To be published as HC 1534-vi




Treasury Committee

Independent Commission on Banking’s Final Report

Wednesday 14 December 2011

Peter Sands

Bob Diamond and Antony Jenkins

Evidence heard in Public Questions 482 - 600



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Oral Evidence

Taken before the Treasury Committee

on Wednesday 14 December 2011

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr Pat McFadden

Mr George Mudie

Jesse Norman

Teresa Pearce

Mr David Ruffley

John Thurso


Examination of Witness

Witness: Peter Sands, Chief Executive, Standard Chartered Bank, gave evidence.

Q482 Chair: We aim to run this session for just under an hour. We are very grateful to you for coming in. You have given very clear views in the past on this subject, and in your response to the interim ICB report you said that, given how much regulation had already changed since the crisis, there was an acute danger of what you called regulatory overkill. Now that the final report is out, is that something you are still concerned about?

Peter Sands: Yes. But if I may start by saying that we are broadly supportive of much of the overall regulatory agenda: so, the core principles of what is being implemented through Basel III in terms of banks having to hold more and better-quality capital, in terms of having a more structured approach to liquidity regulation, all the work being done on resolution and recovery, so that failing firms may exit without calling upon taxpayers, and the whole arena of macroprudential regulation. These are all things that we are very supportive of, but I am concerned that the sheer avalanche of different regulatory initiatives at various levels-national, European, FSB and Basel-adds up to an outcome that may not strike the right balance between things that make the financial system safer and also enable the financial system to play its role in supporting economic growth in the real economy. That is partly about the metrics that banks are going to be held to, but it is partly also just the sheer complexity of having so many different overlapping initiatives, which brings with it a risk of unintended consequences because it is very difficult for any one set of supervisors to see through the complex mix of changes that are being implemented.

Q483 Chair: If you are not sure what is going on, we can be confident the regulators will not be, so what you are telling us is quite bad news.

Peter Sands: I think it is. There is real danger in the sheet quantum and complexity of regulatory change, partly because people can’t see through the unintended consequences, and there are contradictions between different bits of the agenda, and partly also, because both supervisors and bank management teams are spending so much time working out how to navigate all this regulatory change, there is a risk of them taking the eye off the ball about what is going on in the global economy.

Q484 Michael Fallon: The other report since then has been the FSA’s report into the failure of RBS, in which it suggested that the regulator should have another power to block acquisitions. What is your reaction to that?

Peter Sands: I must admit, I thought they did have an effective power to block acquisitions. My understanding was that any acquisition that was likely to breach threshold conditions, they had the power to intervene. Certainly, that was the understanding on which we have been operating on. In my judgment, they could have and should have intervened on the RBS acquisition of ABN. I would have no problem with there being a more explicit power of intervention or scrutiny or whatever on major acquisitions.

Q485 Michael Fallon: I have not seen that suggested elsewhere. You are saying they had a power which they simply failed to use?

Peter Sands: I have to confess, I have only had the chance to skip through the fat report you have in front of you, Michael. But I think there is a comment in there about the fact that they did consider whether or not the threshold conditions were in danger of being breached and they came to the view that they were not. But if they had come to the view that they were in danger of being breached, they would have had the power to intervene in some way. However, I may have misunderstood it. I confess I was reading that at speed.

Q486 Michael Fallon: The other suggestion that Lord Turner makes is that bank executives, the directors themselves, should be held liable, strictly liable, if their firm fails. What is your reaction to that one?

Peter Sands: It is clearly appropriate that directors of a bank that has failed should be held accountable for their actions. In terms of what the precise mechanism is by which you do that, I think we need to think through that quite carefully, so that we do not have any unintended consequences.

Q487 Michael Fallon: What is your reaction to this report, overall?

Peter Sands: Obviously, it is a pretty terrible story, both in terms of appalling decisions and judgment on the part of the management team and board of RBS, but also some real shortcomings in terms of the supervision of the bank. I suppose the observation, when I reflect-and I confess I have only skipped through it pretty quickly-is that it reinforces the importance of good governance and good supervision. There is a slight tendency to think that all the problems around financial services can be solved by, in a sense, throwing more rules at the problem; either rules about the way boards work or rules that supervisors then have to supervise against or implement.

What comes out of the report, just from a quick read, is that fundamentally you still require boards to do their job properly and you require supervisors to do their jobs properly. I would argue that, had they wanted to, the FSA could have stopped the ABN deal. That is clearly not the only issue that led to the failure of RBS, but it was one of the critical items.

Q488 Chair: You are making the point that whatever the legal position is, in practice, they could have exercised influence to obstruct it or prevent it?

Peter Sands: Yes.

Q489 Chair: You said that this body of regulation that is pouring out is highly complex and runs the risk of unintended consequences. Do those proposals and the ICB final report make it more or less likely that Standard Chartered will remain headquartered in the UK?

Peter Sands: Let me step back a bit and say what our preference would be. Our preference would be to stay here in the UK. We see great virtues to London as headquarters of an international bank. It also has the great advantage of it is where we are, and moving the domicile of the bank is a complicated distraction. I would prefer to be focused on our clients and customers and on creating value for our shareholders. We do get asked a lot about our domicile and why we stay in the UK, and increasingly get asked by our investors, because there are costs to being a UK-domiciled institution.

The considerations: one of them is what is sometimes known as super-equivalence, the degree to which the FSA’s regulations are in addition and incrementally expensive relative to, say, the Basel III standards; the second is the bank levy. The aspect of the ICB’s proposals that would cause us most concern in this respect is not so much the ring-fencing, because we don’t have a UK retail business to be ring-fenced, but the proposals around the primary loss-absorbing capital, which we think would cost us.

We also think it is flawed in both maths and logic: maths because we think the determination of the percentage numbers they are looking for is not borne out by the evidence they present, and logic because the ICB had earlier taken the stance that it did not want to make the non-ring-fenced part of UK-domiciled banks disadvantaged in international competition. But the primary loss-absorbing capital proposals, which are proposed for the group as a whole, would do exactly that. They are essentially front-running the evolution of proposals at the level of the Financial Stability Board and the Basel Committee. So, while we are supportive of bail-in capital, and I am not against the concept of primary loss-absorbing capital, it seemed to us unnecessary to do so to come up with requirements of specific levels in advance of what the FSB and the Basel Committee are doing on an international basis.

Q490 Chair: "Flawed in maths and logic"-presumably you set all that out in detail to them in writing?

Peter Sands: Yes.

Q491 Chair: Have you published that as well; made that publicly available?

Peter Sands: I think we argued-

Q492 Chair: Could you do so?

Peter Sands: Yes. If I have not done so, I could check whether-

Q493 Chair: Could you take a look and make it available to the Committee? I think we ought to see that.

Peter Sands: Yes.

Q494 Mr Love: Your Finance Director suggested that you are now looking closely at the whole issue of whether you should be domiciled in London. After what you have just said to us now about the relationship on regulation, the ICB report and taxation, is it not inevitable that you will be moving soon?

Peter Sands: I don’t think it is inevitable at all. As I said, our preference is to stay in the UK. However, we do get asked by our investors why it is that we are here and what we are thinking about it. Therefore, as a board we have an obligation to consider what our options are and to understand the trade-offs.

Q495 Mr Love: What I have heard so far, you are suggesting-and I think we would have some sympathy-that you would be more adversely affected by the bank levy than perhaps any other major bank, certainly one based in London. You have criticised the ICB report, we have just heard. You are talking about the volume of regulation that is coming out from London and at a European level. Where are the countervailing reasons why you should stay? It seems to me your headquarters in London is an accident of history. We understand that means you would be reluctant to leave, but all the arguments you have put so far seem to suggest the strength of the argument to leave is growing and that that is likely to prevail.

Peter Sands: The strength of the argument has grown, unfortunately, and things like the recently announced increase in the bank levy are not helpful to us from that respect, particularly because we are growing our balance sheet; we are growing the amount we are lending to businesses around the world. I do not want to come across as being too negative. London has great virtues. It is still the world’s leading international financial centre. It is an obvious place from which to run an international bank.

Q496 Mr Love: I understand but that seems rather ephemeral. Could I put it another way: is the problem that you can’t find another alternative place to headquarter your business? You seem relaxed about it, so it is not a question of, "We want to be in London"; it is rather, "We are in London. We don’t know where else we could go."

Peter Sands: That would not be the case. We understand what our options are and we would be welcomed, or so we understand, in various parts of the world. Many countries would see a bank with our footprint across the fastest-growing markets in the world as being an asset.

Q497 Mr Love: Let me go on. It has been suggested your largest single shareholder is the sovereign wealth fund of Singapore. You mentioned earlier on about the role that shareholders have in putting pressure on you, asking the board questions, and indeed investors as well. Are any pressures being put on you to move to the Far East, and what do you think the possibilities are the Singapore sovereign wealth fund might take over Standard Chartered and move it to a more appropriate location?

Peter Sands: I can’t comment on the desires or intentions of our largest shareholder. You would have to talk to them to get their views. All I would say is that we get asked about our intentions on domicile-how we are thinking about it, and why it makes sense to stay in the UK-in almost every single investor meeting, including with all our UK investors, and 40% of our shareholders are based here in the UK.

Q498 Mr Love: Does that mean that eventually the pressure will tell, and the detailed work you have done on deciding whether to stay will inevitably come to suggest that you should leave?

Peter Sands: I don’t think there is anything inevitable about it. As I say, we don’t have plans to leave. We have done the analysis and we continue to keep it under review. We understand what our options are but our preference remains to stay here in UK.

Chair: Well, we have heard that.

Q499 Mark Garnier: The ICB tell us that, combined with the international initiatives coming through, their proposals solve the notorious "too important to fail" problem. Do you agree?

Peter Sands: I am afraid to say not really, because the answer to the "too big to fail" problem, you can disaggregate it into how do you stop things failing, and then how do you deal with the consequences of failure? The fundamental best way to stop things failing are the basics of having more and better capital and better liquidity-and that is enshrined mainly in Basel III-and better corporate governance and better supervision in the way we were talking about in the context of the FSA report. In terms of dealing with the consequences of failure, there is still work to be done, but the core of that is all in the agenda driven by the FSB, the Financial Stability Board, around resolution and recovery, crisis management groups, harmonisation of resolution regimes across jurisdictions and so on. That is complicated stuff, but it is very important. It is something where the industry absolutely agrees, people like me absolutely agree, we need to put in sustained effort, because it is important that we have a regime, a framework, which allows banks to fail in an orderly fashion without creating systemic stress and without calls on the taxpayer.

Q500 Mark Garnier: Let me put the question a slightly different way. Do you think these proposals-again, including the international ones-get the British taxpayer off the hook in terms of having to bail out a failing bank?

Peter Sands: I would say the thing that most gets them off the hook is the stuff that I have been describing, which is primarily driven at the international level. If I look at the specific proposals of the ICB, the problem I have with the ring-fencing proposal-and I am making this comment from the perspective of an institution that has nothing to ring-fence-from my observation about it, is that it probably makes resolution easier of the ring-fenced element, but it makes the probability of failure greater of the ring-fenced element. It is a less diversified entity, there is less ability to port liquidity and capital and so less institutional resilience and some considerable cost, so I am not sure that proposal achieves as much as the ICB suggests.

Q501 Mark Garnier: That is very helpful, thank you. Obviously, you have made your comments about how the ring-fencing affects you, but you also say you think that the loss-absorbing capital is flawed for a number of different reasons. Do you think there would have been a better or different way of trying to achieve the same objectives without having to go through ring-fencing and this need to have capital?

Peter Sands: I should clarify. I do not have any problem at all with bail-in debt, which is essentially what the notion is behind primary loss-absorbing capital. In fact, we have been very supportive of the idea of having that as part of the capital structure of banks. My objection is more that the ICB is proposing a set of levels that we should hold, in advance of an international agenda to do exactly the same thing. It strikes me that we might as well do it in line with the rest of the international reform programme. So the underlying concept of bail-in debt, which is captured by the notion of primary loss-absorbing capital, is perfectly sensible.

Q502 Mark Garnier: You don’t necessarily think there is a better way of doing it, including the ring-fencing?

Peter Sands: Can I step back and give you a sense of where I thought the big missed opportunity of the ICB was?

Mark Garnier: Yes, absolutely.

Peter Sands: To my mind the big opportunity-and I made my opinions very clear to John Vickers and the rest of the ICB-was this was also an opportunity not just to add things to the regulatory agenda but to give it a greater degree of coherence and to point out some of the areas where we appear to have duplication or contradiction. I am still of the view that that was a missed opportunity, because all the ICB did was add more stuff. We run a risk of having so much stuff going on that we miss the wood for the trees.

Mark Garnier: That is very helpful. Thank you.

Q503 Mr Ruffley: You spoke about competitiveness. Looking ahead, could you tell us how you will measure the damage to your competitiveness as an international bank, as a result of these ICB proposals being implemented, ahead of other countries and other banks?

Peter Sands: Ultimately, the measure is going to be in our success in delivering sustained growth and value creation for our shareholders, and being able to serve our clients and customers. We have delivered consistently. We have delivered eight years in succession of record income and profits, so we have grown our profits, grown our customer lending all through the crisis. We are on track for our ninth year of record income, record profits. Our challenge is going to be we operate in international markets where many of our competitors are not going to face things like the 17% to 20% primary loss-absorbing capital calculation, or they will not be facing the bank levy that we have, which is effectively imposed on our liabilities internationally. So the question is: how much does that undermine our ability to compete?

Q504 Mr Ruffley: Those things are quite a hit to you, as you have outlined in some detail. Over and above the ICB, have Government Ministers been made aware of this? You are a very significant international bank and yet these proposals seem a story of hits to your competitiveness.

Peter Sands: We do make clear our concerns, and I have done so with various Ministers in various fora. We also appreciate the realities of the situation, in the sense of there is a clear need to reinforce the regulatory framework in banking and there is a clear concern to protect the taxpayer, and there is also acute need to improve the UK’s fiscal decisions.

Q505 Mr Ruffley: I think we all agree on that, but have you done any work on getting to a figure as to what the cost of these proposals could potentially be for your bank? I know that is a very difficult piece of work and you have to make lots of assumptions, but have you tried to quantify the cost to Standard Chartered of all these proposals when they come into effect, the cumulative effect? Has a piece of work been done by your office?

Peter Sands: Yes. We are continually updating our analysis of the costs.

Q506 Mr Ruffley: Do you have a ballpark figure for that?

Peter Sands: If you include the bank levy, which this year will cost us something in the region of $190 million-I apologise to the Committee, because we report in dollars, and my natural frame of reference is to talk in dollars-if you add the other sorts of things that are coming in, which are in a sense super-equivalent to what we would face if we were just held to, say, Basel III, it is pretty easy to get a number north of $500 million a year. There is no particular precision to that, but it is a substantial drag upon our economics.

Q507 Mr Ruffley: A final question. The report talks about international competitiveness, but was written at a time I think where there wasn’t too much cognisance given to what an FTT-financial transaction tax-might do to UK banks. As a result of the Prime Minister’s decision to veto the EU treaty last weekend, there is a possibility that the 17-plus, and maybe some others, might attempt to go for a financial transaction tax if Britain stays out of it. The Chancellor-quite rightly, in my view-said we will be kept out of an FTT, but are there any ways in which that could adversely impact on a bank like yourself headquartered in the UK?

Peter Sands: We certainly welcome the Chancellor’s stance on a financial transaction tax, because for Europe, either the EU or the eurozone, to try and implement a financial transaction tax without the rest of the world doing so would make it extremely difficult for an organisation like us, where 90% of our business is outside Europe. In terms of a eurozone only one, we find it quite difficult to work out what the impact of that would be on us, because the devil is in the detail of how they determine the scope of it. From our perspective, the thing that I am most concerned about coming out of the summit last week is the fact that, once again, the eurozone has not produced a credible answer to how the challenges of the eurozone are going to be dealt with and what the growth agenda is going to be. Although we have negligible direct exposure to the eurozone, and none at all in terms of sovereign exposure to the more troubled countries, I don’t think anybody in the world can be complacent about the consequences of the eurozone continuing to face the kind of turmoil and difficulties that it is taking on.

Chair: We had better move on now.

Q508 John Mann: Is there anything coming out of the European Union or the European Commission-and you mention the financial transaction tax, but are there any other specific proposals that you have concerns about?

Peter Sands: There are quite a lot of proposals coming out of Europe at the moment. The one I do think this Committee might want to take a look at-and I realise you have a fairly daunting agenda of different topics to look at-is the most recent thing coming out on crisis management directives. That is not to say we are against consistent approaches to resolution and recovery, because we think to have consistent approaches is the answer, but we think there are some aspects of that, particularly some aspects that seem biased against entities outside the EU that we find very troubling, given how much of our business and how much of the UK’s international financial services business is outside the EU. That is clearly an important piece of legislation coming of Europe and would merit quite close scrutiny.

Q509 John Mann: That is one. I am not suggesting you spend the rest of the hearing listing the others, but approximately how many other specific proposals, which are on the table at the moment from the European Commission, do you have concerns about?

Peter Sands: I would find it difficult. There is a lot of material. But let me not be entirely negative. There are some aspects of the proposals coming out of the EU that we think are superior to some of the things coming out of the FSA, so it is not that everything out of Brussels is necessarily a bad idea. I would reiterate the biggest issue is the fact that, on any one topic, we are facing sometimes multiple proposals within the UK, other proposals coming out of the EU, some coming out of the FSB and Basel, and then we operate in 70 countries, and most of those have their own variance as well. I could spend more than a couple of hours trying to explain exactly how capital regulation works, and it is not the most coherent of topics.

Q510 John Mann: I am trying to get at two separate aspects here. One is the level of importance to you as an institution of things coming out of the European Commission. But I suppose an easier way to put it is how important we as a Committee should be regarding that in terms of the many priorities that there are. How important is the stuff not coming out of this country but out of the European Commission, in terms of your operation as a bank?

Peter Sands: It is very important because, although it goes through a process of refinement and change, ultimately the capital requirements, directives and so on, end up being the things that gets translated into FSA regulation that we then have to operate by. As I say, some of the European stuff is very sensible and a lot of it is fundamentally just trying to translate into legislation things that have already been agreed at Basel III. One of the things that I am often uncomfortable with is that there is an inward-looking EU focus on some of it, which is quite difficult to reconcile for us, given that we are a business that is growing and focused on the fast-growing markets of Asia, Africa and the Middle East.

Q511 John Mann: I have one more question. You are making specific representations to the Treasury, for example, on specific European Commission regulations that you regard as either good or problematic, it would be quite useful for us to know what they are and what your detailed view is. That would be useful if you sent that through.

But my final question: I listened to the Prime Minister in relation to the decision of Government last week. He was selling that very much on the basis that he wanted to go beyond what the EU was doing, and setting aside the financial transactions tax, which he was very specific about, but with the rest he wanted to go further. He wanted higher requirements on capital, for example. Do you see that as a benefit or a problem in terms of if we in this country decide to go to a higher level of regulation and conditions than that of the EU, as the Prime Minister was suggesting we might?

Peter Sands: I run a bank across 70 or so different markets. I have to say-and I realise this is perhaps an unrealistic aspiration-if I had my wish, it would be that the effort was focused on getting agreement at the FSB, the Financial Stability Board, and the Basel Committee, so that, rather than having countries take various views on particular levels, or particular aspects of regulation, as far as possible this was done at a global level, not just at an EU level. Because every time you have things done, either at a national or regional level, it creates complexity, it undermines transparency, it creates room for regulatory arbitrage and it makes it both more costly and less effective as a regulatory framework.

Q512 Mr McFadden: I would like to ask you about the investment climate here in the UK. Obviously it is important to our economic growth. Standard Chartered plays an important role in financing some inward investment into the UK, for example, Tata Motors, Jaguar Land Rover, which in a very welcome move is establishing a new engine plant in the West Midlands-a very important investment. At the current time, how attractive is the UK for investors from countries, such as India and China, looking to invest in Europe?

Peter Sands: In a very tough global environment, the UK has the potential to position itself very attractively as a place for investment for big companies and wealth funds, and so on, from the fast-growing markets of Asia. Indeed, one thing we think is very important is that the UK growth agenda take full account of what is going on in the world, and what is going on in the world is that growth is shifting east. We need to put more and more focus, both in terms of where British companies should be exporting to, trading with and where investment should be coming from-and it is not just India and China-they are the biggest markets-but it is also places like South-East Asia, Indonesia and so on. We do think that we at Standard Chartered can play a very constructive role in that.

You mentioned Tata as an example. We have a very long-standing, deep relationship with them. We helped them with the Jaguar Land Rover investment. We are working with Chinese companies that are also looking at investments. We are also working with UK companies that are trading with and investing elsewhere. So, for example, we are working with the likes of Diageo all over, in places like East Africa, in China and so on. We see one of the ways that we can make a contribution to the UK economy is helping facilitate that two-way flow of trade and investment, and helping the UK economy get better and stronger growth by repositioning towards the faster-growing parts of the world.

Q513 Mr McFadden: Can I ask you about the other direction then. Statistics show that, at least up until last Friday, more than half of the UK’s trade in goods went to the European Union, but only 2% goes to China. Given your experience in these markets-and UK Governments of both colours have been producing reports for years on the importance of India and China as markets and globalisation, and so on-why do you think our import penetration into these markets or our ability to export goods has not achieved a bigger share of the market than it has so far?

Peter Sands: It is a very good question and to do it justice would probably take a little longer than I have. One of the problems with China is that companies are intimidated by China, and it takes them a little time to get over the barriers of language, of a very different business environment. What you tend to find with China is that you have some British companies that are extremely successful and know China very well. We are one of them. We are the oldest foreign bank in China. SPC is another. There is a range, but it is a relatively small number of British companies that are very knowledgeable and most companies have not got over that threshold. That is one of the areas where I would like to think we could help, and we have made various suggestions about how we can help, particularly, smaller companies understand China better and engage with it more effectively.

It is a different set of issues with India. You don’t have the barriers of language. One of the roles I play is I co-chair with Ratan Tata the UK-India CEO Forum, where we have a bunch of CEOs from both countries looking at ways in which we can increase the economic and business linkage. We have a range of ideas that we are developing to present to both Prime Ministers when they next meet. We are also trying to work with SMEs, and we have worked with, say, Lloyds Bank in this country, because we don’t have a footprint here. We have done a number of workshops for SMEs in different parts of the country about how to do business in India. So there are ways of doing it but you can’t fix it quickly or overnight.

Q514 Mr McFadden: You talked about barriers but, for example, if you look at Germany they have had a very successful export record in recent years. What are they doing that we are not doing?

Peter Sands: There is a range of different things. For one thing, Germany has been more effective, not just in China but more generally around the world, in exporting its manufacturing prowess, and Germany has managed to make "made in Germany" synonymous with being well-engineered and so the brand of German engineering is extremely effective. A lot of Asian businesses underestimate quite how good British businesses are. So, for example, one of the things we have been doing through the UK-India CEO Forum is to try and build awareness of the depth of skills in areas like advanced manufacturing that we have in the UK.

Mr McFadden: Can I just ask one more?

Chair: Sorry, we will have to move on now. I apologise for that.

Q515 Stewart Hosie: The ICB told us that the cost to the banking sector of the proposals would be in the £4 billion to £7 billion range, and Goldman Sachs suggests it will be higher, somewhere just short of £10 billion. Do you have a figure as to the cost of implementing those proposals on the sector as a whole?

Peter Sands: I don’t have an aggregate figure. We would not be the best people to ask because we don’t have an entity that is going to be ring-fenced, and for many of the banks that is the primary driver of costs. I can tell you that my judgment would be that the ICB figure underestimates the total, and my understanding is even the analysts who researched it only analysed the costs for the four big UK banks. They did not include the costs for the likes of us, so you could argue that even some of those figures might be quite conservative. But by the nature of the analysis, this is not a precise science, because you are estimating what credit spreads will be for instruments that do not yet exist and so on.

Q516 Stewart Hosie: What they did say was that the most significant chunk of the costs, whatever it ends up being, was the removal of the implicit taxpayer subsidy, including, for example, access to the Special Liquidity Fund that all banks and international institutions have. Was that an issue for your bank? Did you have access to those funds here? Would that be an issue at all?

Peter Sands: We never use the Special Liquidity Scheme. Indeed, we did not take any equity; we did not use the Credit Guarantee Scheme. We did not use any of these things.

Q517 Stewart Hosie: That is interesting because you did say your biggest concern was the frontloading of the primary losses of the capital in advance of the FSB and Basel III decisions more generally, and you said that the total cost, including the levy, would be north of £500 million.

Peter Sands: Dollars.

Stewart Hosie: Dollars, sorry. Yes, I did write down dollars. Yes, $500 million. What will that mean, in terms of volume of business, in terms of the cost to clients and customers? What would that additional cost base to the bank mean?

Peter Sands: Ultimately, you want banks to be profitable because by being profitable they generate retained earnings and by generating retained earnings they fill their capital base and they can lend from that capital base. The crude proxy is that if you think in terms of, say, a 10% core tier 1 ratio, so a 10% core equity ratio, every $100 million or £100 million equates to a $1 billion or £1 billion in terms of risk-weighted assets, which would equate to a bit more than that in terms of lending capacity. So it is important to have banks that are profitable and generate strong retained earnings, because that is how they are able to continue to support their customers. In some ways, we are a case example of this. We date the beginning of the crisis from the middle of 2007. We were already nervous but that is when we saw things really beginning to deteriorate.

Between the middle of 2007 and the middle of 2011, we have grown our lending to our customers and clients by 75%. We have grown our profits by 80% over that period, and those two things are not a coincidence; they go hand in hand. By being profitable, we have been able to stand by and support our clients. That is also while maintaining what some analysts describe as a rather boring business model, in the sense that we are incredibly conservative about what risks we take. If you look at our liquidity position, we are one of the most liquid banks in the world. If you look at our capital position, we are already at the Basel III standard. So by having a conservative business model, by being very consistent in our approach to customers, but by continuing to be a profitable entity, we can support our customers and clients.

Q518 Stewart Hosie: Indeed, you can, so I will ask the question a slightly different way. In vulgar terms, if this is going to cost $500 million a year, we are talking about a shortfall of around $5 billion in lending each year, mainly on the back of increased capital requirements and the levy, not in relation directly, other than the front loading of the primary losses on the capital, to anything else that Vickers have come forward with.

Peter Sands: It is back-of-the-envelope maths, but it is that sort of thing. Our ability to grow and our ability to compete will be constrained by the cost of these things. The two consequences of that are: one, we can do less in terms of lending for our clients and customers; and two, we can deliver less value for our shareholders, and 40% of our shareholders are here in the UK.

Q519 Jesse Norman: First, an observation: there is something slightly odd about saying that your model is so successful because it is so conservative and yet regulatory attempts to improve the conservativeness of other people’s business models is somehow going to make them less competitive. You have been competitive because you have run a high-liquid and high-capital institution at a time when others have failed in the job of being a boring bank, which is what we want banks to be. We want them to be boring. I have no time, so if you don’t mind I won’t ask for a comment on that, but I hope you agree.

To return to the RBS for a second, it was a bank that grew its assets by four times in six or seven years. It made 24 acquisitions in five years. It was allowed to pursue a contested bid for a bank whose assets Dick Cheney did not understand in an enormously complex transaction. Would you not agree this is a catastrophic failure of supervision?

Peter Sands: It was not a good moment for supervision. I would find it hard to disagree with your statement.

Q520 Jesse Norman: I am grateful for that. Do you think the directors of such an institution should be banned from holding jobs in the financial industry thereafter?

Peter Sands: I don’t know that I am in a position to-

Jesse Norman: By the way, I don’t just mean directors but also senior managers; those directly involved, either with formal Government responsibilities or with operational responsibilities, should they be prevented from holding positions if they presided over a bank failure?

Peter Sands: I clearly think people should be held to account. But, as I said earlier, I do think one needs to be quite careful in thinking through the mechanisms and how that works because otherwise you might end up with consequences that you do not want, such as discouraging talented people from becoming directors of banks. Also, it leads to behaviours in stress situations; you just need to think through the second and third order consequences of these things. But am I sympathetic with the basic view that directors should be held to account if they preside over a failure of an institution that causes the broader economy and society huge costs? Absolutely; I agree.

Jesse Norman: I think we are trying to deter people from becoming directors of failed banks.

Peter Sands: Yes, and that is good.

Q521 Jesse Norman: The Chief Executive of the RBS had no, what I would call, banking experience at all. He had had six years in senior positions in banks in a managerial role. I am not sure he had ever actually lent a penny to any institution. Do you think the regulators ought to permit people to hold senior positions in banks who have no banking experience?

Peter Sands: You need to be quite careful, and I confess that I would be a rather interesting example from that point of view because I came into Standard Chartered as Finance Director, not having had a career in banking. I had had a career in consulting where most of my clients were banks. I am only one example, but one needs to be a little careful about making it a box-ticking exercise. I do think that one has to be very thoughtful about who gets to be in positions of responsibility, and so I am sympathetic to the whole concept of the process around SIFs.

Jesse Norman: Scrutinised, as it were.

Peter Sands: Yes, I am sympathetic to that. How it is executed could be streamlined and made more effective, but the concept of it is a good idea.

Q522 Jesse Norman: I am grateful. Final question, if I may. Should the FSA have stopped the Lloyds-HBOS merger, which after all was worse in many ways, in that it took place a year after the banking crisis had started, at a time when HBOS’ own valuation had plummeted, at a time when the banks had been in conversation for precisely two weeks before they struck a deal? It seems to me that is an absolutely cast-iron example of a case where the FSA should have been screaming, "Stop, stop, this should not go ahead. Proper due diligence should take place. Proper examination should take place".

Chair: Do not take that as a leading question, if you do not want to.

Peter Sands: It is a really good question and it is one that deserves scrutiny. That deal was clearly a mistake from a whole number of different perspectives. If I could just respond very quickly to your first point, which is why is it that a bank that runs on a conservative business model is threatened by a whole set of regulations designed to make the rest of the industry more conservative, which is a way of paraphrasing what you said.

Jesse Norman: It is much better than I used.

Peter Sands: The problem here is that the sheer multiplicity of things that are going on lead to unintended consequences. So, for example, trade finance-and we are now the largest trade finance bank in the world-is absolutely crucial to the world economy, is a very safe business, but because of an unintended interplay of different regulatory initiatives it has ended up attracting a degree of incremental regulatory burden that I do not think any of the regulators would have said was necessary in the first place.

Q523 Chair: So if the conservatism was imposed straightforwardly, you would be happy?

Peter Sands: Yes. Can I make one other comment on that, which is that we need to be very careful not to move to what I would describe as a high-bar, low-buffer environment, in which banks appear to be very resilient but all you have done is you have set their point of failure at a higher level. It is a sort of glass jaw phenomenon, and I think we are in a little bit of a danger of moving in that direction.

Q524 John Thurso: One very quick follow-up on that. Is it not the case that prudence, which is what you are talking about, is a culture and it is very difficult to write a set of rules to make people prudent? Therefore, the danger we face is we write shed-loads of rules but we do not end up with boards that have prudence and a proper calculation of risk.

Peter Sands: I could not agree with you more.

Q525 John Thurso: Thank you. Can I turn to competition. You do not have a retail operation in the UK, so in a way you are a very good person who is independent to ask this question of. At the moment there appears to be almost no competition, particularly for SMEs, in the high street. What should we be doing to get that competition, and is there anything in Vickers that will deliver it?

Peter Sands: I am afraid to say that the ICB’s proposals are, if anything, likely to make competitive entry into the UK retail market, including SMEs, less rather than more likely, because it makes it a less attractive proposition. Ultimately, if you are running a public company you have to be convinced that you can generate value for your shareholders by entering a new market and I am not at all convinced that these proposals are going to foster greater competition.

Q526 John Thurso: What action do you think would foster competition?

Peter Sands: I might have to come back to you with a more considered response to that, if I may. I am afraid to say that, given that our focus is on the markets of Asia, Africa and the Middle East, I simply have not spent a lot of time worrying about the competitive dynamics of the UK retail market.

John Thurso: I would be very grateful if you did want to come back to us because I think one of the biggest challenges that we face is how do we get real competition, so that our SMEs and individual entrepreneurs do get funded? I will have to leave it there, Chair.

Chair: Yes. Also, it would be helpful if you could set out in a little more detail what is wrong with the Vickers proposals on retail banking, which you have alluded to. That was a pretty comprehensive expression of concern you gave. We are very grateful to you for coming to give evidence today. It has been full of interesting material for our inquiry and thank you very much indeed.

Examination of Witnesses

Witnesses: Bob Diamond, Chief Executive, Barclays PLC, and Antony Jenkins, Chief Executive, Retail and Business Banking, Barclays PLC, gave evidence.

Q527 Chair: Thank you very much for coming to give evidence to us this afternoon once again, now we have the final report in front of us. You will no doubt have also seen the press reports and some of the important remarks made by Lord Turner in his report on the failure of RBS, and in the foreword he suggests that "Parliament should consider making senior bank executives personally liable", put personally at risk, unlike non-bank companies, for the risks they take. Do you agree?

Bob Diamond: We touched on this, Chairman, in January. I think corporate law would suggest otherwise and I would not suggest a change. On the other hand, as Chief Executive of a financial institution and a director, I do feel immensely on the hook for behaviour and for delivering the results that our customers, our employees, and our-

Q528 Chair: He is talking about a financial hook, is he not, Mr Diamond? He is talking about putting your shirt on the line, which is a discussion we had a year ago, and your colleagues’ shirts. Do you think that is something we should consider carefully, or do you think it will damage banking?

Bob Diamond: I think the latter. As we discussed in January, my view has not changed on that.

Q529 Chair: Then you said you thought it was something that the shareholders should decide.

Bob Diamond: Ultimately all of those things are decisions for the shareholders, of course.

Q530 Chair: To be frank, I wasn’t quite sure where you stood last January, because when I asked you whether your behaviour would change in any way if your shirt was on the line you said, "No, not at all". So what is to be lost by doing it? You might say "What is to be gained?" but what is to be lost?

Bob Diamond: It is a complicated issue, but of course it has to do with, would financial institutions be investable, what would the shareholder reaction be, and things like that. In terms of feeling responsible, I don’t think that there would be any change to that.

Q531 Chair: So you also disagree with Andy Haldane in the Wincott lecture when he said that limited liability was creating perverse incentives in banking?

Bob Diamond: I don’t recall that specific quote, but I would agree with what I have said if it is the same subject.

Q532 Chair: Also you presumably disagree with the ABI when they said that too much is being paid to employees and not enough to shareholders?

Bob Diamond: You are picking out specific things.

Q533 Chair: I am picking out the same thing among different people’s remarks.

Bob Diamond: I meet with the ABI on a fairly regular basis. I certainly meet with individuals in institutions in compensation discussions.

Q534 Chair: But you are disagreeing with them is the point.

Bob Diamond: That is just a soundbite. That soundbite does not sound right to me but I don’t recall the specific quote.

Chair: We might come back to this in a minute.

Q535 Jesse Norman: Mr Jenkins, when we last met with you I was exploring the logic of the allocation of the 2011 bonus pool as between the commercial bank and the investment bank. It seemed to me, from what you were saying-and I do not think there was enormous disagreement-that it was something of the order of 6% to 8% of the total pool went on the commercial banking side and the remainder went on the investment banking side. Since there is roughly the same number of employees on each side, therefore there is a substantial difference in where they come out.

So the question really then is-and I suppose it is more one for you, Mr Diamond-if the credit conditions got worse at the moment, and if the bank’s own capital came under more pressure or its ability to fund itself came under more pressure, would there be a case then for some kind of bank-wide or industry-wide restraint on bonuses, in order to protect the capital position of the bank and therefore the position of the shareholders?

Antony Jenkins: As we explained when we were here last time, the process of setting compensation in Barclays is very rigorous from the board and the remuneration committee. The determinants of the size of the bonus pool is based on business performance but there are also determinants on individual decisions, which are based on competitive market pressures for any given individual’s talents and, as you raised, different types of people working in the bank and will be subject to different compensation structures.

All of those decisions are reviewed by the board and also discussed with and reviewed with the FSA, in terms of the implications on capital as well as the implications on the balance of, do we have a rigorous methodology? We do have a very rigorous methodology at Barclays. Bob is very involved with that. I am also very involved with that. I have to go and make my case at our remuneration committee for all of the decisions that we take on compensation. So the answer to your question is that there is a very robust process. The balance is business performance, individual performance, competitive pressures and the overall financial condition of the bank.

Q536 Jesse Norman: That is miles away from an answer to my question, which is whether or not there should be some kind of restraint or ban on distributions, in particular bonus distributions, if the capital of a bank came under pressure. Why don’t we open it up? So, of the capital funds to be allocated between dividends and bonuses this year that we are coming into, what percentage will go to the dividends, Mr Diamond, and what percentage will go to bonuses?

Bob Diamond: Let me try to get to the question you feel did not get answered first. I will say, I was looking forward to a discussion on the Independent Commission, and the implementation, but we are right on to the same issues we ended with last time, which I do find disappointing but I am going to answer them as directly as I can.

Jesse, your question on what happens to bonuses broadly in a difficult time for banks I think is a fair one. When a number of us were in front of the House of Lords we talked about what happens if a bank is in resolution; so, for example, let us say a bank was below its minimum capital requirements, then it is absolutely in the province of the regulators to make decisions around issues just as you were speaking to. Equally now in the UK we are moving forward with the FPC guidance, which is coming to us around-it is a dangerous time. There is a lot of risk in Europe. If we are in certain levels of capital, can we put an eye more towards preservation of capital than maybe we would have otherwise, which is something that has been clear in terms of recommendation from the FPC? So certainly Barclays, and I am sure every other bank, is in discussions with our regulator-the FSA-about what that means, given our results, given our capital and those issues.

So I think those are both true. Then, as Antony said, this is the kind of year where we are looking at a very difficult environment for banking and a very difficult environment around compensation, where it is pretty clear that compensation levels will be reduced for those factors as well. It somewhat depends on whether a bank has crossed that line into resolution how official those rules are, but hopefully that helps.

Q537 Jesse Norman: Preservation of capital goes directly to the issue of the Independent Commission on Banking, and that is obviously one of the things that has been sitting in their minds. Mr Diamond, can you tell me a little bit about how you assess the viability of your business lines, as between what you might call the investment banking side and the commercial banking side. I imagine it is on return on investment, return on capital employed, those kinds of assessments in part. Is that right?

Bob Diamond: It has done many, many things, Jesse, and I know you have worked in the investment banking part of the business before, as have I. First of all, within that business there is a business model that is financial in terms of returns, but one of the things that we find interesting with our business model is a lot of the things that our customers and clients require from us, whether it is risk management, foreign exchange, hedging, raising equity, the types of things that we do in the corporate and investment banking area have not changed at all since-

Q538 Jesse Norman: The question I am trying to get to is, why you would want to continue to own the commercial bank in this country if it is not as profitable as other uses of capital, in particular post-ICB implementation? Why would you want to continue to own the commercial bank in the UK? Why own retail branches?

Chair: Yes, what is the answer?

Bob Diamond: You are saying commercial banking?

Jesse Norman: Particularly the retail bank. Why would you want to own that?

Bob Diamond: Why would we want to own the retail bank?

Jesse Norman: Yes. Because it is likely to be low-producing in terms of returns compared to other parts.

Bob Diamond: I am happy to give a compliment where a compliment is needed because the guy on my left runs a fantastic UK retail bank. We are not perfect, but the business continues to improve. I get excited when I walk in to the branches in Cambridge, for example, where I was recently, where we have taken two or three small branches in an area very close and have one larger one with much better facilities.

Chair: I think we have the message that you want to own a commercial bank.

Bob Diamond: Absolutely.

Q539 Chair : I have heard that. Can I take you back to this ABI letter that you described as a soundbite. What that letter says is that "Too much value is being delivered to employees in contrast to dividends paid to shareholders. The reduction in employee payout ratios needs to be achieved by reducing individual remuneration payouts to highly paid employees. This year is the time to make these changes". It could not have been clearer, and this is in a letter addressed to the chairman of your remuneration committee. I don’t think it is a soundbite, but you are disagreeing with it, I take it.

Bob Diamond: Chairman, I am sorry, I was referring to the sentence you gave as a soundbite, not the report. I apologise if that was said poorly on my behalf. We spend time with all of our shareholders.

Q540 Chair: You have told us that, but I am asking whether you agree with it or not.

Bob Diamond: What I agree with is that our principles are pay for performance, and the performance should be adjusted for risk-

Q541 Chair: It is a very fair and direct question. I am just asking you whether you disagree with the ABI’s letter that came to your chairman.

Bob Diamond: What I would say is I can’t comment on the whole letter based on that paragraph but in terms of that-

Q542 Chair: But you have read this letter, surely. It is only two pages. It has had extensive public coverage. You have seen this letter, haven’t you?

Bob Diamond: I think they make generalisations on all banks.

Q543 Chair: Have you seen this letter?

Bob Diamond: I certainly have.

Q544 Chair: Okay, you have read these one and a half pages. With or without the soundbite, do you agree with it?

Bob Diamond: I don’t think it is question of agree or disagree. There are areas in the letter that I support and there are areas in the letter that I do not support.

Q545 Chair: Do you support this section of the letter?

Bob Diamond: I think our process around remuneration and compensation is supported by our shareholders-

Q546 Chair: You would agree it is quite difficult to get straight answers to a reasonably straight question, wouldn’t you? If you had an employee in front of you-

Bob Diamond: Chairman, it is very difficult to say whether I agree with the letter in its entirety.

Q547 Chair: I have not asked you that; I have asked you if you agree with this paragraph.

Bob Diamond: Apologies.

Q548 Chair: Okay, let me just try one more question. There have been recent reports that Lloyds intend to do a clawback of a considerable proportion of Eric Daniels’ bonus on the back of PPI mis-selling. Given that Barclays was forced to set aside £1 billion earlier this year to cover PPI compensation, do you have any intention to do that with your bonus or other senior members’ bonuses?

Bob Diamond: Let me make some comments on how we are treating PPI, and then ask Antony to make a few comments as well.

During our remuneration process we will be discussing with our remuneration committee the impact of the PPI provision, which, for avoidance of doubt, was £1 billion. It is expensive. It is something that both and Antony and I are not happy about. Most importantly, we need to accelerate the payments that have been in the queue as quickly as we can.

Q549 Chair: I am just asking you a very specific question about the remuneration and the response to it.

Bob Diamond: We are taking into account in our businesses that impact in our remuneration.

Q550 Chair: The answer is you are considering it?

Bob Diamond: Yes.

Chair: That is what I wanted to know. Thank you very much.

Q551 Michael Fallon: If we turn to the bank levy, when Bill Winters from the ICB appeared in front of us he said if the Vickers recommendation succeeded in removing the implicit subsidy then there would be a case for removing the bank levy itself. Do you agree with that?

Bob Diamond: Yes, I do.

Q552 Michael Fallon: You do. Do you think then it is reasonable if the credit rating agencies start factoring in some reduction in the implicit subsidy that Government ought to take that into account in framing the bank levy?

Bob Diamond: I think they can be connected or separate. The banks in the UK, if there was an implicit subsidy, it is there no longer for the UK banks in terms of their funding, which was one of the goals of the Independent Commission. We have heard from the rating agencies that they use different notches for UK-based banks and for non-UK-based banks. But the bank levy creates an unlevel playing field, so that when Antony, running his retail business in Africa, is lending to a customer he pays a bank levy on that, where a bank in the United States or a bank in Germany would not. So the biggest issue I have with the bank levy is the creation of an unlevel playing field, so there is a disadvantage to being a UK-based institution versus a Santander or a US bank or a European-based bank.

Q553 Michael Fallon: Have you made representations along those lines to the Treasury?

Bob Diamond: Yes.

Q554 Michael Fallon: Have you had any reaction to that?

Bob Diamond: Certainly, there was a reaction in the discussion. There wasn’t a change in the bank levy.

Michael Fallon: Thank you.

Bob Diamond: If I could say one more thing, Michael, one of the concerns for us is that for other banks operating in the UK, within the UK everyone is on a level playing field, but outside the UK it only applies to the UK-based banks.

Q555 Mark Garnier: You have been here four times, and I think most times you have come we have asked you about your intention of relocating out of the UK. When you came before the House of Lords Economic Affairs Committee you were absolutely categoric that there is absolutely no intention to change that; that you have been in the United Kingdom for 300 years. However, you then put in quite a big caveat, which is, "Having said that, I am, like everybody else here, challenged by our board and our shareholders through our normal planning process to consider all aspects of that, as you would imagine". If you were sitting in front of your board, what would you be advising them to do with regard to maintaining the domicile in the UK?

Bob Diamond: The difficulty in what you are pointing to comes to one can never say never because we don’t know all the facts, but on the things that we know-

Mark Garnier : If you had a board meeting-

Bob Diamond: The things that we know today, this is our home and there are some challenges to being a Chief Executive of a UK-based bank that are not representative. But if you bring all of the pieces in, the strength of the economy, the independent fiscal and monetary policies, my recommendation would clearly be to be domiciled, to be headquartered in the UK.

Q556 Mark Garnier : You don’t see any chance of that changing, given what you know now about all the regulatory changes coming through, the ICB and all the rest of it?

Bob Diamond: Correct. But as we have talked here before, there are some challenges in terms of super-equivalence, there are some challenges in terms of making sure we don’t move too far on safe and sound versus helping drive the economy. I think we will overcome all those challenges but, as an example, I can’t be sure what the final report on the Independent Commission is but I think I know pretty well and, based on that, we think this is the right place for us.

Q557 Mark Garnier : We have a guidance statement on Monday, as you know. How close are you to changing your mind?

Bob Diamond: I don’t mean to hesitate at all. We have been in the United Kingdom for 320 years, this is where we want to be and this is where we intend to be.

Q558 Mark Garnier : When we took evidence on the ICB from the economist, John Kay, he suggested that a possible consequence of the ICB is that Barclays may split itself up and allow parts of Capital to relocate offshore. Again, if you were sitting in a board meeting, what would you recommend your fellow directors do with regard to Barclays Capital and its domicile?

Bob Diamond: They could have their headquarters anywhere they want. The three logical areas I suppose would be somewhere in Asia, London or New York, but that would not change our primary regulator being the FSA, so it is almost a non-issue. We have almost as many people in Barclays Capital today in New York as we have in London. It kind of has multiple headquarters but none of that changes at all the fact that our primary regulator is the UK, and that is the driving force.

Q559 Mr Ruffley: Mr Diamond, the ICB proposals, what will they do to the competitiveness of your investment bank, Bar Cap, relative to other foreign competitors; disadvantage them or make no difference?

Bob Diamond: It is not a positive, it is a negative, and we think we can manage it and, as I have said, ring-fencing was not what we recommended. It certainly would not have been our first choice. From everything we know now, and there are still more details to come, but what we would expect to be the implementation we can live with it and we are going to do the implementation when we know the-

Q560 Mr Ruffley: Have you made an attempt to quantify what the possible cost might be? There are a lot of assumptions we have to make, but is there a ballpark figure that you have in your mind for the extra cost to Bar Cap of these proposals, when they are implemented in full?

Bob Diamond: I haven’t thought of it quite that way. I have a long answer and a short answer, and I know the Chairman wants the short answer.

Chair: Put the long answer in writing, if you would.

Bob Diamond: We have seen the estimates of £4 billion to £7 billion for the industry. If there are four large banks that will assume most of those then if you divide by four we think that is probably in the ballpark, so we think it is probably north of £1 billion, but to get to £2 billion we are not sure yet. That is primarily the funding, the liquidity charges, and the capital charges that come with it. There are others things that we have talked about in terms of the cost of regulation, but that is a good approximation of what we think the impact on Barclays will be of the Independent Commission.

Q561 Mr Ruffley: That is an annual figure?

Bob Diamond: Yes. The majority of that will be felt in Barclays Capital but not all of it. I don’t think they have broken it out by business, but it would certainly be the majority in the corporate and investment banking business.

Q562 Mr Ruffley: My second and final question relates to the EU. Bearing in mind the Prime Minister’s decision last weekend to veto treaty change, this could well have implications for financial services in the single market or our financial service industry position in a single market. Do you have any thoughts as to how this might play out or, more particularly, what assumptions are Barclays making about the aftermath of Mr Cameron’s decision to veto the treaty?

Bob Diamond: Unsurprisingly, both Antony and I would say that the issue is not about financial services. The issue is about the eurozone, the 17-

Q563 Mr Ruffley: I don’t want to career on from that. We all understand that the euro is a big issue, but I want to stick to the UK’s financial service sector position as a result of the decisions made by Her Majesty’s Government last weekend.

Bob Diamond: I will ask Antony to speak, but the focus of decisions has been on getting the eurozone safe and sound as a financial system. I don’t think we know enough to know what the impact-

Q564 Mr Ruffley: I will just be more specific, Mr Diamond. If there were to be a financial transaction tax implemented in the eurozone, would that have any impact on your business?

Bob Diamond: Yes, I think it would be a negative-

Mr Ruffley: Even though Britain is outside?

Bob Diamond: It is not as much my business or even the UK, it is our pension funds, our insurance companies. It would have a very broad-ranging and negative impact on the real economy. That is the real issue with the financial transactions tax.

Q565 Mr Ruffley: Anything you would like to add?

Antony Jenkins: As Bob said, it is still early to see what the implications are for the industry. Clearly, if a financial transaction tax were applied in London that would have severe consequences for the industry, as people generally agree.

Q566 Mr Ruffley: Work on the assumption that the Chancellor has vetoed that and work on the basis that Britain is not a part of the FTT, but is there any way that this levy could be implemented in such a way that it would damage your business?

Antony Jenkins: Frankly, it is still unclear as to how it would be implemented and the details of what legal entity structure it would apply to.

Q567 Mr Ruffley: He must be making some assumptions-worst-case scenario. Have you not done that?

Bob Diamond: Yes. If we did business with a German insurer that is subject to, I would still say that this is having a bigger impact on the real economy than it would have on individual banks.

Q568 Stewart Hosie: Bob, the European Commission wants to implement maximum harmonisation in European financial regulation, and self-evidently that might inhibit the implementation of some of the ICB proposals. On balance, would you prefer to see this maximum harmonisation within Europe, or the UK have the ability to offer the protections to the sector that are implicit in Vickers’ recommendations, or do you prefer option B?

Bob Diamond: I have never thought of it quite that way. You know, from things I have said previously, I think we can accomplish the things necessary for safety and soundness without going as far as a ring-fence. Unsurprisingly, if we had complete harmonisation, I still believe I would put as a very high priority the same goals and aspirations that the ICB have in terms of creating a more safe and sound financial system. As you know, from past times, we believe that through operational subsidiarisation we can accomplish the same thing, that if there were a problem, a bank could be allowed to fail without creating harm to depositors and without bringing in taxpayer money. I don’t know if you have a different view. It is hard to answer the exact question but I think it could be accomplished both ways.

Antony Jenkins: We have done an enormous amount of work on operational subsidiarisation. We think it is extremely important that banks are able to resolve over the proverbial weekend. We think that will afford the protection, both to the systems in this country but also to the other parts of society. The impact of the European framework on this is far from clear, and one of the reasons why these conversations are always complex is because we have many different streams of activity progressing at slightly different paces that all need to be brought together. So for us, one of the questions on our mind, for example, is, "How does your ring-fence work with your operational subsidiarity, work with your holding company, what is the relationship in terms of operational and capital and funding?" All of those things will have profound impacts on the capacity that we are able to provide to the economy, as well as on costs.

Q569 Stewart Hosie: Let me ask you about the ring-fencing; more accurately, what Goldman Sachs said about Vickers in relation to super-equivalence, which is represented by the ICB proposals and the bank levy. Goldman Sachs said that that could structurally disadvantage UK banks, particularly outside the ring-fence. You have already mentioned the impact of the levy being detrimental. Is there anything else inside the Vickers proposals that could structurally disadvantage UK banks outside the ring-fence?

Antony Jenkins: Of course the issue inside the ring-fence is that you are basically trapping parts of the capital of the organisation, and so you minimise the benefits of the universal banking model, which has traditionally resulted in lower funding costs for universal banks. That has the potential to impact our ability to do business cost-effectively, and as Bob has said there is a cost to that. We are in the process of continually reviewing an estimate of that cost. It is in the range that he referenced of one to two.

Q570 Stewart Hosie: So it is the trapping of the capital, in that sense, which offers the biggest structural disadvantage, then?

Antony Jenkins: Plus, the other associated issues of subordination and the relationship of all of that to the capital structure of the organisation, which is what wholesale investors will look at when they think about the pricing of debt specifically.

Q571 Stewart Hosie: Finally on that point, Commissioner Barnier has just announced he wants to set up an expert commission to study the mandatory separation of investment banking from retail banking. Have you had any input into that? Have you spoken to the European Commission? Do you have a view on the way that that might go and how it might be different from what has been proposed by Vickers?

Bob Diamond: You know we have a view on that.

Q572 Stewart Hosie: Have you told Commissioner Barnier what your view is?

Bob Diamond: I have not talked to Commissioner Barnier and I am not aware of any specific meetings we have had, but we are very engaged through our office in Brussels and our public policy on that.

Q573 Stewart Hosie: A final question on that. Should he decide he wants to do this, through the EU or through the FSB, would it make sense for the proposals that he has to be mirrored by the ICB’s proposals rather than having two different ring-fence options coming from two different directions, which strikes me as a huge concern for banks that work throughout Europe?

Bob Diamond: You know I am a big believer in keeping the regulatory framework as consistent among the G20, the large economies, as possible. The Independent Commission ring-fence is a move away from that, in and of itself. This would be another. So, by things I have said in the past, you know I would be opposed to that. I think creating an unlevel playing field is quite dangerous.

Chair: We have just heard similar evidence from Standard Chartered on that very point.

Q574 John Mann: I just have two questions of you. You have already raised concerns on two aspects of regulation emanating from Brussels and the European Commission. I would be interested to know if there are other specific proposals coming from the Commission that you have concerns about, and perhaps you could elaborate, or if it is too much detail then perhaps send us a note of precisely what areas coming from Brussels you have specific concerns about, in terms of the UK’s competitive position.

Bob Diamond: We will do that. I will give you a headline now. We work very closely with the people from the Government in Brussels to keep them abreast of those types of issues as well through public policy. Broadly speaking, the two big initiatives are the implementation of Basel III-it is commonly referred to as CRD 4-and all the issues around crisis management. I don’t know if you want to add to that, but that captures the majority of the-

Q575 John Mann: It would be useful to get the detail of where you think there are problems, so that we are aware of them, and whether there is anything you can raise.

Bob Diamond: I am happy to send to the Committee some of the briefing materials we have given to the-

Q576 John Mann: That would be very helpful. The second question: you have been quoted as using some fairly fruity language in recent times about some of your people. I wondered, considering that you have consistently pointed out that the major problems that we have had in recent years have not emanated from your bank, what your honest assessment is about the quality of the regulators that we have in the UK?

Bob Diamond: That certainly puts me on the spot. The quality level has improved, I would say. The worry I have-and this is something that I have said to our regulators as well-is that we are all trying to balance making the financial system safer and sounder but also driving jobs and economic growth, and I still worry that the regulators are in a position where the focus is much more on safe and sound, which is more capital, more capital, more capital, less risk, less risk, less risk, and the impact that has on the real economy. I have had these open discussions, certainly with Hector and his team, so I am not saying anything that I have not said in those meetings, but I look for more balance because you have heard me speak publicly on this.

With the challenges that the United Kingdom faces in terms of cutting the deficit, which is critical so that we maintain that AAA credit rating, we don’t have a funding issue as Spain or Italy has, and we have the ability to borrow on the financial markets. If we have to cut public spending-I believe the Prime Minister and the Chancellor are doing the right thing-then growth is going to have to come from the private sector. That means the banks and the private sector are going to have to be investing, and confident and certain and acting. So I do worry that we lean too far on "cut your risk, increase your capital", with too little recognition of the impact of that on the real economy.

Q577 Mr Love: Can I ask you how you reconcile the theme of your BBC Today lecture about being a good citizen, with the fact that last year you were paid a total remuneration that was 340-odd times the median income in this country?

Bob Diamond: The focus on citizenship, Mr Love, is very important and it is about doing a much better job of banks expressing to the communities in which we work, and the communities we serve, what we do to help create jobs and help create economic growth. As a chief executive, the thing that is most important for me in that regard is to help bring back confidence that there are good jobs available, that there are good opportunities available, that there are good opportunities to invest, and that is what we are working very hard to do. It is also about giving back to the communities, and I shall ask Antony to say a few words. I find it remarkable the things that the people at Barclays do in their own time to give back to the communities in which they work, whether it is spaces for sports or the things that we are doing with the schools in the UK and in Africa.

Antony Jenkins: We have definitely broadened out our definition of citizenship because, as Bob has referred to, we do many very good things in the communities where we do business. But we increasingly think of it as the way in which we do business across our customers, for our colleagues, for society at large, and being much more critical about some of the decisions that we take along the way of doing that.

Q578 Mr Love: We are limited in time so I will stop you at that point. I want to ask both of you, in a sense, don’t you think that the public, your customers, are right to be cynical, when they are asked to and are making sacrifices at the present time and there does not seem to be any recognition of that from the remuneration committee that you say does such a good job. Mr Diamond?

Bob Diamond: We work very hard to balance being responsible, and listening to the messages coming from our regulators and the messages coming from the public, with being competitive. We are trying to balance that, and I think you will see that that is very, very much how we approach this period. We are very early in the process this year.

Q579 Mr Love: Let me ask Mr Jenkins, Barclays has accepted full responsibility for the PPI debacle that the Chairman asked about earlier on. If you were to be accountable, should somebody be held responsible within the organisation and, as a minimum, should that be reflected in the remuneration? Since we are suggesting that your remuneration should recognise good practice, surely it has to recognise bad practice?

Antony Jenkins: Yes, as a point of principle I agree with you completely. We have talked about this with the board of Barclays and with the remuneration committee of Barclays. The PPI problem dates back to the start of the last decade, 2000. The people who were leading the business at that time and who had accountability for this have left the organisation.

Having said that, we still recognise that our shareholders and customers have been disadvantaged by this and so we have discussed with our remuneration committee how to deal with that issue, and that is an ongoing set of discussions. In terms of pay for performance and in terms of recognition that there should be no payment for failure, that is absolutely on our radar screens and, as Bob has mentioned, our focus now is to make sure that the customers get their redress as quickly as possible.

Q580 Mr Love: Perhaps we could ask that you submit something to us about how that discussion will be reflected in the remuneration of senior executives in the organisation.

Can I move on; there is a report widely in the press that the major banks are lobbying very hard in relation to regulation generally but to the ICB report in particular. Has Barclays been lobbying Government on either of those interests?

Bob Diamond: I appreciate you asking the question. I resent in some ways the accusations of lobbying. They are usually used in a negative way. I and my entire team have been available for the Independent Commission, for the FSA, for anyone that has wanted to talk to us, and we have been encouraged to give our views and I think it is important that we give our views. We have not done any lobbying, and I will tell you why. Strong banks want strong regulation. There is nothing that would fit Barclays better than having a strong regulatory environment seen as an advantage in the United Kingdom.

The banks who were not a burden on the taxpayer, HSBC, Standard Chartered, Barclays, all three of us as Chief Executives said in the House of Lords, when we were asked to testify there, very, very clearly that it was a big burden on us that banks did fail in the United Kingdom. We recognise that the average person on the street does not differentiate between which bank was successful and which bank was bad. They just know that there was a banking crisis and they blame us all. So, we recognise that the best thing we can do is have a strong, tough regulatory environment, and we want that.

Q581 Mr Love: It has also been suggested that the banks have argued that if they were to introduce this new regulation that will lead to a reduction in lending to the real economy. Is that an issue that you have taken up?

Bob Diamond: I have discussed it and I will ask Antony to speak on it too. Just a minute ago I was talking about you do have to find a balance. We can take capital levels so high that banks can't lend and, obviously, you will get safe but you will not have an economy.

Chair: Yes, we are coming on to exactly that question, and I will bring in George Mudie.

Q582 Mr Mudie: I want to follow up on John Mann’s question and your answer. I do not think there is a mainstream political party in the country that does not realise the need to cut back on public expenditure. It is the pace and the damage, and you see from the opening statement that to go faster sometimes means you are standing still. I wonder if you think that; give that some thought, because I wonder if you share my fears that the regulators are panicking a bit and going too fast, in terms of expecting you to build up capital when there is an obvious need in the economy for investment. If they were a bit more aware of the wider circumstances, the collateral damage this race to pressurise you to build up your capital is causing in terms of your lending, couldn’t we all relax a wee bit and get our priorities right? What would you say to that?

Bob Diamond: I would agree with you.

Mr Mudie: Very good. That is the first time, I think. In fact, miracles happen, don’t they?

Bob Diamond: Let’s mark the date and time.

Q583 Mr Mudie: I will. I want to take you on to your BBC lecture, which gladdened my heart but am I too romantic as a Scot to be taken in by your fine words? You made the point about the need for investment in medium-term business to grow the economy, and you spelled it out. You said you were committed, and your people were committed. The figures that were given to us by the Bank of England within the last month indicate that Project Merlin is not working. It may be working in the terms you negotiated, but it is not working. Less net lending is happening and the Governor was worried about it. I am not saying it in terms of trying to attack you or anything, but what can we believe about this commitment? I know the circumstances out there, the pressure on you to build up capital, but do you mean that there will be increased net lending to small and medium enterprises? That you are changing the culture of the bank to see that sector, not as a minority sector but a larger sector in your borrowers?

Bob Diamond: I will give you a couple of facts and then I am going to ask Antony to bring them to life. This is a good question and I appreciate it, because there are stories that are trying to create the news instead of report the news. So let me give you the facts, and I would say that everyone on this Committee, if you would like to come in and verify these, sit with us and see how we approve loans and verify everything I say, please do, but here are the facts. Net lending to businesses in this economy is down about 10% this year as reported by the Bank of England. Our net lending is up 2.5%. There is a 12.5% difference between the average in the UK and Barclays, and that is because Antony and I and a lot of us have said to ourselves that this is critically important. We made a commitment to the Prime Minister and the Chancellor but we said another thing, this is a great business. This is Barclays. What we do is we support business in the United Kingdom, in countries in Africa and in other places. We have clinics where thousands of people have come. We have set up specialty funds.

One of the things that is important for the Treasury Select Committee to understand is when the crisis hit in 2007 those banks that were headquartered outside the UK pretty much pulled their lending out of the market, and the burden fell to the UK-based institutions, and we do believe in citizenship, we do believe it is convincing our clients that we are working in their best interests, and we have a big spread between-

Q584 Mr Mudie: Mr Diamond, let me just ask you, the latest fiscal financial stability report from the Bank of England showed it was the smallest sector, 25% of lending going to small- and medium-sized enterprises. Unless we grow that we can't rebalance the economy.

Bob Diamond: Yes, I agree.

Q585 Mr Mudie: For obvious reasons, you put in your speech that small businesses, small start-ups, a fair number of them are prone to fail. The figures that we have seen with Merlin, the figures that we have seen for decades from the mainstream banks, do you think it is time the British Government-not any British Government-started to look at a different conduit to get money in, along the German model, for example, but a different way of getting money in. For obvious reasons, I sometimes sympathise with you, because it is not the most profitable exercise in your enterprise, so are we just knocking our heads against a brick wall saying you should do more of that, is it going against the grain and should we be looking to have some form of different transmission method?

Antony Jenkins: If I might add to that, concisely I hope. Firstly, lending to small businesses is not a peripheral activity for us or something we are not interested in. It is hugely important to us. We have business managers who work with customers in local communities every day. We approve 85% of loans. We have opened over 100,000 new small business accounts this year. So firstly, it is very important to Barclays as a line of business.

Secondly, we have a demand problem. If you look at the SME segment, SMEs are building cash on their balance sheets, they are paying down debt, they are not taking on more debt, and they are cautious on employment, for all the reasons we know. SMEs are rational, logical; they open up the paper; they see eurozone, fiscal retrenching and all of that.

The third point you made is an important one and that is, do we have the right mechanisms or conduits for the right types of financing for these businesses? Oftentimes what these businesses need is not debt or revolving credit facilities; what they need is more equity, and getting that equity to small businesses is something that we are looking at.

We have just kicked off a piece of work inside Barclays, in partnership with the Work Foundation, to look at how we as an organisation are supporting innovation, and we are doing an audit right now to look at that and to see whether there are ways that we can act differently to tackle this very important question of, how do you get more equity and different types of products and structures into small and medium enterprises? That is the German model and we don’t have that in the UK and we need a solution to that. I don’t think the solution entirely rests with the Government. We need private-sector initiatives and we are committed to looking at that and reporting on that.

Chair: That is an interesting reply.

Mr McFadden: I am going to ask you about the speech as well.

Bob Diamond: I worked very long on that.

Q586 Mr McFadden: It was reported, almost as an act of contrition, you used language like being a good citizen, focusing on jobs and growth, rebuilding trust. People would say "Amen" to all of that. I just want to ask you very honestly-you know my old boss Peter Mandelson described you as "The unacceptable face of capitalism", and this is a very different tone-is it fair to read this as a change of mind on your part, in terms of a previous tone of defiance about questions about reward and so on?

Bob Diamond: I have been asked that question before. In terms of Peter Mandelson, that was a rather political statement at the time. He and I have since met, and he has come in and spent many hours with us to learn more about what we do in our corporate and investment banking business to help customers and clients. So I think he would see a lot of value added. The part of what he said that bothered me the most was he said all we do is shuffle papers, and we clearly have a strong value-add to our customers and clients.

Mr McFadden: What I am trying to explore is have you changed your mind about-

Bob Diamond: I don’t think I have changed my mind, but I think I am more sensitive and I have learned a lot in the last three years. As I said in the speech, it shook me when people did not believe that banks could be good citizens, not only were they not good citizens but that they couldn’t be, and so we spent a lot of time on it. It is not a change as much as it is an evolution, but I do think it is important that we all learn from the environment that we are operating in.

Q587 Mr McFadden: Let me ask you about a couple of examples then in terms of the bank’s policies. You have recently made a change on overdraft charges on basic bank accounts, which could see people being charged not £8 a day but £24 a day if they go into unauthorised debt with you. That is more in some ways than the payday lending companies that have been criticised a lot in the media recently. These are people on the very margins of financial stability. Surely, you agree we want them banking with a reputable High Street bank, like Barclays or one of the other High Street banks. How is it being a good citizen to take customers of yours, constituents of ours, on the very margins of financial stability and hit them with a charge of £24 a day for what might be quite small amounts of debt?

Antony Jenkins: I am very pleased that you have raised this because I view our activities in this space as a good example of citizenship. We are the biggest provider of basic bank accounts in the United Kingdom. We are generally recognised as the most inclusive bank in the UK of the big banks. I was in Tower Hamlets recently with one of the third sector organisations talking about this very issue.

From time to time we do change product features. On the basic bank account we did a lot of research with our customers and with consumer groups on this product and what came back to us were two things. One was information and the second was access. Access was about, "I want to be able to go into a branch. I want to be able to use any ATM". We know that using ATMs is important to customers who are marginalised because-

Mr McFadden: We will come on to ATMs-

Antony Jenkins: Maybe I can head that one off at the pass. The issue is, do I go and use an ATM where I have to pay a charge down the road or do I get on a bus and go to a bank where I can use an ATM? We heard loud and clear, "You’ve got to give us access to all the channels". So we are not going to impose charges for using non-Barclays ATMs. That came loud and clear through the research.

The other thing that people said to us was, "We want to feel in control", so what we have done is we have taken away the charge that we made for texting people their balances and we are giving that to people free. So, we are giving them free texts with a £15 buffer on the account, and only then if they go overdrawn or if that-

Q588 Mr McFadden: More than £15?

Antony Jenkins: More than £15, then the charges kick in. But when we gave a series of choices and product features not only to customers but to consumer groups, they said that this was the right way forward, and the reason why I am so passionate about this is because we believe in this as something that we have to support. We are very committed to this product and to making it work. For example, we are the only organisation-one of two actually-that provide this to undischarged bankrupts, people who are trying to rehabilitate their finances, and as I mentioned before we will not be imposing ATM charges on customers.

Q589 Mr McFadden: Just to clarify, you can guarantee that-unlike Lloyds and RBS who have been before us recently-that you will not plan to impose charges on the basic, but that you will guarantee that there will not be charges on basic bank account holders using non-Barclays ATMs?

Antony Jenkins: Correct.

Chair: One last very quick question.

Q590 Mr McFadden: Therefore are you saying this £24 per day charge is the price that other customers have to pay for that guarantee?

Antony Jenkins: Firstly, to characterise it as a £24-a-day charge is incorrect. It is a maximum of £24 a day, assuming you have three unpaid items; and secondly, we are saying we have changed the product configuration slightly to better meet our customers’ needs, because customers told us what they wanted was to get a text that says, "You’ve got £100 in your account, you’ve got £50 in your account, you’ve got £25 in your account", because that is what gives them the sense of control. We are told by customers and consumer groups that this is by far the best product in the UK and we are committed to continuing to make it the best product in the UK, and we will periodically review all of the product feature functionality, including the one you have referenced, to make sure that it stays the best product in the UK.

Q591 John Thurso: I want to go back to discussing SME finance, and particularly the area of competition, but first can I have a quick question on compensation? I have recently read research done in America that said that in 1991 or 1992 the average top executive in the big banks in America was paid around $2 million, or thereabouts, and it is now up to about $20 million and that exactly correlates to return on earnings, which is the measure of success that is used, so it is no surprise.

Bob Diamond: Return on equity.

Q592 John Thurso: Sorry, return on equity, absolutely. Thank you. The thesis that was put forward was this skews earnings and that if it was measured against return on assets their compensation would have gone up to approximately $3.5 million. Do you believe that the measures that have been used for compensation across the banking industry worldwide are skewed in favour of the executive and against the interests of shareholders, because of the measures that are used to judge success?

Bob Diamond: It is complicated, but I can help give some views in that regard. I do not recognise or support the data. I think it has been presented in a way that fits the story, but the point is return on equity versus return on assets, and I understand what you mean.

If I start with return on equity, we have done an awful lot of research, as you can imagine. Since our bank is valued below our book value we are concerned about bank valuations, and for our strategy day we did an awful lot of work on this. The financial measure that is most correlated with bank valuations is return on equity. That is why I would have liked to have had a longer discussion with the Chairman about the report from ABI, because the ABI themselves know that the single most important financial metric-if you could pick only one, and no one every wants to pick one-that is most consistent with high valuations of banks is high return on equity. It is very important to our shareholders.

On the other hand, we recognise that there has to be a balance in these things and so all of our long-term plans we have evolved over the last four or five years are now consistent whether it is in retail banking or corporate investment banking, so that their major financial measure-we don’t use only one-is a return on risk-rated assets. We agree that there should be a blend in compensation and we are more heavily weighted now to return on risk-rated assets.

I would just add in that the risk rate on the assets is important as well. It should not be return on assets un-risk-rated. It should be a risk-rated measure. But there is some food for thought.

Q593 John Thurso: Thank you. I suspect it is something we will come back to in due course. Can I turn to SME financing and whoever thinks is best go for it. Based on my experience in my part of the world, which is at the far north, which means there is no Barclays-there isn’t a Barclays' branch-I think you have an operation just starting in Inverness, but you don’t register in anything that I deal with. I have about 10 cases, and I am involved with a small fund through the Nuclear Decommissioning Agency that is lending money to companies, where the banks are not, on purpose to help them. But businesses that are winning business from major companies need working capital, the primary requirement of an overdraft, and they are having their overdrafts compressed by their current lenders, who find it impossible to get out and find any other competitor who will lend to them. It would appear that there is no competition in some parts of the country-that all of the providers have taken the same decision on the same matrices, and so companies, which can and should be expanding and have new business, are not being financed. That goes to George’s question about the failure of some of the Merlin participants, though clearly not Barclays. What can we do to put competition into the High Street for SMEs?

Antony Jenkins: Part of this is what Bob referred to. If you go back to 2006, 2007, not only were the domestic banks having more capacity because they had to carry less capital and had more leverage, but also there were many foreign banks participating in this market, which created capacity and of course downward.

John Thurso: I know that one, absolutely right.

Antony Jenkins: So, part of this is a consequence of the issues that we have discussed here, in terms of regulation and the impact of that. In the part of the country that you are referring to, which I must admit I don’t know and we don’t have a presence, I can understand that that problem would be exacerbated-

Q594 John Thurso: Let me put it to you that 80% of the bank presence in my part of the world are nationalised or part-nationalised banks who are, it is alleged, extremely short of capital, and therefore they cannot lend because they have to hang on to their capital. You are a strong bank with more capital and you can lend. Is that not part of the problem?

Bob Diamond: It sounds like we should get some coverage people up there.

Antony Jenkins: Yes.

John Thurso: I am trying to persuade you to open a branch in Thurso and Wick or Tay or Inverness.

Chair: Also, Chichester at the same time.

Q595 John Thurso: It is quite true there are an awful lot of small businesses out there who are having their credit reduced or not supplied when they have good businesses and I am failing to understand why this is.

Chair: We are quite pressed for time, so if you could be concise.

Antony Jenkins: So very shortly, obviously there are pockets of the country where we don’t do business and we periodically review that, we will take a look at that. But again, Bob’s point is we have increased our lending and we have increased it because we have booked new customers, we have gained customers from the banks that are pulling out of the business.

Q596 Andrea Leadsom: Just coming on to the bit of the ICB report that deals with competition, do you think that it is a good proposal for this Payments Council group that is going to help switching through to its conclusion?

Antony Jenkins: I do think it is a good proposal and, as we have discussed in the past, some of the alternatives are very expensive to deliver and have the consequence of potentially derailing significant innovation in financial services for several years. The industry solution, which the ICB endorses in their report, is a very good step forward. It is complex to deliver operationally because you have not just the banks but also the direct-debiters that all have to be brought together, but it is a good plan. There are good milestones along the way that will hold everybody accountable, and it is deliverable in the timeframe that has been laid out. So, I do think it will be helpful, in terms of giving consumers certainty around the ability to migrate their accounts.

Q597 Andrea Leadsom: So, you are fully committed to it?

Antony Jenkins: Absolutely. To be perfectly honest with you, we were one of the organisations that were pushing this very hard because we thought it was the right solution to the problem and we have been driving this hard in all the industry bodies.

Q598 Andrea Leadsom: Mr Diamond, can I just ask you, because I know we have done this before, would you agree that there is a case for full account portability purely from the perspective of taking away the stickiness of accounts, because there is still residual reluctance on the part of consumers to change bank accounts? Would you agree that account portability would change that reluctance?

Bob Diamond: Are you happy for-

Andrea Leadsom: I am asking you because obviously to achieve full account portability it would require going far beyond what the ICB have proposed.

Bob Diamond: Andrea, we believe that the easier it is for customers to switch banks the better it is going to be for Barclays, simply stated. What we are trying to evaluate is, what is the cost benefit of getting them there?

Q599 Andrea Leadsom: We talked very loosely, and certainly with VocaLink previously, about a cost of around £2 billion versus around £600 million for a payment service that ensures your payments go through and your standing orders get transferred and so on, versus a system that you could potentially introduce at the same time as the retail ring-fence that could enable people, rather like mobile phones, to be able to switch bank accounts today and again tomorrow and again the next day. From a purely consumer point of view, would you agree that that would enable new entrants to come to the market very easily, to simply get their licence and plug and play, they don’t have to go to another bank to act as agency-clearer and so on?

Antony Jenkins: No, I don’t think that we agree that the proposed solution is going to be a superior solution for the customer, and I will tell you why. Firstly, if we have a seven-working-day window for transferring the account I think that is analogous to moving your mobile phone number, speaking as someone who has done it recently, but importantly I also think if we go down the route of true account number portability the cost is going to be enormous. The £2 billion number feels low to me. But equally, more importantly, it is going to tie up the industry and all of our technology development resources for several years to deliver that. It is not something that is going to be easy to be done in parallel with the ICB recommendations at all, and I worry that that is going to suck out innovation from the industry and doing things for customers that really matter, like improving how they make payments and bringing new products and services to the market.

Q600 Andrea Leadsom: Just to press back slightly, what the Payments Council is proposing is not account portability. You will have to change your account number. You will have to move all your standing orders, whereas account portability is just that, you take your number with you. So, if I logged on to iTunes, I don’t have to change my bank account number. I think that is a key point because that is obviously a major reason for stickiness. Secondly, the fact that if you created full account portability, would you accept it would make it easier for new entrants? Then just a third point is, it does not have to be the banks tied up doing this technology; for example, it could be a third party provider, almost through PFIs.

Antony Jenkins: To work backwards from that, it can't be a third-party provider because we would have to change all of our systems to accommodate whatever we are connecting into, so that is that point. In terms of consumers, we know that consumers run multiple bank accounts and often they do it on a try-before-you-buy type of basis, so the fact that there is not full account number portability I don’t think is a real issue for consumers. We can increase more lubrication into the system through this proposal. It is a very good proposal for consumers and, as Bob says, we like it because we think we will benefit from it at Barclays.

Chair: We are very grateful to you for giving evidence today. You challenged the data at one point on John Thurso’s question earlier, saying you did not recognise the data with respect to ROE and ROA. This is the return on equity and the return on assets. This was derived from Andy Haldane’s speech. It would be extremely valuable to have Barclays’ response to that. I think the whole Committee would like to see that.

Thank you very much for coming to give evidence. It has been extremely helpful for our inquiry.

Prepared 22nd December 2011