were paid in subordinated debt rather than in equity,
is that a view you would support?
Eric Daniels: Subordinated
debt rather than equity. I think that was the suggestion from
Lord Myners and from others. I think that what is important is
that the idea that executives should be paid at the market, in
other words it should be a market based set of pay, first, second
I think that the concept of deferral so that we can recognise
whether there was a additional risk taken over a more extended
period is important. The actual instrument, whether it's debt
or equity, I think is a lot less important. I think the principles
are—
Q174 Jesse Norman:
But you recognise the point the Governor of the Bank of England
made to us, which is that there is an implicit subsidy in having
an equity compensation scheme because it encourages people to
ratchet up the debt in the balance sheet knowing that they can
take—
Eric Daniels: No,
I'm not quite sure I agree that. I think that there are pros and
cons to each kind of instrument and there's not a one-line answer.
What the thinking had been among many banks was that, and many
companies—it is not simply banks—that by having more
equity in the compensation programmes that it would align the
executive with the shareholder so that they would be more aligned.
That had been the prevailing thought, whether it was an industrial
company or a bank.
Q175 Chair:
Just before I pass on questioning to John Thurso, back to Helen
Weir for a moment. You have been prepared to tell us what you
are deriving in revenues from current accounts, why not tell each
individual customer what they are getting?
Helen Weir: Well
we are as of next year going to be disclosing on the statement
the amount that each customer is paying in terms of the various
items that they are incurring in terms of charges, interest and
so forth.
Q176 Chair:
So that they can arrive at a bottom line for the revenues you
are deriving from their account?
Helen Weir: They
won't have all the information but they will know what they're
paying.
Q177 Chair:
What information are you withholding?
Helen Weir: They
won't understand the cost of funds. They won't have that information
but beyond that, yes.
Q178 Chair:
In that case we will then be able to introduce some price-based
competition into current accounts, will we not?
Helen Weir: I would
argue that it is a very price-competitive market right now. Santander
is offering £100 to get customers to switch. There's a lot
of competition going on in that market already.
Q179 Chair:
Yes, that is because there is inertia once clients are obtained.
It has nothing to do with ongoing competition. People cannot tell
what price they are buying a product at in any subsequent year,
can they?
Helen Weir: I think
most customers would have a pretty good idea of what they're paying
for their current banking, certainly our research—
Q180 Chair:
How much do you pay?
Helen Weir: In
terms of my foregone interest, quite a bit of money.
Q181 Chair:
But you do not know?
Helen Weir: No.
Chair: But you are expecting
most customers to have a pretty good idea and you are the Chief
Executive and you do not know. I think that is, if I may say so,
a ludicrous remark. The overwhelming majority of people do not
have a clue and that is one of the reasons why we are engaging
in this investigation.
Helen Weir: And
that's one of the reasons also why we're committed to making that
information available on our statements next year.
Q182 John Thurso:
Thank you, Chairman. Mr Daniels, I wanted to ask you a couple
of questions about the comments you made in the article in the
FT on 25 November, but can I first ask regarding the parts of
the group that have to be sold off to meet the requirements of
the European Commissioner. Did you consider the possibility of
taking the Bank of Scotland and hiving that off, not Halifax but
just the Bank of Scotland? If not, why not?
Eric Daniels: Yes,
what we did when we were negotiating with the European Commission
was we presented a series of alternatives to them and then worked
together with them collaboratively to try and arrive at a solution.
Q183 John Thurso:
Was that one of the alternatives?
Eric Daniels: What
we presented to them was, again, a variety of alternatives.
Q184 John Thurso:
Was the possibility of the Bank of Scotland becoming a discreet
identity one of those alternatives?
Eric Daniels: I
don't believe that was an alternative considered.
Q185 John Thurso:
Why is it that is so important whereas the TSB branches in Scotland
you are happy to—or prepared to see go?
Eric Daniels: I
would hardly term the divestiture as happy.
John Thurso: Yes, I did
correct myself.
Eric Daniels: But
what I would say is that one of the things that's terribly important
to us is the brand identification by our customers. The Bank of
Scotland is a very powerful brand in Scotland, it's a 300-year-old
name and the customer identification with it is very strong, and
we thought that that in fact was a brand that had more resonance
with the Scottish customers than the TSB brand.
Q186 John Thurso:
Coming back to what you said, you responded to Clare Spottiswoode's
suggestion that the Independent Banking Commission might reverse
the whole merger, really by saying the present Government should
honour the promises of the last Government. Why do you think that
is particularly important?
Eric Daniels: Well,
I didn't respond specifically to Mrs Spottiswoode's comment, I
basically said it is what it is. It was an introductory remark
that she had in the public hearing. In terms of how I feel about
the current arrangement, very clearly what happened during the
economic crisis or the banking crisis was that there was a thought
that HBOS could in fact go down. It was in very, very bad shape,
as we all know. I think the prevailing thought was at the time
that were it to happen—and this was on the heels of Northern
Rock having gone down and having seen the disruption that could
cause—that it was a far preferable thing if a bank were
able to take it over and have continuity of service and not have
the pretty dramatic implications of a bank being either brought
into Government ownership, or falling.
On that basis the Secretary of State introduced a
new criterion which basically said that the concerns about stability
were paramount and then Parliament in fact agreed with that and
passed that.
John Thurso: Reluctantly,
I was on that statutory instrument.
Eric Daniels: I
beg your pardon?
John Thurso: Very reluctantly.
Eric Daniels: I
can understand that, but nevertheless it was passed by Parliament.
So on that basis we went ahead with the deal. Now this never was
meant to give us a permanent waiver for competition, on the contrary
all the rules around competition still prevail, whether it's market
abuse or use of size and so on. Those are still very much—we
are subject to them, as is every other bank, and there has been
to date no issue with the competition authorities.
Q187 John Thurso:
Looking at that point of competition, if the independent commission
were to come back and say that there is sufficient evidence to
say that Lloyds Banking Group is too big and in the interests
of competition it should be further reduced in size, what would
your response be to that?
Eric Daniels: I
think that's a hypothetical question. We are just, at the moment,
giving evidence to the International—Independent Banking
Commission, excuse me, and I think it's very premature to judge
an outcome. What I will say is that this is an enormously competitive
market and I'm not sure that dividing banks up further will give
any better outcome. As you suggested, we are already divesting
a fair number of branches and current account share, and that
will lead to the creation of the seventh largest bank in the UK.
I think every independent study has shown that UK consumers get
a top quartile, or at worst a second quartile, value deal and
that concentration does not lead to lack of competition. In other
words, the UK, as many other concentrated markets, are very competitive.
I think if we look at the discounting that happens, that is one
of the signs that the OECD uses to determine how competitive a
market is, and this is a market that discounts very heavily indeed.
John Thurso: Thank you.
Q188 Mark Garnier:
Thank you, Chair. Carrying on from this point, Mr Daniels, just
looking at these numbers. You have personal current accounts;
you have a 30% market share leader; savings account 13%, number
two in the market; mortgages 28%, number one in the market; unsecured
personal loans 25%, number one in the market; credit cards 29%,
number one in the market. Do you know what your investment products
market share and market position is?
Eric Daniels: We
would certainly be among the top three, I don't know exactly.
Q189 Mark Garnier:
Maybe not number one. SME business?
Eric Daniels: SME
we would be among the top three again, but not number one.
Q190 Mark Garnier:
So definitely not number on in either of those two?
Eric Daniels: I
don't believe so.
Q191 Mark Garnier:
It would be very helpful if you would get back to us on that.
Talking about putting a lid on competition is just a nonsense
really; you have this monumental dominant market share on just
about every area. How can you possibly justify being the biggest
bank in everything or nearly the biggest bank in everything?
Eric Daniels: Well,
in the first place I'd be very happy to get back to you with our
market position on both SMEs as well as investment products so
we'll write to you separately. But again, I think as I was saying
before, this is a very highly competitive market and—
Q192 Mark Garnier:
How? How is it competitive?
Eric Daniels: Well,
if I may? We really have five different markets, if you will.
If you take the mortgage market, for example, there are about
60 competitors. Over half of mortgages are basically sourced through
brokers, through IFAs. So what happens is the IFA industry, which
is very large and, again, accounts for over 50%—
Q193 Mark Garnier:
The IFA industry is about to be—
Eric Daniels: Excuse
me, I'm sorry.
Mark Garnier: The IFA
industry is about to be constricted as a result of RDR so presumably
you see RDR as now being anti-competitive?
Eric Daniels: I'm
not quite sure what form the RDR will take yet but if I just may
continue for a second.
Mark Garnier: Yes, sorry.
Eric Daniels: The
independent broker determines which is the best deal for the customer,
and in fact mortgages are very, very competitive. There are, again,
60 different providers. If—
Q194 Mark Garnier:
Sorry, I do apologise for cutting across you, but if you have
30% of the personal current account market, one of the great advantages
of having this big ownership of the current account market is
that you have access to 30% of the market. You have 28% of the
mortgage market, those numbers are pretty much identical and you
are both dominant market share. How can you possibly say that
it is IFAs that are going out and sourcing these things when you
can get in touch directly with 30% of the market through those
current accounts and go straight to them and sell them a mortgage
product? What is the correlation between current account customers—the
correlation coefficient I want—and mortgage customers?
Eric Daniels: It's
very low; it's at less than 25%. What is very typical in this
marketplace, and again I know it's a lengthy answer but this is
a complex subject, there are five different markets. It's personal
loans, mortgages, current accounts, savings and credit cards.
Each one has different competitors, each one behaves differently.
The cross-over among them is very, very small. So I think that
if we were to look at a typical consumer it would be very normal
for them to have a mortgage with one bank, a credit card with
yet another and a current account with a third institution. That's
very normal behaviour.
If we look at the comparisons, if you look at Europe
and other international comparisons, the concentration of a customer's
wallet—in other words the number of products they buy from
an individual institution—is much higher in Europe than
it is in the UK because customers shop around for different banks,
different products.
Q195 Mark Garnier:
Can I ask you what the correlation is then between personal current
accounts and investment products?
Eric Daniels: Personal
current accounts and investment, I'd have to look it up, I don't
have it to hand.
Mark Garnier: Could you
get back to us on that.
Eric Daniels: Be
happy to.
Q196 Mark Garnier:
The other thing is, on SMEs, you are not at all sure what your
market share is on the SME?
Eric Daniels: Our
SME market share is approximately 20%, somewhere in that neighbourhood.
Q197 Mark Garnier:
20%, and you are one of the biggest players?
Eric Daniels: We
would be among the top three certainly. RBS and Barclays would
be larger probably.
Q198 Mark Garnier:
In my mail bag the vast majority of complaints I get from SMEs
about having trouble finding loans, comes from Lloyd Bank customers.
Do you think that is because you are offering the worst product
or do you think it is because you are one of the biggest players
therefore I am going to get a selection more from Lloyd Bank customers
than anybody else?
Eric Daniels: I'm
very surprised at that statistic because in our own research we
find that the great majority of our customers are satisfied. We
have made a commitment to our customers, approximately two years
ago, that any customer with a creditworthy proposition will, in
fact, be funded. We will extend the credit.
Q199 Mark Garnier:
To what extent has that creditworthiness changed then in the last
three years? Because there are a great many people who are your
customers who were getting credit prior to the collapse and are
not getting credit now and it's stifling business.
Eric Daniels: I
beg your pardon but I don't believe that's the case.
Mark Garnier: Well, I
can certainly bring them around to come and meet you, if you would
like to meet some of these people.
Eric Daniels: I
would very much appreciate that—
Mark Garnier: We will
see what we can do.
Eric Daniels: —because
we have not changed our credit criteria or our pricing over the
last three years.
Mark Garnier: You would
be amazed at some of the stories I can tell you and I will happily
pass them on to you.
Eric Daniels: Please
do, because again I would say that we have not changed, on the
contrary, we last year helped 100,000 new customers start up businesses.
We are very, very mindful that we have a role to play in the recovery
of the economy.
Q200 Mark Garnier:
Just one last question. I have a current account cross-selling
conversion rates by product, I just want to know if you are finding
that in the case of Lloyds Banking Group this agrees with how
you are finding things. So the cross savings between current accounts
and savings account is 88% and credit cards 53%, cash is 42%,
unsecured personal loan 42% and, as you say, mortgage about 27%.
Are you finding that that is the case in Lloyds Bank? Are you
finding that roughly 88% of people who have current accounts are
opening a savings account with you as well?
Eric Daniels: I
don't believe that's the case. Helen, would you—
Helen Weir: No,
those numbers sound very high to me.
Q201 Mark Garnier:
Again, it would be incredibly helpful if you could come back with
the cross-selling from personal current account into your other
products, it would be very helpful if you could do that.
Helen Weir: Absolutely,
we can come back.
Eric Daniels: Again
what we can tell you is that—and we will be happy to write
to you—the concentration of purchasing from an individual
institution is less in the UK than it is in most other places,
and that's because customers do shop around and each one of the
markets behaves differently with different competitors. So the
mortgage market has 60 different competitors, the current account
has about 30, and there are about 80 competitors in the savings
market. So you have a very wide variety of players that are offering
different products. The number of mortgage products is absolutely
phenomenal in this marketplace so customers have real choice,
and there is real value by any independent standard.
Mark Garnier: Try saying
that to a 30 year old trying to get their first mortgage. Thank
you.
Eric Daniels: If
I may respond to that. In fact in the UK, first mortgage purchasers
are generally in their early 30s,. In the Continent and other
places they are generally in their late 30s, early 40s. We make
better availability on better terms, easier terms, for first time
buyers than virtually any other marketplace.
Mark Garnier: I believe
in the 1980s first time buyers were around 22, 23, but thank you
very much.
Q202 Michael Fallon:
Mr Foley, you are an economist, would British banking be more
competitive or less competitive if you did not retain control
of the money transmission system?
Patrick Foley:
Well, I don't think we have control, I don't think the banks have
control of the money transmission system. There's free entry and
exit from the money transmission system so I don't think it would
make any difference to what is a very competitive marketplace.
Q203 Michael Fallon:
But Don Cruickshank told us last week that control of the money
transmission systems was the major source of banks' market power.
Patrick Foley:
I don't think he's correct, and I think to be fair to Mr Cruickshank
it was 10 years ago he did his review and a lot has changed in
the money transmission system and the way it's governed since
that time.
Q204 Michael Fallon:
It was last week he sent us a submission saying, "I wouldn't
allow Google to manage the internet, we wouldn't allow BT to re-establish
control over the numbering system or terms of access to its dominant
network, why do we allow banks" he said, last week not 10
years ago, "acting in concert almost absolute control over
the money transmission systems over which all financial transactions
take place."
Patrick Foley:
I understand he said it last week, but I have read his evidence
and what he pointed out, I think, on a number of occasions to
the Committee was his review was done 10 years ago and he had
not been close to the banking system since then. As I say, I think
the money transmission system and its governance has changed quite
a bit in that time.
Q205 Michael Fallon:
Yes, but you still have an influence over it, do you not?
Patrick Foley:
No, I think the banks generally own the system or have access
to the system but there's no barriers to—
Q206 Michael Fallon:
Well, do they own it or have access to it?
Patrick Foley:
They have access to the system but there's no—
Q207 Michael Fallon:
They do not own it? Who do you think owns it?
Patrick Foley:
I'm not sure of the ownership structure of the system, to be frank,
but there are no barriers to new—
Q208 Michael Fallon:
But you are the Chief Economist at the bank, you must know who
owns the money transmission system?
Patrick Foley:
Well, I am the Chief Economist, I am not an expert on the governance
of all the systems.
Q209 Michael Fallon:
Well, who did you think owned it?
Patrick Foley:
That is not the point, the point is do companies—do new
entrants have entry of—are able to enter or exit the money
transmission system, and can the existing players stop them? The
existing players cannot stop them entering and, indeed, the OFT
in their barriers to entry study said that the money transmission
system was not a barrier to entry.
Q210 Michael Fallon:
How many have entered over the last 20 years?
Patrick Foley:
That is nothing to do with the money transmission system, I think
that is to do with a very competitive UK marketplace. It doesn't
make it an attractive marketplace for some entrants to come in.
Michael Fallon: Thank
you.
Q211 Chair:
You said in evidence just a moment ago, Mr Foley, that a lot has
changed in 10 years since Cruickshank wrote his report. In fact
what he said to us in evidence, and I have it in front of me—written
evidence—"Nothing much has happened. So not surprisingly
nothing much has changed." Quite the opposite to the impression
that you have just given.
Patrick Foley:
No, well I think that's his observation from outside the industry,
but he hasn't been close to the industry for 10 years, since he
wrote his review.
Q212 Chair:
Yes, but a moment ago you said that he himself was, in evidence,
suggesting that a lot has changed in 10 years.
Patrick Foley:
No, no, please don't misunderstand me, all I was saying was he
said he had not been close to the industry since he did his review
10 years ago and therefore was not in a good position, in my view,
to judge how much the industry had changed.
Q213 Chair:
So your primary criticism of Cruickshank is that he is just not
up to speed, out of date and—
Patrick Foley:
No, it's not intended as a criticism at all, it's just he has
not been a close observer—
Q214 Chair:
What weight should we attach to Mr Cruickshank's evidence?
Patrick Foley:
I think Mr Cruickshank was very close to the banking system 10
years ago, he wrote a very interesting report at that time, but
the industry has changed a lot since that time and therefore what
he concluded in his report 10 years ago is not particularly relevant
to the industry today.
Q215 Michael Fallon:
But he told us last week, "A regulator armed with independent
authority over money transmission systems would make a huge difference,
certainly in retail markets where the current account market is
key." Why is he wrong?
Patrick Foley:
I don't see what difference that regulator would make. I mean
there is free entry and exit to the money transmission system
so I'm not quite sure what difference a regulator would make.
Q216 Andrea Leadsom:
Thank you. Mr Daniels, would you say that your retail banking
activities are profitable? Would you say it is generally a profitable
business?
Eric Daniels: Yes,
it is.
Q217 Andrea Leadsom:
So why then would you argue so strongly that it is highly competitive
and that there is free entry and exit of players?
Eric Daniels: I'm
not sure that profitability is associated with competitiveness
or lack of competitiveness. What we're seeing is, in fact, that
over the past 10 years there has been huge movement in terms of
market shares, for example. What we have seen is, for example,
Nationwide triple their market share over the past decade. We've
seen Virgin enter the market, we've seen Tesco enter the market
and we've also seen a fair number of foreign banks in the credit
card markets, for example, NBNA, Cap One and others enter this
market, so it is highly competitive and customers get very good
value from it.
Q218 Andrea Leadsom:
But evidence from the FSA suggested that there have been very
few new entrants to the UK retail market. You are saying on the
one hand it's competitive, on the other hand it is profitable,
on the next hand there is free entry and exit of market players.
Anybody with any grounding in economics would expect then, for
more new entrants into that market. Why do you think that that
is not the case?
Eric Daniels: I'm
sorry, anyone would expect?
Andrea Leadsom: That there
would be many new players coming into the market. Why do you think
that is not the case?
Eric Daniels: Again,
I do believe we are seeing a fair number of new players entering
into the market. As little as three years ago there were 164 mortgage
providers in this marketplace, today there are around 60. So you
see an awful lot of entry and exit into the marketplace.
Q219 Andrea Leadsom:
Into the mortgage market, yes, but we are specifically talking
about the UK retail banking market here and, as I understand it,
there has only been one new banking licence granted in the last
three years, I think was the evidence we had recently from the
FSA.
Eric Daniels: That
was with Metro Bank. But what I am referring to, when you refer
to the retail market, again I think there are five separate markets
starting with current accounts, savings, mortgages, credit cards
and personal loans. If you look there are a large number of competitors
across each one of those markets, as I said, and I think you're
probably thinking of the personal current account market. There
are 30 providers of personal current accounts in the market today,
so it's very competitive.
Q220 Andrea Leadsom:
So then why do you have such a huge market share? Why is there
so much concentration—I think it is over 60% in the top
five, or is it three players in the personal current account market.
There are 73% share amongst the four largest players. It does
not to me, with my knowledge of economics, sound like a mature
highly competitive low margin business that you are suggesting
it is. It sounds to me as though there is something in at least
the PCA market that means that four banks are able to generate
this enormous market share to make monopoly profits and to keep
out new entrants.
Eric Daniels: Well,
I beg to differ. I think if you look at the concentration in the
UK market it, in fact, is less than many markets. If you look
at Australia, or you look at Canada or France, for example, you
would find even greater concentrations. The US and Germany are
often looked at as markets that are more fragmented and would
display more of the kind of behaviours that you had suggested.
In fact they are every bit as concentrated if you look by region.
So if you looked in California, for example, and you looked at
the concentration levels there, they would in fact be higher than
the UK.
So it depends on which region you look at. I think
the facts are that if you have a market where you have several
different competitors and there's high concentration but there's
high contestability—in other words players will seek to
gain share and therefore will fight very hard on service, on advertising,
on trying to reach out to customers—that that leads to very
good customer outcomes and that's, in fact, what we're seeing
in the UK market where you are seeing first quartile value in
most cases for banking products.
Q221 Andrea Leadsom:
But, excuse me, sir, that is not borne out by the experience because
customer inertia, the likelihood of individuals moving their bank
accounts is very low, is it not? There isn't an enormous amount
of switching going on.
Eric Daniels: No,
no, that's not in fact the case. That's one of the pieces, I think,
of perceived wisdom that is not true. If you look—
Q222 Chair:
Are people changing their bank accounts the whole time, are they?
Every year—
Eric Daniels: People
in fact are changing their bank accounts—
Chair: And the figures
we have been given on the rigidity in the market is—
Andrea Leadsom: Enormous
customer inertia.
Eric Daniels: If
I may answer the question. If you look at the switching behaviours
of PCA customers, personal current account customers, it is somewhere
between 7% to 11% of the customer base every year. Within Lloyds
we have to attract in a million new current accounts every year
to make up for the attrition that we experience. So 7% to 11%
is very high. That's about the international norm. If you look
at the switching behaviours in mortgages and in savings accounts,
in fact the UK switching is much higher than the international
norm. So customers in fact do shop, they are well informed and
they are very willing to switch.
Q223 Andrea Leadsom:
Can you tell me, how long does it take if I want to move my current
account today from your bank to another bank? How long would that
take, roughly?
Eric Daniels: I'd
ask Helen to answer.
Helen Weir: It
will very much depend on your third party direct debit providers,
that is the critical path time. Sometimes they can take up to
two months to transfer the direct debits. Typically within the
banking system most of the change could happen within two to four
weeks.
Q224 Andrea Leadsom:
So if I am paying my utilities monthly I instantly have one massive
problem to transferring my bank account. One of the things that—
Helen Weir: Sorry,
could I just pick up on that?
Andrea Leadsom: Yes.
Helen Weir: No,
as I say we offer a switching service which means we manage that
through for our customers.
Q225 Andrea Leadsom:
So you would pay my gas bill even though there is no direct debit
set up?
Helen Weir: We
will work with the providers to make sure the direct debit gets
moved, even when the utility directs it to the wrong place.
Q226 Andrea Leadsom:
For the convenience of the customers, would you support the idea
that if the customer wanted to take their bank account number
with them that they might be allowed to do so?
Helen Weir: I'm
happy to pick that up. I think there are a number of different
forms that account portability—which I think is what you're
referring to—can take. One is where the sort code and the
account number go with the customer, that is probably the most
expensive to implement but it is a viable form of account portability.
Q227 Andrea Leadsom:
So you would allow any customer that wanted to to take their sort
code and account number with them?
Helen Weir: That
is a form of account portability.
Q228 Andrea Leadsom:
But would you allow that to happen? If I said to you I want to
move my bank account from you, take it to Barclays and I want
to take my account number and sort code with me, would you let
me do that?
Helen Weir: At
the moment I couldn't do that because of the way the system is
set up, the sort code is very specific to a particular banking
institution as I am sure you are aware. There are various ways
though which switching can be made easier without going the full
way.
Q229 Andrea Leadsom:
I want to specifically deal with the idea of account portability,
it is a very particular point that Sir Don Cruickshank raised
which was very interesting. Going back to the point about who
owns the money transmission system, if I want to change my account
number and my sort code, what is stopping me? Is it not the case
that it is the fact that the banks own the money transmission
system and it is the banks who have decided that I cannot do that?
Just to give you an analogy, Sir Don Cruickshank, when he was
leading Oftel, saw through legislation to make telecoms companies
allow number portability which previously was absolutely impossible
and never happened before and so on. Is there any technological
reason why that could not be the case in the banking system?
Eric Daniels: If
I may, and this is again one of those that is very hard to give
a one line answer. The purpose of a sort code is so that in fact
the money can find its way to the appropriate bank and to the
appropriate branch and then to the appropriate account number.
So there is a unique sort code that allows the transmission to
be successful. If you in fact have a homogenous sort code for
example then it would cause an enormous ripple in the money transmission
system, money wouldn't go to the right place.
Andrea Leadsom: As it
currently is, yes.
Eric Daniels: So
what we would have to do is to completely redesign and rethink
how a money transmission that's been around for many, many years,
how it would operate. Again, that's not something that can done
from one day to the next.
Andrea Leadsom: As Oftel
did, yes.
Eric Daniels: No,
telephone numbers are completely different. Telephone numbers
are independent of whatever switch. Technology has changed all
that but the sort codes are not, they are very specific identifiers.
So, again, this is not something where I would venture an answer
in two minutes or two hours. I think it requires much more profound
study.
Q230 Andrea Leadsom:
But would you agree that the technology exists to be able to do
that?
Eric Daniels: I
think if we were willing to completely rethink how money transmission
systems work, it's not beyond the wit of man to figure out a different
system, but I'm not sure that you would ever be able to justify
that investment. As Helen suggested, I think there are much better
ways to improve portability.
Q231 Chair:
Just to be clear, you are flatly contradicting—and happy
I presume on the record flatly to contradict—the OFT, who
in their conclusions on this issue say, "We have found significant
challenges in attracting personal and SME customers through a
combination of low levels of switching", and they go on to
other things.
Eric Daniels: Through
a combination of?
Chair: "Low levels
of switching, high levels of brand loyalty and consumer's preference
for providers for a branch network."
Eric Daniels: I
would absolutely disagree with that conclusion.
Q232 Chair:
They just got it completely wrong?
Eric Daniels: I
believe that the OFT in their same report, said that 80% of customers
in personal current accounts are satisfied. That's their research—
Chair: They are also ignorant
of how much they are paying.
Eric Daniels: Of
the 20% that are not, about a third to a half of them switch every
year. Certainly in the SME market what we're seeing is switching
of somewhere around 20% per year. Part of that is because you
have, again, in SMEs a very high morbidity rate, and so what you
find is a lot of people exiting the market and a lot of people
entering the market and that gives them new choice, as well as
switching among the existing players.
So I think that the switching behaviours are much
higher than I think the report would lead you to believe.
Q233 Mr Umunna:
Thank you, Chair. Mr Daniels, could you just—very succinctly
if you can for the record—confirm for our benefit the size
of the Government's stake in your group?
Eric Daniels: It's
approximately 40%.
Q234 Mr Umunna:
Do you think it would be fair to say that without the assistance
and support given by the UK Government over the last two or so
years, your business, as it is today, may not exist?
Eric Daniels: I
think there are two things that have to be understood. That in
the first place I think all banks have received assistance from
the central banks and from Government, so this is not unique to
Lloyds.
Mr Umunna: I am not suggesting
it is.
Eric Daniels: And
that very clearly when the liquidity markets froze that all banks
were very grateful for the assistance that was given. So I think
that would be the point that I would make.
Q235 Mr Umunna:
Could you therefore explain how you can possibly justify charging—I
am talking about the UK Government providing support but really
its UK taxpayers—those UK taxpayers who bank with you a
19.3% charge for an authorised overdraft facility, which is more
than 38 times the Bank of England's base rate.
Eric Daniels: What
I would tell you—and I'd ask Helen to give you a better
explanation in terms of our overdraft charging mechanisms—that
by and large overdrafts are a very low return product. They're
not something that we make a lot of money from. We use the product
as a service to our customers, but it's not necessarily something
that we would greatly enjoy. In other words, it's not a high return
product. But, Helen, perhaps you can give a fuller explanation.
Q236 Mr Umunna:
One moment, Mr Daniels, I asked you how you could possibly justify
charging 38 times the Bank of England's base rate, are you saying
to me you think that is justifiable?
Eric Daniels: If
I may, and again I'll refer the question to Helen, the Bank of
England base rate has nothing to do with our cost of funds and
that's something that's commonly not understood. The actual cost
of funds that we have is considerably higher. We can't borrow
money from the Bank of England at that rate, nor can anyone else.
So that's—
Chair: But just take 3%
off the figure and you get to your cost of funds. So you move
down the yield curve.
Mr Umunna: So let us say
it is not 19% but 16%.
Q237 Chair: So now
if we re-pose the question, can you justify 16%?
Eric Daniels: And
again, if I may, we then have to deduct the losses. This is the
highest loss product of any that we issue. So every time we extend
an overdraft we in fact incur losses at some point down the road.
In addition to that you have administration costs, so the total
return on overdrafts is, in fact, not very good. Helen?
Helen Weir: No,
that's exactly right. The typical losses on our overdraft product
are somewhere of the order of between 11% and 13%. So when you
take that and you take the cost of money and you take the cost
of provision of the branch network and the servicing of that you
can—
Q238 Mr Umunna:
So are you saying that if you look at the income you get from
levying overdraft charges across the board, you are not making
a profit from them?
Helen Weir: Overall
on the current account product—Eric has already said that
overdraft is not a significantly profitable instrument for us.
Likewise, the current account is not a significantly profitable—
Q239 Mr Umunna:
But that was not the question I asked. The question I asked is
if you look across the board of the income you get from levying
overdraft charges, authorised overdraft charges, are you saying
that you are not making a profit?
Helen Weir: It
will very much depend on how a customer uses a particular overdraft.
We do make some profit on overdraft but—
Mr Umunna: Well, hang
on—
Helen Weir: No,
I am answering your question. We do make a profit on overdrafts
but I'm saying also that it is not a product that delivers excessive
returns.
Q240 Mr Umunna:
Right, but you are still making a profit through charging these
exorbitant interest rates to people up and down this country?
Helen Weir: We
are making a profit. I think we've outlined already the numerous
costs against which the income we get from those customers has
to cover, including—
Q241 Mr Umunna:
Does that factor in the, I think it is, £5 a month charge
that you levy on top of the interest?
Helen Weir: For
customers who use their overdraft. We also have the costs of capital
which we have to hold against these overdrafts because we are
required through the capital regime to do that. So there are significant
costs also of—
Q242 Mr Umunna:
Can you understand why customers may be feel that they are being
ripped off by you?
Helen Weir: I'm
concerned that's how customers feel and I do believe that it's
important that we are transparent with our charging so customers
understand what they're getting. However, back to my original
point, the average customer pays—and that's including foregone
interest—less than a cup of coffee per week for their banking.
For that they get access with our group to over 3,000 branches,
a wide ATM network, money transmission service, use of debit card
and so forth. If you compare that with things like mobile, with
Sky and a number of other things that's good value.
Q243 Mr Umunna:
You keep using this cup of coffee comparison as if—a cup
of coffee, if you get coffee here, about £2, something like
that. It is still about £100 a year at least which is actually
quite a lot of money to many of my constituents. The rates and
the charges that I was just citing there are, of course, Lloyds
rates and you are responsible for Halifax as well. I think I am
right in that, am I?
Helen Weir: That's
correct, yes.
Q244 Mr Umunna:
And obviously about this time last year—I am a Halifax customer—you
changed your overdraft pricing structure from charging interest
at a rate of 19% to this £1 a day daily fee. So a £1
daily fee, for example, on an overdraft of £250 would be
equivalent to like 146% APR. How have your customers reacted to
this new overdraft pricing structure?
Helen Weir: The
response from our customers has been very good. We widely researched
the charging structure before we implemented it. Customers told
us they liked it because they felt they understood it. It was
very clear—back to the earlier point—they understand
what they were going to get charged for. The level of complaints
that we have seen has fallen very significantly.
Q245 Mr Umunna:
Have you done any analysis of how many customers—we have
had read reports in the media that tens of thousands of customers
left as a result of you introducing this new pricing structure.
Can you tell us how many left as a result of you levying the new
charge?
Helen Weir: I can't
tell you off the top of my head although I could make that information
available; I can write to you afterwards if you wish. We know
that some customers did leave as a result of it. We also know
that quite a few customers also changed their behaviour in terms
of how they operated their account. But overall our satisfaction
levels with the account have gone up.
Q246 Mr Umunna:
Right, but presumably if you are carrying out a survey, a satisfaction
survey, you are not really going to be getting opinions of the
people who have left, are you?
Helen Weir: No,
that's correct.
Q247 Mr Umunna:
Right, so in truth you do not really know the satisfaction or
not that there was when you introduced this new pricing structure,
because all those people who left as a result of you introducing
it, you do not know their views?
Helen Weir: Well,
I'm assuming that the people who left would not have been happy
with that charging structure.
Q248 Mr Umunna:
Yes, and you also are not able to tell me off the top of your
head how many people left as a result of that pricing structure?
Helen Weir: Yes.
Q249 Mr Umunna:
So, in fairness, you do not really know how satisfied people really
were when you were introducing the new structure?
Helen Weir: What
I know is we lost relatively few customers and the vast majority
of our customers are happy with the product. We've seen an improvement
in customer satisfaction and a very, very significant reduction
in complaints.
Mr Umunna: Thank you.
Q250 Chair:
Can I just be clear, are these overdraft facilities profitable
or loss-making?
Helen Weir: I've
said that they were profitable.
Q251 Chair:
So when Mr Daniel's told us that the high interest type of overdraft
facility was not profitable, and that you do not particularly
enjoy providing it—
Eric Daniels: No,
what I said is it is not a particularly high return. I believe
those were my words. So I didn't deny profitability at all. It
is profitable but I don't think they give us the kind of returns
that we get from other products.
Chair: Okay, that is fair
enough. I think we have nailed this.
Q252 John Thurso:
Can I just follow up on this question? I have fondly been borrowing
large amounts of money from the Bank of Scotland for a very long
time thinking that I am a profitable customer. Is there a difference,
just to get clear, between the overdraft you have been talking
about which are typically small in size and then carry costs for
not a great return, and the larger overdraft that might be arranged
with an SME or a larger customer? Is what you are saying that
the lack of profitability is down to the complexity of small overdrafts
rather than big, or are you just saying that overdrafts is a not
very profitable area of business?
Eric Daniels: I
think it's important to distinguish between corporates, including
SMEs, and individuals. They are much different markets. What happens
is in the case of an SME or a corporate, what we do is we arrange
a facility, so we tell the entity that they can borrow up to a
certain amount and that the pricing on it is prearranged. That
is a much different equation. It generally tends to be individual
lending and it's not the more formulaic lending that you would
have to an individual using credit scoring and models. So they
tend to be much different.
Q253 John Thurso:
Somebody comes to see me once a year, for which I am extremely
grateful, and we decide how much I need to borrow and that facility
is put in place, a fee is charged, it is perfectly straightforward
and an amount over Libor is paid. But what you are talking about
is not that kind of arranged personal overdraft—
Eric Daniels: That's
correct.
John Thurso: —you
are talking about relatively small overdrafts, which are required
by people who are probably on quite low incomes and who are dipping
in and out as a result of small cash flow movements. That is what
we are really talking about here.
Eric Daniels: If
I may characterise it somewhat differently. Yes, they are completely
distinct but what we find is that the overdraft is a service or
a facility for our customers so that when a customer doesn't think
about how many debits are coming into the account because they
have standing orders—for gas, electricity, the supermarket,
whatever—and they don't manage their account as prudently
as they would wish to, we extend the facility of allowing them
to not have their payment rejected, with all the issues that are
related to that, so it's a service, it's a facility. It happens
to be a very costly one and results in a lot of losses, which
is the reason why we're not enamoured with the product, although
we do view it as a key service to our customers and that's the
reason why we offer it.
Q254 John Thurso:
But you are still making money on it, though. It is a low return
product, that is what you have been saying, just to be clear?
Eric Daniels: Correct.
Q255 Mr Mudie:
There are talks reported by the BBC between banks and the Government
on bonuses. Is this a fact that talks are going on?
Eric Daniels: I
have not spoken to Government to—
Mr Mudie: Sorry?
Eric Daniels: I
have not spoken to Government regarding bonuses.
Q256 Mr Mudie: To
your knowledge are talks going on?
Eric Daniels: I
beg your pardon?
Mr Mudie: To your knowledge,
if you are saying you are not involved, are you aware of talks
going on?
Eric Daniels: I
think it would be perfectly reasonable to believe that they are.
The banks speak with Government on a wide variety of issues with
fair frequency, I imagine it must be happening.
Q257 Mr Mudie: Would
you be willing to participate in these talks if you were invited,
if part of the talks was the question of limiting bonuses to your
staff?
Eric Daniels: I'm
sorry, would I be pleased to speak to Government about bonuses?
Is that the question?
Q258 Mr Mudie: Well,
I said would you be pleased to attend and would you be willing
to look favourably on limiting bonuses to your staff?
Eric Daniels: Well,
I think that there are a couple of things. Yes, I would be pleased
to have any conversation, but in the case of Lloyds I think that
we have to be very clear, we are not an investment bank. We are
a commercial bank. The average salary of our employees is about
£25,000 a year. The average bonus payout is somewhere around
£1,000 per employee so we are not in fact an investment bank,
we are a commercial bank. We serve customers, that's what we do.
Q259 Mr Mudie: So
I presume you will not have anyone employed by your bank earning
more than you?
Eric Daniels: No,
that would not be the case. We have specialists and, as you would
expect, people who have very specialised skills that are much
in demand for the market, have, in fact, a different market comparator
so we could very easily have people making more than I am.
Q260 Mr Mudie: How
many?
Eric Daniels: I
don't know off hand.
Q261 Mr Mudie: Mr
Daniels, you are the Chief Executive and you do not know how many
people in your bank are earning more than you? I find that hard
to believe.
Eric Daniels: I
wouldn't be able to give you a number off the top of my head.
Q262 Mr Mudie:
You would not wish to, or you would not be able to?
Eric Daniels: I
would not venture a guess.
Q263 Mr Mudie:
Well, I will be happy for you not venturing a guess but can you
send the information through to the Committee in writing?
Eric Daniels: I'd
be happy to.
Q264 Mr Mudie:
Lovely. Seeing we own 41% of the bank, I see from your—and
I accept that you are not accepting bonuses, I hope I am not putting
words into your mouth, but that is my understanding?
Eric Daniels: I
beg your pardon?
Mr Mudie: You are not
accepting bonuses, was it last year and is it this year?
Eric Daniels: For
the bonuses that would normally be paid out in 2010 I did not
accept it and in 2009 I did not receive a bonus either.
Q265 Mr Mudie: Oh
good. Well, I see your shares, could you just tell me these shares,
I had the figures somewhere, yes, December 2008 you had 423,000,
in February 26 you had 607,000 shares listed in the accounts.
Are these shares you have bought or were these shares given by
the bank?
Eric Daniels: No,
those are shares that have all been purchased.
Mr Mudie: Have?
Eric Daniels: All
been purchased.
Q266 Mr Mudie: You
have purchased them yourself and you have to list them?
Eric Daniels: That's
correct.
Q267 Mr Mudie: Now,
in the same accounts, these have moved to 2.5 million. Is this
a restructuring of the shares? Because it seems strange that you
go from 423,000 to 2.5 million at December 2009. Even you could
not have bought that number of shares.
Eric Daniels: Yes,
Mr Mudie, in fact I did. What happened is—
Mr Mudie: 2.5 million?
Eric Daniels: If
you recall, Mr Mudie, we had a rights offering, a very significant
capital raising in December of last year, November/December of
last year, and then each one of our shareholders had the right
to exercise their rights and purchase additional shares, which
is, in fact, what I did.
Q268 Mr Mudie:
How many other shares do you have that you have purchased, including
share options?
Eric Daniels: I
really have not a clue.
Mr Mudie: I am sorry?
Eric Daniels: I
don't have a clue off hand. You're giving me more information
than I had at my fingertips, so you're better informed than I
am about my personal finances.
Mr Mudie: You must have
a fair number if you do not know how many you have.
Eric Daniels: I
don't know off hand.
Q269 Mr Mudie:
Do you not know the share options you received last year?
Eric Daniels: No,
but I'd be happy to provide them. They're in fact in our directors'
report on remuneration and they're included in every annual report
so it's public information.
Q270 Mr Mudie:
Just a minor point, again speaking as somebody who contributes
to your bank through tax. Why do you get cash to pay your tax
planning and, in particular, in 2008 in the annual accounts you
have got an education allowance?
Eric Daniels: When
I came to the UK they were costed in making the move. Part of
the contract, and it was simply part of the compensation, were
a number of features, including some tax planning. That's not
at all unusual. It was one of those things where, instead of including
it in my salary, which would then have meant that my pension and
all the rest of those would be higher, the bank chose to allocate
a certain amount of my compensation to those allowances. It's
pretty much normal.
Q271 Mr Mudie: But
that has continued in each year, 2009?
Eric Daniels: By
and large my contract has been largely unmodified, save for the
normal increases that happen periodically.
Q272 Mr Mudie: I
notice in the question, but I am not sure whether you are preoccupied
with tax allowances, you left the education allowances out. I
am not sure about the education allowances. How much were they,
and what were—
Eric Daniels: I
don't recall what the education allowance is. Certainly I'd be
happy to write to you if it's important.
Q273 Mr Mudie: The
difference between the two figures year-on-year is £30,000,
so they would be considerable.
Eric Daniels: I
don't know offhand, but again it was part of the Director's remuneration
report. It's easy to look up and it's public information. I no
longer receive that allowance.
Q274 Mr Mudie: You
certainly seem vague for a major Chief Executive.
Eric Daniels: Well,
perhaps I spend more time worrying about the bank than I do about
my personal affairs.
Mr Mudie: If I was on
a £1 million salary, I would probably be the same.
Q275 Mr Love: You
drew the distinction earlier on between an investment bank and
Lloyds, which you have characterised as a commercial bank. In
those circumstances, I think you were drawing the distinction
that you do not have the excessive salaries that have been complained
about. Would that mean that you would be perfectly happy to disclose
according to the Walker principles?
Eric Daniels: I
believe that what Mr Walker recommended was that there be disclosure
among several tranches of compensation, but I also believe that
Mr Walker has recommended that not be done unilaterally, for fear
that the UK would stand out from other countries. So we are much
less affected. We have many fewer employees who would be in those
tranches, although we do have some. But I think that the recommendation
from Mr Walker at the moment is that the UK should not act unilaterally,
and I believe that's right.
Q276 Mr Love: What
is wrong with Lloyds acting unilaterally? After all, you are telling
us that what that would show is how few among your senior executives
are in these pay packets. Would that not be of benefit? Would
that not reassure your customers that excessive salaries were
not being paid?
Eric Daniels: I
don't think that our customers are particularly concerned. They're
concerned must more about value; about good service; about convenience.
Those are the things that matter to them, and that's what we strive
to do.
Q277 Mr Love: I am
quite surprised at you saying that your customers are not concerned
at the level of—and I cannot trace it directly back to customers
of Lloyds Bank, but I think there is a very strong perception
and there is real concern out there among the public about the
level of bankers' remuneration, especially in the context of what
has happened over the last few years. Do you not think that Lloyds
have a responsibility to try to address those concerns?
Eric Daniels: What
we believe in Lloyds is that we are very much a part of this society
and in fact we take pride in terms of being good corporate citizens,
whether it is our carbon footprint; whether it is the amount that
we donate to charity through our foundations; whether it's the
activities of our employees for worthy causes in their communities.
So we are very proud of our corporate citizenship. We are very
attuned to the debate that is going on regarding the role of banks
in society and the role of bankers in society, so I would say
that we are responsive and we're certainly listening to what is
happening, with what our customers feel as well as the broader
public.
Q278 Mr Love: Let
me ask you: you drew attention—quite rightly in my view—to
the fact that you pay bonuses to some of your less well-remunerated
staff. What is the total level of your bonuses last year and this
year, and how does that compare with dividend payments in those
two years?
Eric Daniels: It
is no secret that we did not pay any dividends over the last two
years. We are prohibited from paying dividends until January 2012
through our agreement with Europe. So any bonuses that were paid—if
we did pay bonuses—would be infinite in comparison to the
dividend.
Q279 Mr Love: I would
like to move to a completely different subject: about the disposal
of your 600 branches. I wondered whether you had had any discussions,
as yet, with UKFI, particularly in relation to achieving their
objective of enhancing competition as a result of that disposal?
Eric Daniels: We
certainly meet with UKFI on a regular basis and we certainly talk
about not only the financial condition of the business but also
some of our clients, going forward, as we would with any large
shareholder. So we continue to have ongoing discussions with them.
Q280 Mr Love: During
those discussions have they expressed any preference about selling
to a new entrant? Has there been any discussion about whether
it is just a case of getting the highest price possible, or is
there any discussion about bias towards new entrants into the
marketplace to enhance competition?
Eric Daniels: It
would be totally inappropriate for UKFI to have a view on who
a potential buyer could be. Their role as shareholder is to maximise
the value for the taxpayer.
Q281 Mr Love: There
is some talk about a public interest test on the sale of the 600
branches. How do you view that? Should there be a public interest
test that UKFI should ensure is complied with in this disposal?
Eric Daniels: I'm
not sure what the shape of that public interest has to be, so
I would find it very difficult to answer the question.
Q282 David Rutley:
Could I just ask one question, going back to the profitability
or the low returns on PCAs, which is what I think you have given
evidence on. You will be familiar with the 2008 market study by
the OFT on PCAs, and it says the OFT estimated banks earned £8.3
billion in revenues from personal accounts in 2006, equivalent
to £152 per active current account. It broke it down by saying
that these profits were generated by five sources: net credit
interest, the difference between interest paid on credit balances
to consumers and income derived by the bank from those funds;
net debit interest, interest paid by consumers minus the cost
to the bank of lending these funds; insufficient funds charges;
package fees and ancillary charges. All that comes together in
2006 to £8.3 billion for all the banks. This seems a rather
profitable business, and I am rather concerned when I also see
that the OFT believe that the PCA revenues are bigger than savings
and credit cards combined. So if the PCA generates more cash for
you guys than savings and credit card products, why are you telling
us that you are doing us all a favour providing PCAs?
Eric Daniels: I'll
ask Helen to comment as well, but I think that you're looking
at only one component of the profit and loss statement. In other
words, you're looking at the revenues that are coming in. Against
those revenues we have losses on the overdrafts, which we have
mentioned before. We have branches, we have ATMs; we have thousands
and thousands of employees who serve the PCA market. So I think
that if you were to look at the net—in other words, you
take the revenues, less the costs, less the losses—then
the return against the PCAs tends to be at the lower end of the
range of the banking products that we do offer.
Q283 David Rutley:
Finally, Chair, I would like to just clear this up, because it
is suggesting here that savings and credit cards together generate
less revenue than active bank accounts, and I understand that
you are saying that when you net off the cost of ATMs—but
there must also be similar costs for savings and credit cards?
Eric Daniels: Yes
and no. For a credit card, for example, most credit card providers
don't use branches, so—I think there are something like
60 credit card providers, perhaps 30 to 60, I'm not sure which,
but there are a fair number of credit card providers—the
majority of them don't have branch networks so, in other words,
their cost dynamics are much different. They tend to use the mail;
they tend to use direct marketing rather than branch sales, so
that changes their dynamics.
Q284 David Rutley:
Is it true of savings products as well?
Eric Daniels: There
are approximately 80 savings competitors in the marketplace.
Many of them are direct.
David Rutley: I think what we would find
useful, Chair, is if we could have a written breakdown of some
of the evidence you have given about the profitability and the
margins on PCAs for your bank, if you could provide that.
Eric Daniels: We
would be happy to give you what information is available.
Q285 Chair: Thank
you very much. Before you go, Mr Daniels, could you give us a
view on when you think the Government's shareholding should be
sold?
Eric Daniels: I
don't have a particular view on that. That is very much up to
UKFI and the Government.
Q286 Chair: At what
price?
Eric Daniels: The
price currently is above the break-even point for Government.
So, in other words, the taxpayer is in the money.
Q287 When the taxpayer
gets substantially "in the money", do you think that
Government should consider divesting itself or some or all of
that holding?
Eric Daniels: That's
very much a decision for Government.
Q288 Chair: Does
the company have no view on this at all?
Eric Daniels: No,
I think the company's view is that the management's purpose is
to serve our shareholders well; to serve all of our stakeholders,
and that's really our job. Any one of our shareholders, whether
it is some of the more traditional names that you would expect,
such as Standard Life, L&G and fidelities, or UKFI, have the
absolute ability to be able to buy and sell when they wish to.
Q289 Chair: But your
preferred position must be zero Government holdings, must it not?
Eric Daniels: Certainly,
I think that the presence of any abnormally large shareholder
impacts the stock and impacts the other shareholders, so—
Chair: Yes, but I am talking about a
Government shareholder here.
Eric Daniels: So
it would be—
Q290 Chair: What
about the presence of a government shareholder? Does that not
have particular significance?
Eric Daniels: It
would be my desire to have a much more evenly balanced shareholder
base.
Q291 Chair: Therefore,
how quickly do you think the Government should get its holding
down to something that you are describing as a more even shareholder
base?
Eric Daniels: Again,
Mr Tyrie, I think that's a decision for Government.
Chair: We have had a few
witnesses recently who have played a straight bat and certainly
that was one. Andrea Leadsom had one quick point that she wanted
to come in on.
Q292 Andrea Leadsom:
Yes, bearing in mind the substantial size of the Government shareholding,
how long do you think it will take, once the Government decides
to divest, to sell all of those shares and place those shares
in the marketplace? What is your professional view of that?
Eric Daniels: I
think there are various models. There is one, for example, a city
in the US had the Government sell down in a relatively short period
by having a fairly large sale and then a scheduled sell down over
time. So it could in fact be done very quickly. There are other
types of sale where there are large holders, for example large
pension funds that might be interested in purchasing blocks, so
I think it is something that will depend at the time the Government
wish to sell. They will have to decide whether they wish to sell
down all or some and the rapidity with which they wish to do it,
but that is—
Q293 Andrea Leadsom:
Are you on the lookout for buyers yourselves? Do you see that
as part of your role?
Eric Daniels: It
is not my shareholding so it would be inappropriate for me—
Chair: Andy Love had a very quick question.
Q294 Mr Love: It
is going back. I am sorry to do it, but I think we need to press
you on this matter. It is about the public interest test. The
consumers' organisation will be suggesting that that public interest
test should look at what the effect will be on competition of
any sale, and whether it will enhance competition. If that was
a public interest test, would it be something that Lloyds could
support?
Eric Daniels: As
you know, one of the conditions of the European accord was in
fact to sell to a party that had no more than 14% current account
market share. So I believe there is already some thought toward
trying to create a new competitor in the marketplace.
Chair: Thank you very much for coming
before us. I know that for bankers before the Treasury Select
Committee it is often not an easy ride. I have to say, we have
heard some very interesting evidence, and some surprising evidence:
the idea that customers have a pretty good idea how much they
are paying for their current accounts will be met with something
of a loss of credulity among many of them, particularly, if I
may say so, since the Group Executive Director herself did not
know how much she was paying.
Thank you very much for coming before us today.
Eric Daniels:
Thank you.
Chair: We will now
take a five minute break.
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