§ 4.27 p.m.
§ Lord McIntosh of HaringeyMy Lords, with the leave of the House, I shall now repeat a Statement 962 made in another place by the Chancellor of the Exchequer on banks competition. The Statement is as follows:
"With permission, Mr Speaker, in presenting the Competition Commission's report on the supply of banking services to small and medium-sized enterprises—my and my right honourable friend the Secretary of State for Trade and Industry's response to it—our starting point and guiding objective is our belief in competition as the spur to efficiency, innovation and competitiveness.
"It is underpinned by our statement in July that, just as in the last Parliament it was right to make monetary decisions independent of political influence under an independent authority— —first de facto and then by law—so too it is right to make competition decisions—de facto and then de jure— independent of political interference, with government accepting the decisions of independent competition authorities.
"Having already moved de facto to such a regime in the way we handle merger cases, in the forthcoming Enterprise Bill we will legislate to make decisions on mergers and complex monopolies independent.
"There are over 3.5 million small businesses in the UK, representing 55 per cent of jobs, 50 per cent of all business turnover and £1 trillion of economic activity a year. The access to finance and the quality of service they receive from banks are critically important to their—and the British economy's productivity and prosperity.
"So when the Cruickshank review of banking services found little prospect of effective competition emerging in the small business market, the Secretary of State for Trade and Industry and I referred small business banking to the Competition Commission for a full investigation. Its report is published and laid before the House today.
"Under the Fair Trading Act 1973, there are three necessary tests, all of which must be met before it can be concluded that there is a complex monopoly operating that is harmful to the public interest.
"The first test is that at least a quarter of the services under consideration must be supplied by a group of persons. The commission found that the eight largest clearing banks supplied at least a quarter of the banking services in 'the UK, with the four largest, in fact, providing 86 per cent of services, and that this degree of concentration had changed little over the past 10 years.
"The second test is that this group of persons must be found to conduct its affairs,
'as in any way to prevent, restrict or distort competition'."And, finally, the third test is that the restriction or distortion of competition caused by the complex monopoly must be shown to operate against the public interest."Let me set out the Competition Commission's findings. First, it finds that these banks had failed to compete on price by: refusing to pay interest on 963 current accounts and only paying low rates of interest on smaller, short-term deposit accounts; and by maintaining a structure of charges not related to costs.
"Secondly, it finds that these banks had reduced choice and the ability of small businesses to make savings on bank charges by: restricting small businesses to business rather than personal bank accounts; failing to inform small businesses about possible benefits from set off and sweep facilities which allow for credit balances in one account to be set off against debit balances in another; and requiring small businesses wanting a deposit account or a loan to also hold a current account.
"Thirdly, it finds that these banks had made it hard for small businesses to compare the deals available from different banks by: failing to provide small businesses with a breakdown of interest charges on their current account; and offering discounts only to selected customers.
"Fourthly, it finds that these banks had made it more difficult and expensive for new entrants and alternative suppliers to attract small businesses by: confining free banking to business start-ups and to small businesses who had moved from another bank; and negotiating reduced charges for small businesses who were likely to switch banks.
"The Competition Commission concludes that all eight of the largest clearing banks in the UK were found to be carrying out one or more of those practices which operated against the public interest.
"Moreover, the Competition Commission finds that,
'the average return on equity between 1998 and 2000 is 36 per cent compared with an estimated cost of equity of about 15 per cent. We, however, recognised that a number of adjustments should be made to these figures … despite the cautious approach we have adopted to a number of those factors, we have concluded that the four largest clearing groups … are together charging excessive prices … and therefore making excessive profits in England and Wales of about £725 million a year over the last three years with adverse effects on SMEs'."Profits are absolutely central to the effective and efficient working of a market economy. They are the engine in the dynamic process of competition, innovation and meeting needs of consumers. Where high profits are due to relative efficiency rather than monopoly—as the Competition Commission found in the case of Northern Bank—the question of whether high profits are against the public interest does not arise."Where high profits are derived from an absence of competition or through a complex monopoly situation, and are earned by overcharging customers, the effectiveness of the market is reduced. Indeed as the Competition Commission observed: where the consumers concerned—in this case small and medium sized companies—are themselves operating in highly competitive markets, the adverse effects on the public interest are exacerbated.
964 "Because practices carried out by the eight main clearing banks, and the overcharging by the four largest in England and Wales, were found to operate against the public interest, the Competition Commission recommend that all eight clearing banks identified make a number of changes to their practices to help promote competition in this market, including: being required to facilitate the switching of accounts; providing, if requested by a small or medium enterprise, a portable credit history; making the charges for their services more transparent; investigating the feasibility, costs and benefits of a national scheme for sharing branches; and extending the BBA Business Banking Code.
"Taken together, the Competition Commission states that these remedies along with others it proposes would help promote greater competition in banking services.
"The Competition Commission wants,
'a decisive and significant shift towards what [they] consider to be competitive levels',because, as it states,'competition and entry has to date not been effective in reducing excess profits and prices, nor is the immediate prospect of new entry in [their] view sufficient to reduce excess profits and prices in a reasonable time period'.It recommends a further transitional remedy requiring the four largest banks operating current accounts in England and Wales, where evidence of excessive charges were found, to offer all small businesses one of three possible options: a current account that pays interest of at least the Bank of England base rate minus 2.5 per cent; or a current account free of money transmission charges; or a choice between the two."The Competition Commission concludes that since certain current banking practices have operated against the public interest and lead to small businesses paying more than they should for services, it would be wrong to let the situation continue for several more years until the behavioural remedies to promote competition took effect.
"From our starting point—our belief in competition as the spur to efficiency—the Secretary of State for Trade and Industry and I have considered the Competition Commission's report carefully. We have examined the recommendations and the remedies proposed to promote competition, encourage new banking suppliers to enter the market and directly address the lack of choice and information.
"Until the competition authorities are fully independent, the Government have legal responsibility for decisions on complex monopoly cases. And in preparing the Government's response we have sought and received additional advice on the report's technical analysis and recommendations from independent experts.
"The advice of the Director-General of Fair Trading—published today—agrees with the Competition Commission that the limited degree, 965 and difficulty, of switching bank accounts is a key factor in inhibiting competition in the SME banking market. In his advice, that I am also publishing today, Sir Bryan Carsberg, former Chairman of the International Accounting Standards Board and ex-Director-General of Fair Trading, concluded that,
'the framework adopted by the Commission is sound and would be accepted as appropriate by most independent experts'."Like the Competition Commission, we recognise that to be robust and play their key role in the economy, it is necessary and desirable for banks, at points in the economic cycle, to make higher than average profits. But while we are pro profit, we are also pro competition and cannot be on the side of any monopoly, or any other behaviour that unfairly restricts competition in markets."The Competition Commission explicitly concludes in this case that practices by banks do operate against the public interest. Having carefully considered its report, the Secretary of State for Trade and Industry and I agree that action must now be taken to promote greater competition.
"First, the Competition Commission recommends that banks be required to facilitate the switching of accounts to enable small businesses to move accounts from one bank to another easily and quickly by completing a substantial percentage of all account switching within five working days; by publishing their performance objectives and efficiency in achieving them; and by imposing no charges for closing accounts. We agree with the commission's recommendation.
"Secondly, the commission recommends that banks be required, if requested by a small business, to provide a portable credit history—a statement of the SME's credit performance—that can be passed to other banks and will improve the prospects for smaller competitors and new entrants into the banking sector. We agree with the commission's recommendation.
"Thirdly, the commission recommends that banks be required to stop 'bundling' services and not impose any requirement on small businesses to hold a current account in order to obtain a loan or deposit account. We agree with the commission's recommendation.
"Fourthly, the Competition Commission recommends that banks be required to make the charges for their services more transparent, by routinely publishing their standard tariff prices for money transmission services and interest paid on current and short-term deposit accounts allowing small businesses easily to compare charges. We agree with the commission's recommendation.
"Fifthly, because the lack of access to a bank branch represented a key barrier to many substantial new competitors entering the market, the Competition Commission recommends banks are required to investigate the feasibility, costs and benefits of a national scheme for sharing branches and publish their findings within a year. We agree with the commission's recommendation.
966 "The Julius report concluded that the principles underlying the voluntary code for banking and mortgages for households should be extended to small businesses. And so the Competition Commission also made a number of other informal suggestions, some of which are incorporated in the new code announced by the British Banking Association last week. Others, including banks improving their procedures for dealing with errors and paying compensation, the Competition Commission recommends should now be added to the code.
"These and other remedies proposed by the Competition Commission are in pursuit of competition and we ask the banks to work with the Director-General of Fair Trading to move the recommendations forward with speed.
"In seeking an earlier and decisive switch towards a better service for small businesses, the commission considered more radical measures including proposals for divestment of both bank branches and SME banking businesses—where banks would either be forced to give over some of their branches or some of their customers to other banks. And they considered a licence fee, an obligatory fund and a windfall tax.
"The Competition Commission rejected these proposals, and we agree with this rejection.
"The Competition Commission recommends a transitional remedy that is not about preventing companies earning high profits, but simply ensuring that they can only do so as a result of a genuine competitive advantage, a remedy that
'imposes no restriction on new entrants … and should not interfere with the natural emergence of desirable competition'."So the commission recommends, and we agree, as a transitional measure, that the four largest banks operating current accounts in England and Wales be required to offer any SME either a current account paying interest of at least the Bank of England base rate minus 2.5 per cent; or a current account free of money transmission charges; or a choice between the two. And the Director-General of Fair Trading recommends, and we agree, that we ask him to obtain undertakings from the banks to implement this remedy."The commission suggests that all remedies are put in place within six months—we hope that the Director-General of Fair Trading will be able to reach an earlier agreement on the transitional remedy.
"The commission also recommends that the Director-General of Fair Trading should review all the remedies three years after its implementation. Under the Fair Trading Act there is flexibility for a review to take place sooner.
"We state our view that if at any time within the three years the Office of Fair Trading observes more effective competition emerging—or banks have proposals they believe would make for a more competitive environment—then an early review could and should take place.
967 "Our goal is to create an environment where new entrants can compete with existing banks on a fair basis and both can secure more competitive services for small businesses.
"I urge the banks to work with the Director-General of Fair Trading to achieve what is in everyone's interest: a better service, a fairer deal for Britain's three-and-a-half million small businesses".
My Lords, that concludes the Statement.
§ 4.42 p.m.
§ The Earl of NortheskMy Lords, I am of course extremely grateful to the Minister for repeating the Statement. That said, I cannot let the moment pass without registering some protest and resentment. By no means do I attach opprobrium to the Minister. I cannot be certain, but he might have preferred to have had a clear run at his Employment Bill brief in Grand Committee. But the point does have to be made that we were advised that this Statement was being made at a very late hour. Indeed, my understanding is that colleagues in another place were only given 25 minutes notice.
Following hard on the heels of the failure of the Government to offer a full Statement on the White Paper concerning economic and financial reform of the European Union, is this not another regrettable example of the Chancellor of the Exchequer's distain for due parliamentary process? I therefore suggest to the noble Lord that we would be extremely grateful if he could use his not inconsiderable influence to try to persuade his Treasury colleagues, and indeed the Chancellor, of the merits of observing the courtesies and giving adequate notice of impending Statements. Tangentially, and because I have touched on it, I also take this opportunity to iterate our expressed wish for a proper debate on the European Union reform White Paper.
It has been suggested—and perhaps the noble Lord can confirm this—that the Competition Commission report which forms the substance of the Statement, has been gathering dust within the Department of Trade and Industry for some five months. Insofar as that is accurate, it represents an unusual delay, particularly against the background of the lightning speed with which the Chancellor has sprung his Statement on Parliament today. But in these circumstances perhaps I may ask the noble Lord whether it might not have been more helpful and beneficial to have published the report earlier to afford a period of consultation on it? In effect, does not the Chancellor's decision to publish the report in conjunction with the Government's response to it, have the effect of stifling proper and legitimate debate about its content?
Having got those two points off my chest, I hope that your Lordships will acknowledge that in the time available it has been a herculean task to get to grips with the subject matter of the Statement. The Competition Commission report itself runs to four London-sized telephone directories. Inevitably, therefore, our analysis of both the report and the 968 Statement to date has had to be somewhat cursory. As we delve deeper I have no doubt, therefore, that other issues and questions will arise. None the less, we note the observation from the Chancellor that,
Our starting point and guiding objective is our belief in competition as the spur to efficiency, innovation and competitiveness".Hooray to that. We have no difficulty in accepting the premise that the most important way to get a good deal for small business is via the route of competition.To that extent do the Government accept that notwithstanding the findings of the Cruickshank review there has already been a significant enhancement to competition in the banking sector in recent times through the entry into the small and medium-sized enterprises lending market of the likes of Abbey National and the National Australian Group?
My understanding of the Statement is that the recommendations of the Competition Commission, as accepted by the Government, are to be focused on the biggest four banks, which cover 86 per cent of the market. Is that a correct assumption? Or is it the Government's intention that the recommendations should apply to the whole banking sector, including new entrants? In this context, too, we would welcome some clarification of the implications that the recommendations may or may not have for the proposals for the universal bank.
We note, too, that the Government have accepted the recommendation that the banks should conduct a feasibility study about sharing branches. However, how will the Government respond should the banks decline to conduct such a study?
As I have already suggested, we can afford to give a gentle welcome to the Chancellor's acceptance of the recommendations. As I am sure the Minister will readily accede, we need more time to study the detail of the report before we can be satisfied that the Statement is worthy of a more robust welcome. On balance, we can conclude that this does represent a reasonable step forward in furthering the interest of small and medium-sized businesses. However, it would be remiss of me if I were not to make the point that in reality it is relatively small beer when set against the tide of regulation and red tape that the Government have imposed on them: 4,642 regulations last year alone, one for every 25 minutes of every working day in the year.
The Secretary of State for Trade and Industry, in her announcement of the publication of the report, states,
The Competition Commission finds that as a result small and medium-sized enterprises in England and Wales are being overcharged".That may be so in the banking sector. But equally we should not lose sight of the Government's own capacity, as it were, to overcharge small and medium-sized enterprises with red tape and regulation. After all, the Government—and here we on these Benches wholeheartedly agree—acknowledge the significance and importance of the small business sector both to 969 and within the economy. To that extent it merits assistance from government, not only in respect of banking services, as announced in the Statement, but also more widely in relieving the regulatory burden.
§ 4.48 p.m.
§ Lord Oakeshott of Seagrove BayMy Lords, I declare an interest as an investment manager and an employee of a British investment bank. We on these Benches wholeheartedly support the Competition Commission's report, both in its analysis of the banking services market and in its prescriptions for action. It comes as no surprise for us. We have been pointing out the problem and campaigning for a solution along these lines for the past two years. We support it strongly, but it has taken far too long for action to come.
It seems to us that the commission has clearly established that competition between the largest banks serving small and medium-sized businesses is limited. In particular, it is very hard for such businesses to compare charges and service. The banks are also slow in practice to let their business customers use their ultimate sanction which, of course, as consumers, is to close and move their accounts. But those two things have to be done at the same time so customers and banks are in rather a different position from customers of some other services.
We also strongly support the point made about the independence of the Competition Commission and the fact that such recommendations should be accepted without political interference. That is an important point and we strongly support that principle.
It has been a long Statement and I do not intend to detain the House for long. However, it is right to pick out the section of the report that identified the £725 million a year excess charges that the four largest clearing banks alone had made in the past three years. The commission analysed the figures and pointed out how much the overcharging had cost customers. It is not hard to see in that case why the commission concluded that the level of pricing in this area needs a decisive and significant downward shift. The banks should not he too unhappy with the proposal that they should offer a minimum rate of interest that is no worse than 2.5 per cent less than the Bank base rate. It would not be too crippling, given that it would be 1.5 per cent on deposits today.
Will the Minister also recognise that slow transmission of money by the banks is an effective extra charge to businesses? Time is money if there is too long a gap between charging the person sending the money and giving value to the person receiving it. I hope that that will also be taken into account.
I end with a question. Why has it taken the Government so long to act? The problems in this area were clear when the Cruickshank report was published two years ago. Small businesses in many different sectors and different parts of the economy have been suffering badly from our extremely unbalanced economy over the past two years and they need 970 practical help from their banks now. We welcome the report and look forward to urgent action from the Government—better late than never.
§ 4.51 p.m.
§ Lord McIntosh of HaringeyMy Lords, I thank both noble Lords for their responses to the Statement. I start with the point made by the noble Earl, Lord Northesk, about process. I entirely reject the analysis that he has given on what happened. The usual practice with Competition Commission reports is to make no statement at all, either written or oral. The normal practice is response by press notice. We have done it this way on this occasion because the report is about an entire market of the UK economy. We emphasise the importance of small and medium-sized enterprises in the Statement itself. That is why the Chancellor and the Secretary of State felt it necessary to make a Statement to Parliament. W. are often criticised for not making Statements to Parliament. As we are so often criticised for leaking and spinning Statements beforehand, I must make it clear that we are entirely fulfilling our obligations to Parliament as obviously there were no leaks or spins on this report or Statement.
Having said that, the Chancellor is constrained by considerations of market sensitivity and by the confidentiality requirements of the Fair Trading Act. He explained that to Michael Howard and Matthew Taylor in letters this morning and, of course, he took steps to ensure that the Speaker was informed. All that we properly could and did do was to inform the banks late last night that a Statement would be made. For obvious reasons of commercial confidentiality and market sensitivity, we could not confide to anyone what would be in the Statement. All the documents, including the text of the report, were available in the Printed Paper Office at exactly the same time as they were in the House of Commons. I used to have to do this in opposition, so I appreciate that it is extraordinarily difficult to try to understand such matters in a short time. But I hope that the House will agree that proprieties in this case have been observed with great precision.
The noble Earl, Lord Northesk, went on to say that the report had been gathering dust for five months. It certainly has not. Until we have achieved by statute the full independence of the Competition Commission, Ministers have a severe responsibility on them. Even if they are to accept all the commission's recommendations, they have to assure themselves that its analysis is soundly based and must examine the possibilities of remedy. That is why in the period between the provision of the unpublished report and today, Ministers commissioned Sir Bryan Carsberg to analyse the accounting standards in the report, which he found to be sound. They also consulted the Director-General of Fair Trading on implementation. Again, that was referred to in the report. I do not think that in those circumstances the request for earlier publication for consultation will be seen to be appropriate.
971 The noble Earl, Lord Northesk, also asked whether there had been some improvement since the Cruickshank report. There may have been, but it has not affected the extreme dominance of the big four in the banking market, which is the important point. In any case the recommendations are not for the whole banking sector. The 13 behavioural recommendations are for the eight big banks and the immediate recommendation is for the big four banks who have been found guilty of excessive charging. I do not think that there is any read across to the universal bank. The noble Earl denied that his response was grudging. I would say that it was modified rapture.
I am grateful to the noble Lord, Lord Oakeshott, for his support and agree with him entirely about the importance of making it easy to switch banks to ensure that small and medium-sized enterprises have proper banking services, which is the subject of many of the recommendations, including the 13 recommendations for the eight banks and the more informal observations. The noble Lord is right on the question of the independence of the Competition Commission, but, as I have said, until the enterprise Bill achieves that, Ministers have responsibility.
On the question of the slow transition of money, again this is something with which we agree. It was an important part of Cruickshank's recommendations, but it applies not only to small and medium-sized enterprises but to large enterprises and personal banking. We expect action in response to Cruickshank, but we are considering a rather wider subject today. As for the time it takes to produce results, Cruickshank identified problems. The Competition Commission has identified solutions and in accepting its report those solutions are in hand.
§ 4.58 p.m.
§ Lord BorrieMy Lords, I welcome the Chancellor's Statement today, as distinct from a mere press release. This is a most important matter. I do not share at all the grumbles of the noble Earl, Lord Northesk, at the five months that the Government have had—if that is the right number of months—to consider the matter. I welcome, too, the Chancellor's suggestion yet again that the enterprise Bill that will be introduced will give responsibility to the competition authorities to ensure that their proposals will be carried forward and that the Government will he unable to interfere by amending or altering them—whatever the phrase is. At present, the Government have a legal responsibility to deal with those matters. Hence the five months and the proper consultation that they undertook.
I hope that the Minister will forgive me as I have not yet read the enormous report. It looks as if the main proposals outlined by the Competition Commission are sensible and that the Government have accepted them. However, one part of the Statement worries me somewhat. I refer to the £725 million a year excess profit that has been made by the four major clearing banks for a period—I do not know for how long. All the proposals of the Competition Commission, which 972 have been accepted by the Government, are designed to make the market more competitive in the future, and it is to be hoped that they will work. None the less, those excess profits have been made. We are informed in the Statement that the Competition Commission has not proposed a windfall tax and that the Government have agreed that there should not be one. When I get round to reading the Competition Commission report I shall no doubt see its negative reasons for that. But what are the Government's reasons for not imposing a windfall tax in the light of the clear statements about the excess profits made by the banks on the grounds described?
§ Lord McIntosh of HaringeyMy Lords, I am grateful to my noble friend Lord Borrie for his welcome for the Statement. I shall let him into a secret—I have not read the report either. I received it as late as anyone else and I have read as much of the surrounding documentation as I can.
My noble friend is right. The Competition Commission found, after a rather complicated accounting analysis, that the four principal banks have made excess profits of £725 million per year over the past three years. That is the period with which it was concerned. He asked why we have accepted the Competition Commission's recommendation that there should not be a windfall tax on the banks. Although there are good precedents for windfall taxes—after all, the noble and learned Lord, Lord Howe of Aberavon, imposed a windfall tax on banking profits in 1981, and so it is not unheard of even in the banking sector—we felt that, on balance, on this occasion it was more important to put matters right for the future rather than to seek penalties for the past. Small and medium enterprises are looking for action in the future.
§ Lord SkelmersdaleMy Lords, I have declared my financial interests at the micro end of the small and medium enterprise scale many times before and I do so again today.
The Statement refers to a transitional remedy—or, rather, four transitional parts of a single remedy. My interest lies in two of those transitional parts. As I understand the Statement, the banks are either to pay interest on SM E accounts, or they are to offer a current account free of money transmission charges, or a choice between the two. From the point of view of SMEs, the result will be a trade off between cash flow and lower costs.
Be that as it may, I am always slightly suspicious of the phrase "transitional remedy". Transitional remedies attached to Acts of Parliament and so on are sometimes of short-term duration and sometimes of long-term duration. Like everyone else, I have not read the detailed background to the Statement but I know that there is a whole string of long-term remedies. Does this mean that the transitional remedies will disappear when the long-term remedies are completely effective?
§ Lord McIntosh of HaringeyMy Lords, I, too, should declare an interest. I have spent most of my 973 working life owning and running a small rather than medium sized enterprise. The noble Lord's analysis of the proposed remedies is right. Their intention is to secure greater competition. The matter will be kept under continuous review by the Office of Fair Trading. It is conceivable that, if the remedies are applied as we intend they shall be, after a period of time there will be evidence of greater competition in these markets and it will be no longer necessary for this undertaking to continue. But that is some way into the future. Let us get justice for small and medium enterprises first and then look at the effectiveness of the longer-term remedies.
§ Lord Brooke of Sutton MandevilleMy Lords, as the banking problem in rural areas is not so much a lack of access to bank branches for new entrants to the market as a lack of access to any bank branch for banking customers at large, can the Minister say what progress has been made on enhanced facilities through post offices in rural areas, without whom this Statement about competition remains somewhat academic?
§ Lord McIntosh of HaringeyMy Lords, I said in response to the noble Earl, Lord Northesk, that there is no read-across from the proposals for a universal hank, which are still going ahead. The idea of a universal bank — to which I think the noble Lord, Lord Brooke, is referring—is that it should offer very basic banking services, particularly for those who are without bank facilities at the present time. It is unlikely that that will apply to many of the small and medium enterprises with which the report and the Statement are concerned.
The noble Lord is right. The reduction in the number of bank branches in rural areas is a serious problem, but as it is not seen as a competition issue the Competition Commission did not consider the matter. However, the Government are well aware of the problem and wish to see it resolved.