Session 2010-11
Publications on the internet

To be published as HC 612-vii

House of commons

oral evidence

taken before the

Treasury Committee

Competition and Choice in the banking sector

Tuesday 18 January 2011

Jayne-Anne Gadhia and Ana BotÍn

Evidence heard in Public Questions 628 - 757



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 18 January 2011

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr George Mudie

Jesse Norman

Mr David Ruffley

John Thurso


Examination of Witness

Witness: Jayne-Anne Gadhia, Chief Executive, Virgin Money, gave evidence.

Q628 Chair: Thank you very much for coming to see us this morning and to help us with our inquiry into retail banking competition. In a letter to the Financial Times recently, you challenged comments made by Stephen Hester and Eric Daniels, which they made to this Committee, that retail banking in the UK-I think this is their phrase-was "enormously competitive". Do you disagree strongly with that, and if so why?

Jayne-Anne Gadhia: I do disagree strongly with that, Mr Chairman. I think the comments are surprising because, in my mind, one of the most significant barriers to entry, competition and consumer choice in the UK is what is, I believe, an effective oligopoly of the five big banks, and while I’ve seen in evidence that a number of the big banks have said that the market is very competitive, when you look at the facts-and I think they’re important-that those five big banks together operate almost 90% of the current account market and more than 90% of the SME market, I think that it’s hard to say that the market that customers should be enjoying is, in any way, properly competitive so that consumers get the best deal.

Q629 Chair: What key raft of changes do you think are essential if we are to get to a point where what you describe as the oligopoly is broken down?

Jayne-Anne Gadhia: I think that, at the end of the day, making sure that consumers have choice of product and that the financial system is confident that it has safe and secure banks are important, and to that end, in my mind, we have to make sure that there is no bank that is too big to fail. I do believe, therefore, that banks should be smaller than the very big banks are today.

Q630 Chair: So you would favour breaking up some of the big banks?

Jayne-Anne Gadhia: I think it’s a difficult argument, but I would certainly favour looking at reducing the scale of balance sheets, both across the banking sector and potentially within some of the bigger banks. For example, we have all been reading the discussions around whether or not investment banking and retail banking should happen in the same institution. If it’s concluded that indeed that is acceptable, then why not do it through separate balance sheets that are separately capitalised, have separate risk management systems and separate management teams? In doing so, the retail banking customers could be confident that they were being properly invested in, that the capital was very safe and we, as customers, would know that, as a bank, the right decisions were being taken.

Chair: Those are points that, I’m sure, Sir John Vickers will have heard, or will hear, when he sees your evidence.

Q631 Stewart Hosie: Just to follow up on that, obviously Virgin Money sees that Tesco Bank is growing, the Metro Bank exists and Santander is growing. Do you not see any hope for more competition through organic growth and the creation of these new institutions?

Jayne-Anne Gadhia: I do, and I think that we welcome all that competition very strongly. I think my point really, Mr Hosie, is that I was thinking, as I was thinking about this session, that one of the constituents that I think is being undeserved in so much of the review of the banking sector has been consumers themselves.

We have talked about taxpayers, which is very important. We’ve talked about bankers’ bonuses. We’ve talked about investment banking, but I’m not aware-working for Virgin, we aim to be the consumer champion-that the consumer has perhaps had enough of a look-in within some of this analysis.

I was imagining being a consumer in the High Street today. Many High Streets have a Santander, an RBS, a Lloyds and so on, often all together, so how would I make the decision which one to go into? What do I judge on? Colour? The products seem very similar, the offerings seem very similar, the publicity is very similar, and I think that the banks that you describe, such as Tesco, ourselves and Metro, bring genuine choice and a different approach to banking that I think is extremely important.

The problem, I think, certainly for me as a new entrant, and perhaps for them too, is that, faced with the sort of oligopoly that I referred to, it’s very difficult to achieve scale to provide real competition for a large number of consumers in the marketplace as we grow, and I think that’s very important.

Q632 Stewart Hosie: I have a slight difficulty; I am trying to get my head around this. I can think of some High Streets where there will be a Clydesdale, an RBS, an HBOS, a TSB, a Santander, a Nationwide, and I can think of other communities where all the banks pulled out many years ago-their physical presence-and I am not quite sure where the balance lies. Stephen Hester claimed the UK retail market was not particularly concentrated; in certain High Streets that is reflected, but in others it is not reflected at all. What’s your view on the concentration? Do you really think that there is an oligopoly between the five big banks?

Jayne-Anne Gadhia: As I say, I think that the key product in retail banking is current accounts, and I’m sure we’ll get on to discussing them, and when 90% of that market is held by those five big banks, I think it’s very difficult to argue anything other than that, to be honest.

Q633 Stewart Hosie: In that case, in terms of this competition, is it a lack of competition between banks themselves, or between products and product availability, or between the pricing of the products? Where does the balance of the lack of competition lie?

Jayne-Anne Gadhia: I think in the eyes of the consumer it lies in the lack of transparency of the products, predominantly. Again, as I imagine lining up outside an array of branches, I know, as a member of the industry, that there are differences between the current accounts offered by, for example, Santander and Lloyds, but looking at it through a consumer’s eyes, I think it’s quite difficult to understand what those differences really are. We at Virgin Money-I know many of the new banks are equally in this position-are absolutely committed to the transparent disclosure of product features in a clear, concise and consumer-friendly way, and I think that’s particularly essential in the world of current accounts.

Q634 Stewart Hosie: If we have this transparency-transparency is a good thing in general terms-and you can list the features and the costs, does that not offer the risk of more-how can I put this gently?-price-signalling, so we end up with every bank coming together at the more profitable end of the market?

Jayne-Anne Gadhia: My view of transparency is that it should give consumers greater choice. Ten years ago, I was running a small business called the Virgin One Account, which was a current account mortgage, so we had some direct and relatively high-volume experience of this, and, effectively, we offered on our current account product a tariff of charges so that consumers could see very clearly that if they wrote a cheque, or made a foreign exchange transaction, for example, exactly how much that was going to cost them.

I think the problem today with many banks is that it’s very difficult to identify exactly what those individual transaction costs are and, as a consequence, I think that free banking is a fallacy. There is no such thing as free banking-we all know that-and I think that customers are being misled to stay with the big banks who claim to offer free banking when actually these non-transparent charges are really what’s making them money.

Q635 Stewart Hosie: If we had all the transparency in the world, do you think that the brand loyalty that people have-the loyalty to the banks-would be broken down quickly in terms of people switching quickly?

Jayne-Anne Gadhia: I think switching is an altogether different kettle of fish. I do think that there’s brand loyalty to all sorts of brands-there certainly is to mine-and all well and good, providing that loyalty comes from great service and good products. I don’t think it should be blind loyalty, and transparency will make sure it’s not. I’ll know that I like my branch, like my bank, like my bank manager and get a good product, and I think that’s very important.

Moving on to switching, I think it is really, really essential that we find a way to make switching in the UK much easier. Again, I’ve seen people saying, "Well, 7% to 11% of current accounts switch a year. Isn’t that good?" I don’t believe it is. I think that the underlying rate of switching is probably less than 5%. That’s because people find it really difficult to contemplate making that transaction happen. I absolutely believe that we should help people with switching and that we should do that definitely by insisting that all banks offer a single common account number for customers, and we would certainly support that.

Q636 Jesse Norman: Ms Gadhia, you are obviously very concerned about the effects on your business of the Basel II capital requirements. Can you talk about why that has disadvantaged it, then perhaps you can move on to Basel III?

Jayne-Anne Gadhia: My particular concern isn’t Basel II or III per se, and I think that managing capital within banks has proven to be essential through the crisis. The point that we’re trying to make in our submission is that the regulatory capital regime, understandably in some cases, clearly differentiates between the big incumbents and the smaller providers, and for smaller providers, therefore, there’s a requirement to hold more equity.

At one level, I understand that, but if we look at what’s happened in the recent crisis, quite clearly the Basel II regime that has allowed the big banks to reduce their capital requirement because of historic experience, has-I would go as far as saying this-failed to identify the systemic risks that those banks themselves introduce to the system, and that capital should be held against those systemic risks, especially at particular times of the cycle.

Q637 Jesse Norman: Do you think that smaller banks or retail financial institutions have been disadvantaged precisely because the assumption is they can fail and, therefore, more capital needs to be held by them, relatively speaking?

Jayne-Anne Gadhia: No, what I’m really arguing for is certainly not that we and smaller banks should be required to hold less capital; I don’t think that would be healthy. I think that the current capital regime and the anticipated capital regime we are broadly very supportive of. Our own capital ratios we intend to hold in excess of all the regulatory requirements, as we currently do.

What I’m really saying is, in order to level that playing field, do we believe that capital requirements are a risk of size trade off, or should they be a risk of impact trade off too? And that the impact that the failure of the big banks could have perhaps wasn’t sufficiently identified in the capital regime, and it should be. When it is, there will be more of an equal basis to the capital in the system.

Q638 Jesse Norman: Because you might expect the big banks to have more capital, as it were, required of them because they are engaging in lots of very complicated, non-transparent and often rather risky derivative activities?

Jayne-Anne Gadhia: That’s true. Where I was particularly going-to be honest, Mr Norman-was this. If I look at the capital requirement for a mortgage, as Virgin Money launches mortgages, we treat mortgages at the 35% risk-rating level to provide capital against that. When I worked at RBS and was running a mortgage business there, because of the scale of the business and the history of the customer, the 35% is a much lower number-as low as 17% or less in some cases.

Q639 Jesse Norman: About half as much capital required against the business?

Jayne-Anne Gadhia: Yes, and that’s not necessarily the case across all products, but certainly in the mortgage business it’s true, and I think that’s generally the trend. My point-let’s face it, regulators have been saying it for a very long time-is that while that capital requirement has been built up on empirical historical evidence, we all know that past performance isn’t necessarily a guide to the future.

Q640 Jesse Norman: No kidding. Do you think banks should be able to use their own risk models?

Jayne-Anne Gadhia: I think that banks should be able to assess their own view of risk and then discuss that appropriately with the regulators, or the appropriate body, to agree whether the external and internal views coincide. I think, necessarily, there is a conflict of interest in running an internal risk model where holding more capital is going to reduce profitability or return on equity, and I think that we need to get that conflict of interest out of the banking system in a regulated way.

Q641 Jesse Norman: When with RBS, you were comfortable that there was enough disclosure to allow the regulators to make an assessment of the correct amount of capital to be held?

Jayne-Anne Gadhia: If I’m honest, at that point, my role didn’t really take me to that place with the regulators.

Jesse Norman: Okay, thank you very much.

Q642 Mr Ruffley: Good morning.

Jayne-Anne Gadhia: Good morning.

Mr Ruffley: I think many of us believe that one of the problems of British banking is that it is insufficiently competitive, so I for one certainly welcome your participation in the market. Could you just explain to us, from your perspective, how the perception that the big four banks are too big to fail has acted as a barrier to new entrants? What are the particular advantages and benefits of being seen as too big to fail? How does that operate in their favour to the detriment of other banks and potential new players?

Jayne-Anne Gadhia: I think that switching of banks has become even less over the time of the crisis and that’s been unfortunate. As trust has been eroded, I think people have been less ready to take the risk of switching accounts, so that, perhaps, has locked the market still further.

I think, too, that when customers effectively get a sovereign guarantee on a big bank, why wouldn’t they put their money in that bank while the market is in flux? I think that, as a consequence of the necessary response to the financial crisis-I have to say clearly, in terms of financial stability, it was very important-competition and the movement of customers have been reduced.

Q643 Mr Ruffley: It’s mainly that is it-the switching point?

Jayne-Anne Gadhia: Yes, it’s mainly the switching point, but it’s also to do with the fact that current accounts enable big banks to cross-sell to customers. And, to my mind, the reason that banks want to attract current account customers-big banks do-and want to talk about free banking is because a lot of profitability comes off the analysis that is subsequently undertaken to enable big banks to sell different products to customers. For example, if I happen to have a large balance in my account, I might expect a call to see whether or not I want an investment product. I think it starts with current accounts, but it broadens out into the wider system.

Q644 Mr Ruffley: There are reports this morning that Paul Tucker at the Bank-and also, I think, Mr Diamond last week-said that it will, in the future, be a good thing if banks fail-in other words, we get rid of the idea that any institution is too big to fail. How do you see that playing out?

Jayne-Anne Gadhia: I think it’s very important-I’ve fully agreed with Bob Diamond that banks are allowed to fail. Clearly, we can allow them to fail only within a smaller systemic consequence, so I think we need clearly to address the systems and structure of banking before that can be allowed to happen. But I think that once everybody is very clear that banks are allowed to fail, risk-taking will be reduced considerably and the reduction in risk will protect the system for us all.

Q645 Mr Ruffley: Just expanding on that, risk-taking will be lower, but what consequences do you think that will have for customers, retail or corporate?

Jayne-Anne Gadhia: You see, from my perspective I am-

Mr Ruffley: From Virgin’s perspective?

Jayne-Anne Gadhia: Yes. I am only, and very proud to be only, a retail banker, so our view is very much consumer focused. Inevitably, there is a lot of risk management that’s essential in making sure that retail banks perform appropriately, but I do believe-I think we all believe-that many of the risks that have been taken in the investment banking arms of big banks have meant that the capital consequences there have bled over into the retail divisions and, as a consequence, have led to under-investment in retail, potentially, and a risk that’s been a retail risk and a risk to the consumer. I think that that would be eradicated from the system if banks realised that they would be allowed to fail.

Q646 Mr Ruffley: Just one question. You’re a big advocate of splitting up the big banks so that their investment banking arms are separated from retail. Don’t you think that’s a rather extreme, dislocatory step to take? How would you justify it?

Jayne-Anne Gadhia: For me, it’s extremely important that competition is introduced to the system-to build trust, to improve financial stability as a consequence, to give consumers a better deal and to avoid the issues that having banks that are too big to fail created over the last two or three years. From my perspective, making sure that we have a range of smaller banks is much more likely to give us an active market where there is choice of product, choice of provider and transparency, and, as a consequence, people will have to make a decision based on price and service, and I think that’s where healthy markets operate effectively.

Q647 Mr Ruffley: Do you think the current Government is minded to do that? Are you picking up those messages when you speak to Ministers and civil servants-that they have a plan-or are they actively examining the option of splitting up the banks?

Jayne-Anne Gadhia: I’ve not talked to them about splitting up the banks. I talk to them occasionally about my own business and all I can say is that-as you would expect, and many people are in the same place-I feel a lot of encouragement to all the new entrants to grow competition in the market.

Q648 Mr Ruffley: This is my final question: what is the appetite among the policy-makers you meet for splitting the banks so that the investment banks become one thing and retail banks another? You are in a very good position: you are a respected bank, you’ve been very brave as a new entrant and you’re advocating something that’s quite radical. I’m trying to understand what pressure is coming from banks like your own and smaller players for this and whether it has any traction, because that’s what we’d like to know.

Jayne-Anne Gadhia: It’s not an issue that I’ve discussed with any Minister, so I, as a retail bank, am very focused on retail. That’s what I discuss, to the extent that I have those sort of discussions, but on your point, Mr Ruffley, that it’s perhaps an extreme solution, I think we’ve seen extreme times, and rightly everyone is looking at what sort of policy interventions could be made to avoid a similar problem for the future. I suspect that extreme problems that we’ve had require some extreme solutions.

Q649 Mr Ruffley: But there is no evidence that I see that this is a runner-that this is being actively proposed and articulated and argued for-apart from yourself; you make the point. But is this really a serious runner or just an interesting bit in business editors’ editorials? Who is arguing for it? Who is practically saying, "This will be good for competition"? You are, but who else?

Jayne-Anne Gadhia: As I say, my own position is very much on the retail side of things. I heard a number of people talking about the need to separate out retail and investment banking. I support that, although, just to be really clear, as I think I said at the beginning, I support that perhaps less radically than you are implying in that I do believe that single banks-any of the incumbents-could run separate balance sheets within their corporate structure for their retail and their investment banking, which would protect the risk without being as extreme as I think you are implying I am trying to be.

Mr Ruffley: Okay, thank you.

Q650 Chair: Just for clarity’s sake, have you given evidence to the Vickers Commission, formally or informally?

Jayne-Anne Gadhia: No, but I’m due to do so in the future.

Q651 John Mann: Why will risk-taking be lower?

Jayne-Anne Gadhia: In the future?

John Mann: Yes, with your scenario.

Jayne-Anne Gadhia: I believe that where banks believe that they can fail and not be bailed out by the authorities, there arises a certain additional personal consequence, if you like, if they-

John Mann: What’s that?

Jayne-Anne Gadhia: Put it this way, I suppose within my own organisation, I’m very aware that we’re not too big to fail and, as a consequence, I think the detailed understanding of everything that’s in my balance sheet-everything that’s done with my customers-is something that I, with the management team, talk about and review very clearly on a daily basis.

Q652 John Mann: It’s a different matter. Why will risk-taking be lower? You’re not suggesting any personal liability. Why will risk-taking be lower?

Jayne-Anne Gadhia: That is a belief of mine in that-

John Mann: It’s not based on any evidence, is it, or any structural change in terms of any personal liability of any kind?

Jayne-Anne Gadhia: From my own position, as I say, I’m leading a bank that isn’t too big to fail, and from my perspective I do believe that the requirements on me, as a Chief Executive, put me in a place where some of the risks that perhaps have happened in the past and which caused the crisis are not something that we’d even contemplate. Say, for example-

Q653 John Mann: Was Northern Rock too big to fail?

Jayne-Anne Gadhia: If I look back at Northern Rock, before the Northern Rock crisis all of us, Virgin included, were looking at the Northern Rock model and saying, "That looks like a good, strong model; is it something that we can copy?" Let’s face it, Northern Rock were the markets’ darlings only 12 months before they failed. Then we realised exactly what had gone wrong through excessive risk-taking that people hadn’t understood-where boards hadn’t gone through the detailed risk that may come of hitting the iceberg.

Q654 John Mann: It’s got nothing to do with Northern Rock’s size.

Jayne-Anne Gadhia: I think it has, to be honest, because the scale of that business was such that the Government felt that they needed to bail out the depositors.

Q655 John Mann: It’s because they had depositors though. Lehman Brothers was allowed to fail and it was rather large. Competition-there used to be lots of mutuals not that long ago and they all got de-mutualised and bought up, so there’s nothing to stop that happening with new entrants to the market if they are successful here.

Jayne-Anne Gadhia: That the new entrants could be bought up?

John Mann: Yes.

Jayne-Anne Gadhia: No, no, I’m sure that’s true-

John Mann: That would be competition.

Jayne-Anne Gadhia: It’s a possibility, but in my view we should be making sure that as banks grow, they don’t grow above a particular size-I couldn’t tell you what I think that particular size is-and if by acquisition they reach that threshold, I don’t think that those transactions should be allowed to take place, so-

Q656 John Mann: You’re saying there should be restrictions on concentrations of the market to stop the kind of thing that happened with the mutuals, where they’ve been bought up by larger predators?

Jayne-Anne Gadhia: I think that’s something that the Competition Authority should look at, yes, and indeed, let’s face it, that is part of the OFT’s remit on any M and A transaction to make sure that business doesn’t become non-competitive, and I think it important that we continue to do that.

Q657 John Mann: Allegedly. With the credit card industry, the new entrants to the market, like MBNA, became some of the worst culprits in keeping bad practices going, so there’s nothing to say that new entrants are going to be any better. Is it the case that what you will do, if you can get a significant foothold, is cherry-pick in the south-east of England like Metro bank wants to do?

Jayne-Anne Gadhia: Definitely not. From our point of view-although we are deemed a new entrant and I understand that-we have well over 2.5 million customers already and that’s certainly not cherry-picked. Our customers come from all over the UK and the reason for that is that we’re very successful online. Although we will be launching branches too, they’ll be distributed across the nation and we’ll continue to have our nationwide presence through our online capability and product sales.

Q658 John Mann: You will go in a few big cities and it’ll be those consumers who are comfortable with online transactions, so you’ll cherry-pick that end of the market.

Jayne-Anne Gadhia: Our model going forwards is to make sure that customers have access to us wherever they want it and wherever our products are appealing for them.

Q659 John Mann: But if they’re not comfortable with online banking and you don’t have a bank manager-you used the term yourself a few minutes ago-in a branch in the locality, they’re not going to go to you, so you are cherry-picking the top end of the market-the people who read the financial papers, who use online banking and who tend to work in large cities.

Jayne-Anne Gadhia: First, I’d say that 2.5 million people is not cherry-picking; it’s a significant number of customers that we have now. From our perspective, it’s our intention to grow over the next five years to over 70 branches through organic growth, but you’ll have read, I’m sure, that we continue to look at possible acquisition opportunities to enhance our branch position, and we’d be very keen to do that if the right opportunity arose.

Q660 John Mann: If one of the remaining small mutuals that is provincial-based demutualised, you would grab it and reduce competition further?

Jayne-Anne Gadhia: No, not at all. What we would do is bring the Virgin model to the country in a bigger way, and I think that’s important through acquisition.

Q661 John Mann: What about an area like mine that does not have a great deal of choice. Will you be looking to access the market in my area?

Jayne-Anne Gadhia: Forgive me, Mr Mann, tell me where your area is?

John Mann: No, let’s say traditional coal-mining areas.

Jayne-Anne Gadhia: Of course, absolutely.

John Mann: How?

Jayne-Anne Gadhia: Every product that we offer is a bulk standard banking product. We don’t have bells and whistles, we make sure that we’re good value and good service, and I think that’s a really important point. We want to give customers access the way that they want it, and that means online, in branches, over the telephone and on digital phones if people want it, and I think that that gives us great access to all sorts of areas.

Q662 John Mann: A lot of people in my area, from my observation, would like access via a branch. That appears to be their behaviour, but there are not many branches to buy up from anyone else and you are not there. How will you offer your facility to my constituents or are you cherry-picking?

Jayne-Anne Gadhia: I think I disagree with your view of cherry-picking, so we would offer our products to your constituency if we couldn’t do that in branches, and we aim to do that over time and to grow over time. One of the problems with growing as a new entrant is growing branches, as I think Vernon Hill said here a few weeks ago, is that it takes time, but it is do-able and it is our intention to get there in the end. But all our advertising is in the newspapers and on the television. It gives telephone numbers as well as online numbers for people to be able to access us. We’ll have call centres-as well as online, as well as branch, as well as digital technology. The intention is to be as accessible as possible to the people for whom we’re appropriate.

Q663 John Mann: Final question, do you intend to do any deal with the Post Office?

Jayne-Anne Gadhia: It’s certainly nothing that we’ve looked at.

John Mann: It has branches in my area and other mining communities.

Jayne-Anne Gadhia: Which I think is a great service that they offer and something that we fully support, but we haven’t looked at that.

John Mann: Are you going to?

Jayne-Anne Gadhia: Never say never, but it’s nothing that we’re working on at the moment.

John Mann: So, no.

Q664 Andrea Leadsom: Ms Gadhia, how important do you think the Virgin brand is, as distinct from any other bank? The fact that you have this Virgin brand-a bit like a Tesco brand or something-makes it speak of more products than just banking. Do you think that helps your business model?

Jayne-Anne Gadhia: I think it does. Indeed, some objective external research says it does exactly that, so at the moment, although we’re a very small bank, following our purchase of Church House Trust last year, external analysis-not that we’ve done ourselves-shows that people are as likely to buy from a Virgin bank as they are from any of the big five. I think the key to that, to be honest, is that so much trust has broken down in the banking sector that customers are looking for a trusted brand, and that we believe that trust comes from a package of things. It’s our corporate ambition to make everyone better off with Virgin Money, and for me that’s a mutual model for the future. It’s about giving customers a great deal on price and service, making a fair but not too high a return for shareholders, and creating a business where staff are happy, want to serve customers well and do a bit of good in the world. That’s what the Virgin brand can bring to banking.

Q665 Andrea Leadsom: So if you’re keen to see more competition, would you like it to be along the lines of an M&S Bank and a Tesco Bank and a Louis Vuitton bank for the wealthy? Is that where you see it going?

Jayne-Anne Gadhia: You mean outside the banks that we have at the moment?

Andrea Leadsom: Outside of banking itself, yes.

Jayne-Anne Gadhia: Well, let me put it this way: despite what I’ve said about the incumbents, the important thing, I think, is that we have the right expertise in banking. Again, the crisis has shown us that it is important that we have experienced bankers taking the banking business forwards and learning the mistakes of the past and creating new banks for the future. I have no view, really, on whether that should be a Louis Vuitton bank, although that sounds like a particular brand, but I do think that banks for the future need to find out what their particular position is in the marketplace-consumer champion, service proposition, price proposition, whatever that might be, or digital branch-and really build on that and give customers a great deal as a consequence. But at the moment, banking seems so homogeneous I don’t think customers have sufficient choice.

Q666 Andrea Leadsom: Looking at the idea of a diversified group, where financial services is just a part of it, could that also be partly a solution to the "too big to fail" question-in other words, where you have other resources, other sources of income and so on to support a particular banking activity?

Jayne-Anne Gadhia: Well, one of the things that I should say before properly answering that question is that although Virgin Money is part of the Virgin Group, that’s true from a branding position as opposed to a corporate structure, so we’re not a subsidiary of a big Virgin holding company.

Q667 Andrea Leadsom: So you wouldn’t be bailed by out by any other Virgin entity if you got into difficulty?

Jayne-Anne Gadhia: Exactly. So all our capital and profitability is ring-circled to the banking operation, which I think is entirely appropriate, and so my own view is that, no, every bank should be operating in a way that means that it’s going to be achieving sustainable profitability for the long term.

Q668 Andrea Leadsom: I think you have said that retail and investment banking activities should be split out-in other words, a sort of re-imposition of Glass-Steagall. Is that right, and if so, why do you think specifically along those lines? The reason for asking that is that, as my colleague, John, just said, it didn’t help in the case of Northern Rock, which wasn’t an investment bank, nor did it help in the case of Lehmans, which wasn’t a deposit taker.

Jayne-Anne Gadhia: As I said earlier, my view on that is not necessarily that we should cut the banks in half, but that maybe one of the banks, which has both those arms, should be operating two separate balance sheets, rather than a consolidated balance sheet, and that capital should be held separately in those organisations. I think that would go a long way towards achieving what I’m talking about. The reason that I say it, to be honest, isn’t just because of all the arguments that we’ve heard about investment banking; it’s because I fear that retail banking has been under-invested for a long time and that running a separate balance sheet, with separate capital and separate profitability, would perhaps refocus organisations to drive great service for customers and to compete most effectively in a retail marketplace.

Q669 Andrea Leadsom: Would you like to see the Lloyds and HBOS merger undone? Would you like to see that split out again?

Jayne-Anne Gadhia: To be honest, I really don’t have a view on specifically what should happen in the-

Q670 Andrea Leadsom: But you do have quite strong views on competition and on the need to improve competition, and presumably therefore you would be concerned about the market share of the Lloyds HBOS combined entity?

Jayne-Anne Gadhia: I think that Lloyds’ current account share is 30% and their SME share is 20%. That’s clearly significant and something that I’m certain the competition authorities are looking at. Whether or not Lloyds and HBOS should be split up is, I think, a very difficult issue, because of all the work and appropriate focus that is happening there, I’m sure, to make that integration work effectively, and then to turn around and ask them to split it all out again seems to me to be very unfortunate. Lloyds have been asked by the EU to sell a package of assets that will reduce the impact of that big group on competition, so from my perspective, making that asset sale effective would be going a very long way towards both not wasting the good work that’s been done and creating a more competitive environment.

Q671 Andrea Leadsom: But just to press you slightly, clearly Lloyds HBOS is an enormous entity with an enormous market share. You are keen to see smaller, fleeter of foot entities and more competition, so, almost by definition, you must want to see that merger reversed.

Jayne-Anne Gadhia: Well, as I say, I think that it’s a matter for public record that the EU have asked Lloyds to sell off some branches, including the Cheltenham & Gloucester, Intelligent Finance and the TSB brand, and I think that that will go a long way to creating some of those smaller entities that you talk about, which we genuinely support.

Q672 Andrea Leadsom: A final question: what do you think about breadth of product offering in a financial services entity? Do you think it’s important that they do have a wide range of services? Do you think that adds to, or detracts from, the risk if they are offering full service retail and investment banking services?

Jayne-Anne Gadhia: Put it this way: when I ran the Virgin One account 10 years ago, we found that we were able to be extremely focused by looking only at a very small range of retail products. We were able to do them well, we were able to explain them well, and we were able to train staff very well.

Q673 Andrea Leadsom: But what about risk specifically?

Jayne-Anne Gadhia: This was a fundamentally retail product that everyone had full knowledge of, where we could absolutely work out customer behaviour from a risk perspective. We very much managed risk, to be honest. It was a very sound business that was appropriately deemed to be sound by external parties, including the regulator. So yes, I think there’s something to be said for real focus in doing one thing very well, and I think that, perhaps when the eye is taken off the ball across a range of complicated subjects, it’s hard to do many things equally well.

Andrea Leadsom: Okay, thank you.

Q674 Mr Mudie: We keep being told by the big four or five that there is limited profitability in personal accounts. Do you accept that, and if so, why are you keen to get into this limited profitability market?

Jayne-Anne Gadhia: I think the interesting point is that, without a doubt, having read some of the evidence, there’s appropriate comment made that current accounts should take their fair share of branch costs, for example, and the invested costs that big banks have in their 3,000-branch network, for example. I guess inevitably when you absorb those sorts of cost against current accounts, the profitability looks lower. I think it’s true too that the costs of transactional banking are quite expensive, and as a consequence I don’t believe that current accounts from a transactional perspective are a cash cow. That said, was it only last year the current account market made something like £9 billion for the banking industry, half of which came from interest forgone, so I suspect that there is significant reason for banks to be in the current account market to manage their interest capability, as well as managing the transactional costs.

Q675 Mr Mudie: But that takes you to the other thing they keep telling us, that it’s a mature low-growth market-

Jayne-Anne Gadhia: It is a? I’m sorry, Mr Mudie.

Mr Mudie: A mature low-growth market.

Jayne-Anne Gadhia: Yes.

Mr Mudie: Now, I notice that you’ve been in business for 15 years at Virgin Money, and only after 15 years are you going into this market, and over the next five years you’re intending to have only 70 branches. That suggests either that you are going to be content to be a small player-a very small player-or that you are depending on the Government breaking up some of these big banks. Which are you going to be satisfied with?

Jayne-Anne Gadhia: I’m not sure we’ll ever be satisfied with either of them in the way that you mean, but in terms of our plan going forwards, we have a strong plan to grow organically, which, because of some of the barriers to growth, will be quite slow, and our board and shareholders have accepted that that’s the case. If we are able to make an acquisition, obviously we can grow more quickly and bring Virgin service and products-

Q676 Mr Mudie: Okay. Sorry to cut you off, but if you then say, "We are ambitious to grow branch by branch," what barriers are stopping you making that 140 or 250 over five years?

Jayne-Anne Gadhia: There are a number of reasons, to be honest. There’s the availability of capital. We want to be able to grow in a controlled and sensible way, and we believe that opening a branch a month is quite a fast thing to do. If you think about the practicalities of training staff properly, treating customers properly and making sure systems work effectively-we want to be in this business for the next 100 years or 200 years. We’re not here to do it as fast as we possibly can for any particular reason, so doing it right is really important for us, and we believe that means that we have to take it a step at a time.

Q677 Mr Mudie: Yes, but we are looking at barriers to entry to be institutional things, but you are just mentioning capital. That’s a barrier to entry in any field, an appropriate amount of capital. So there’s nothing that is stopping you, apart from your ability to raise the capital and train the staff?

Jayne-Anne Gadhia: I think there are four strategic barriers to growth in the marketplace, to be honest. The first one we’ve talked about, which is the oligopoly of the other banks and the fact that they have so many customers locked in. The second is product-

Mr Mudie: Well, they don’t have them locked in. We have had Metro, and he takes a totally different approach, a different view and different attitude from Virgin. He just thinks he will win and he’s well ahead of his growth plan already, whereas when I read your paper, I thought that Virgin’s putting all its money-or whatever money it has-on the break up and a chance purchase.

Jayne-Anne Gadhia: I wish Metro every success. I read Vernon Hill’s evidence, and I was inspired by it too, and I think we’ll be in a place where our growth plans will probably be similar to or exceed those, because don’t forget, we already have 2.5 million customers. We already are a very significant internet bank, so we’re adding our branches to that, rather than investing all our money in rolling out branches, and that’s very important, I think.

You know, 2.5 million customers is not an insignificant business, so we’re not so much a brand new entrant perhaps, in the Metro way, as an entrant that’s growing into banking and trying to do that properly. I think that’s really important. We want to do that in a way that does unlock the current account question, and I do agree, and I’m not suggesting that there is no current account movement. I think Barclays and Lloyds said that they both moved 1 million current accounts last year-well, they probably moved them between the two of them-and that’s significant movement, and for us, to be able to attract a number of those customers to our current account would be extremely attractive. So again, we’re very much talking about growth there. But the fact of the matter is that 95% of customers every year stick with their current bank, so I believe that’s an oligopoly. For me, that’s the first strategic issue that makes it more difficult to grow to a really significant scale. That’s my first point.

My second point is one about product, and again, we touched on it. I really don’t think there’s any such thing as free banking. I really believe that customers need more transparent disclosure around how current accounts work, and I believe that we should make it much easier for customers to move accounts than is currently perceived and is actually the case. That shouldn’t be beyond the wit of man. When the big banks say it’s impossible, they mean it’s expensive, and we should be able to overcome that, I think.

My third point-again, we discussed it with Mr Norman-is to do with capital and whether we can level the playing field by requiring the bigger banks to hold more capital against their systemic risk. My fourth point is about acquisition. If we’re serious about competition and using acquisition opportunities to enhance competition, we should be applying a public interest test to make sure that those acquisitions are good for competition.

Those would be my four strategic points: while I’m saying they’re a barrier to growth, I’m not suggesting they’re going to keep us tiny. I’m just saying that my ambition would be to be the fifth or sixth biggest bank in the UK and to attract customers, give them great service and great products, and I want to be able to aspire to that objective. Those are the four strategic barriers that I will need to find ways to overcome to get there.

Q678 Mr Mudie: I’d just like gently to press you further. You referred to bank customers being locked in, then you said a bit more gently that 95% of them don’t switch. Looking at the behaviour of bankers, which has attracted more public attention and real anger; looking at the figures on customer unhappiness; looking at the publicity that’s been given to the opaqueness of the charges and the fact that that amounts to over £8 million to customers on personal accounts; and looking at the cheapness of property, why on earth is someone like you, or your bank, not thinking, "This is the time when we can burst this business wide open"? What is the problem with moving so easily?

Jayne-Anne Gadhia: I think as much as anything, there are two things. It takes-

Q679 Mr Mudie: Well, no, no-that’s the wrong question. Why the hell are you not taking action-the time in the market is now? What is stopping you in Virgin getting these customers to switch in great numbers? If Metro were up in Yorkshire, I would switch tomorrow, and I’ve been with my bank 35 bloody years, but they are a scandal. Why are you not inviting us to join you?

Jayne-Anne Gadhia: I’d be delighted to do so, Mr Mudie, next year when our systems are there and ready in branch to welcome you. One of the issues-I know Vernon talked about it, too-is that, as a new provider, we have to invest heavily and properly in getting the IT systems to set up really good banking systems for the future. We received the capital to fund our bank in August just gone, so getting to market within 18 months or so with a full range of banking products in branches to welcome people like you is absolutely what we’re focused on.

The key issue, though, or a key issue from a transfer point of view, is, wouldn’t you feel so much more confident if you could simply move your account number to me or to Metro and know that all your direct debits and standing orders moved with it? I can talk, and lots of people can talk, about doing that, and frankly I think it’s groups like this one that need to make a policy intervention to make that a requirement.

Mr Mudie: Except, Jayne, not that I have a good word to say about Barclays, but the head of retail banking, who was before us last week, spelled out in detail, not the plans, but the arrangements they have to switch people, with financing in between switching, so they don’t lose if something happens to the direct debit. It seems to be possible to do.

Jayne-Anne Gadhia: Yes, and to be honest, in the Virgin One account that I discussed earlier, we made that happen too, and for us, it took an army of people to make sure that we were managing it appropriately for customers, and inevitably, when you get so much manual intervention, some things go wrong. There’s nothing worse, is there, as a customer, if you find that you thought that you were going to pay off your credit card bill-let’s say this month, because the standing order should go through-but, because of the process in the bank, with whatever good intention, it doesn’t go through automatically. For me, the real solution to this is not to have to worry about changing them from provider to provider, but to lock those monthly transactions into an account number and port the account number. And it would change and revolutionise-

Q680 Mr Mudie: Yes, but we’ve heard that is going to be very expensive, but what is wrong with, as Barclays suggest they are doing, putting in a guarantee that they will fund you between the switch and if anything goes wrong, they’ll pick up the price? So I would switch tomorrow if I thought, "Well, they will make the arrangements, and if it takes six months, it’s nothing to me, because they are taking care of it".

Jayne-Anne Gadhia: Would you really, Mr Mudie? I think that’s fine on paper, and then when you get into the process and something goes wrong and you’re stuck with a call centre waiting for 40 minutes for the phone to be answered, the frustration means that people just give up, and I think that’s what’s happened. It isn’t impossible, I’ve seen it happen at RBS and I know that Helen Weir said the same thing, but sometimes it can take between two and four weeks. The trouble is that so many people think it might not happen perfectly, and, "I need it to happen perfectly and my life’s too busy to worry about my direct debit."

I absolutely believe that if we can give everybody a single National Insurance number, and we’ve been able to do that for decades-we can change everybody’s telephone number whenever they want to change between phone providers-we should be able to change people’s bank accounts. I hear people say that that’s very expensive and I’m disappointed to hear those people then say, "And of course the customer would have to bear that cost." This is from banks that are making billions of pounds in profit. I think that the banks should work together and we would be delighted to do so-of course, we’re in a different position-to implement a system that would revolutionise the way in which the banking system worked.

Q681 John Thurso: In your submission, you make it clear that you believe it’s important to become a full service bank, offering relationship as well as transactional banking products. You also make it clear that that means that you need to go to the SME market, but you then come up with this catch 22, which is that-

Jayne-Anne Gadhia: You’ve got to be in it to win it.

John Thurso: Yes, you have to be in it to get in it, as it were. Can you amplify that?

Jayne-Anne Gadhia: The way in which the SME market works, particularly because it’s dominated by such a small number of providers, is that there would be, we think, negative selection. In other words, businesses that were turned down by the big banks would be more likely to go to the small banks, as one tries to get into the SME market. Now, that’s not universally true, and absolutely there is a need for more competition from SMEs and better service for SMEs. I think small business people really want great service, but the way in which SMEs get service is quite complex. The big banks have that tied down to a certain extent, and it’s one of the reasons why the sale of the RBS branch network may have been a bit of an opportunity lost perhaps, because so much SME business went with that transaction that we’ve perhaps locked that SME world into the five banks in the same way that retail banking is locked to them as well.

Q682 John Thurso: Is that then just a fact of life or is there a policy change we should be looking at?

Jayne-Anne Gadhia: I suspect on the SME side of things, it’s less policy and more being able to grow as an organisation, and again, as I said in response to another question, to the extent that new entrants are able to acquire smaller portfolios of products such as current accounts and SMEs, it will definitely introduce competition to the marketplace and reduce this risk of entering the market from nowhere.

Q683 John Thurso: How do SMEs suffer as customers from the current set-up?

Jayne-Anne Gadhia: Because I’m not in an SME business, I’m talking not from personal experience, but I think that we’ve all heard, and perhaps know personally, people who are finding it difficult to get additional lending or support to grow their business in difficult times, and we at Virgin, given that we’re such an entrepreneurial company that has set up so many businesses, feel that it’s important to support that sector-for banks to support that sector as much as we possibly can.

Q684 John Thurso: With great respect, those are wonderfully warm words-like all bankers, they all want to lend, but they just don’t do it-but what do they mean in practical terms? What can you do practically that will make me move my small company in the north of Scotland from its current home to your bank? What is the advantage for me? How am I better off as a consumer?

Jayne-Anne Gadhia: As an SME person, do you mean?

John Thurso: Yes.

Jayne-Anne Gadhia: When we were looking at potentially acquiring the RBS network, we gave some thought to all this, and I think that, like all customers, the owners of small and medium businesses want proper, personal service. They want people who understand their business, and they want their banking to be made easy, and as far as possible, a pleasure, rather than an added burden in a busy life, when they want to be focusing on growing their businesses.

Q685 John Thurso: What I want above all is that, when I need an overdraft, you say yes.

Jayne-Anne Gadhia: Absolutely.

John Thurso: And it doesn’t cost me too much.

Jayne-Anne Gadhia: Looking at credit policy, lending criteria and having a personal relationship with the bank manager, such that that lending decision is made much more easily, I’m a very big advocate of making credit decisions as close to the customer as possible. One of the big problems with banks that have grown so big is that credit decisions have been more and more centralised, and for the poor guys who are facing the customers in branches, whether they are SME customers or not, the computer says no. It’s difficult to make the credit decision.

I was very fortunate to work with Sir Brian Pitman for two or three years, before his death last year, and we talked very much about our banking model being back to the future-let’s use new technology to bring old relationship banking back to the consumer and to the SME business, and I think that is definitely a way to change the market.

Q686 John Thurso: A last question, if I may. Back to the future I suppose means you have a human being relatively locally who is empowered to take a decision. That was the Bank of Scotland model, and the Lloyds model is to do it centrally with a matrix, and it was Bank of Scotland who got into trouble. Can you prevent that by doing what Metro suggested-by each branch having to have its own capital, as it were? In other words, having a branch record of deposits rather than, as now, the whole thing is obfuscated? Is that a policy measure we should be looking at?

Jayne-Anne Gadhia: I think that that’s a really sensible way forward. I believe that Handelsbanken do something similar, and we admire their model and Metro’s model, such that we have a team within each branch that’s responsible for its own capital, its own profitability, its own customer service.

Q687 John Thurso: And then you put the human being in charge of the risk as well as the reward?

Jayne-Anne Gadhia: Yes, and then you centralise remuneration, and you centralise risk management to make sure that everybody’s as consistent as possible. I think that, in that way, we get the best of both worlds.

John Thurso: Thank you.

Q688 Mark Garnier: Can I turn to the barriers facing new entrants to the banking market? You were a new entrant in 1995, when we had a different regulatory regime. Lord Turner came in earlier, and I specifically asked him about the barriers to entry with regard to the regulatory process, and I think that until Metro Bank came to the market, they hadn’t regulated a new entrant. Do you have any views on the regulatory process? I know it’s slightly difficult for you to answer that, because you haven’t gone through it as a new entrant, but from your experience of dealing with the FSA, do you think there are any issues that you would want to be addressed in respect of new entrants coming to the market?

Jayne-Anne Gadhia: I think I could argue that we have gone through it as a new entrant, and the reason that I say that was that we achieved approval to own our banking licence only last January, with the purchase of a small bank, Church House Trust, down in Yeovil. During the last quarter of last year, I and the team at Virgin Money were going through the FSA approval-the change of control process as opposed to a new banking licence approval. I have to say that we found that process entirely appropriate. I found it demanding and challenging, but particularly given everything that we’ve gone through, I think we all expected it to be such. It certainly didn’t feel like the approach was, "The answer is no, now what’s the question?" It was very much, "Okay, we understand what you’re trying to do. Let’s discuss your business plan, let’s discuss how you’re going to get there, who are your team, what’s your governance, how is your capital going to be managed, how do you assess risk?" It was only having gone through that entirely appropriate process that, in January, we were approved to take ownership of the bank.

Q689 Mark Garnier: So you’re happy with the FSA?

Jayne-Anne Gadhia: Completely, absolutely. We have a really strong relationship with the FSA and the time scales that we all believed would be achieved at the beginning and they hoped to achieve were indeed achieved.

Q690 Mark Garnier: How long was that?

Jayne-Anne Gadhia: Because it was a change of control process, I believe it was three months.

Q691 Mark Garnier: Okay, fantastic. Vernon Hill, when he came in-somebody mentioned this a bit earlier-talked about the IT systems, and particularly he was talking about how in America you have off-the-shelf IT systems, which are kind of pre-regulated almost, whereas here, there’s no such thing and you have to construct your own. Do you see that as a significant barrier to entry?

Jayne-Anne Gadhia: Absolutely, definitely, and I think it’s quite interesting. I think that the reason is that in the UK we’re focused on developing product, and we view systems as manipulated systems to distribute product. I believe that in America, product, if you like, comes in the box and then service is the differentiator that’s wrapped around that, and I think that’s a very interesting model.

Q692 Mark Garnier: Is that a regulatory problem or do you think that’s just the fact that some IT company hasn’t entered the market trying to provide this type of service?

Jayne-Anne Gadhia: I think it’s all to do with legacy systems, and so many of the big banks have very expensive legacy systems, as we know. It’s meant that when providers have come in trying to offer it-indeed they have, although off the top of my head, I can’t give any particular examples, but they definitely exist-it’s been difficult, or the big banks haven’t welcomed them necessarily because they have their own systems that they have built on their own platforms over years, so as a consequence, we’ve ended up with a tangle of IT systems, which means that we don’t have a common model that new entrants can use. Developing IT to get into banking is very complex, very expensive and something that we’re spending a lot of time on. To Mr Mudie’s earlier point, it’s the reason that it would take us from licence to being able to welcome you to our Yorkshire branch in perhaps 18 months, and that’s because we want to be able to offer you the full range of service across the full range of access channels very well.

Q693 Mark Garnier: This also comes on to the argument of smaller banks, and we have obviously talked a great deal about breaking the banks up to a certain extent. Not only do they allow greater competition, but they also create a greater marketplace for this type of IT system, should somebody come in. Do you think we are culturally too wedded as consumers to the big banks, and that we’ve got to break through that cultural problem? There seem to be so many strong arguments as to why you should have smaller banks, which is the competition and the fact that you are going to have more off-the-shelf systems to go with it, the fact that you’re going to have more direct lending coming through and the fact that you can have more local intelligence. You have a bank for Kidderminster, a bank for Retford, a bank for wherever. Do you think that cultural thing is a big problem?

Jayne-Anne Gadhia: I do. I think that it probably happens, and banks are very good at it. Almost from university-hood or student-hood, if not from childhood, people get their first bank account, and a lot of people probably get their first bank account either because it’s where mum and dad were or because it’s not where mum and dad were, and then you stick with it because it’s such a pain to move. I think there is a cultural point there, yes.

Mark Garnier: And yet you have 2.5 million customers, so you are living proof that you can buck the trend.

Jayne-Anne Gadhia: Yes, absolutely, and that’s to do with the fact that-as far as possible; we don’t always get it right-93%, I think, of our customers are either satisfied or extremely satisfied, which we’re delighted with. I think it’s because we aim first and foremost to give customers great service.

Q694 Mark Garnier: The OFT has also shown scepticism-that it is very difficult for new entrants to the banking market because of the absence of an extensive branch network. Again, that is not really your experience, is it?

Jayne-Anne Gadhia: I’m sorry, that that has been an obstacle?

Mark Garnier: That that is an obstacle.

Jayne-Anne Gadhia: Yes, as I said to Mr Mann, we’ve been very successful online. I don’t believe that’s cherry-picking. I do believe that’s trying to give the widest possible population-understanding the limitations-access to the product.

Q695 Mark Garnier: Can I just develop the point that John was making, which is, do you tend to select your customers because they are techno-geeks? Sorry, I’m probably being very rude to your customers, but is it because they like banking online or because they’re looking for an alternative type of banking? Do they tend to be younger?

Jayne-Anne Gadhia: No, not particularly. I think our average customers by age-we have 2.5 million customers, so it’s a full range-tend to be between 35 and 42. That is where the focus is.

Q696 Mark Garnier: So these are people who are completely computer literate?

Jayne-Anne Gadhia: I guess that’s true, and attracted to the Virgin brand.

Mark Garnier: And attracted to the new method of banking?

Jayne-Anne Gadhia: And attracted to the new method of banking, definitely.

Q697 Mark Garnier: So you planning to open branch networks is trying to attract those other people, such as John was talking about, who live in mining communities?

Jayne-Anne Gadhia: Yes. Whereas in the past banks have thought about distributing product to customers, saying, "We’ll distribute it through branches, or through the telephone or online," we’re trying to create a model that gives customers access to us in whatever way suits them best, so they might want to, let’s say, explore what products we offer online, but then pop into the branch to talk to somebody about it, and that’s one of the key reasons that we’re opening our branch network.

Q698 Mark Garnier: And you are going to do it by organic growth, as opposed to the way Santander has done it, by acquisition?

Jayne-Anne Gadhia: Well, organic growth is plan A, and if acquisition opportunities come along, obviously we’ll look seriously at them.

Mark Garnier: And do both, okay.

Q699 John Thurso: Just a very quick question, for the record: who owns you and what is your own capital structure at Virgin?

Jayne-Anne Gadhia: We are owned roughly 80% by the Virgin Group and 20% by Wilbur Ross, which is an American PE firm.

Q700 John Thurso: Is there a barrier to you expanding through raising capital or do you have access to the capital that you need?

Jayne-Anne Gadhia: We have access to capital through our existing shareholders and the opportunity to raise capital through other investors at this point, but we’re not quoted on the markets, if that’s what you mean, at this point.

John Thurso: Thank you very much.

Q701 Chair: Can I take you back to your four barriers to entry? One was product and you were saying, "We need more transparency in disclosure." Would that extend at the level of the customer to enabling the customer to see how much interest forgone is made on his account?

Jayne-Anne Gadhia: Yes. We believe that it’s possible to show-certainly against, let’s say, base rate-how much interest is forgone. I think there needs to be a lot of work done to understand how best to communicate that in a simple, clear, straightforward way. I think there’s a risk that we could confuse customers by giving too much information, but our intention certainly, as we plan our current account, is to be able to show customers the cost of their banking, which is the transaction cost and also the interest forgone on their account.

Q702 Chair: And another of the barriers you mentioned was the public interest test you are proposing on the acquisitions issue. What do you think would be added by a public interest test? What do you think we would discover?

Jayne-Anne Gadhia: What we’re really saying is that, as Government assets are sold, we think that it’s important that the boards of the companies selling them are not looking solely at the economic benefit of that transaction, but are also appropriately mindful of predominantly the competition effect. We also think that the effect on jobs is important, so in going forwards, it’s quite clear that if a big incumbent buys a smaller part of a competitor’s business, it’s possible to reduce costs through reducing jobs, and I think that that’s something that should be taken into account as well.

Chair: Okay. Thank you very much for giving such clear evidence this morning, with no banker-speak. We really appreciate it.

Jayne-Anne Gadhia: Thank you.

Chair: It has been very interesting and added a lot to our inquiry. Thank you very much for coming.

Jayne-Anne Gadhia: Thank you very much.

Chair: We will now take a three-minute break and begin at 11.10 am.

Examination of Witness

Witness: Ana Botín, Chief Executive, Santander UK, gave evidence.

Q703 Chair: Let’s begin. Thank you very much for coming to give evidence before us this morning and welcome to your new job. First, would you say a bit about Project Merlin, the project led by John Varley, for the banks collectively to engage in the bonus issue and also lending to SMEs, and where Santander stands on that?

Ana Botín: Sure. Good morning, I’m very happy to be here. We are in discussions, so discussions remain ongoing. We at Santander very much support the overall, I would say, economy-wide objectives of Merlin in terms of growing lending to the economy and supporting SMEs and communities. As a matter of fact, we have been growing our lending in the last few years, and last year around 27% to SMEs, so we’re very supportive of all these objectives. Our intention right now is to participate specifically also in the lending commitments. As I said, we’re already growing our lending to SMEs. That is basically where we stand.

Q704 Chair: So the reports that you had withdrawn from Project Merlin are mistaken?

Ana Botín: As I mentioned, we intend to be in Merlin, but in our own way in certain of the areas that Merlin is working on, so that is the reason, maybe, why these reports have come out so.

Q705 Chair: Turning to your retail customer base, what explains Santander’s persistent poor performance in consumer satisfaction surveys?

Ana Botín: The issue of service quality is a very important one for Santander, and we have had issues in the past few months. As soon as these issues came out, we apologised and started to take action. We are beginning to improve. There’s a lot of work to be done, and we’re working basically on two levels. One is in fixing the underlying issues-improving processes and getting queues down in the branches and so on. We have 25 million customers. During 2010, we integrated 5 million customers from A&L, so this has meant that, unfortunately, we have not done the best job for all of them. So we’re working on the underlying. We’re also working-it’s a big priority for us-to improve the complaints handling, and there’s also evidence that we are beginning to do that much better.

Q706 Chair: So it’s, "Haven’t done well enough, but is going to do better"?

Ana Botín: It’s a top priority for the bank and for me to improve service quality and also to improve the complaints handling, so, for example, one of the issues that we have done this year is that we’ve added 1,000 new people just to handle complaints, 600 in the branches and 400 in the call centres. We’re aiming to have all of our complaints-today, it’s 80%-fixed in 48 hours. So there are many issues that are ongoing. We are improving, and of course our objective is to have all our customers treated in the best possible way.

Q707 Chair: And what about the record on SME lending? How has Santander been doing there and what steps are you taking to improve that?

Ana Botín: On SME lending in Santander, there is a ranking on eBay and we come out best in the UK, so we are the bank that has the best record in terms of SME lending. There is a number that are not happy still, and, as I said, it’s the best track record. SME lending is the most difficult business for any bank, so it’s going to be one of our priorities to become not only a larger player, but also a better player. Understanding the customer, being their partner, really going through with them in all the sectors of the cycle-sometimes it’s not easy for them, so we have to make sure we understand them so we can be with them in the worst times-are absolutely some of our priorities. We’ve added 150 new relationship managers this year in SME lending.

Q708 Chair: Why is it that other banks cannot get money to their SME clients? Why are they complaining to us so vigorously?

Ana Botín: As I said, lending to SMEs is probably the hardest thing a bank has to do because we’re attending hundreds of thousands, even millions, of small entrepreneurs. We need to get the person who is dealing with that entrepreneur understanding the business, and this is not easy. Entrepreneurs usually are very successful, hardworking and very experienced in what they do, so understanding their business is the key for us to be able to be with them not only on the lending side, but on the products and giving them the services for export. Given the global economy today, very small companies are selling all over the world. So the whole range of products-the way we deliver that to the SME-is quite complex and something most banks have an issue with sometimes. The other issue today is liquidity. Given the situation in the market, liquidity is also an issue in growing lending at a faster rate, as a system.

Q709 Chair: I just want a little clarity on why it is these customers are complaining to us about other banks so vigorously-indeed, they probably complain a bit about your bank, but less so than others-and how we’re going to address this apparent shortage of reasonably priced lending to SMEs as we try and secure the recovery.

Ana Botín: Again, on the retail side, Santander has 25 million customers. Most of them are retail customers today. In SMEs we have a small market share-3%-but we’ve tripled our business since 2007, going from £1 billion to £3 billion in lending, but still being able to deliver that quality of service is much harder when you have to personalise the service. You need specialist relationship managers. You make sure that those relationship managers can offer the full range of products that the customer needs. Sometimes they’re quite sophisticated, even though they might be small-trade finance, for example, or international confirming. All these products are not easy sometimes to understand, but, as I mentioned, there’s another issue, which is the structure of the market-the cycle we are in right now-which means that liquidity costs for all of us have increased substantially, and this is something that we have to pass on in some way or another to the customer. There is less demand at these higher prices. The other issue is confidence. Customers need to be confident that the economy is growing to invest, so it’s both a supply and a demand issue.

Q710 Chair: These huge rates of interest being demanded by a number of banks for SME loans cannot fully be explained by the liquidity question, can they?

Ana Botín: By that, and also it’s a higher risk business, so at the end, you have to take into account the risk return and, depending on the segment, this is the way the-

Q711 Chair: The banks have become very nervous about this recovery?

Ana Botín: It has been a long crisis. It’s a lot of customers, and many economies like the UK and others are deleveraging. Deleveraging means there’s less capacity and less capacity obviously is companies that are either retrenching or, some of them, disappearing, so it’s both an issue of demand and supply.

Q712 John Mann: I seem to recall your predecessor coming in front of this Committee in 2009 and giving the distinct impression that there was a superior Spanish model of banking as opposed to the Anglo-Saxon model. The Spanish economy seems to have collapsed compared to other European economies, so what has gone wrong?

Ana Botín: I wouldn’t say there’s a superior banking model or inferior. At the end, I think we need to look at what customers get and the products they have. It’s very important that they have the choice of products, so you need to be in a market that offers competitive pricing and good products, then customers can move around and change. In that respect, I believe that the UK and Spain come out as quite competitive and good markets, both for retail and SMEs. In terms of the question on Spain, Spain has had 15 years of very high growth in many cases. I’m not sure of the exact figure, but it is one and a half to two percentage points higher than the rest of Europe. Spain is now in a period of adjustment. The adjustment is happening on the current account. It’s gone from 11% to 5% in 18 months. The savings rate is going up. Again, as other economies, Spain needs to be leveraged, so the economy is contracting, the savings rate is going up. The Government is making many of the necessary reforms so that the country can get growing again. In the banking sector, it’s a bad three years with one very small institution having to be intervened on. What is happening now? A very important step was taken in July, when a law for savings banks was changed so that private capital could go into the savings banks. The worry now in the market is not the Spanish banks, which are among the strongest in the world, including Santander, but the savings banks. Savings banks now will go into a process of recapitalisation and attracting private capital, and this will be very important also for the future growth of the economy.

Q713 John Mann: In the United Kingdom, how many branch closures do you plan for this year?

Ana Botín: None. We are planning to open. We have-

Q714 John Mann: So there will be no closures?

Ana Botín: No. There will be no net closures. We might reposition some branches, but then, net, we are opening branches and that is the important issue. We have not closed branches in the last three integrations. Going forward, we might reposition some branches, but, net, we plan to add to our branch network. Branches and the personal contact are key aspects of our banking model-being close to the customers. So we have 1,300 branches, or a bit more than that, and we’ll end the year with over 1,700 branches, with RBS branches.

Q715 John Mann: Final question. Your bank has been somewhat under the radar in the discussion on bank bonuses, so how much do you pay in bonuses? For the last year, what was the highest bonus that anyone from the bank was paid and will that be the same or more this year?

Ana Botín: Just to give you an indication of where our bonuses will stand relative to the UK, in the bonus stats, we paid 1%, so that is the proportion of the total bonus pool in the UK system, whereas we have over 10%, and in some cases 13%, of the retail market. The highest bonus has been the CEO bonus.

Q716 John Mann: How much is that?

Ana Botín: I was not involved in that; it was my predecessor.

Q717 John Mann: But you must have a good idea how much it is, or was?

Ana Botín: I’m happy to tell you my bonus last year in Spain, running Banesco, was €1.7 million.

Q718 John Mann: And that is what you would anticipate this year?

Ana Botín: The bonus will depend on performance in the UK and in the UK market, and on what CEOs currently get paid for running a business. In our case, it’s related to performance and significant portions are deferred, and deferred in shares, and we believe it’s very important that our bonuses in general are aligned to the interests of the bank and our shareholders.

Chair: We have had a good canter round bonuses in recent weeks. David Ruffley.

Q719 Mr Ruffley: Thank you, Chairman, and good morning. Helen Weir from Lloyds gave evidence to this Committee to the effect that the current account market is a very price competitive market right now. Do you agree with that?

Ana Botín: Currently, Santander has around 7 million current accounts and we see ourselves as a challenger bank. We would like to continue growing in general in the UK market and we have been able to attract 1 million new current accounts in 2009 and another 1 million in 2010. We do believe it’s a market where transparency and the ease of switch could be improved, and we would welcome, and we are working ourselves, on ways to do that. I say it’s important to put that into context of the overall financial services market. In that case, it’s an extremely competitive market overall for different reasons and probably the current account market is the one that has less competition. Again, even though switching has been made easier in the last year in the industry, and we, in particular, are working to improve that, it’s important that customers have clear information on what they’re paying and what they’re receiving for the current accounts, and it’s very important that they can change and switch as easily as possible.

Q720 Mr Ruffley: I understand that, but the things you have talked about-greater transparency and the rest of it-have, to a large extent, been true for many years in British banking, yet we still have this problem of lack of competition. One indicator of that is lack of switching. What steps would you like to see put in place-either by yourselves or by Government through a new regulatory regime-to give you the opportunity to compete with the big four? How to improve competition, from your perspective?

Ana Botín: I would like to reiterate that we have doubled our number of current accounts organically in three years, so we have been very successful and we are introducing competition to the current account market.

Q721 Mr Ruffley: How have you done that? I think it’s laudable. How have you done it?

Ana Botín: We have done it, very importantly, through new products and innovation. We have launched very attractive products like the zero current account, which has attracted 176,000 customers. That’s zero fees if you go into overdraft. It’s been very successful with our customers. We have the best buy also for in-credit current accounts with 5% interest. The key here is to be able to have competitive institutions-and competitive means efficient institutions-that can also manage risk appropriately, of course. That’s very important for a bank, and that is the best way to introduce more competition into the market. So it’s in our interest to have more information and more transparency for the customer-for example, in current account statements, which is something that was not done before and is now being done.

For the end of this year, we have all that information once a year for our customers, but they can access through different ways-in the branches or on the internet-the different rates and different products that we offer, with the cost and the interest paid in the case of credit. The other issue is the direct debit institutions-how that gets done. Again, that’s an area where I believe there has been significant improvement in the last year. So, ease of switch, making sure the customers are aware of what he or she is paying and receiving. Our studies show that there is a perception that customers see this as an issue; it’s a hassle to change and it’s not that much the case for the majority of customers, so I think consumer education is also important.

Q722 Mr Ruffley: Looking at your big four competitors, would competition be enhanced or stay the same if investment banking was split off in those four banks from retail, and are you arguing for that?

Ana Botín: We believe that the universal banking model is important for the economy and to support customers big and small. The way that that business is managed internally and how capital is allocated is, we believe, more important in terms of competition and stability of the banking system. We believe a very strict separation is probably not what would make the system safer or more competitive, and those are the key issues when one analyses what is the banking model we want-here and in the rest of the world-that we should bear in mind. Many times, those two objectives are not exactly aligned. It is a complex issue, rather than just saying that by separating pure retail commercial banking from universal banks we’re going to have a better or more competitive system. By better, I mean safe and sound and competitive.

Q723 Mr Ruffley: You’re saying you’re not arguing for that.

Ana Botín: We’re not, no. Santander is 85% retail and commercial banking, but we do have a small portion of our business that is managing our own balance sheet and helping our customers to manage their risk. When we speak about SMEs or large corporates, we offer them interest rate or foreign exchange services, for example, and in very strict separation that probably would not fit into the model. We think that that model is valid and has proven during the crisis that some of the most stable and successful banks were universal banks and large banks.

David Ruffley: Okay, thank you.

Q724 Michael Fallon: How much mortgage lending did Santander do in the UK last year?

Ana Botín: Our total mortgage book is around £160 billion or £170 billion, and of that, we turned over-our new business-around £40 billion, but I’d like to get back to you on the exact number. In terms of market share, the number is 18% of all the new mortgages in the UK. That is one in five mortgages done by Santander.

Q725 Michael Fallon: How much do you expect to do this year?

Ana Botín: The market has been softer, so in terms of overall size and how many mortgages, probably about the same or maybe a bit more. We are still aiming to gain market share. Our current market share is a bit below 14%, so we would aim to do more than our share and grow.

Q726 Michael Fallon: To increase by share or by volume?

Ana Botín: Our projection right now is for the market to be relatively stable in mortgages, or maybe grow a little bit, so we will grow our mortgages and grow market share, but the exact growth is difficult, depending on what the market is going to be doing.

Q727 Michael Fallon: One of the consumer groups has told us that for those looking to buy for the first time, conditions have worsened significantly.

Ana Botín: We have some very attractive first-time buyers’ products-I’d be happy to send the details to you-but we do have an agreement with another institution to offer that product, so we have been active in the first-time buyers’ market.

Q728 Michael Fallon: Given how far the policy rate set by the Monetary Policy Committee is now detached from the actual rate that borrowers are being charged, will your home owners have to match any increases that now transpire from the MPC? Will they have to pay more than that increase or less?

Ana Botín: It depends on the product they have. We have a fixed rate product; we also have a variable rate product, so it will depend. Fixed rate obviously for the first two years usually is fixed, so there will be no effect if there is a change in interest rate. The variable obviously will change if rates move up.

Q729 Michael Fallon: But how will it change? Will they have to pay the full increase of any increase in the policy rate?

Ana Botín: If they stayed with that mortgage they would, because this is a fixed spread, so the spread is fixed in the variable rate and, depending on the base, it moves up or down. If you go for a fixed-rate product, you would have a fixed rate mortgage, obviously not affected by interest rate movements. The interesting thing in this market, which at least to me is a surprise, is the very big turnover, so the average mortgage is four to five years. Typically, in Spain, for example, it’s 12 years, so there’s a very big turnaround of the whole mortgage market, plus there’s another interesting thing, which maybe just from looking at the banking-pure banks-is not evident, which is the big amount, over 50%, of the mortgages originated by IFAs, the Independent Financial Advisers.

Q730 Michael Fallon: Do you think there is any action that regulators here could take to make it easier for first-time buyers-to make it easier for you to lend to them?

Ana Botín: Again, what’s important is to have a competitive market, so I think different banks at different times will have different strategies. Again, competition is the best way to get first-time buyers to have access to a home. It’s important that some of the regulations that are in place ensure that the market is not going against competition. Even though it’s not exactly about first-time buyers, the mortgage market review, for example, in terms of income verification, could also-if it is approved, as is being discussed-hinder competition by introducing obligations. We are now allowed a fast-track method of approval for mortgages that allows us to rely on the Independent Financial Adviser’s income verification. If we had to do that ourselves, it would hamper the approvals and, therefore, the market, so that is a general comment on how we could be more inclusive in allowing everybody and every single different type of customer in the UK to have access to an attractive and competitive product.

Q731 Michael Fallon: But you wouldn’t want to go back to the days of self-certification, would you?

Ana Botín: What’s important is that we are allowed to go, as we have been now, through the Independent Financial Advisers for verification of income. This is clearly an advantage. What we would not like, as has been discussed-it’s another important issue in that ongoing process-is banks that have primary current accounts with that customer being allowed to do that, but banks that don’t not being able to do it. Again, that is one of the issues in that regulation that would affect us as a challenger.

Michael Fallon: Thank you.

Q732 Andrea Leadsom: Ms Botín, I wanted to talk to you about SMEs a bit further, but first, will you comment on a remark made by the Chief Executive of Virgin Money, who was just here, where she was suggesting that one way to create some sort of safer banking system would be to have banks keep separate capital for their retail operations and their investment operations. Will you comment on that from Santander’s point of view?

Ana Botín: In terms of crisis prevention, it’s clear that how we approach regulation is important, and the governance model and the structure of the universal banks in the case you’re mentioning-that is, having investment and commercial banking within the same group. On the Santander model-this is just one model; we’re not saying that it is for everyone-I believe, and we believe, that diversity of models is important for the system, and for choice and for customers, but in that specific model of universal banking and how to allocate capital, our model is very much a model of subsidiary, so we believe in separation between the different entities. Santander UK is absolutely stand-alone from Santander Spain or Santander Brazil or the other companies that we have in the group. Within each of these companies, it’s a very strict separation between that small portion that have of market risk-treasury management for ourselves and our customers. We allocate different amounts of capital to the business, but we don’t believe there has to be necessarily a very strict separation. Our model, we believe, has a lot of merit in terms of crisis prevention and resolution for the system, and is very much based upon the principle of separate subsidiaries for countries.

Q733 Andrea Leadsom: Just to be clear, you are allocating capital to each subsidiary, so the UK subsidiary has a separate pool of capital from the Brazilian subsidiary, for example.

Ana Botín: Yes. They stand alone and they issue in the markets, and there are no cross-subsidies or relationships more than the services in terms of technology and all that, but not in terms of capital or funding.

Q734 Andrea Leadsom: For example, if your Brazilian subsidiary were to get into financial difficulty, would there be some cross-subsidisation from the rest of the group?

Ana Botín: No. In fact, Santander did have an issue 10 or 12 years ago in Argentina. We followed that principle, so a subsidiary had issued that in the market, and of course had been paying a higher spread than the Santander group would have done, so investors were very much aware that this was a stand-alone subsidiary and we followed that through, so we have done that in the past.

Q735 Andrea Leadsom: I am sorry for going slightly off the tack of what we said we were going to discuss, but I think this is a very interesting point. When Bob Diamond was here last week, he was advocating that subsidisation would not work and to support his thesis he gave, in my opinion, an incorrect example-Barings’ failure. Would you say that subsidisation would be an effective means of limiting this argument about "too big to fail"?

Ana Botín: Yes. We believe it has a lot of merit. We do not believe it has to be applied to everybody, but we believe that "too big to fail" has to be complemented by other measures. Interconnection-or governance or subsidisation-is an issue that would limit the amount of capital you would need to apply to large systemic banks. We have done a lot of work on that and we are very happy to share it. We are sharing it with the regulators in different countries, including here.

Andrea Leadsom: Is there a report on that, Chairman?

Q736 Chair: Are you giving evidence to the Vickers Commission on that-on the issue of subsidisation?

Ana Botín: Yes. I was there last week. I don’t recall that we were going to share it, but we can do that. We’re very happy to do it.

Q737 Andrea Leadsom: May we request a report on specifically that point?

Chair: If you have something you’d like to send us, we’d be grateful to see it.

Q738 Andrea Leadsom: Thank you. Can I ask one final question on that? Have you found that it has affected your credit rating-the fact that you have these independent subsidiaries standing alone in different countries? Do you find that it limits your ability to access the capital markets in those countries?

Ana Botín: No, on the contrary. We access through different names, and now it’s mostly Santander. Banesco, the bank I used to run, is the only exception, but it allows us to access markets, I think with greater ease and offering more choice to investors.

Andrea Leadsom: Thank you. Coming on briefly, if I may, to SMEs?

Chair: It will be a brief last rejoinder.

Q739 Andrea Leadsom: Very brief, then. The Future of Banking Commission said that since the financial crisis, difficulties faced by SMEs have manifested themselves through higher costs, problems in getting credit extended and sudden and unfair changes to terms of contracts such as the withdrawal of overdraft facilities. Would you say that Santander’s rapid growth in SME share is down to that dissatisfaction of customers?

Ana Botín: SME lending is one of the hardest things for a bank to do and to do well, and I think there’s a lot of opportunity for us to do much better in that. That would be one of my priorities in growing the UK business. We want to have a more balanced mix between SMEs and medium-sized companies and retail to deliver 80% retail individuals, but definitely, yes. I believe there’s a move by SMEs to have several banking transactions, not just one. I think this is very good not only for the system-for us as providers- but for the small companies. Just relying on one provider is probably not advisable. Having too many probably is also not possible, because you have to manage all these relationships, but having at least two is a very good trend, and from our research in the UK, that seems to be happening and we are clearly benefitting.

We incorporated 1,500 new customers. It’s not a huge number in SMEs, but remember we’re coming from zero almost, three or four years ago. So we’re very happy in terms of the response to our product, and I know this is difficult to quantify-it’s actually not quantifiable-but we are trying to invest in our relationship managers and, as I was saying before, trying to have them understand the business of the entrepreneur and of the small company. That is not easy, but it’s where we’ve made the biggest investment and it has been one of our priorities.

Q740 Mark Garnier: May I develop the point about relationship banking? One of the problems that I have seen in the past, and certainly anecdotally from constituents of mine, is that the relationship manager of the big four banks has always been pretty bad. What are you doing that is different from them?

Ana Botín: I know that this is not a very easy-to-measure answer, but the culture of SME business is something that takes many years to build. We have that culture. Santander, as a group, has been known for 150-plus years, and that has been one of our core strengths. We have traditionally been a leader in SME lending and that’s a culture-

Q741 Mark Garnier: In Spain is that?

Ana Botín: Yes, in Spain, but at the end, a lot of the practices are similar. This is a totally different market and you’re absolutely right that we need to understand it. The reason that we’re hoping to be a bigger player in that area is because we have the chance now to incorporate RBS branches, so we’ll get to a market share that allows us to compete more effectively. There are different cultures coming from RBS and from A&L, but, on top of that, we’re putting in our own, and we have developed our own culture already over the last three or four years, and it’s a combination of having the best local talent, having clear what it is that we want to offer, based on all our experience, and adapting it, yes.

Q742 Mark Garnier: Again, anecdotally this is, I have heard that RBS is particularly bad. Are you not worried that by buying the RBS branches you are buying bad practices into your otherwise okay bank?

Ana Botín: We have incorporated a lot of people ourselves and trained them over the last few years. As I said, it takes time to develop that, but we are quite happy with the results we’re getting so far. We’re not complacent. We know it’s a difficult business, so that’s a big focus-when we incorporate these managers, we’re already working with them and we have had different sessions. Also, I will be meeting with them shortly, so we’re trying to work on that as of today, even though they will not come on board for a year or even more. So yes, we need to work on that, but we believe we have the model and the process to do it.

Q743 Mark Garnier: Coming back to a point that Andrea made, a lot of SMEs complain about problems-this is since the banking crisis-through higher costs, problems with getting credit extended and, something I feel particularly strongly about, this sudden manifestation of unfair changes to terms and contracts, such as withdrawal of overdraft facilities. Two questions on that particular point. The first is, do you recognise that in the existing marketplace in the UK? Secondly, has that been to your benefit? Are you seeing dissatisfied customers moving across to you as a result of it?

Ana Botín: Even though it’s hard to explain, we believe we offer a different kind of SME service, and that, we believe, is the reason that customers are joining us. As to the industry-this is not specific to the UK; it’s throughout the world-I’ve been 30 years in banking and I’ve had the opportunity to work in the US and Spain, but also in other countries. SME lending is hard and this is an issue that we all grapple with-how to improve that.

Here in the UK, we now are part of the BBA taskforce on SME lending and a lot of things are happening there. There are 17 different measures, like mentors, for example-putting people who have had experience in banking mentoring SMEs. So yes, we are getting some dissatisfied customers joining us. We are starting from a small base and we intend to grow that. For me, it’s going to be one of the priorities trying to see how we can do that better. We are going to work not only as a business; we’re going to do programmes. I’m going back to the Merlin Group. That’s one of the objectives, and in that one we’re going to go with our own strategy. I did that at Banesco myself with my team, and we believe we can add through the universities programme that Santander already has in place here, working with entrepreneurs, working with partners to help SME growth, not only on the lending side, but also helping their business. So we’ll be working on that.

Q744 Mark Garnier: You are a big bank. One of the other problems that people have is that an SME will go to its local bank manager and they will have a conversation about a credit term, buy some new plant or machinery, or invest in something. The local manager could be very willing, very helpful and do all the usual platitudes to keep it happy, but by the time it’s been back up to the credit committee in some distant city and then come back down, it has either taken rather a long time, so opportunities may have been missed, or alternatively, it just comes back with, "The computer says no." Are you going to try and address that problem or are you going to have to live with it because of the size of your bank?

Ana Botín: I don’t think size is an excuse. I think size makes it harder when you’re very big, but we’re not at that point yet in the UK. You’re right: at some point, having systems might mean having automated systems that are faster, but more rigid. In our model, we have risk people, because our risk function is totally separate, so they would be working with the relationship managers. We need to work on a way forward. I’m not familiar yet exactly with how it is done here, but we will have to analyse and make sure that that works well together.

Q745 Mark Garnier: My final question, if I may, Chairman? Are you concerned by the stranglehold that Barclays, RBS, Lloyds and HSBC have in the SME market? I think they have about 90% of it. Do you think that this high level of concentration has led to really bad outcomes for SME customers?

Ana Botín: The outcomes for SME customers I’m not that familiar with, so I don’t know the exact numbers. I’ve only been here for a month, but I presume it’s not much different from other places. I am familiar with the structure of the SMEs in this country and they’re much smaller. You have a lot that are much smaller at the base, and this is much harder to serve for any institution, because they’re even more difficult to understand in terms of numbers and harder to reach, so probably the outcomes have not been that good, in part because of that.

We’re very much a challenger in the SME market and we very much believe that the RBS transaction allows us to be a real challenger because we will be able to be present in all of the country and our objective is to reach 70 business centres for SMEs. We’ll be hiring new RMs this year again and opening new business centres, as well as integrating RBS. So, independently of RBS, we’ll be opening a few more business centres-I think it’s 10 or 15, so we do expect to be a strong player over the next two or three years.

Mark Garnier: I certainly hope so. I think the SME market would welcome a fresh approach to this. Thank you very much.

Q746 Stewart Hosie: Can I say before I ask my questions that I have seen your relationship managers at work in a business in my constituency, agreeing to lend money to that business, which others would not, and that allowed a good, solid business investment to go ahead that otherwise would not have? I thank you for that and say that the more of that you can do in Scotland, the better. However, if I can go back to the questions we have, it is believed that there is an implicit taxpayer subsidy to banks, which are too big to fail. The Government will stand behind them; they have recapitalised them. They have access to the special liquidity scheme. There is paid-for commercial inter-bank lending as well. Do you think that gives those banks, which are too big to fail, a competitive advantage-because the Government stand behind them in that way?

Ana Botín: I believe, and we believe, that no bank should be too big to fail, so we should have a mechanism that allows banks to fail. Having said this, we should have a system that prevents them as much as possible from failing. If that happens, we mitigate the risk and we reduce the impact on the taxpayer and on the economy. Going back to the systemic issue, once you have depositors involved, you have regulation and, therefore, you need to monitor that, and most countries have a minimum guarantee deposit scheme, which clearly makes everybody, big or small, able to compete on that level of the market. Once you get to the higher level and you become systemic, yes, it’s probably an issue and, therefore, what we are advocating is that capital should be allocated not just because you’re big, but depending on the types of business you do.

On the systemic issue, we should not only have size, but have the kind of business you have. For example, Santander, as a group, and Santander UK, has a big proportion of its balance sheet in prime, residential mortgages. We have half the arrears of the system here in the UK, so if the quality of our balance sheet is better, the business we have is more recurrent, and that’s why, importantly, we do well in all modes of the cycle. We should not be asked to have as much capital as a bank that is riskier. We believe those issues are important and should be taken into account in our non-systemic institutions.

Q747 Stewart Hosie: I understand that, but what I am trying to understand is whether you believe that the banks that are backed by the Government-in one way or another, whether through direct recapitalisation or access to special liquidity-have an advantage over the institutions that are not seen as too big to fail?

Ana Botín: If you look at the CDS spreads in the market, it depends on the countries. It’s not necessarily a direct correlation. There are banks that have been intervened and have the Government as a shareholder, or have had support, that have better spreads than others, and others don’t, so it’s not an exact correlation. However, there will be more banks in that category that have a lower perception of risk. It’s difficult to measure perceptions and the only way that I know of is the CDS, so looking at that number-at that CDS spread for different banks in Europe or the US-some banks that have Government shareholding or support have a perception of higher risk than others, because a bank like Santander has not had that as a group and we still have CDS’s that are better than Government.

Q748 Stewart Hosie: Okay. Has the Santander operation in the UK benefitted from any of the implicit subsidy the Government provided? Does Santander access the special liquidity scheme, for example?

Ana Botín: When the crisis occurred, all banks in the UK were asked to participate in the special liquidity scheme-not in the CGS, but yes, in the SLS.

Q749 Stewart Hosie: If that was withdrawn, would it have an impact on the cost of money to the banks?

Ana Botín: The issue in the UK is the funding gap as a system and all extra liquidity that is given to the system will have an impact on the system’s total lending capacity, so it’s not just us. We have a big base of retail deposits. We are mostly retail commercial deposit funded, but I think the issue that’s important is, as a system, if you take away liquidity, there will be less money to be lent out to companies. That’s quite clear, so it would have an impact on the system as a whole.

Q750 Stewart Hosie: Right, and on Santander specifically?

Ana Botín: On everyone who has participated-including us, yes.

Q751 Steward Hosie: In terms of competition, I wasn’t meaning to go down that road, but the banks that are deemed to be too big to fail have this implicit support from Government. What incentive is there for a customer-a retail customer-to leave a large bank with that implicit support and move to a new entrant in the market?

Ana Botín: I think that retail customers, except in moments of crisis, are motivated to change for a variety of factors, and not only the soundness of the bank, which is very important. Retail depositors are guaranteed across the board, up to a very high amount, so the issue of solvency usually is not affecting, except in a crisis and when there’s a period when things change. That is one of the issues we have to ask the financial system to decide, both here and in other countries. How do we want to manage crises? How do we want to work to prevent crises? Do we have systemic banks having more capital? How do we allocate that? The purpose is to try to make the system safe and sound, and also competitive. Those are the two key issues that we have to ensure, but I do not believe retail customers, in today’s situation, are being moved by that.

Q752 Mr Love: You mentioned earlier you’ve only been with us only a month-we hope you enjoy your time here in the UK-but that gives you an opportunity to have a fresh perspective. On personal current accounts, the level of switching in this country is very low. Have you had time to think about that, why it happens and what can be done about it?

Ana Botín: Yes. The level of switching is low, but we today have 7 million current account customers and we started with, I think, 2 million or 3 million only three years ago. I don’t know the exact number, but we’ve grown very fast, and 2 million of those in the last two years. What we believe is that over the years that we’ve been present in the UK-this is what I have been explaining-the transparency has improved greatly and the switching process has been made easier. That is something that we will continue to work on because we believe this is what is important for the markets to be competitive, and we work on that. We believe that our strategy and our business model will allow us to offer best-buy products. In 2010, Santander offered a quarter of all the best-buy products in retail. We will work to continue to be not only efficient, but good in service, as I mentioned before. This is the key for that switching to happen, the issues being the transfer from the direct debit companies is done fast, that there is the least manual intervention from the customer and that things happen in a short time period. Those are the issues we are working on.

Q753 Mr Love: A witness at one of our sessions suggested that account portability might an issue. I want to come back to the issue of transparency, which you have mentioned several times in your evidence, but would account portability and other technical issues help to achieve this? Other witnesses have said it would be too expensive. What is Santander’s view?

Ana Botín: My view is that I don’t have enough evidence and that it’s certainly a matter that can be looked into and analysed. From the information I have received, it seems like it would be a very expensive thing to do and, therefore, maybe that’s not the thing we need to focus on. The other thing is we should focus on working on the issues that we think will really improve switching and ease of transfer. Again, I don’t have the numbers and it might be interesting to look at some analysis, but we’d have to change so much inside the banks and in the system that, probably, the time and effort would be better spent in other areas.

Q754 Mr Love: You’ve mentioned transparency several times and backed that up with a couple of the products that you are offering, which you think will bring in new customers and lead them to switch. Another approach would be a common transparency code that all banks-all major institutions-would have to follow so that the customer could compare the offers that each was making. Does that have some merit from Santander’s point of view?

Ana Botín: Yes. For example, we are offering our savings account customers-I’m not sure if it’s savings or investments now, but one, maybe both-different kinds of product. If you’re a customer who has product A from Santander, you can see, either online or in the branch, what other products we have and what they pay you, or what they charge you. In this case, it’s Spain-it’s investments. I think the more information we can get to the customer, the better for customer choice. Because we are a challenger, we welcome this and are trying to work on it. We’ll be working during this year at different levels to improve that information to the customer.

Q755 Mr Love: Some of our witnesses have questioned whether the "free banking when in credit" system, which is predominant in this country, militates against transparency and the ability to switch accounts. What is the Santander view of free banking? Is it helpful in Spain?

Ana Botín: The research I have seen so far-maybe there is more to be done-makes it seem that is very much an ingrained model in the UK banking consumer. This is something that people value and it seems to work. It could work better and that’s something we need to focus on. Again, the issue is choice. We have brought out a number of products of packaged accounts. I believe it’s a very interesting product. We did a lot of that in Banesco in Spain, so we would have a flat fee account and you would pay anything from €5 a month to €15 and would get a different value for that. This is not a very big market right now in the UK, but some customers like it and we have brought out different models of it. What’s important is choice. From the evidence and from what we have seen so far, the "free if in credit" model in the UK seems to be quite well established.

Q756 Mr Love: You are right that packaged accounts have taken some of the market away from "free if in credit", but the public seem to be very committed-I think perhaps because they don’t fully understand-and of course the industry is very reluctant to move, because whoever does it first will suffer somewhat in the short term. If we agree-it seems to be emerging from our inquiry that there are major concerns about "free if in credit" banking in terms of competition for customers-how we do not undermine it, but at least raise the issue of choice and the fact that people should look carefully at whether they are getting good value from "free if in credit"?

Ana Botín: As you have mentioned, I am very much a newcomer and I believe that the financial system in the UK has a lot of checks and balances. There is a lot of media exposure. There’s a lot of regulation that is monitoring whether we are doing things right or not, so I think we have a lot of things in place and maybe having more is not really going to help. I believe that, even in current accounts, there is competition and Santander has proven that because 1 million current accounts per year for two years is a big number and we intend to continue growing.

I believe we just need to make sure that that competition continues, so there are one or two incumbent players that have large market shares and we need to continue on a dynamic way to monitor. I don’t think we need to have new measures or new regulation. Given the changes in liquidity, capital and restructuring, there have been many things happening and I think we want banks lending again more and focusing on growth, and having new requirements in terms of anything would hamper that. Frankly and honestly, I believe there are a lot of checks and balances, a lot of competition and media exposure. At least as a newcomer, my best advice would be that we should probably make sure that that works.

Q757 Mr Love: One final question. If competition is to work, there has to be transparency in the marketplace. You mentioned packaged products, yet the level of transparency in some of those is not as great as we would hope. On "free if in credit" banking, there is very little understanding out there among the public and very little transparency about what the checks and balances are in costs. How far do we need to go with transparency to make competition more of a reality in this marketplace?

Ana Botín: I think you can never go too far in transparency, and I think it’s a gradual process. When you have 25million customers and thousands of products, it takes time, but I think the direction in which the industry, and certainly ourselves, is going-we’d like to be leading that movement-is encouraging and the right one. We very much welcome that. We are a challenger and we want to grow market share. We are lending more. We are doing more mortgages and are growing SME lending, so any transparency increment for us is welcome and I think it’s very good for the market.

Chair: Thank you very much for coming to give evidence to us today. We have found it extremely valuable, and the Santander experience is certainly quite different and in many ways refreshing for UK customers. We will take away a good deal of what you have said, which will inform our report. Thanks again.

Ana Botín: Thank you very much.