This transcript is confidential and may contain privileged information. Do not publish or disclose its contents without the permission of the Competition Commission.

COMPETITION COMMISSION

Lloyds TSB / Abbey National Merger Inquiry

Notes of an Open Meeting
Held on: Friday, 30^th March 2001
At: The Strand Palace Hotel, Strand, London WC2R OJJ

__________

PRESENT:

FOR THE COMMISSION

Mrs Denise Kingsmill (Chairman)

Mr Graham Hadley

Mr David Jenkins

Professor David Parker

FOR THE STAFF:

Mr Malcolm Field

Mr Alastair Catto

Mr Robert Foster

Mr Brian McHenry

Ms Gill Booth

_____________________

Transcript of the Shorthand Notes of

Harry Counsell & Company
(Incorporating Cliffords Inn Conference Centre)
Cliffords Inn, Fetter Lane, London EC4
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(9.30 a.m.)

THE CHAIRMAN: Ladies and gentlemen, I think it is time we started the proceedings. I a Denise Kingsmill and I am Deputy Chairman of the Competition Commission and I am Chairman of the Inquiry investigating this proposed merger. I would like to introduce to you my colleagues. On my right is Graham Hadley.

MR HADLEY: Good morning.

THE CHAIRMAN: Next to me is Professor David Parker and next to him is David Jenkins. The four of us make up the group that is investigating this matter today. We are holding this meeting, which is the first public meeting that we have had in a commercial merger, as part of our Inquiry into the proposed acquisition of Abbey National by Lloyds TSB. The Inquiry is taking place under the Merger Provisions of the Fair Trading Act following a reference from the Secretary of State, Sir Stephen Byers, made to us on 23rd February. We have about three and a half months in which to carry out our Inquiry, and we are due to deliver our report on 12th June. The Secretary of State and the DTI have indicated they will usually take about six weeks thereafter to publish the report.

The purpose of this morning's meeting is to canvass as wide a range of views as we possibly can. As you will be aware, the Commission takes its information in all sorts of forms, mostly in writing, but we also have confidential hearings as well, and the public hearing is designed to enable those people to whom we have been unable to offer a private hearing because of the pressures of time, to have the opportunity to express their views. I am sure that there are many people here today who have interesting points of view to put across.

We also want to get a debate going in a sense here, because it is extremely useful for the group to hear the views expressed in a debating forum. This is not a question and answer session. We are not here for people to raise questions and have them answered by either of the parties or by us. The group is in listening mode and, as far as we are concerned, we

want to hear views rather than have questions put to us or to anyone else.

We have had an extremely strong response to our invitations and, unfortunately, we have had to turn a number of people away. So we are taking a web cast of this and it will be on the internet, and people will be able to send in electronic responses to the morning's proceedings as well. So if you see the cameras around the place, please ignore them and just act normally!

The session this morning will be divided into two parts. The first session, for which we have three speakers, will be basically talking about the state of the UK banking industry, those competitive influences, the economic drivers, where the industry is going. The second part of our debate this morning will be concerning the way in which this particular merger impacts upon that background.

Speaking initially will be Mike Fairey and Ian Harley who will both be giving their point of view, and we will also in the first half be hearing from Professor David Llewellyn. Thereafter we will have a debate on the issues raised. I am intending to move on from that at about 11 o'clock to the next stage which is to discuss this particular merger. We will then be having Phil Evans and David Rhodes who will be making contributions.

As I said, after the main speakers have spoken, I would be grateful if the people who want to make a contribution would indicate who they are, what organization they come from, and whether or not they have any particular interest in this merger, i.e. whether or not they have a financial interest or what their interest is as far as this proposed merger is concerned. If it is a member of the public that is speaking, I would be grateful if they would let us know whether they are an employee, a customer or whatever and what their interest is in putting their point of view across.

I am going to rule out of order any interventions that I think constitute whinges or grizzles or complaints about banking services or anything else like that. This is meant to be a debate upon the issues relating to this particular merger. So, although the Consumers Association tell me that second only to the railways are the number of complaints they get about banks, I do not want to hear them today. Today is not the forum to hear that sort of thing.

There is one further point I should raise. A question has been raised about the market sensitivity of today's event. Obviously the outcome of our Inquiry will be highly market sensitive, but we are very much at an early stage. We have formed no views at all. The purpose of this morning's meeting, and of all our other investigative procedures, is to get an understanding of the views of everybody so that we can then form our conclusions. We are at a very early stage and much needs to be done, including our private hearings with two parties, Lloyds TSB and Abbey National. So no one should draw any inferences from anything which is said today, and certainly nothing that may be said by any of the Commissioner Members or myself. As I said before, this is a case where we are sitting and listening.

A transcript is being taken in addition to the web cast. There is a transcript writer here this morning and the transcript will be available to those people who want a copy of it. I should tell you that representatives of the media are here and they are occupying the back two rows of the room.

I think now what I should like to do is to invite Mr Mike Fairey of Lloyds TSB to come along and speak. Before I do so, I would make the usual request and that is that everybody turns off their mobiles. I know that people from the City hate to be cut off from that lifeline, but, nevertheless, today it would make it very much easier for the proceedings if everybody turns their mobiles off. Thank you. Mr Fairey.

MR FAIREY: Thank you, Mrs Kingsmill. Good morning, ladies and gentlemen. As mentioned, I am Mike Fairey and I am the Deputy Group Chief Executive of Lloyds TSB. I welcome the opportunity to set out our views today. I am also joined by a number of my senior executive colleagues who, I am sure, will get the chance to participate later.

I have been asked to focus my comments today on how we at Lloyds TSB see the personal banking market, and specifically the issue of competition in relation to our proposed merger with Abbey National, which we firmly believe will be in the best interests of all stakeholders and, as a consequence, will not be against the public interest.

I am going to be fairly brief in outlining our thoughts on these issues. As Mrs Kingsmill has just said, we will have the opportunity to debate these in greater detail later. First let me say a few words about competition. Competition is very much alive and kicking in retail banking. You only have to walk down the high street of any major town to see first hand the number of branch-based competitors. Just by way of illustration, over 90 per cent of Abbey's branches are located in areas where there are at least three other competitors within easy reach, and in many places there are over a dozen. Staff in our branches compete day in, day out to sell our products and services in the face of fierce competition, not only from high street competitors, but also from suppliers at the other end of a telephone or a computer.

While new technology is an important distribution tool, it is equally important as a powerful information tool for consumers seeking best buys. Web sites such as FT.com and MoneyNet provide immediate and easy sources of comparative financial information. Whether this is through the web or newspapers columns, there is a wide array of information meeting the needs of an increasingly knowledgeable and demanding population of consumers.

There is absolutely no reason to suppose that the consumer who shops around for the best deal on other products does not likewise shop around for their financial products. They simply do. There has never been more consumer choice at ever decreasing prices. If you take the credit card and mortgage markets as examples, in both of those markets there has been significant switching on the basis of extremely strong and highly visible price competition.

Competition has also been reinforced by the level of aggressive new entry into the industry. Over a year ago Don Cruickshank in his review of banking noted that since 1989 there had been a significant number of new entrants with, for example, fifteen new mortgage providers, seventeen new providers in the savings market, and in the current account market there were eight.

Recent new entry comes from all sides, whether it is demutualized building societies such as Halifax, the Nationwide extending their product range, overseas competitors such as Capital One in the credit card market and well-established businesses and brands in other sectors such as Standard Life, Egg, Virgin, Tesco's, Sainsbury's and so on. Competitive activity is not just confined to the new entrants. There is a suggestion that traditional players do not compete vigorously. I can assure you that this is not the case. Contrary to the belief of some, if we can take business off Barclays, HSBC or RBS NatWest, we most certainly will.

Moreover, the traditional players compete through innovation. For example, they champion telephone and internet banking, so they can offer their customers the ability to access their accounts whenever and wherever they want. Anywhere, any time banking is what we call it, and it is a major component of our overall service offer to customers.

Lloyds TSB was one of the first to expand into telephone banking in a big way; the first to enter into partnership with the Post Office for our customers to use their counters, and the only bank to maintain a last-bank-in-town policy. All of this was geared towards providing the best possible access and service to all our customers, but also, of course, in an endeavour to attract new customers. It was another traditional player with the Midland Bank who introduced free in credit banking for current accounts some years ago.

The scale of competitive pressure upon financial service companies is also reflected by City analysts' predictions, that the margins banks make between borrowing and lending will continue to fall considerably over the next few months and years, all of course to the benefit of consumers generally. By way of example, over the last year alone the impact of margin erosion on our business at Lloyds TSB was well over £200,000,000. It is not surprising, therefore, that most City analysts also predict that the banks' returns on their equity will also fall significantly.

Let me now, if I may, say a few words about the current account. Some believe this is not a competitive market, but they are wrong. It is no less competitive than other financial service markets. Again, if my staff can win a current account customer from one of our competitors they will do so, and they are incentivised to do just that. The current account is basically a package of money transmission facilities which include, as a minimum, the ability to withdraw cash, to make deposits, to set up standing orders and direct debits, and of course they have a chequebook. Other features, such as debit cards and overdrafts, are optional extras. The overriding feature of the current account is that it is provided free. UK consumers are almost unique, in that in nearly all other countries customers pay for this service.

There is of course a cost of providing the current account service and it is substantial. The Cruickshank report noted that with an average current account bank of £1,000 the banks only break even, and our experience broadly bears this out. So, consequently, in the current account market, as the product is free, competition inevitably focuses on service quality. If customers are broadly satisfied with a service that they receive for free, it is hardly surprising that the reported level of switching is low.

We attach a great deal of importance to customer service and we measure it continuously. Our experience based on monthly independent surveys that we conduct shows that 90 per cent of our customers are satisfied with the overall service that we provide. This figure was mirrored in the DTI's own recent report on current accounts and switching.

Switching also takes many forms. Often customers do not close their old accounts. They just open another one elsewhere and wind down their original account. This behaviour is on the increase and invariably marks the real underlying trend. We do, however, believe that switching should be as quick and as seamless as possible. We have, therefore, recently announced that we are introducing a much improved switching package to dramatically improve on the requirements of the Banking Code. We have committed to a three-day turn around, and if we fail to deliver we will pay each customer compensation of £50.

Perhaps I might also touch on the extent to which the current account is an axis to the gateway for the sale of other products and services. Of course we would like to sell as many products as we can to our customers. We would not be doing our job if we did not try to do this, but if the current account is supposed to be the gateway to those opportunities, I am afraid that its reputation is seriously exaggerated. On average, every current account holder with Lloyds TSB buys 1.2 additional financial products from us out of the eight they averagely hold. Our performance is very good by industry standards. Of course we are continually working to improve on this, but customers will always be free to take their business elsewhere, and they will do so if we do not deliver what they want at a price acceptable to them. In those circumstances, however well we do, I cannot see the present position changing to any great extent.

I am now, if I may, going to turn to Abbey National and just say a few words about its position as we see it in the competitive landscape. Now much has been made of Abbey as the fifth horse in the UK banking industry. That presupposes that we need to create a fifth force. That assumption, in our view, is simply wrong. Competition is strong throughout the industry, as much between the leading banks as between any other supplier. If anything, according to market data, Abbey has lost share in recent times in most of their core markets and not gained it. It is also a little odd to read about Abbey's significance as a branch based competitor when it has executed one of the most aggressive branch closure programmes of any high street player. Furthermore, I understand that Abbey has withdrawn the ability for their customers to pay bills over its counters, hardly customer friendly and a policy we would reverse.

Abbey's current account business is certainly not the primary reason for our interest in a merger. The real reasons are the substantial scope for improved efficiency and savings which the combination would deliver, and the opportunity to increase the sale of our broad range of products. This unrelenting focus on efficiency is, we believe, the only way in which we will be able to continue to provide the broad based access through a range of distribution channels for all our customers. We acknowledge there will be job reductions. Our track record, however, in dealing with this sensitively, in liaising with our trade unions and achieving much of the reduction through natural wastage, is second to none. We believe benefits will also flow from the complementing skills of both businesses. When Lloyds and TSB came together five years ago, both brought specific skills and expertise to the new combination and we are sure the same would prevail this time.

So, in summary, the largest part of the gains that we expect to see arising from a merger lie in the cost savings that can be made through combining the two operations. Whilst Lloyds TSB has one of the best efficiency ratios in the world, the pressure on costs must remain to further increase our efficiency and hence our ability to compete during this period of rapidly falling margins.

We do expect to be able to increase the sale of other Lloyds TSB products to Abbey customers. That is nothing more than a consequence of bringing Abbey's performance in this respect up to and approaching our own level. This is not intended as a criticism. It is simply that we are widely regarded for our retailing skills and we do have a wider product range. However, our success in this respect will very much depend on the competitive forces at play in the market at any given time.

Ladies and gentlemen, we genuinely believe that a combination with Abbey will be in the best interests of all stakeholders. Neither the market structure nor Lloyds TSB's own position in that market give it the ability to force uncompetitive products or services on consumers. That is true today. It will be true tomorrow and it will continue to be true if we are able to come together with Abbey National. Thank you very much.

THE CHAIRMAN: Thank you. Now can I call upon Mr Ian Harley from Abbey to make the next presentation.

MR HARLEY: Good morning, everyone, and thank you, Chairman, for inviting me here today to discuss the issues surrounding the proposed takeover of Abbey National by Lloyds TSB. I am accompanied this morning by my colleague Andrew Pople who is the Managing Director of our retail bank. We very much welcome the decision to discuss the full range of points raised by this case in an open forum, and look forward to hearing the views of the many different parties and interested organizations represented here today. I note also this is not intended to be a forum for the discussion of the implications of the Lloyds' approach for shareholders. The Abbey National Board's views on this area are, in any event, already well publicised.

We are here today to discuss the competition issues as we all have an interest, not only in this case but in the impact on the banking sector generally. You have asked us to comment on the markets for the supply of personal banking services, focusing particularly on current accounts. We would also like to take the opportunity to comment on the supply of services to small and medium sized enterprises, but perhaps I could begin by explaining the range of activities that Abbey National undertakes in the UK.

Abbey National is the UK's fifth largest bank, and in terms of revenue growth the fastest growing over the last five years. We have grown by providing attractive and competitive products and services to over 15,000,000 customers and by developing the skills of our 27,000 employees.

Since conversion in 1989 Abbey National has pursued a strategy of growing the business organically through joint ventures and by agreed acquisitions, and we have developed into a fully diversified retail bank, broadening the range of products and services offered to our customers. In the process we have doubled our customer base, more than doubled our employee numbers, and now more than half of our profits are generated in markets other than mortgages and savings.

As Abbey National has grown it has increased its presence in the high street to over 750 locations across the UK, a significant increase when compared with the size of our network in the early 1990s. We continue to invest in our retail network to meet changing customer needs. For example, thirty-eight branches have opened inside Safeway Stores and we are working with partners such as Cosca Coffee and Carphone Warehouse. Our aim is to make the Abbey National branch a more attractive place to visit and spend time. We see the branch as key in providing continued choice for consumers. Indeed, our research shows that 90 per cent of customers write "convenient branch location" at the top of their needs when choosing a current account provider. We realize, however, that customers cannot always visit a branch, and we give them a choice to meet their banking needs in other ways.

We have invested heavily in developing our ATM network which has resulted in over 3,000 being owned by Abbey National. We now have one of the largest UK networks at convenient locations such as railway stations and supermarkets. We have also moved forward strongly with a bricks and clicks approach over the last twelve months, and over 800,000 of our retail customers have registered for e-banking over the internet and digital TV. We have also increased choice for retail customers through building new brands such as Cahoot, a stand-alone internet bank, and Inscape, a wealth management service aimed at the approximately 5,000,000 individuals in the UK with significant liquid assets.

We have done more than any other bank to popularize investment ISAs and PEPs. We are now the UK's leading bank assurer and, because we operate from a low cost base, we will continue to compete vigorously in a 1 per cent role, including the stakeholder pensions' market. Scottish Providence has agreed, subject to the approval of its members, to join the Abbey National Group in the summer, and this will bring our total investment funds in the management to over £38 billion.

Abbey National also provides financial services to businesses and larger corporate clients. We have built from scratch a global wholesale banking business that now has a balance sheet of £100 billion of assets and helps to fund railways, roads and hospitals in the UK. We have also developed in First National one of the two major UK finance houses. First National includes our SME activities, such as our business information banking service which provides an attractive alternative to the big four. I announced in June 2000 our plans to grow this business to 5 per cent of the SME market by 2005.

In all these markets we actively seek to challenge the dominance of the established players by providing customers with choices of different products, more attractive pricing and a better service. Innovation is at the heart of our business strategy. We were of course the first building society to convert to plc status, and we are pleased to have led the market in developing new ideas to provide our customers with better, more flexible products and services. For example, we were the first bank to introduce an interest bearing current account with a £100 cheque guarantee card, the first to introduce a basic bank account for those normally excluded from banking services, and the first to provide access to current accounts via digital television and the internet.

Our commitment to providing straightforward and transparent communications to customers was acknowledged in 1989 when we were the first bank to receive the claimed English Crystal Mark award for our television adverts. Our track record of innovation and the advantages of having a well-known and trusted brand and a large personal customer base, have enabled us to make significant inroads into personal banking.

In recent years we have grown our share of current accounts to over 6 per cent. However, given the size of our savings and mortgage base, why have we not moved faster into personal current account banking? Well, there are significant entry barriers into UK banking. Together the four largest banks control almost three-quarters of all personal current accounts in the UK, and own more than two-thirds of all bank branches. As a regional bank wishing to compete for bank account market share on a national scale, we have had to incur all the fixed costs such as a national branch network and an extensive money transmission infrastructure, as well as significant marketing and advertising costs.

Notwithstanding these investments aimed at raising awareness and providing superior products, we face very low levels of customer switching, which makes new entry and growth difficult. Indeed a recent DTI survey showed that only 6 per cent of customers have switched providers in the last five years. There are three reasons for this. First, customers fear their credit status may be affected if they change providers. Secondly, they fear they may disrupt other financial arrangements with their current bank. Thirdly, the perceived hassle and complexity of altering all the facilities associated with current accounts, direct debits, standing orders and other arrangements, can be considerable. Taken together, these considerations constitute a substantial barrier to entry into the market for current accounts, and current accounts are pretty well important not just for money transmission, but because they provide the key to competition in other financial product areas such as mortgages, personal loans and savings.

Our branch network is crucial to the strength of our challenge to the big four. As we mentioned earlier, customer surveys consistently indicate that when choosing a bank convenience of location, whether near the office or the home, is the single most important deciding factor. Branches are also central to meeting the needs of the majority of small and medium sized enterprises. We recognize that to achieve our stated target of 5 per cent of the market we will need to make greater use of our branch network. In particular, provision of services through branches will enable Abbey National to reach a larger number of business customers. Outside the big four, Abbey National is currently the only provider of business banking services with a developed national branch network. We have clear plans to shake this market up and provide real competition.

This market of course is currently subject to a separate Competition Commission investigation. Competition in the SME market is a structural issue. The big four currently have a market share of just under 90 per cent. Abbey National is an innovative new entrant and should be seen as part of the solution and not part of the problem. For example, we already pay interest on our small business bank accounts. Abbey National, and possibly only Abbey National, has the size, the capability, the commitment and approach to innovation to sustain a meaningful challenge to the big four and go for the personal and business banking markets. We provide customer choice and competition in these critical banking markets.

I would like to end by emphasising that since becoming a plc, Abbey National has consistently delivered high returns to its shareholders. Our track record shows that it is possible to achieve this whilst growing and diversifying the business, innovating and improving customer service and offering choice. We shall continue to do this in the future as we have in the past. Thank you for listening.

THE CHAIRMAN: Thank you very much, Mr Harley. Having heard the initial submissions from the two main parties, I would now like to call on Professor David Llewellyn from Loughborough University to give us some ideas about the structure of UK banking as he sees it, and some of the directions in which he anticipates it may well go.

PROF LLEWELLYN: Thank you very much, Mrs Kingsmill, and good morning, ladies and gentlemen. Can I just step aside a little bit from this particular deal, because I think we do need to look at the broader context of what is happening in the market, but, above all, where the market is going. I think one of my fears is that we base public policy judgments on a snapshot of where we are at this moment, without recognizing that the key aspect of this industry is one of very substantial change. I think we need to look at where the industry is going, rather than where it is at the moment.

I just have a few minutes to give what, unfortunately, is a rather big story. So, if you will forgive me, I will concentrate on a few bullet points which may sound rather superficial. I just hope that I can justify to you that there is analysis behind this, and if there are any masochists in the audience I will be more than happy to send them some papers.

May I just concentrate then on what I think are the key themes that we ought to be considering in this issue. The first one is the very point about competition, and I am not even sure that that is a word that we ought to be looking at. My judgment is that the key aspect of particularly retail banking is not so much the degree of competition, but the degree of contestability in this market. I think that many of the changes and many of the pressures that I will outline, are moving in the direction of increasing the degree of contestability in this market. This is not just a rather minor debating point, because if a market is more contestable, and my judgment is that this one is, then the degree of concentration in that industry does not necessarily indicate the ability to adopt hazardous behaviour against the consumer interest. The ability of new firms to come in, and also to get out at relatively low cost, is as important an issue as the number of players at any one time in the market.

My second theme would be that the market environment in which retail banking is being conducted is changing very rapidly. All aspects of banking are changing in a very substantial way: the production of banking services, the delivery and access to banking services. The economics of processing are changing very substantially. All of this is also leading to new organizational structures where new firms, relatively small firms, can come into the market and actually buy in economies of scale from outside. You do not need to be big in order to get economies of scale with new organizational structures such as outsourcing, etc. Who is competing in this market is changing also quite substantially. Above all, we are finding that a much greater variety of financial firms, rather than the traditional integrated large bank, are also able to compete.

My third general theme is that there is a whole combination of factors operating at the moment which are genuinely changing the underlying economics of retail banking, and we should not underestimate the power in combination of these factors and how they are likely to influence the fourth.

As I said, fourthly, I believe that contestability in this market has increased and that it is likely to increase yet further. The problem we have from a public policy point of view, therefore, is that we are shooting at a moving target. I think a judgment does need to be made whether we are going to shoot at this target or at a target that might emerge in X years time. I really would want to emphasise that. It is a very difficult job.

Having said that, however, I think also we have to recognize that the degree of competition, and the degree of contestability, is very different between different subsets of the retail banking market. There is no such thing as "the retail banking market". We need to divide it up between different customer groups and also between different products and services. You can imagine a matrix of customer groups on a horizontal axis and products on the vertical axis. You then have a series of cells, each one of which, in my view, can be identified as a separate market. The degree of contestability and competition in those cells can vary quite substantially.

I think the question, therefore, from the public policy point of view, with respect to the very important judgment that the Competition Commission will have to make in this proposed bid, is what degree of non-contestability and non-competition is it reasonable to accept? It may well be that the approach would be: what can we do from a public policy point of view about those cells (in my matrix) which have low degrees of competition and low degrees of contestability?

Then a point of perspective. We should not underestimate the significance of the new players in the market. It is my view that we have yet to see the full impact of this, and that we should not underestimate the idea that when competition develops from outside of a traditional industry, experience in other industries seems to suggest that that is when competition can become most powerful, simply because their economics are different, their strategies are different and, above all, their cost structures are fundamentally different from the incumbents.

So the point I would emphasise there, ladies and gentlemen, is that competition is developing, not from within the traditional industry, but is largely being driven from outside, and that is often much more powerful than when it is generated internally.

Finally, if I may, just to outline one or two points about this idea of contestability. It is, as I say, my main argument that we should be thinking about how contestable the market is rather than how competitive and how many competitors there are. There are a whole series of factors which are increasing the contestability of this market. The development of information technology, for instance, in itself lowers entry barriers. The supply of information is increasing. The cost of information is falling for potential new entrants into this market. The development of credit scoring techniques is also lowering entry barriers. It is making it easier for newcomers to analyze information and analyze risks.

Forgive me if I use what I have constructed myself as a technical term. Deconstruction I think is really quite an important aspect in terms of lowering entry barriers. What I mean by that is simply the idea that individual banking products, individual banking services, can be broken down into their component parts: manufacture, processing, administration, risk analysis, finding the customer in the first place.

What we actually find now is that with the development of technology new firms can come into this market without actually doing everything from a basic product or a basic service. They simply subcontract those parts that they are not good at or are not efficient at. That substantially reduces entry barriers, simply because it means you can get the benefits of economies of scale while you are still small. You simply buy in the expensive parts from outside.

Therefore, I would judge that scale is becoming less significant, which is rather against, I think, the conventional wisdom that scale is becoming less significant in retail financial services, simply because you can buy it in and there are many different ways of getting the benefits of economies scale. But we have a peculiar structure here that might be of relevance in the final judgment. If scale is less significant, then the curious thing is that, first of all, there is less need for mergers to take place because you can get these benefits in other ways. Personally, I am sceptical about the economies of scale that allegedly exist within large banks. On the other hand, if scale is less significant, then the public policy concern about a merger is correspondingly less, because you can still get entry and the benefits of economies of scale for newcomers.

The development of securitization is also lowering entry barriers, the idea that a newcomer can come in to originate business without the necessity of holding on the balance sheet. Above all, of course, the economics of delivery, the way that financial services are delivered, major changes in the market, that in itself is reducing entry barriers. We no longer need an extensive branch network to supply at least all retail financial services.

My final point, Chairman, being conscious of time, let us not underestimate how the internet is changing the fundamental economics of this industry. Distance becomes meaningless. Search costs are reduced for the consumer. Price discovery and transparency are increased as a result of the internet. Above all, new players can come into this market at relatively low cost where the fixed and sunk costs are relatively low.

So what I have tried to suggest, madam Chairman, ladies and gentlemen, is that we are looking at a moving target. I take no view about the economics of this particular deal. There are lots of arguments that could be used on either side. What I would urge I think is to have a look at the trends and the pressures that are moving banking, rather than to take a snapshot at any particular point in time. Thank you very much.

THE CHAIRMAN: Thank you. There have been some very interesting issues and topics touched upon in the contributions of the three speakers. I would now like to throw it open to the floor and to receive views from other people, either on matters arising from topics that have been mentioned already or indeed new topics. We have some roving mikes. If you put your hand up we can get to you quite easily. I would repeat, if you would be kind enough to give us your name and your organization, if you have one, and any interest in this particular merger that you may have. I cannot believe you came just to watch! I am glad to see we have a speaker here.

MR WEATHERILL: My name is Eddie Weatherhill. I am a Chief Executive of IBAS, that is the Independent Banking Advisory Service. For the last eight years we have represented a large number of people with banking situations. We are opposed to this merger, because we see it as consolidating an industry which does not need consolidating at this time. We believe it is a short-term fix for Lloyds TSB, and it takes out a competitor who is vastly needed in the short term in a marketplace which affects SMEs.

I would like to touch on other points later, madam Chairman, but I thought I ought to get the discussion started somewhere because others seem reluctant to stand up.

THE CHAIRMAN: Thank you. The City is not usually so coy. Are there any other contributions?

MR MURPHY: Rory Murphy from UNIFI. I hope to make a comment in the second half, but this is just on what Professor Llewellyn was saying, if I may. In his paper in 1994 he spoke about the vulnerability of banks to contestability, and I would be interested in his comments on that, whether his view has changed in fact.

THE CHAIRMAN: Thank you.

MR BELL: Thank you, Chairman. My name is Reginald Bell. I am both a very small shareholder of Abbey National, together with being a branch user. We have already seen the effects of the closure of branches. In my area, I am based at Claygate near Esher, we had a branch of NatWest close and we have to go to Esher. We have an Abbey National Bank at Esher which I use. Previously I have also used a Woolwich Bank which has gone. Banking is becoming more and more remote to the user, both with internet use and the fact that branches are being closed, and I think the Competition Commission should take account of that fact. In my case as a small shareholder, I am realistically realizing that the impact to the small shareholder is negligible. If the Commission give the go-ahead for this merger, then the likelihood is that the institutional investors will make the decision. Thank you.

THE CHAIRMAN: Thank you, Mr Bell. It is an issue that we are quite interested in at the Commission, that is the importance of a branch network. I wonder if there is anybody else who would like to talk about this, the competitive impact of having a branch network, whether or not having a branch network is essential as a driver for current accounts.

MR WEATHERHILL: Madam Chairman, I would like to draw your attention to a comment made by Lloyds TSB in their presentation to the previous Commission Inquiry. In there it says, "In our view, the prerequisites for entry ...", this is for competition in banking, the first one on the list is access to a branch network where customers can deposit and withdraw cash conveniently. The gentleman in the front row typifies a large number of the adult population. We find it very difficult indeed to access a form of current account on a local basis. The taking away of a branch network which exists at this present moment in time, which is competing already in the SME sector, one of the few that is competing at this moment in time, will actually add to the problems of short-term competition in the UK sector. I do not believe anything else will take its place short term. In the long term there are also other problems, madam Chairman. If this merger does take place, then the government probably can forget its long-term requirements on the way in which competition is looked at in this country, because at this moment in time Abbey National does have a trusted reputation, it does encourage confidence and it does compete. If competition is taken away, all we can see is another merger, following that more cost cutting, more job losses and less service. I do not believe we need this merger at all and certainly not now.

THE CHAIRMAN: Thank you. Are there any other comments on the importance of a branch network?

MR LEVER: Good morning. My name is Michael Lever from HSBC Securities. I shall make it clear that we have no interest in either side of this transaction. Nor do I have any personal interest in either of the shares of the two parties involved. My view here is that the issue is one of enlightenment and empowerment. I think from the consumer's point of view, clearly the consumer needs to be enlightened as to the service he is receiving and on what terms he is receiving those services. In terms of empowerment, it may be necessary for some institutional arrangements to be changed in order to allow consumers that once they have been enlightened as to their current situation, they can change it if they so wish.

This leads on to the issue of choice. I quite agree with some of the comments of Professor Llewellyn earlier this morning in terms of the dynamics of the marketplace and how we are changing. The fact remains, however, that the new entrants relying on remote forms of delivery have actually made very little progress in the year to date. Clearly, it was the view of the market twelve months ago that new entrants might wipe the traditional players off the face of the earth, and that has proved so far to be incorrect. I think one should not underestimate the power of the brand that exists in the incumbent players, the power of the security that is offered by those players and the power of the existing delivery. The fact of the matter remains that although it is clearly possible to obtain a variety of banking services from a wide variety of sources, most consumers I think for the foreseeable future are going to want to continue to use the branch network.

There is an issue here in relation to Lloyds TSB in that it seems, and I stand to be corrected, to have scaled back its own plans for its free-standing internet bank called Evolve over the past recent months, which possibly suggests that it itself sees more mileage in the branch network, and I think has stated as such over time, that branches will continue to be used by the large bulk of consumers for some time to come. Thank you.

THE CHAIRMAN: Thank you very much.

MS PERCHARD: Good morning. My name is Teresa Perchard. I work for the National Association of Citizens Advice Bureaux. I had not actually intended to say anything, but feel driven by the debate about branch closures to suggest that the Commission needs to look at this from the broad perspective of the public interest, not just the competitive aspect that you raised. I think it is clear that the public interest in this area encompasses the government's wider strategy for tackling financial exclusion and also financial literacy. Research from the Financial Services Authority has shown that consumers are for more likely to trust advice on financial matters if it is accompanied by face to face. Even if it is a person who gives out the leaflet in a branch, there is actually a greater level of confidence about the information that is being given and there is somebody that you can ask to check it out.

I actually came to hear what the differences would be in the merged company compared with the approaches of the two separate companies now, and I hear Abbey National are committed to branch extensions opening up, access to face-to-face with consumers, many of whom we advise have been excluded from the banking system for too long. I would hope that you would look in some detail at the plans for the merged company in terms of the branch network, and also what will happen to the general programme of social responsibility of the merged company for tackling financial exclusion and also improving financial literacy for people at really the lower end of the market, the people who do not carry £1,000 in their current account, the people for whom the banking industry do not regard them as enabling them to break even. Thank you.

THE CHAIRMAN: Thank you. Are there any other contributions on the subject of branches?

MS HEATON: I am Frances Heaton from Lazard. I likewise was not really expecting to talk, but as there seems to be not a glut of points being made, perhaps I could put my rural hat on because this looks to be a predominantly urban audience. When I am in the country I have to drive seven miles to get to my bank, and that is fine, or I can go to Sainsbury to the teller machine to draw money out, but the problem and why I need my branch network is to pay money in. I do not think there has been any change in the methods of paying money in over the last twenty-five years. I do not know whether it would be possible to have more places where one could put a credit slip and/or money, because that must be one of the main reasons why people still want their branch network. I wonder whether the banks have done much research into the reasons why people are still wanting it, and whether it really is just the face-to-face contact or whether it is the actual service offered or not offered.

THE CHAIRMAN: Thank you.

MR COLLUP: Good morning. My name is Keith Collup. I represent Lloyds TSB Group Union who have 40,000 members in membership across the whole strata in all divisions of Lloyds TSB. We have given a formal written submission. I only stand up because I want to say something later about the effects, but there has been a trend about branches and their closure and keeping them open. Let me say that the Union I represent actually supports this merger. Our members believe it is in the best interests of staff, customers and shareholders alike. We believe that much of the assertions about this merger are purely academic. We looked at the town where we are based in Bedford with a population of 80,000, and in its streets stand fifteen deposit-taking institutions. I was a manager in Lloyds Bank for a quarter of a century and always counted the opposition surrounding us. In Bedford there are no less than fifteen. Nationally there are twenty-nine deposit-taking institutions available, without going into the newer types of banking that are continually appearing as the Professor rightly said.

I have daily contact through career development counselling and all sorts of things with managers throughout the Group, and I can tell you that their experience of competition is fierce, real, challenging, desperately trying to hold on to that which they already have. That is the actual scenario in which they work. We are disturbed that there has been some serious misrepresentation with regard to the Lloyds TSB bid, especially with surrounding reports that Lloyds are going to close immediately 600 branches. The facts of the matter are, as we understand it, that after two years they will look at the situation, and where there are branches within 440 yards, namely a quarter of a mile, they may well progressively re-locate, co-locate them within the various high streets, looking for the least and of course the most impressive premises.

This has been going on with Lloyds TSB, but one thing someone mentioned about rural banking I think is what got me to my feet. Lloyds TSB has an agency arrangement with the Post Office, 17,500 outlets, and those people in Abbey National, should this merger go through, will have the benefit of using those Post Offices which they do not have at the moment.

Perhaps the best way I can sum this up is to say that if this merger goes ahead, Abbey National customers will still have access to their accounts in the same location, not the same building maybe, in the same location and their staff, the staff of the whole Group, will work in the same communities. We say that all that will change is the customers will be better served by being able to call on a greatly expanded network. May I leave it there at this point.

THE CHAIRMAN: Thank you very much, Mr Collup. I think we will move now from the issue of the branch network to possibly the importance of the entry of the non-traditional suppliers of financial services, people like supermarkets, Virgin, that sort of thing. Is this an important area that we should be looking at in terms of the developing structure of the UK banking system? Perhaps there may be some contributions from the floor in relation to this. Yes.

MR WILLIS: Simon Willis from ING Baring Charterhouse. We have neither a corporate interest on either side of the situation, nor do I have a personal interest in the shares of either company. All I would say regarding the entry of non-traditional suppliers into the banking arena in the last maybe three or fours years, and also looking further back at the entry of direct line into the assurance industry ten to fifteen years ago, is that it seemed to me very, very clear then, and seems equally as clear now, that there is scope for new entrants to make a very significant impact. One example in the near past would be the entry of Egg into the banking arena.

All I would say as regards competition and contestability, I think contestability is a very worthwhile concept and I can understand the difference to competition, but on both scores it seems very, very plain to me in terms of pure logic that there is no lack of competition in the market currently, and nor would that be affected subsequent to a Lloyds merger or takeover of Abbey National.

That being the case, there are a number of things I found a little bit curious in the news release from the DTI as to the reasons for the referral. It is probably best that I leave it at that. I think on the basis of pure logic and numbers -- maybe I should qualify that. I accept the issue of 25 per cent market share and the essential reasons for the referral, but in terms of logic, it seems to me there is no lack of competition now and nor is there likely to be either in twelve months time or five years time. Within that context, the entry of non-traditional suppliers is clearly key. Thank you.

THE CHAIRMAN: Thank you. You will appreciate that what we are doing in this part of the debate is trying to set the context for the merger. I would be very interested, therefore, to hear what anybody else has to say about, for example, barriers to entry or other competitive forces or other structural issues which are important to the competitiveness of this industry. One of the things that has occurred to us is that it is necessary to have a very important brand, a very substantial investment in marketing and branding, but that is a significant barrier to entry. I believe in the audience somewhere is Mr Greg Delaney who is an advertising guru, as I understand it, and I would be grateful if he could perhaps enlighten us a little bit on this aspect, whether or not this would constitute a barrier to entry.

MR DELANEY: I am Greg Delaney from the advertising agency Delaney Lund Knox Warren. I have worked with various different financial services companies, and currently am a brand adviser to the Halifax. We have heard a lot this morning about competitors and competition. There are a number of competitors in this market, but, as far as consumers are concerned, there is not an awful lot of competition, partly as a result of the fact that people really are not very interested, I am afraid, in general in the subject of financial services. Unlike the people in this audience, most people out there really do not want to know very much about this subject.

It is also a function of the fact that there are a huge number of brands advertising and putting across their brand message. I think some £700,000,000 is spent in this area which is more than any other sector, but despite that, when you ask consumers about the differences between these different brands, they find it very difficult to articulate them. So when you look at, for example, the banks and how they are differentiated, people find it quite difficult to say how one brand is different from another. In fact, when you ask them how they make their choices, choices are often to do with relocation or indeed family or a friend recommendation, rather than the real differences between those different brands. This is contrasted with other areas where people really can talk about the difference between, for example, Tesco and Sainsbury and they feel genuine loyalty to their choice.

When it comes to looking specifically at Abbey, some time ago Abbey was very differentiated as a brand, but that has been eroded over time. For consumers the real difference is going come out from something like service or indeed value. These are the two most important factors. On neither of those two scores currently are Abbey very differentiated. So whilst many customers may object if their local convenient branch is no longer there, they will not necessarily feel the lack of that brand.

THE CHAIRMAN: Thank you very much indeed. That is very interesting. Are there any other contributions?

PROF LLEWELLYN: I hope you do not mind me coming back fairly quickly, but you did ask for a few comments on new entrants. Can I quickly say a word about brand, because I certainly understand why the Competition Commission would look at brand as a potential barrier to entry. My judgment here, however, in retail banking is that this could be grossly over-estimated as an entry barrier for two reasons.

First, the consumer image of who can credibly offer retail financial services has changed quite radically over the past few years. If you had said, what, five years ago that I might be having a major savings account at a subsidiary of an organization I buy my eggs and bacon from, I think you would say that I was pretty crazy, but now this is really quite acceptable. I am not sure that the consumer will automatically gravitate towards the traditional player.

Secondly, to question the idea of brand, there is one organization I think called First E, a French bank incorporated in Dublin, Ireland. I do not think anybody would have heard of that organization in this country. In fact it was a newly created organization, and yet still within a relatively few months it was able to acquire very substantial balances. So I think I put a little bit of a question mark as to how needful it is to have a brand.

As for the new entrants, I think it is rather interesting to look at the characteristics of the new entrants. First of all, they are highly focused in the product range. Virtually all of the new entrants are offering services in a very, very limited way, and it is in those areas that the degree of contestability is high. Secondly, it is interesting to know which areas they went into, and I think the answer is quite simple. It is those areas where they were exploiting the cross-subsidies pricing policy of existing banks. In other words, the incumbent players actually made it extremely easy and extremely profitable for newcomers to come into the market simply because of their pricing policy. If you have subsidizing and subsidize part of the business, it is not surprising that if entry barriers come down a new player would go into the subsidizing bit and leave the subsidized bit to the existing players.

Finally, they are also able to enter and a common characteristic of the new entrant is that they have low fixed costs. I think more important than the fact of low costs, the real significance is they have low fixed costs, albeit higher variable costs. The reason why that I think is important is that it both reduces entry barriers, the initial cost of entry alone, but it also lowers exit barriers because they have lower sunk costs, and therefore there can be more scope for experimentation, to come in, see if you can make profits out of it, if not, you can exit at relatively little cost. Thank you.

THE CHAIRMAN: Thank you, Professor Llewellyn. Yes.

MR McCLAIN: Thank you. I am Ian McClain, Deputy General Secretary of UNIFI, the bank workers union. Just on the point about the characteristics of the so-called new entrant, it does occur to us that quite a vital factor is being ignored here. What I am referring to is that when you look very closely at the market the reality is that many of these so-called new entrants are in fact parts of or off shoots from the main banks, the supermarket and internet banks in particular. They are very closely linked indeed with the bigger banks.

May I just refer to something that was said in the Cruickshank review of last year on this matter. The Cruickshank review noted that:

"It is often argued that the UK has one of the most competitive markets in the world in which retailers, new and foreign banks all compete against established high street players." The review went on to say: "On closer examination, not all new entrants are as new as they might appear, and there is anyway a danger that future consolidation could remove them from the market."

The point I think I want to emphasise is that if you look, for example, at the banking section of Tesco, that is linked to the Royal Bank of Scotland. If you look at Sainsbury's Bank, that is linked to the Bank of Scotland. Asda is part of or linked to at any rate Lloyds TSB. Safeway is linked to Abbey National. Similarly, many of the new internet banks are off-shoots of the established financial companies or are the internet arms of the big banks. Again, for example, the internet bank Egg, as is well known, is a subsidiary of Prudential. IF (or is it I.F., I am never quite sure) is part of the Halifax Group. Smile is part of the Co-Op, and so on.

My final point is that the suggestion that technology does create, as it were, new banks and new competitors I think is misguided. What it appears to do is in fact to create new delivery channels for the existing big players. I think that is a very different way of viewing the situation. Thank you.

THE CHAIRMAN: Thank you. Yes.

MR TYCE: John Tyce of SG Securities, London. I have no interest in either shares or in any of these transactions. I thought there was a slight tendency at the end of the last speaker's comment to infer that because the new innovations have been championed or indeed pushed more energetically by the existing banks, in some way or other this meant that there was not an increase in competition. I think it is actually the other way round. I think it shows that in fact the established players, who really do have a little bit of a difficulty persuading the world at large that they are killing each other, is the evidence one should be looking for to support that.

THE CHAIRMAN: Thank you.

MR TOSH: Donald Tosh from Morely Fund Management. We are major shareholders in Lloyds TSB, Abbey National and all other UK banks. I think it is important to point out that depositors expect when they put money in to get their money back, in the same way that when banks lend they expect to get the money back with interest. The interest is on both sides. Consequently, it is important to remember that people could only reasonably be expected to put money into someone with capital to support that activity. There is no point in giving the money to a bank and not expecting to be able to get it back.

THE CHAIRMAN: It may be, however, that that impression of solidarity and the importance you allude to of trust and so on, was represented in the past by mahogany and marble pillars but is today represented by solid and powerful brand values. That is the point we were talking about earlier. If there are any other contributions in this area, I would be interested to hear them before I move on to the next subject. Yes.

MR LEVER: Good morning. It is Mike Lever at HSBC Securities again. I think the key issue here really is what profits are actually made by these new entrants over the years. If we look at different business models what can we see? We see that Direct Line Insurance made a profit, but that was on a product which needed really to be bought and is rather different. Apart from that, the only material profits that have been made by new entrants that I can think of have come from Marks & Spencer's Financial Services. That has taken ten years, an established brand and initially only the use of Marks & Spencer's own credit card, to get that far.

So, yes, there is a lot of choice in the market, but what has that choice led to in terms of a material impact on the existing incumbent players' profitability? The answer is very little so far. I do not think there is any shortage, personally, of competition at all in the marketplace, but I think competition exists very much amongst incumbents in terms of its impact on the market and not with new entrants. So the question really to be addressed is whether the removal of one of those incumbents, namely Abbey National, sufficiently alters the choice to change the competitive environment amongst the incumbents, rather than relying on new entrants to provide that competition. I leave that for others to make a decision on. Thank you.

THE CHAIRMAN: I suppose another aspect of competition that we should be looking at is not simply the ease of new entry or the nature of new entry, but also how competitive the behaviour is, for example, of the existing big four, or indeed with any of the institutions outside the big four. As far as this competitiveness is represented by switching is concerned, on the face of it, it does not look as if there is much switching going on. I would be interested to hear the views of the assembled group about the competitive behaviour of the main players in the marketplace at the present moment. Yes.

MR WHITELEGG: I am a customer of Lloyds TSB and I was interested to pick up on the point about switching that Mike Fairey mentioned. There has been much in the press made of Lloyds' offer to offer a three-day switch package to customers. As a customer, I do see this as a positive development. I see it as something that will enable customers to take advantage of the competition that does exist at present within the market.

Surrounding this, though, I think there are probably four other issues that would need to be in place to make this effective. I think it would need to be something that would be taken aboard and used by other banks in the market, particularly because as a customer I would like to go to my new bank of choice and say to them, "OK, my old bank was Lloyds", sorry for the example, I would simply want to tell them that fact, be that in a branch, on the internet, on the telephone, and for the onus to be on the two banks to liaise and put that in place within three days. Also I would see there being an onus on my old bank to provide my new bank with sufficient credit information and history, old account statements, for them to make a full decision on providing me with a full product range. I would also see it as important that the authentication documentation that I gave to my previous bank would be passed to my new bank, so that I would not need to traipse around with a passport, a driving licence and so forth. So they would be things that I would see as important to make that effective. Thank you.

THE CHAIRMAN: Yes.

MR SAMUELS: Good morning. It is Simon Samuels from Schroder Somer Smith Barney. We are joint corporate broker to Lloyds TSB. From memory I have a few shares in Abbey National, and I think my wife has a TESSA but I am not certain. The issue I wanted to touch on briefly was really the word "new" within the idea of new entrants. One of the previous speakers was broadly saying, well, new entrants are not really that new because backing them typically are large financial service institutions. One of the things that we often discuss is the whole issue of incumbents versus new entrants in terms of market share. Particularly one of the structures that is common in the UK retail financial service market, but, for example, is not that common elsewhere in Europe, is this silo mentality, the fact that broadly consumers tend to take certain products from certain financial institutions. So, for example, you have large incumbents in current account markets or life assurance markets or mortgage markets who might be incumbent and maybe therefore very price disciplined in their home market, but are very aggressive new entrants in other markets.

I just jotted down some examples, albeit not an exhaustive list, of new entrants who really are undisciplined or less disciplined pricing competitors in their new markets. People like Egg, yes, it is owned by the Prudential, but the Prudential could be very aggressive in deposit markets because it did not really have a big share of that market to start with. Halifax is currently being very aggressive in the current account market, again a market where it does not have a high exposure. Scottish Widows in the mortgage market has been very aggressive. As an earlier speaker mentioned, the Royal Bank of Scotland group really shook up the general insurance market in the UK from the mid-1980s onwards, again a market in which it did not have a large share.

I am suggesting that the definition of "new" in the new entrant debate should fully include existing large financial service providers who are entering markets that are new to them.

THE CHAIRMAN: A good point. Anything else on this subject?

MR WEATHERHILL: Eddie Weatherhill again from IBAS. I feel that one important thing that was said a little while earlier from the marketing guru somewhere at the back here is the matter of confusion on products. There may be a great many products on the market, as indeed there seems to be, but the differentiation between each product is extremely difficult for the ordinary consumer. It does not matter how it is packaged or what magazine they put out, there is a problem with establishing what is competitive, how it is competitive, and obviously the problem of usage. How do you use a product and find out that it is not quite what you wanted and move on to somebody else? That is not quite as simple as with any other product out there.

The banking industry has a little thing called a current account which does make customers captive, because there are things like the overdraft to consider. The overdraft will make that customer captive to that bank with security often in place. There will be products which are sold to that customer which are allied to the original product, i.e. the overdraft, i.e. the current account, which will make that customer very profitable to that particular bank.

We at IBAS are particularly worried about the captive customers, because it is a huge amount of the market that exists in current accounts. The overdraft particularly, the way in which it is established, the way in which it is allowed to be moved, is important. I believe that the current accounts control the marketplace, and the actual proportion of current accounts that are enjoyed by any particular bank will give it market control or a strength in that marketplace. I believe that should be a very important issue for the Competition Commission in the way in which public interest is perceived in this proposed merger.

The portability of accounts has been mentioned from the front. It is almost non-existent at this moment in time. If you could pick up an account within three days and move it by a CD disc or anything like that which was mentioned at the Cruickshank Inquiry as a possibility, yes, it would be marvellous. It will not happen in the near future. The branch closures that we talked about, they will happen in the near future, but the competition we are getting at the moment is not quite so quick. It is happening, but it needs a gentle nudge to be kept on the move.

So all of these things are important to consumers. That is why I am here today as a consumer representative. I think most of the people in this room are probably from institutions, and I think that too is important. The majority of the people in this room are talking about where their shares might be best off in the near future or can make the most money. We are interested in what will give the best service, give the best choice and give the best opportunity for consumers as a whole in the time to come. Thank you.

THE CHAIRMAN: Yes, it is interesting that a few years ago nobody thought about moving their mortgages. Now it is quite frequent to have people changing their mortgage provider, but there does not seem to be the same willingness and the same readiness to change current accounts. It is something that we are quite interested in understanding and about the impact that that has on competition.

MS ATKINSON: My name is Caroline Atkinson. I am a shareholder in Lloyds Bank. In fact I am part of a family shareholding which goes back well into the last century. I am also a customer of the bank, and a few years ago I could have made a lot of complaints about the way they looked after accounts. Today I think there has been a sea change. I think they look after customers very well. I am in favour of this takeover, merger, whatever you call it, because we need a strong bank in Britain. There are plenty of other banks and financial institutions within Europe of which we are part who would like to take our business. This is important for people here. I think the development with the local Post Office is very important. In the countryside, as somebody mentioned earlier, is where we do need a great deal more support. But for people who work for Lloyds Bank and for Abbey National, they need to be assured of a strong future. I would be concerned if I were an Abbey National shareholder at the number of branches they are opening at the moment. This is very expensive. We do not need so many branches. We need to have enough in given areas. So I would just like to say I think this should go ahead.

THE CHAIRMAN: Thank you.

MR TIBBETS: Thank you. It is Mike Tibbits at Bear Stearns. I am a UK banks' analyst. We have no corporate involvement in this deal. I do have a small, regrettable small, shareholding in both of these stocks. The issue about brands has been talked about a lot. I think it is worth reiterating that Lloyds TSB has said that on a two-year view the brands will not be affected, that the status quo as far as the customer is concerned will be maintained, and ditto with the branch networks. The issue is what happens after that two-year period. It would seem obvious to me that Lloyds would not want to go into this deal on the basis of actually losing customers. It would want to retain the customers. The evidence seems to be in the US and in Europe that if you do not tamper with the brand proposition you will not lose the customers.

The issue then is to what extent does Lloyds TSB exploit that position? This comes back I think to the important issue that Professor Llewellyn raised about contestability. Do you believe that there is contestability in this market? You do not have to take our view. You simply have to take the view I think of probably a new entrant into the current account market, but an existing player in the mortgage market which is Halifax. Halifax is taking market share in the current account. I would take issue with the comments that have been made that the current account is a sticky product. The Halifax is winning market share in that market and, to quote the Chief Executive, the days of customer inertia in that market are over.

THE CHAIRMAN: Thank you. What I think I am going to do now as we are approaching 11 o'clock, is I am going to ask the Consumers Association perhaps to make a few comments on how they see the market. Then I will give both the main parties an opportunity to respond to some of the points, but before I do so, there is a gentleman in the front who raised the issue of switching and I think he has one or two comments further he would like to make.

MR WHITELEGG: Thank you. Returning again to the switching point, I do think this issue is as important in the small business market as in the personal market. I think indeed the importance of Abbey National as a competitor in the SME market has been raised both by Abbey National and a gentleman over here earlier. I would be interested to know if anyone from Lloyds would comment on whether they also plan to introduce a three-day switch deal into the small business market.

THE CHAIRMAN: Thank you. Just before I leave comments from the floor, there is one gentleman here who I will ask if you could keep it brief.

MR GRANT: I will keep it very brief. I was only prompted to speak by the last comment and the feeling we were never going to be given the opportunity to talk about commercial banking. I am Stephen Grant. I am from Somerfield. We have no direct interest in this transaction, but I should say for completeness that Gareth Jones is an Executive Director of Abbey National and he is one of our non-Executive Directors, but that fact has no bearing on the view which is based upon ten years experience of commercial loans. We have taken syndicated loans for ten years and, frankly, our view of that market, if you want to talk of Professor Llewellyn's matrix of cells, that particular cell is not competitive. In particular, the element of that cell which is least competitive is the provision of commercial overdraft facilities, which is not widely made available by banks other than the UK banks in our experience, and to lose one UK bank from that market would be unfortunate.

THE CHAIRMAN: Thank you. Now, Phil, if you would like to summarize some of the points from the Consumers Association, and by all means come up to the stand.

MR EVANS: Good morning, everybody. I would like to start by commending the Competition Commission for their willingness to open up competition policy as an important issue for the wider general public. I think it is indicative of the importance of that, given the number of people in the audience. I would also like to commend Lloyds and Abbey National for coming to this hearing in a spirit of openness which we have not seen in all previous hearings, as I am sure we all remember.

What I will run through is the iterative process that we went through trying to work out what we thought about this merger and what we thought about this market. Some of it will reflect on the discussion we have heard already, but I will try to tailor it specifically to this merger rather than a more general discussion.

The first issue we have to ask ourselves about really is why this merger. Why worry about this one as opposed to Barclays/Woolwich? We did carry out some preliminary work on Barclays/Woolwich to get a feel on the current account market and how we thought the dynamics of that market were functioning. The key problem you have, in a sense, with that question is that a lot of the discussion we have had thus far has been about the big four and the difference between the big four and the smaller players, the remaining four or the remaining sort of twenty-five. In many ways that actually points to much more of a complex monopoly process in terms of your thinking about the markets. It is very much I think in the way in which you look at the data and you look at the vigour of competition. You are looking much more in thinking at a complex monopoly process.

What is peculiar about this merger that sets it apart from a more general desire to look at the sector? Essentially I think there are two key issues, the first of which is the simple scale of it, not just tipping over the 25 per cent, in a sense, bureaucratic hurdle that you have to get over in these things, but the fact that you would end up with a player with 30 per cent of the current account market and the potential knock-on effect on competition from that.

The second and perhaps more important one is the trigger effect that such a merger going through may have in terms of greater concentration in the market amongst the remaining three big players, and their ability, in a sense the green light, to buy up the smaller players in that market.

I would like briefly to come back to a point that has been made about contestability. I love hearing about contestability in markets, because in virtually every single market where it has been said there is contestability it has failed. Contestability was originally developed by a French economist in the 30s, but in its modern characterization from the 70s it has been applied to aviation, telecoms, every network industry you can think of, and every single time it has been applied and people have said, "Look, it is contestable, we don't need to worry about mergers", it has failed and it has failed to address real competition in that market.

So I think we need to take claims of contestability with an enormous pinch of salt, because it never has applied effectively in the past. It is a useful tool, but not, in a sense, the trump card. It is no way a trump card to deal with this particular market. So I think what we need to look at is what are the indicators you can use to look at the effects of competition in the market. We have the indicators of the number of new entrants, but, in a sense, the number of new entrants is not important. It is the effectiveness of those entrants, the longevity of those entrants and whether they go beyond niche markets. There are relatively few indicators of competition in this market. You have heard the complex bundle of products that you have with a current account, particularly in terms of "free banking". What are the charging mechanisms that exist within the current account market? They tend to focus on interest rates paid on credits and charged on overdrafts. In that respect, you effectively see that the smaller entrants, the new entrants, had zero effect on the charging policies of the big four. There has been virtually no change. The parallelism in charging amongst the big four players has been very strong and has not been affected by the extremely differentiated charging on overdrafts and the much greater credit offered on credit balances.

You also need to look at the argument about the breakeven point of 1,000 in terms of the current account market. That, to me, points to a number of factors: first of all cross-subsidy and secondly inefficiency. Both of those tend to point towards greater entry by smaller players and by players from other markets which you would expect to see, or a greater need for disintermediation which is the point that was by the Professor. But we have not seen that to the extent you would expect, particularly given the extent to which it happened in other markets on a very similar time scale and the mortgage market I think is a key.

So the second question I ask myself is if we are worried about the existing current account market in terms of its effectiveness, which we are and have been for many years, what about the future? I think this is a key point. I think the Professor is entirely correct to look to the future. When we look to the future, when we look to the dynamics in the market, what are we really looking look at? In pure numbers terms we are actually looking at a relatively small impact. We think about new current accounts as the main indicator of where this market is heading, but the new current account market is effectively three or four separate submarkets. The first is the first ever, the people who have never had a current account before, and that tends to be heavily biased towards youth and student accounts. Then there are the external switchers, i.e. people moving from one institution to another, and internal switchers, people moving within the same institution to get a slightly different bank account. The problem there is that that, in a sense, is the definition of what the new current account market is. As you will see from that definition, it is not actually all new in terms of the internal transfers in particular. There are very different drivers of those subsegments of the market.

In terms of the first ever, we have heard evidence from Abbey, and I do not think it will be disputed by anyone, in terms of the key factor in choice is access to a branch. It is access to what you know. This is particularly interesting given the age profile of brand new accounts that you would expect to be more open to the use of the internet, telephones and new technologies. I think when you look at the distribution or concentration in the market for brand new current accounts, it is actually marginally higher than it is for standard current accounts. That is a very interesting factor in our understanding of this potential change that will come from first-ever current accounts.

You also have a major problem with external switches, as we all know. Everyone sort of scratches their head and thinks, well, why the hell are there not more people switching their current accounts? We have banged on for many, many years and we keep telling our members, "Switch your current account, please do, these are the reasons to do it", and they do not. That is amongst our members, and you would think, and we hope, that our members would be the people most likely to do so. We get regular letters from people on other markets which indicate that they are, in a sense, what you see in the credit card market as the promiscuous consumers, the people who continually change products. It does not happen at all in the current account market. In our own polling of our members, when we ask them what accounts they have, the distribution of their accounts is very similar actually to the national distribution with a slight skewing towards newer entrants, which is what we would hope and expect to see.

The reason we think that is an issue here is that the process of calculating your choice and your decision to switch is an extremely complex one and is becoming more complex. I think that again is a defining factor of the way in which, in a sense, this very concentrated oligopoly is operating and moving forward. In actually calculating your decision to switch you are dealing with experienced products. You are dealing with things where it is very difficult to calculate the benefits and the losses.

When you try to work out the value of your own product it is a difficult enough exercise. When I was doing my evidence I did actually try to work out what I had in my current account in terms of the additional products, and I had forgotten half of the things I had in there. You then have to make the calculation of, well, what is on offer? What is the alternative? Again, it is a difficult process to quantify, particularly when you obviously cannot experience it without switching. Then you add in the cost of switching, and that multiplies, in a sense, the complexity of the decision. I think when you look at the future, particularly when you look at the processes of segmentation which is a sensible commercial decision for any large bank to take, the process of segmentation leads to greater complexity in products, particularly with the add-on products, which makes it more and more difficult for individual consumers actually to make decisions about switching in a rather perverse way. It is actually a disincentive to switch because of the time element, as was pointed out by what has been termed our "marketing guru" or "branding guru". We have other things to do. Although everyone in this room is fascinated by financial services, how much time do you have in your life to make your decisions? You simply do not have that in this market because of the compexity of the decision, and also because of the inherent inertia in your attitude to the current account.

So that I think is our view, in a sense, of the problems that we have with switching, and with internal transfers as well in terms of the increasing complexity of the product and the increasing difficulty, in a sense, of calculating your benefit or disbenefit of movement. This would point us essentially towards the idea that you cannot simply make the process simpler. We applaud Lloyds for their initiative in making the process simpler. I think that is a very good initiative, and we do hope that every other bank will do likewise. Unfortunately, I do not think it will actually have the effect that we would all hope it would have. Simply making the process simpler will not be enough, because there are very real and very obvious factors in the market which will make it not occur to the extent that we would think.

THE CHAIRMAN: Phil, I am going to ask you to come back to talk more specifically about this particular merger in a moment or two. I am grateful for those comments about switching in particular. What I would like to do before we move on to the merger discussion, is to invite both of the main parties to comment on some of the remarks that have been made already about the structure. If I could ask you then to come back and do the merger presentation that would be great.

MR FAIREY: I think we have had a very stimulating debate. I think one of the worst things that hit me is how many institutional people around this room do not have accounts with Lloyds TSB, so we will be speaking to you afterwards! I guess the key factor we are coming to is really the impact of Lloyds TSB and hopefully Abbey National coming together as a combination, and the impact that will have on competition generally. As you heard me say in our presentation, we believe that coming together would not alter the competitive landscape at all. Clearly branch networks are important. They have value. I mean that is obvious. But it is a fact of life that more branches have been closing over the years than have been opened, and I will leave you to make your own conclusions in that respect.

In the context of Lloyds TSB, with the coming together of Lloyds and TSB five years or so ago we went through a programme of what we call co-locations. I know technically that is not English, but it is pulling together, bringing together two branches within very close proximity and putting them into one branch. The impact of that, I think, answers Mr Bell's point over here, in the sense that that does not inconvenience customers. It does not inconvenience staff because all the staff just transfer from one branch to the other. In actual fact, our experience has been very good indeed. Our recruitment through the co-location branches that we have undertaken, we have done over 300, is actually above that which otherwise would have been the case with individual branches. Our loss of customers, which obviously we monitor very closely, has not changed at all.

I think Michael Lever mentioned Evolve specifically. You asked the question and I will just touch on that. Evolve is our stand-alone internet bank. It is not that we view the branch more favourably and therefore have come back on Evolve. It is just a matter of priority. We have entered into a joint venture with Centrica and we will, Michael, be spending more money on that joint venture this year than otherwise would have been the case in developing Evolve.

We have talked about rural support. I think Lloyds TSB is the most inclusive and most supportive bank of the rural community of all the banks. Twenty per cent of our branches are in rural communities in comparison with 10 per cent of our customers. We also make the point, though, that with rural communities it is a two-way thing. Probably as you will detect, I come from Lincolnshire, dear to my heart. We closed a branch in Lincolnshire. It was I believe the last branch in the town. This was before we came out with our new policy. We got 600 complaints and 500 were from non-customers. So I think it is a two-way thing.

We have talked about overdrafts a little. Well, it is a substitutional product. There are plenty of other alternative availabilities of credit, and that is what we within Lloyds TSB promote to our customers. Our belief is that the best way (and we did touch upon this in terms of capital structures) of providing that sort of support to customers, obviously we provide overdrafts, is through a more formalized repayment method, either personal loan, credit card or whatever, because if you are in the banking game and you are lending money you tend to want to get it back.

We have talked about switching. I know that is a key issue and I will finish on this note, if I may. I have made the point that the current account, first and foremost, is free. Nobody pays for their current account and they have not done for years. I believe the service is good. Certainly in my own case, as I mentioned, 90 per cent of our customers are regularly telling us that they like the service we provide. I was particularly interested to hear from your good self of your own personal experience.

So we work very hard on the service proposition, because at the end of the day what we are endeavouring to do is to sell other products and services to those customers. Whilst we think we are pretty good at it, we are not terribly successful, as I mentioned, because we are only managing to sell one more averagely. I think the other factor is that there is no conditionality whatsoever with a current account customer. They do not have to buy our other products. There is no obligation to do so.

So I put it to you that if you have something which is free, people value the service and they do not have to do anything more, then it is probably not too much wonder why there is limited switching going on. To endeavour to facilitate the increase in switching, if that is what consumers want and we believe that to be the case and Phil talked about that, then we have come out with this new approach which, we believe, other banks will simply have to follow.

In terms of SMEs, we are looking at it, but, as you can imagine, it is a little bit more complex because of security arrangements and so on.

So I think it has been a very stimulating debate. Again, thank you for the opportunity to respond.

THE CHAIRMAN: Thank you.

MR HARLEY: Likewise I think it has been a very interesting morning so far. There are one or two points I would like to pick up on too. On the issue of new entrants and the scale analysis that was offered up by the Professor, I am inclined to agree with that. We are, Abbey National that is, of course a new entrant in relative terms in most of our markets by definition, apart from mortgages and savings which were our traditional markets. So we have grown our market shares aggressively in life assurance, in general insurance, in current accounts, in unsecured lending and in credit cards. We have made a differences in those markets. We have the scale, the distribution and the muscle to keep the feet of the existing providers to the fire and we intend to carry on doing that. We can and we have changed these markets.

In terms of distribution, there was some discussion, quite a lot of discussion obviously on distribution. We are wholly committed to branches as a means of distribution. There is no doubt, much to my chagrin, that people do find financial services boring, intimidating, something they do not want to spend time on. They do spend more time on it if they have a face-to-face service. In our experience, therefore, branches are extremely important. We are committed to multi-channel distribution, but branches are at the core of that. I think it is important to say too that our branch numbers are larger than they were in 1990, but also, and perhaps more importantly, our branch square footage dedicated to the public is three times larger than it was in 1990.

On efficiency, there was some reference to scale economies, in particular, in these markets. We are, Abbey National, and Lloyds too it has to be said, already globally efficient banks. In certain parts of the UK markets, in particular life assurance, Abbey National is already the most efficient provider of these services. So, to look for more efficiencies may be chasing chimeras.

In terms of attractiveness, these markets are very attractive to us and to our shareholders. Make no bones about it, the terms available are high, are attractive and from our position in particular where we have small market shares, we can grow aggressively into these markets and square the circle: good results for shareholders, good results for customers and good results for the staff too.

If you bear with me, perhaps my colleague, Mr Pople, could say something on switching.

MR POPLE: Thank you, Ian. I just wanted to say a few words about switching because I think it does go to the heart of the issue of competition in the current account market. I think that is a key relationship as far as broader financial services competition is concerned. I am broadly in agreement with the points that were made by the Consumers Association by Phil on this. I just thought the people here today might be interested to hear our current experience on switching.

About one in four of new bank accounts are externally switching to us at the moment. We currently have about 6,000 people going through the switching process. I applaud Lloyds' move and I would encourage the other big four banks to sign up as soon as possible to a similar initiative. But I think it is worth reminding people that the hassle involved in switching is not just the complexity of exchanging information between banks. It also requires that we go out to the originators of the salaries, the originators of the direct debits, the standing orders and the other mandates for them actually to switch the payments across. Of the 6,000 people we have going through this process in our centralized team at the moment, the delays on average of around fifteen days or more are down to the 4,000 people where we have the information from the other banks but we are trying to get the originators to switch over the data, and we are chasing the originators, the utility companies, other card companies, etc., to do that.

That actually creates an overall process which takes approximately six weeks at the moment. I think six weeks out of most people's lives as far as confidence in their financial arrangements makes it a slightly worrying time. Unfortunately, only 10 per cent of our customers are currently within that six weeks' deadline. In other words, for nine of out ten people it is taking longer. It is principally taking longer because it is taking a little bit more time to get the originators to switch once we have the data from the banks.

THE CHAIRMAN: Thank you very much indeed. I was not proposing that we should have a break, but if anybody does want to leave for a comfort break or anything else like that by all means go ahead and do so. I will now ask Phil Evans to come back up on to the stand to give us the first of the presentations in relation to this particular merger. We have in the first half set the scene, so to speak. Now we would like to have a little look at some comments on this particular merger from people. Phil.

MR EVANS: Thank you very much. Apologies for boring you twice. In terms of the specific merger, as I said, it is actually a difficult analytical question as to why this, why now, why deal with this merger. I think the dynamics, as I said, in terms of this merger are most focused on the current account market and much less so on the mortgage market. We do not see a problem in the mortgage market at all, largely because of the different dynamic in terms of the position of intermediaries and the role of remortgaging which has grown enormously over the last few years. There is an interesting factor in difference between that and the current account market in terms of the non-existence, in a sense, of intermediaries all switching current accounts which is an interesting problem.

There is another element which we have discounted, although not entirely, which is something we have also had some discussion on in terms of the secondary product, the cross-selling of products. Again, when we regularly review these products we tend to find, and this in a sense is a paradox, that the products offered by the big four and Lloyds amongst them are not very competitive and are not very good products. The interesting factor there is that on the one hand you have the fact that cross-selling is not as great as it could be, but, on the other hand, you have those products which are effectively cross sold not being competitive in relation to the ones in the market. There is a peculiar paradox there, that if cross-selling is not very strong, then why are these products still so bad in terms of the interest rates on credit cards, for instance?

So what would the effect of this merger be? In a sense, these are the sorts of key questions that we need to look at. The first is obviously the big four who are already in a strong position with 75 per cent of the market. If this merger went through that would increase to roughly 80 per cent of the current account market, which would make it a highly concentrated market, not a moderately concentrated one. That is not just simply a statistical tip-over effect.

The charging structures have not moved amongst the big four to meet the competition from the smaller entrants. We think this merger would allow Lloyds and allow the big four even greater ability to insulate themselves from competition from the smaller entrants. In a sense, it would condemn the smaller entrants to the niche position they are in. Without significant entry from someone with enormously deep pockets, we see the issue of bank branches there as a key factor in terms of getting new players into the market and new customers into the market. As we have heard, the importance of the branch and the importance of access, in a sense, to someone you recognize and trust are factors here.

We have not seen a great improvement in terms of the way in which banks deal with their customers. Interestingly, if you take the satisfaction work which is done by banks amongst their customers which always show that 90 per cent favour their banks and are happy with them, when we do a similar survey where we ask them if they are happy with the bank and then we also ask them the question, "If you had the choice again, would you bank with your existing bank?", you then have a complete reversal of data.

So, yes, people sort of say, "Oh, yes, I am quite happy, I am satisfied", but when you ask, "If you could start again, would you go with them?", the answer generally is "No". So you need to be careful which data you rest upon as an indication of satisfaction.

So what is the solution to the problems that we see in existence in the current account market? Obviously new entrants is one, but, my God, we have seen a lot of new entrants and they have not had an awful lot of effect. As a potential sort of second stop, the established smaller players being able to grow through the obtaining of new customers and through external switching and merger, that is a different order of things when you look at mergers, in a sense, in a second tier of banks which between them have around a quarter or less than a quarter of the market as opposed to mergers further up in terms of the value chain.

So what would the effect of the proposed merger be? Obviously we do not think it would improve competition at all. The big four have moved in convoy, as we said, in charging and service terms and have generally not moved to meet the competition. So this will do nothing to improve competition.

The potential negatives in terms of the effect on competition, obviously the current account market will become highly concentrated. We think it will also serve as a signal to the remaining three players, in a sense, that they can pick off the other smaller players, the other small arrivals, and allow much more effective segmentation of the market.

We have heard a lot about internet banking and telephone banking. Some of the greatest innovations in that have come from the very, very small niche players, and I think if this merger is allowed to go through there will be a signal to segment the market. When you have segmentation with market power you have price discrimination, and that is not something which generally benefits consumers. We think it would clearly condemn the small arrivals to a niche role. There would not be much growth in the sort of twenty-five firms that have 25 per cent of the market. It would insulate Lloyds and the remaining big four in terms of their ability to over-charge and under-provide in terms of interest banks.

So the key question then is, well, what the hell do you do about it? There are essentially two ways that you can deal with it. The first is behavioural remedies. What behaviour can we look to? What reforms in terms of behaviour can we look to actually to solve the problem? That, in our view, would have to focus on the current account market. As we said, we applaud the movement of Lloyds, but we do not think that actually behavioural factors in this market will work. They have not really worked much in the past. The experience of the Banking Code in certain areas has not been particularly joyful, and behavioural factors are unlikely to deal with some of the problems that we think exist.

What structural remedies might there be? Structural remedies, in our view, are almost entirely left in the mortgage market, and we see absolutely no problem in the mortgage market. We do not think there would be any benefit in enforcing Lloyds or Abbey to divest themselves of any part of the mortgage market, because the mortgage market is significantly more competitive.

So we think the problem with this particular merger is that you are left, in a sense, between the devil and the deep blue sea in terms of what you may do about it. The first is allowing it through with behavioural remedies, which we do not think would be particularly useful, or blocking it outright. It is a fairly stark choice. It has to be said that, on balance, we have now taken the decision that we actually think the thing needs to be blocked outright, because we do not think behavioural remedies are sufficient and we do not think structural remedies are actually possible.

THE CHAIRMAN: Thank you very much indeed. Can I call upon David Rhodes, please, of Boston Consulting to give the second presentation?

MR RHODES: Good morning. My name is David Rhodes and I am a Senior Vice President at the Boston Consulting Group, a leading global firm of management consultants. We work for financial institutions all over the world, including many leading UK institutions such as Lloyds TSB. We also work for many of the non-traditional competitors. I have been asked to speak today in my capacity as an industry observer, having worked in the financial services industry all over the world for the last twenty-two years. So today I will address three issues: the forces driving change in the retail financial services industry today, the specific impact of these forces on the competitive position of the banks, and, thirdly, our belief about what the future may hold in relation to banking consolidation.

Four broad and interrelated factors drive the significant change we are witnessing in the financial services industry today. Firstly, consumers are becoming more demanding in terms of service and value. Even more widely available information allows them to make better informed choices. They demand greater quality, more transparency, improved convenience. They increasingly vote with their feet.

Secondly, advances in technology, such as computing and telecommunications, are opening up new distribution and service possibilities. These new technologies allow companies to compete selectively in those segments or activities where they see the highest return. This is perhaps the most important of the forces for change.

So, where once banks did everything, today we see all sorts of specialists. Each competes on the basis of a distinct competitive advantage. MBNA and Capital One are product specialists with unique credit card capabilities. FDC, a name many of you will not have heard of, enjoys processing scale beyond the reach of any single bank. Tesco, Virgin, British Airways and so on have powerful retail franchises. Often these groups of specialists work together. Tesco is now a serious competitor in retail financials services. It provides a brand and a customer base, but then it orchestrates third-party providers who do everything else. Today having no infrastructure is not a barrier to entry.

Thirdly, there are enormous changes in the way financial services are distributed. Branches and sales forces are declining in importance. The last decade saw the advance of the telephone. This decade we will see the explosion in the use of the internet, digital television and mobile devices. The absence of a branch network is no longer an impediment to acquiring and serving customers.

Fourthly, new entrants exploiting new technologies and changes in consumer behaviour have transformed the competitive landscape. These new entrants range from insurers or former building societies invading the banks' traditional turf to unlikely players like utilities and airlines. That is because established brands are an advantage, but it does not have to be a bank brand. Just look at Tesco, Virgin, Standard Life. These new entrants are rewriting the rules and, very importantly, cherry picking many of the most important and attractive customers with consequences we will talk about later.

So let me now turn to the impact of all of this on the competitive position of the industry. Competition has increased significantly. Across all products we see common trends, margins declining, branches losing out to direct, and the banks steadily losing market share, particularly amongst the most profitable, affluent customers.

Given the nature of the debate so far this morning, perhaps it would be useful to bring a few facts to bear. Take deposits, average margins have halved over the last few years as incumbents fought for business and new entrants, such as Egg and the supermarkets, unincumbered by expensive branch networks, introduced low cost, high interest direct accounts. Share of the major banks has dropped to 30 per cent. The story is no different in unsecured personal credit and, by the way, overdrafts are less than 5 per cent of the total personal credit market. In credit cards competition is even more intense. The majority of cards are originated direct. Aggressive US card providers such as Capital One and British new entrants such as Egg, account for over half of all new cards issued. Net interest margins in this market have dropped by a third over the last seven years.

As we heard, competition in mortgages has also increased. Consumers have switched from branch purchase to independent brokers. Brokers now sell 55 per cent of all mortgages. Remortgaging has increased dramatically. More than one quarter of all new mortgages are re-mortgages, striking evidence of consumer ability and willingness to shop around for better deals. Independent brokers also continue to dominant the life pensions and investment markets, and, in the battle to sell unit trusts, we perhaps see the future. To compete with the brokers, banks are increasingly offering third-party products, competing on the basis of choice and price.

Now current accounts. There has been much debate relating to this merger about the competitiveness of this product, a product from which the UK banking industry overall makes no return and is ostensibly free to customers. Current accounts are clearly no longer a certain route to cross sales and customer relationship. In reality, it is doubtful that they ever were. Of course, they provide banks with valuable customer information, but the combination of greater customer sophistication and decreasing branch visits, has reduced the value of the current account as a sales platform. Actually I think it is perverse to view retail financial services competition as centred on the banks and centred on the current account. The panoply of competitors has over 200,000,000 customer relationships. Simple maths suggest that the average consumer has a relationship with around four providers, all of whom are trying to grow share of wallet. It is not a surprise that the banks find it difficult to sell more than two products per customer.

Added to this, independent intermediaries are thriving in the UK, with a high share of the critical mortgage and investment markets. This makes the UK very different from most continental European markets. These are characterized by bank dominated distribution of almost all products. In fact, the major banks in the UK have a lower share in savings, mortgages, life and pensions, mutual funds, personal lending than their counterparts in Italy, Spain and France to name but three. Margins in these even more concentrated markets are under just the same pressure as in the UK from the new entrants.

Let my finally turn to some beliefs about what the future may hold. The nature of competitive advantage is shifting. Incumbency and size alone used to be enough. Not any more. Increasingly the winners need to be competitive in each individual product and each distribution channel. Of course there is still advantage to owning a customer base in a large branch network, but relying on that alone will see an inevitable erosion of the franchise. The cost of entry into almost all product categories is low and getting lower. New entrants gaining share in individual product categories are finding that they do not need a current account to do it. It is no accident that high street retailers such as Tesco do not devote space in their supermarkets or much space to financial services. As you know, retailers know the value of competing uses of retail space.

At the same time, financial advisers are continuing to capture the more profitable affluent customers by offering wider and more competitive choices. Banks who do not compete effectively run the risk of being left with just the current account, expensive to operate and of decreasing relationship value. The new entrants will continue to exploit the low barriers to entry in this industry, and they will cherry pick the most attractive customers.

In fact, far from being a consolidated industry, the financial services markets are becoming more fragmented. The successful banks, therefore, have matched or even exceeded the customer centric and focused approach of the new entrants. In the future they will need to continue to price competitively, as well as provide an even better service and convenience. The time has long gone when they need only look to each other. Yet the incumbents have a disadvantage. It is expensive to operate the multi-channel offer demanded by bank customers. A telephone transaction costs only a third of that of a branch transaction. Internet transactions cost even less. This gives new competitors an advantage. So the incumbents can respond in only two ways.

Firstly, they will need to become even more efficient and continue to improve service, in order to be able to compete head on with the lower cost, lower priced providers. Secondly, they will need to consider pricing differentially by channel and service, charging for branch access and current account usage, in order to recover the high costs of providing these services in order to compete effectively in the other product areas. If banks fail to become more efficient, they will lose out to those competitors who have none of the infrastructure costs associated with current accounts and branches.

In branch banking, cost efficiency requires scale. The implication of this is clear. The banking industry overall needs to drive down its collective costs, otherwise individual institutions will be unable to sustain the increasing burden of investing in new systems and new channels, whilst continuing to retain the branch coverage we all want. Furthermore, further consolidation would permit the overall banking system to reduce its costs even more, allowing the remaining banks to provide a cost-effective service. The competitive environment suggests that a good part of such cost reduction today would necessarily be passed on to the consumer. Thank you.

THE CHAIRMAN: Thank you very much. Again some issues raised there which I think are worthy of some further comment, and I would be interested to hear what speakers from the floor have to say in relation to some of those particular issues. For example, if there are any comments about the importance of current accounts as a means of cross-selling, is it, as David Rhodes has suggested, of decreasing importance or is it still something which is important for us to be taking into account as far as recognizing where the competitiveness is in this marketplace? How would this merger impact on the provision of current accounts and the cross-selling therefrom? Are there any comments from the floor? Yes. It is good to have the regulars.

MR WEATHERHILL: I am sorry to be so regular. I would have liked somebody else to have something to say.

THE CHAIRMAN: As long as you have sensible things to say we are delighted to hear from you.

MR WEATHERHILL: I listen with interest for the future of the banking industry. Unfortunately, we are not there yet. Unfortunately, IBAS has perceived over an eight-year period a change in the industry, yes, but it is not as quick as the figures we just heard would suggest. We are still locked in, as Ian Harley has suggested with Abbey National, to branch account business being somewhat of importance. It is important to him. It is equally important to Lloyds TSB. The more I listened the more I became aware that the one single focus of this merger has to be about cost cutting. The more I listened to what this gentleman had to say, the more important the accounts that already exist with both these banks became. I am talking about the current accounts, the captive customers.

We listened with interest to the fact that one point, whatever it is, extra products are not sold, but how many are sold to the captive customers that do not move banks? I think they are a lot more than the 1.5 products per person. I am worried about those captive customers that do not move, from inertia, from security or whatever reason they remain with that particular bank.

The Consumers Association have said that the market share in the big banks will be 80 per cent. That to me says this is a very large share of any marketplace indeed. If they then control that percentage of current accounts and the ability to influence the products on their customers, particularly the captive customers, then we have some concerns. As Phil from the Consumers Association has also said, behavioural remedies have not appeared to work in the past. Why should they work in the future?

Therefore, we have to look at should this merger happen at all. There does not appear to be anything except the consolidation of scale and cost cutting to approve it. If that then, therefore, means that the current account customers, and I mean all the customers of a combined bank, become captive to Lloyds TSB and their products and their cross-selling of products in a larger piece of that marketplace, then we must all have serious concerns.

The gentleman who just spoke had some very good arguments indeed, but they are tomorrow's arguments and they might be a long way into tomorrow as far as I can see. We are talking about customers that do not move banks quickly, do not move accounts at all, people that have had a lifetime with one bank. They do not move very quickly or easily. We need a lot of information for them to be able to do it, and they need some persuasion. They also need to do it very quickly, as this gentleman in the front row has suggested, and yet we heard from people in the industry at Abbey National of the problems with quick movement of accounts. So the ability to hold on to a customer for a length of time, even when they have moved accounts, is still a problem. I cannot see that happening very quickly. Something akin to that problem might give us a lead in to how captive that customer might remain in the future.

All of these obstacles to movement of accounts creates captive customers, and any captive customer left at the mercy of a large bank with a higher customer base than it had previously, with more products to sell at a higher price, does not give me a great deal of thought for competition in the future. Thank you, madam Chairman.

THE CHAIRMAN: Thank you.

MR GRUENWALD: I am Peter Gruenwald, Chairman of ANSA, Abbey National Staff Association. I would like to know how Lloyds intend to make the £900,000,000 saving and also whether or not the figure of 9,000 redundancies is a gross underestimate.

THE CHAIRMAN: Are there any other comments in relation to this particular merger and the impact that it is likely to have on customers, the impact that it could have on other financial institutions and consolidation in the marketplace as a whole, the impact that it may have in relation to employment issues as we have just heard?

MS ROLPH: Good morning. I am Lynda Rolph. I am General Secretary of ANSA, the recognized trade union within Abbey National. We are a thinking modern union. However, we are firmly of the view that a takeover of Abbey National by Lloyds is against the public interest. The major reason being that Abbey National is one of the few organizations of sufficient size to be a genuine alternative to the big four. Predicting what may happen in the future is always difficult. However, on the past pattern of mergers there are a number of things we should expect if this merger is approved. There will, for example, be huge job losses. Lloyds have already stated that 9,000 jobs will be axed. Our view is that this figure will be much higher and need compulsory redundancies.

Since Lloyds merged with TSB over 16,000 jobs have been lost. The Royal Bank of Scotland has shed 13,000 in the first year and their target is 18,000. We believe the final figure for job losses in this proposed takeover would be nearer 20,000 than 9,000. Even at 9,000 there is bound to be a mismatch between job losses and volunteers which will lead to compulsory redundancies, many of which will be women in full and part-time roles.

ANSA also believes there will be significant branch closures. There are some 600 branches of Lloyds TSB and Abbey National within 500 metres of each other. Some of these are bound to close. Fewer branches and fewer staff serving the same or more customers can only mean a poorer service for the general public. Despite the economies of scale that recent mergers have provided, there is no evidence that this has led to better interest rates. Indeed, the evidence suggests that the smaller banks and building societies have provided better rates than the big four. We fear that if a merger is approved it will be the death knell for small organizations. If Abbey National cannot protect itself from unwanted mergers, what chance have the smaller organizations? Thank you.

THE CHAIRMAN: Thank you. Again, are there any other comments that people would like to make in relation to any of the points that have been raised today?

MR MURPHY: I am Rory Murphy, the joint General Secretary of UNIFI. We are the largest specialist finance union in Europe and the eleventh largest union in Britain. I want to talk about a few things in relation to the industry as a whole, as well as Lloyds TSB and Abbey National. We do indeed represent members in Lloyds TSB and Abbey National.

We have this industry-wide perspective which is very important and, as such, we are concerned about competition in the sector, but we are obviously especially concerned about the developments that have an impact on job losses, branch closures, consumer choice and customer standards. UNIFI has publicly stated its support for the Cruickshank report that was published last year. We firmly believe that all proposed mergers involving the top ten UK financial institutions should be referred for public scrutiny to ensure competition is maintained within the industry.

Our primary interest, however, in these merger matters must involve the employment and human resource issues. In this context I would like to acknowledge at the outset our good working relationship with Abbey National and Lloyds TSB, and personally with Mike Fairey. However, we are deeply concerned about a further 9,000 job cuts over the next four years and 60 branch closures planned for the future. These 9,000 minimum job losses are far more than those that have gained recent attention in the steel industry at Corris, for example, and will represent a significant cut in the workforce of the combined companies. Moreover, 9,000 new job cuts are in addition to the 16,000 or so jobs already lost following the merger of Lloyds and TSB. We have concerns about reducing the workforce further and the manner in which such a reduction would be achieved and managed.

One of our concerns is these job cuts could fall disproportionately on women part-time workers who the bank would like to work longer hours as it is. More broadly, we believe that staff reductions of this magnitude will lead to unacceptable levels of stress and pressure on the remaining staff known as survivors syndrome, and that this could lead to a further deterioration in the quality of service to customers.

We believe that staffing in Lloyds TSB is already very tight and, in our view, there is nothing left to cut. Whatever cuts there will be will have an adverse impact on those that remain. Consolidation does not need to mean job cuts, especially when there are skill shortages and demands from customers for an improved service. We also have to consider the impact of staff reduction on customers who will have less branches to visit, and will undoubtedly be faced with longer queues and waiting times with fewer, more stressed staff to serve them.

To counter these fears we want and have asked Lloyds TSB to give its workforce a no compulsory redundancy guarantee, but to date, unfortunately, this has not been forthcoming. This is of vital importance to us.

We are also concerned about the impact of the merger upon particular communities, both in terms of job losses and the removal of banking services. We would like to see careful consideration and protection for jobs in areas of special economic status and areas such as Bradford, South Wales and the North East.

Our concern, however, is not just the impact on jobs in Lloyds TSB and Abbey National. As the national union for banking and finance in this country, we also take a view on the wider competition issues and the longer term implications. This merger would remove one of the major second-tier companies from the sector, and one that has recently developed products and services for personal customers and small businesses. This merger will reduce competition and will undoubtedly concentrate the market. Our concern is that if the merger were approved it could allow other large institutions to pick off smaller, often innovative companies just when they were beginning to represent competition in the market.

As a union we acknowledge the employment as well as the competition implications. Like the Consumers Association, we feel that if this merger were allowed to proceed it would unleash a wave of further consolidation. As our submission made clear, there have been many, many thousands of job losses in the last five years amongst the top five banks, and there can be no doubt that it would be a matter of public interest if there were to be further thousands of job losses in the next five years.

It is not just the big institutions who have an interest in this merger. Every single employee, every single customer, every shareholder in the financial services sector will be concerned if this merger is approved. In our view, the distribution of employment will be unbalanced further and we can expect further reductions in staffing levels across the industry. Our view is that only if a merger is in the interests of all stakeholders should it be permitted.

This proposed merger, as we understand at present, is not in the public interest. It will worsen customer service. It will not maintain or promote a balanced distribution of industry and employment, and will reduce competition. Thank you.

THE CHAIRMAN: Thank you. We have covered a pretty broad range. There is a speaker just here I think who wants to make an additional comment.

DR THAKER: My name is Dr Thaker and I work in a medical centre. We have had accounts in Lloyds TSB since the last twelve to thirteen years as a family. We have found a catalogue of mistakes, a catalogue of inefficiencies and a catalogue of lies from the higher management, deliberate delays in resolving disputes, taking months and years in resolving certain queries. That is just on an individual basis. On a general view, if you consider the benefits which we may be able to get from a merger, particularly with reference to the small businesses, there is a real concern regarding that. At the moment small businesses are being charged unauthorized interest charges, unauthorized fees, management fees, management charges and management time for the same services they are charging. This is very common at Lloyds TSB. I feel the only people who are going to benefit from this merger will be City shareholders, senior management and large businesses.

I would like the Commission particularly to look into what will be the effect on small businesses, small individuals, particularly in relation to the current account.

THE CHAIRMAN: Thank you very much for that intervention. That is an issue that we will be looking at, and I think my colleague, David Parker, has some points he wanted to raise in relation to small businesses.

PROF PARKER: Only so far, Chairman, as we have not had much of a discussion on the impact that this proposed merger might have on the banking facilities for small to medium sized enterprises. I would be particularly interested if anyone in the room today has any views on that to put them to us at the present time.

MR WEATHERHILL: Sorry, again, to put my viewpoint across. IBAS, the Independent Banking Advisory Service, has represented quite a number of small businesses over an eight-year period, probably nine years now. I rather hoped that the small business community would be represented by the Forum or the Federation but I do not see their faces here.

THE CHAIRMAN: I believe they have been invited.

MR WEATHERHILL: Thank you. Nevertheless, our viewpoint has been that margins, although they have been spoken about earlier, have been reducing. It has not been too evident from where we have been sitting in the small business marketplace that margins have reduced on lending. We have not been involved in the savings market, but we have been involved in the market where businesses get into trouble and where they have to be rescued. We are concerned about the major players when it comes down to security, when it is on an overdraft, when it is on loan and secured loans, I might add, where it is on demand. The one feature that comes across consistently is the demand process and how much obligation that places on the bank holding that security, as to how they enforce it, how they actually act on the information they are given, and whether they use it for their own benefit or for the customers and their benefit. We have seen the Code of Practice constantly manoeuvred around by the big banks. We have seen the way in which the banks manipulate their market position, and a dominant market position, in an uneven battle when the customer complains or in fact says something is wrong.

Unfortunately, we have yet to see the sort of tide that is effected in the USA where the customer is key. I do not expect it to be here in the near future. As far as small businesses are concerned, they do need nurturing. They do need a lot of attention, and they do not need something which comes along and takes their assets away quickly for the benefit of the bank.

I am not confident that this particular merger is of benefit to small business, because we have a major player in the market in Lloyds TSB looking to take over or merge with a minor player who has just entered the marketplace. The minor player is competitive and wants to enter this marketplace. The major player might want to take them over at this opportune time, because they are in fact a threat to that marketplace. I think a lot of small business people out there would assume that is the major reason for the merger. It is an effective tool to take out a competitor at a time when it is becoming effective. That is the position we would speak for, Chairman.

THE CHAIRMAN: Thank you. Are there any other contributions representing the small business sector who would like to make a comment or indeed if there is a contrary view? I think my colleague, Mr Jenkins, has a point he would like to initiate a debate about.

MR JENKINS: Whether it will initiate a debate is a matter we shall see in a moment. I throw out the thought, I think, as much as anything else that we have had evidence coming in and points being made today which point to this as being a vibrantly competitive marketplace on the one hand, a very stayed and competitive marketplace on the other; one which is full of new competition and new entrants being put on the one hand, a rather sort of stale old market being argued by some others. The one thing which I think has come across clearly is that there is a variety of players now in the marketplace generally, some of whom might be categorized as the old traditional banks, some of whom might be categorized as people who have been in other forms of financial institutions and are now moving into banking, and some who might have been associated more with high street retailing than banking per se.

I am wondering, picking back on the issue of branding which we touched on earlier, as to whether maybe people do not necessarily identify clearly between the brand of Lloyds and NatWest, for instance. But do people differentiate, and this is the question I would throw out, between the traditional banks as a generic brand in themselves, which differentiates them perhaps from the more recent arrivals of Abbey and Halifax, and more certainly further identify them from the Tescos and the Sainsburys and the Safeways? Does that actually make any sense in terms of the way we should be looking at this market?

THE CHAIRMAN: Greg, I wonder if you could respond to that. I suppose one of the points we might want to think about is whether or not places like Safeway's and Sainsbury's can extend their brand to cover things like financial services, whether or not there is a differentiation, whether people do understand the difference between a bank, a former building society, a building society, if they do differentiate in that way.

MR DELANEY: I think they do differentiate between the banks and the mutual building societies. Certainly as far as Abbey is concerned, I think they enjoyed for some time some of the more benevolent attitudes of customers towards the mutual societies. I think what has happened in Abbey's case is partly a function of getting more involved in the rather difficult area of current accounts where there are more transactions, there is more scope for difficulty and misunderstanding, and there are more service issues and more complaints as a result. The closer you get to current accounts the less generally you are liked by your customers. I think this is a reality.

We were talking about switching earlier on. I think there were something like 580,000 odd bank accounts that were switched last year, which is not a huge proportion, it is 2 or 3 per cent I think of the total, but Halifax, as one of the speakers mentioned, by introducing a current account with specific value benefit gave people a very tangible reason to move, because the sort of the touch of the finger reasons for moving are really insufficient in a market which is defined by inertia and convenience.

When it comes to the new entrants, if they come in and offer real value to customers, then they have a very good chance of attracting those customers to their brands, particularly if the brands already have some very good benefits that those customers are appreciating and enjoying. So, for example, if the major retailers come in and make very good value or price offers to customers, the customers will be already aware and will trust them and will be able, therefore, to make I think a very good choice about that.

The key issue I think is one of real choice as opposed to a choice defined in terms of numbers, because there is no reason why in any market there has to be a huge number of different players in order to offer real customer choice. As far as consumers are concerned, they will define choice as real choice, a tangible differential, not just a different coloured logo or indeed a different name.

I think Halifax have demonstrated that you can overcome inertia with real value. The opportunity is there for any of the competitors or indeed the new competitors coming in to educate consumers, if you like, as to their choices and make very real and tangible offers to them which, as in other markets, is in the end the only way to tempt them across from one brand to another.

THE CHAIRMAN: Thank you.

MR ENNALS: I should immediately say my name is Ford Ennals and I work for Lloyds TSB, so I have a very definite interest. On the more philosophical issues behind your question, my background is marketing at Mars and British Airways prior to working for Lloyds TSB. I think one of the things we would detect is that there is actually no barrier to entry for any brand that is truly trusted by the customer. If you actually look at whether that be Virgin, Marks & Spencer, Tesco, Sainsbury, and indeed Virgin, customers are very willing to consider those products and to buy them if they offer them value. So, as I said, I think the history of the last five years of the banking industry is that there is no barrier to entry.

If you look at the markets for savings, for loans, for credit cards, and indeed for mortgages, I do not like to use the term "the big four", but actually 70 per cent of those markets are not in the hands of the big four. They are in the hands of the other players, and many sizeable shares with new entrants into the market.

I think on the issue about current accounts, and I hate to say this because I have not heard anyone say it, certainly not in the press, I actually do believe that customers are, by and large, satisfied with their arrangements from their existing current account provider. Independent market surveys for the industry show that less than 5 per cent of people state that they are dissatisfied with the service from their current account provider. Our own research actually says not only are 90 per cent of people satisfied, but 87 per cent of people would recommend our service to others, and indeed do recommend our service to others.

So I think what we see here is that there is no barrier to entry for strong brands and for trusted brands. I think we and other people in retail financial services do our job well. We actually manage current accounts well. We satisfy our customers. We serve our customers well and we are highly efficient in that business. The business indeed, as has already been said today, is probably on a current account basis in a breakeven position. I think that has been the big deterrent for some of these other new brands who are trusted from coming into our market. Thank you.

THE CHAIRMAN: Thank you. There is a comment at the back from Mr Lever I think.

MR LEVER: It is Michael Lever again of HSBC Securities. I have listened to some very interesting arguments this morning, perhaps sympathy with many of them. I think if we, however, look at the market dynamics what we see is no shortage of choice, but plenty shortage of profits. If you look at the new entrants, whether they are Egg or Direct Line Financial Services or Tesco or Virgin or Standard Life Bank, to name a few, what you see is some degree of attracting customers basically on price-led propositions often in single product areas. What we have no concrete examples of really of any degree is those new entrants actually having a business model which makes profits. You have to ask yourself the question as to whether all these new entrants, if they are unable to turn a profit once they turn down their price-led strategies, will they still be there? I think the key message that comes out is that an incumbent position with an incumbent large customer base is a distinct advantage against other suppliers which have to buy their customer base through price-led strategies. Thank you.

THE CHAIRMAN: Thank you.

A MEMBER OF THE AUDIENCE: Can I make a point as a consumer?

THE CHAIRMAN: Yes, of course. You can have more than one hat in this meeting.

A MEMBER OF THE AUDIENCE: What surprises me is that the issue is not entry. The issue is survival. When they are in the market can they survive? As a consumer it is important to me that I have alternatives to go to if I want to change my account. I do not change my account for fun. I change it because I am hacked off because I am unhappy, and I want to be able to go to another supplier who is not connected with the one who has hacked me off in the first place. So I think survival becomes an important element, and that is where the competition element comes back in again. If we have an important player like Abbey National playing a role in the market, we should cherish that. That is what real competition is about.

THE CHAIRMAN: Our initial researches seem to suggest and many of the figures seem to suggest that of the small proportion of people who do switch, they do often switch within the big four themselves. So switching out is not something which happens very often, but we are getting more figures in on that from various sources.

MR COLLUP: I did ask if I could come back about the effects on the industry. My name is Keith Collup from Lloyds TSB Group Union. Before I speak about job security which has been mentioned, can I say this, that coming from speakers today have been various thoughts. One train of thought is that there will be change ahead, major change, major alterations. My union's position in this situation has been that it is better to correct things or change things while the industry is healthy than later on when it is in any major decline.

Can I talk about job security and preface my remarks by saying that my union has some really serious disagreements with Lloyds TSB over various negotiating matters, really serious, but then I have to say to you, in fairness to them, that job security is not one of them. It is proper for you to know, for anybody to know, when there are such threats as we have heard to jobs that there have been negotiated severance terms that attract large numbers of volunteers. Since the Lloyds TSB merger the unions, and that includes UNIFI here, and the bank have negotiated robust job security procedures that have removed the need for any compulsory redundancy. It seems to me that in the minds of many people when the term "job losses" is issued, then it is read as compulsory redundancy. I have to say that we believe there is a huge difference. Let me explain why.

We would not wish to see redundancies at all. So we have looked at the fact that we are told these job losses will occur over four years. We have looked to see what is the natural wastage going on in Lloyds TSB at the moment. I can you tell you it is something over 7,000 people a year. I suspect some 2,000 people maybe in Abbey National, who knows, but we do know about Lloyds TSB. That means, just taking the Lloyds TSB figure, that over a four-year period 28,000 people will leave.

There is, of course, the problem of matching positions, but it does follow from that, even if it was halved because there was an economic downturn, that the banks would have to recruit. That is why it does not bear any comparison with job losses in the steel or car industry. There is no dispute that there are less jobs, but I do say that we have done it largely with no real compulsory redundancies.

THE CHAIRMAN: Thank you very much.

MS PERCHARD: Teresa Perchard from the National Association of Citizen Advice Bureaux again. I am sorry to sound like a branch obsessionist, but I will mention branches again. There are probably a couple things I should have mentioned earlier. I am actually involved with the Treasury Group that is led by Dianne Julius reviewing the Banking and Mortgage Codes. We have also been discussing the mystery of why consumers do not switch and what role the Banking Code might play in bringing about more common standards of service across the industry which might build confidence about switching.

My main observation on the issue we have been discussing from the issues that have come out is really that the whole question of the branch network in whatever shape or form it is being delivered is key to switching. We heard Mr Delaney say that consumer choice is driven by convenience of access. A lady referred to the problem of paying in, and it is about paying in. It is easy to get money out. You can get cash back in pubs with Switch. Getting money out is easy and paying bills is easy once you have a bank account, but getting your money in is key. That is where people really need a branch to access.

So it seems to me that if you are going to look at competition on switching and the impact of this merger on that, you really need to know what the merged company will do about its branch network in order for you to make a judgment about the impact on the wider market. I think information about service standards on switching and ease of switching will only really have a marginal effect. It is the branch network which will be key.

As I have said, I think we probably need to have some dialogue between yourselves and the Banking Code Review Group. In terms of interests, the CAB service is supported extensively by the financial services sector and Lloyds TSB is a prominent supporter, but all banks bring problems to Citizens Advice Bureaux. I would wholly agree with the observation that it is quite hard to distinguish between them in terms of service standards and also compliance with industry standards like the Banking Code.

THE CHAIRMAN: Just on that point, do you notice any difference between what is termed "the big four" and others in making those remarks?

MS PERCHARD: I think all financial services providers are capable of causing problems for consumers. They are all represented well in our case book.

THE CHAIRMAN: Graham, I think you wanted to throw something open to the group.

MR HADLEY: Yes, thank you, Chairman. It was just to see if there are any more views from the floor on one subject that I think Phil Evans actually introduced for the first time this morning. Clearly one of the things we have to do is to look at all the various numerical indicators of competition or the lack of it in this industry, whether it is market share, the rate of switching or profitability and all the others we have heard about this morning, very interesting. Phil talked about the spread of pricing of current accounts, which is basically the spread of interest rates on positive and negative balances, overdrafts. He drew some conclusions about the concentration of pricing by the big four as compared with a wider spread from new entrants. We heard a view I think from Mr Fairey that looking at the pricing of overdrafts was a different ball game, because it is part of the general credit market.

Clearly we have to look quite carefully at all of this evidence. I would just be very interested in any other observations that we have from the floor on how we ought to look at this kind of data.

THE CHAIRMAN: Yes, David.

PROF LLEWELLYN: Apologies for coming back again, but this is specifically on that last issue. It has been observed that the switching of current accounts is comparatively low and I think two reasons have been given. One I think came from Lloyds Bank which said, well, if the consumer is broadly happy with the service he or she is getting, what is the incentive to move? Well, that is obviously logically one possibility. The other extreme of the spectrum is that the consumer is not really satisfied, but the transaction costs of shifting are too high. There is a lot of bother, a lot of mistakes can be made, there are several weeks of uncertainty.

Could I introduce a third possibility which I think is possibly more realistic than either of those two, and that is the rather perverse pricing that we actually have in this market. I think this is something that the Competition Commission could usefully look at, in the sense that it is alleged that we have free banking. Well, of course we do not have free banking. We just pay for our banking in a rather inefficient way through relatively low rates of interest on positive balances.

I would suggest that if we move to a regime where the consumer paid the economic cost of transactions as and when made, and at the same time, as a quid pro quo, received a market rate of interest on every single pound that he or she had in the account, then I think you could get more scope for competition. Why would we expect there to be competition in current accounts if it does not have an observable price? We have effectively eliminated one of the most important dimensions in which competition could take place. Therefore, in a rather curious way, the consumer could benefit by actually being charged for the payment services as and when used. There is, therefore, an area where incumbents and new entrants could compete, but which is being denied at the moment.

THE CHAIRMAN: Thank you.

MR MILLS: Thank you, madam Chairman. My name is David Mills. I am General Manager of Personal Banking at HSBC, and I also happen to be Chairman of First Direct. I would like to add a little bit to David's point. It is around your branding and your switching area. I was there at the beginning of First Direct. That was one of the first new banks, as you would understand it to be. Of course it was the first new name in the marketplace. So it had none of the trust and acceptability that some of the commentators have said that a new brand has to have to get into the marketplace. What it had was a different service proposition. It was going twenty-four hours a day 365 days a year, and it had a newness and a freshness about it that was attractive to consumers. Why should consumers switch if they have no new benefit to switch? There has to be some rationale and it does not have to be around pricing. It could simply be about the attitude of the organization to the consumer.

So I do not think, first of all, that branding is an issue, and I will go on to say why I do not think that is an issue, and I actually do not think switching is an issue. I should know because this bank has grown only from switchers. There have been no other people coming to it. We do not attract the youth market. We do not have any problem attracting switchers from other banks. Neither, incidently, do we have any problem with a six-week wait from Abbey National, because other banks are more efficient than Abbey National at transferring people.

Going back to the branding issue, ironically I have had responsibility in the UK for changing the brand of Midland Bank to HSBC. Now you all will have said, well, what does HSBC stand for? It does not matter what it stands for. What I can tell you for a fact is we switched it over some eighteen months ago or there or thereabouts, and our customer base now is indifferent to the name change. In fact it likes HSBC better than it liked the name of Midland. That is hard for me to say, because I was probably one of the only executives that did not want to make the change. So I do not think brand is an issue and I do not think switching is an issue. I think there are other issues that you might need to concentrate your efforts on, but they are no barrier to competition I believe.

THE CHAIRMAN: Tell us what they might be? This is what the purpose of this meeting is.

MR MILLS: That is your task to find out, madam Chairman!

MR LAW: Robert Law of Lehman Brothers. Lehman is adviser and corporate broker to Abbey National. I was not proposing to make a comment this morning, but I thought I might comment on some of the apparent squaring of the circle between the idea that there is vibrant competition but, at the same time, there is little change in market shares. I think the Commission needs to consider the different segments in the market. I think it has been a case that there has always been a relatively competitive segment in the market. I think the new entrants have particularly targeted that area. There is a case that they have made that particular segment more competitive and that is where they have had their impact, but, as has been stressed, their impact I think has been relatively limited in overall market share terms.

I think if you look at the case of First Direct, it has been in business for over ten years now and still has really only something like a 1 per cent market share. I think you need to consider whether those trends are actually changing the behaviour in market shares of the mass market, which is obviously a much bigger part of the overall market and more significant in terms of the competitive conditions in the industry as a whole.

THE CHAIRMAN: Thank you. I hope people are not going to be mysterious about what they think the issues are that we should be considering. The purpose of this open meeting is to get all those issues out on the table. We have stimulated, I hope, some debate in relation to some of the ones that have been in the forefront of our minds, but I am quite certain there are an awful lot more. I might say that if you are feeling shy about speaking in this forum, we will still be delighted to receive any written submissions from anybody who is stimulated to do so as a result of this debate, or indeed electronic submissions on the web site. In the meantime let us have an oral submission from his gentleman here.

MR TIBBITS: Thank you. It is Mike Tibbets at Bear Stearns again. I just want to come back to the question that David Jenkins raised about the disparity of views on competition. When you look at the new entrant effect, I think there may be confusion with cause and effect. I think the cause of increased competition is probably more to do with the economic cycle. If you look at how banks have behaved probably prior to the last few years, they did tend to stumble from one crisis to the next, driven a lot by economic policy, driven by the interest rate environment. In the last few years we have seen a more stable economic environment. We have seen stable rates. We have seen growth relatively stable. It is a better playing field on which to compete. It is a more certain playing field on which to compete. That applies to new entrants. It equally applies to the incumbent players. I think the confusion is the extent to which the existing players are now competing internally, and that is probably being misread.

THE CHAIRMAN: Would you like to comment on the extent to which you think the big four are competing with each other?

MR TIBBITS: Well, the point you have raised about switching within the four rather than outside I think is probably one area. I think if you look at the mortgage market, probably the big initiative that was taken in the mortgage market was actually taken by HSBC Midland in the middle of last year, not by a new entrant. Their repricing of standard variable rates caused panic in the mortgage market and in the stock market. It was not a new entrant that did that.

THE CHAIRMAN: You think that competitive pressures are felt very much within the big four?

MR TIBBITS: Within the big four, yes. The second thing is that I think there is some flawed logic in some of the arguments here. The view that a merger will lead to job losses, therefore no merger will lead to no job losses, is seriously flawed. If the banks are not allowed to merge, if this merger is not allowed to go ahead, I think banks will look to alternative ways of becoming more efficient, to start to look at the extent of outsourcing that is going on in the UK. If it is not outsourcing to third parties, it will be a merger of processing operations and a merger of cheque clearing operations. The real cost savings are, I would suggest, at that end of the chain and not at the branch end. You have only got to look at the Royal Bank NatWest deal, no branch closures. In fact the NatWest branch closure programme was reversed. The savings are actually coming from the manufacturing end of the business. In fact Royal Bank and NatWest combined are gaining business now and not losing business. Thank you.

THE CHAIRMAN: Yes.

MR WILLIS: Thank you. It is Simon Willis at ING Baring Charterhouse again. To follow on from Mike Tibbits' comments and also with reference to an earlier question of yours, madam Chairperson, in respect of evidence of competition among the big four, I think I would point to the decline in the net interest margin of quite a number of quoted UK banks both over the last three years, but perhaps more particularly over the last twelve to eighteen months. That is not just in the mortgage area or certain segments of their business, but you could look in some instances at the decline in the group net interest margin overall. I think if you were to contrast that picture with the pattern of net interest margins for a lot of the major continental European banks, the US banks, particularly the regional banks over the last couple of years, also, for example, banks in Asia and Australia, and Australia itself went through quite a significant decline in the typical margin on the mortgage product a few years ago, then I think that would point pretty clearly to evidence of competition having escalated in a meaningful way over the last year or three years.

THE CHAIRMAN: Would you say that was internal competition to the big four as opposed to competition arising from external forces, is that what you are saying?

MR WILLIS: Any analysis that I have done, and I have looked at it, and I think any logical analysis would find it hard to dispute that that has been driven, among other things, plainly from competition within the big four. Mike Tibbets' example of the HSBC move on the standard variable rate in the mortgage market last year is a good example. I think there are other examples as well. I think maybe it is harder to deny that the banks still make quite significant net interest margins and returns on equity in, for example, the SME market. The issue over current accounts and cross-subsidizing is always a moot point with banks.

I think, as I say, if you look at the trend in group net interest margins where there are a number of instances, and certainly the trend in the number of smaller segments of the businesses, notably the UK retail banking businesses having a number of major quoted banks, then it seems to me the evidence to support the view that competition has been increasing is pretty clear.

THE CHAIRMAN: Thanks a lot.

MR SEN: Thank you very much. My name is Anik Sen from UBS Warburg. We are adviser to Abbey National. I would like to comment on the margin issues and to go back to the request for ideas for looking at the numerical side of things. When you look at the net interest margin of any bank, there are a lot of items that go into it, especially when you start to compare cross-border and cross-country margins for banks. What I would suggest is to look at interest rivalry in the way of looking perhaps at the deposit margins in the 20F report and accounts for some of the competitors of Lloyds and Abbey National, and to note that these margins have remained relatively stable over the last five years or so. In my mind, that is an indication of perhaps the strength of their franchise, and the limited impact that new entrants have made in this market, despite the buying of market shares we have seen from the likes of Egg and others.

THE CHAIRMAN: Are you saying then that you think this is a static market? Where do you feel the competitive impulses are coming from?

MR SEN: There are competitive impulses by product category. I think there is no doubt that in certain markets, going back to the silo mentality somebody mentioned earlier on, margins have come down dramatically, but when you look at certain markets where the banks are dominant, where the market shares are relatively concentrated, the pricing policy of competitors has been relatively stable. I think the overall margins in these areas have indeed been very stable when you look at the figures.

THE CHAIRMAN: I suppose one of the things that we would like also to get a view about is what will happen to the marketplace, for example, and to the players if for any reason the merger did not go ahead. Does this mean that there would be a fifth, a sixth force? What are some of the scenarios that people could envisage in the event that this merger was found to be against the public interest and did not go ahead, for example? I put this forward as an entirely hypothetical position, I emphasise, because we are nowhere near having reached any views on this point, but it would be interesting to hear from the audience what the view would be to the state of competition in the banking industry. Would a fifth force in fact grow? Would a sixth force in fact grow or not? Would the situation remain much the same as it is with the big four and some outliers and some relatively small new entrants? Does anybody have a view? Yes, please.

MR LEVER: It is Michael Lever again from HSBC Securities. If I can answer the question in a slightly different way, I think the question really is would the incumbents have acted in the way that they have acted in terms of competitive pricing had there not been alternative suppliers and new entrants in the market? I think there is no doubt in my mind. I support the previous comments made by some commentators that competition exists and that competition has come from the incumbents, but there is a prior question as to why that competition has come and why it has accelerated. I think you have to look back over the last couple of years and you have seen some very aggressive new pricing initiatives. It just so happens that those new pricing initiatives coincided with a pick-up in new entrants, both in terms of number and in terms of aggressiveness in their own pricing propositions.

So the question is not so much whether the removal of a fifth force or the creation of a sixth force, whether they would actually flourish as individual competitors, but rather what the catalytical effect would be on the incumbent players if they were to be removed. I think it is that proposition that needs to be explored.

Just to respond to your earlier request as to ways of looking at pricing in the market and margins in the market, personally I think margins in the market have definitely come down, but you need to look very carefully at the margins that are being achieved on new business versus the margins that are being achieved on average across all business. I think if you did so you would see a completely different message. Thank you.

THE CHAIRMAN: Thank you. There is a gentleman here from the unions who wants to speak again, and there is one at the back who wants to speak.

MR WILLIS: It is a very brief comment to qualify my last comment, and also Michael Lever's and Anik's comments with reference to margins. I do not feel that I am particularly hung up on net interest margins. In fact I think the complete opposite is true. I think I would rather start looking at ratios that emerge from the bottom of the profit and loss account rather than those at the top, and that would be by looking at returns on equity. I think to form a link between net interest margins and returns on equity, which ultimately are of much greater importance to investors, you go through the steps of going down the P&L net interest margin, growth in trends in non-interest income, which obviously raises cross-selling particularly of life assurance and other such products, you go through cost control and the cost-income ratio, and also take account of bad debt trends. Clearly in the UK in the last couple of years we have just come out of the trough on the bad debt cycle, and I think you have to take account of the abilities of the banks to manage all those different lines in the P&L and then perhaps look at returns on equity, just as much if not more than the net interest margin figures.

That said, I would still come to the same conclusion in my last comment regarding the evidence suggesting that there is significant competition among the big four in the UK, just as we feel there is across the whole market in the UK. Thank you.

THE CHAIRMAN: These are some of the lines of enquiry that some of the gentlemen in the front row from the Competition Commission are already pursuing. So thank you for you that. Yes.

MR McCLAIN: Ian McClain from UNIFI. Thank you very much. I wanted just for a moment briefly to bring us back to the jobs and employment issues, because I am conscious that the meeting may be getting, as it were, confused messages as between UNIFI and the LTU. I thought it might just be reassuring both for yourselves and for the meeting to know that in fact the LTU, and I am sure Mr Collup will not mind me making reference to this, has said and indeed is on record of saying that it will oppose this merger if there are not reassurances on jobs.

One of the things I want to point out is that UNIFI strongly agrees with the statement made by LTU that Lloyds TSB has inadequate staff now and with nothing left to cut. So in case there was a view that we were coming from a completely different angle, I think we ought to make that clear.

They have also said, and we agree with the LTU's statement, that there is no reason why guarantees cannot be given on job assurances. They have said that if clear assurances are not given they will oppose a merger at every point. What I want to say is that the problem and perhaps the difference is that, indeed as Mike Fairey knows all too well, these assurances which both the LTU and ourselves it would appear have sought, have not yet been forthcoming from Lloyds TSB. As a trade union with the interests of employees at our centre, we simply do not believe that we would be doing our job correctly if we were, as it were, to endorse the proposed merger before we had concrete assurances on our members' jobs. So I hope that may help to clarify the position. Thank you.

THE CHAIRMAN: Are there any further comments? I am getting the sense of the meeting that we have just about exhausted those areas of involvement and interests that people want to express. There are still an awful lot of people who asked to come to this meeting but have not as yet expressed views. Before I draw the matters to a close by once again inviting the parties to sum up and comment on some of the things they have heard, this is your last chance at least in open forum to speak.

A MEMBER OF THE AUDIENCE: Madam Chairman, can I follow up the previous precedent and speak with a different hat in a personal capacity? I have been a customer of First Direct for ten years and I have to disagree with the Chairman of First Direct's assertion that the ability to switch is unimportant. For me it is critical. Why did I go to First Direct? Because I was totally dissatisfied with the service of the previous provider, which, oddly enough, was Midland, and before that another bank which I do not need to name, but that left only two clearing banks or at the time only two clearing banks for me to choose from. I guess I would now increase that number to four by adding Abbey and Halifax to the options available to me. If the ability to switch is further reduced, I would see that as a great disadvantage, although of course at the moment I do not have any expectation of doing so.

THE CHAIRMAN: Yes.

MR WEATHERHILL: One last crack from IBAS! Thank you very much. I think for us the most important thing, the most important thing, is does this merger have to happen at all at this time? If it is merely to allow Lloyds a cost-cutting exercise to inflate their margin and to take out a major competitor in the small business focused marketplace, then it should not happen at all. If Lloyds TSB cannot grow their own business without a merger to allow it to cost cut to inflate its margins at a time when they are critical, then I believe they should be finding another way. Perhaps it is, as the speaker up there suggested, in the overseas marketplaces where obviously the cross-selling of products is much simpler and much easier, as has been quoted earlier. Here it seems to be more of a problem. So perhaps the Lloyds TSB merger should not go ahead just on that one basis alone, because it will not allow them the cross-selling of products which they say they have not gained so far from the previous mergers.

Abbey National have looked at their marketplace in what seems to be an innovative fashion. They have been leading the marketplace to a degree as a fifth force. Whether or not a fifth force is necessary I think we will have to wait and see, because, so far competition, has been led by innovation, by new entrants forcing the previous incumbents, for want of a better word, actually to do something about segments of their market which they previously had not bothered with.

I think competition is essential and it needs to be maintained. If this merger is to proceed competition as such will get a punch on the nose. Those people out there looking at this marketplace will think, competition is now dead, Lloyds are the major players, they will just gobble up whoever is left. I am afraid that is with two hats, the consumer and small business. Thank you.

THE CHAIRMAN: Yes, another speaker at the back there.

MR SYKES: It is Tim Sykes from Credit Suisse First Boston. We act for neither Abbey National nor Lloyds. Just one point really. We have talked about barriers to entry in banking this morning, we have talked about branches and we have talked about brands. Donald Tosh raised the issue of capital. Just to sort of tie a few things together, in terms of the capital which is invested in the UK banking sector, it is about £90 billion. Now new entrants, new new entrants, not sponsored by incumbents, have brought in about a billion. In which case the competition we have seen in this sector is about the capital which is already there competing against itself. Now if Lloyds is allowed to buy Abbey National, there is no increase in the amount of capital that is competing in the banking sector, but equally there is no decrease. What equity Lloyds might issue will be off-set by any cash which actually leaves the sector.

So given that the competition has been driven by the incumbents fighting themselves, you have to ask yourself that given there is no change in the level of capital, will Lloyds Abbey actually increase or decrease the propensity of the incumbents to compete against themselves? That is the issue you should consider.

THE CHAIRMAN: Do you have any views on that?

MR SYKES: Do I have any views on that?

THE CHAIRMAN: Well, none you want to express in open forum!

MR SYKES: That is my thought from this morning. I think the scale of Lloyds Abbey National will mean that the other banks will have probably to react. So the issue that if there are some economies of scales in banking, and I believe there are particularly in terms of investment and the need to invest, then the other banks will need to respond. I think equally if you disallow this merger, then Abbey, Halifax, Bank of Scotland who may be seen as outwith the big four may decide that they need to bulk up in order to compete with the big four.

THE CHAIRMAN: That is interesting. Thank you. Does anybody have any comments on any of those points? I might reiterate the point I have already made. If there are comments that you would like to make in a private capacity, please do write in or email us. I can appreciate that there may be some people who have positions which they do not necessarily want to express in an audience. The purpose of this meeting, however, was to throw as much into the pot as we possibly can. I think that has been a very successful exercise so far, but what I am going to do now is to give the parties to this proposed merger the opportunity to have the last word.

MR HARLEY: I will not take long. I would just like to reirritate that we believe Abbey National offers real choice in these markets. These markets run beyond, of course, simply current account banking. They include challenges against the big four in banking, yes, but also challenges in the pensions market, the life assurance market, the unsecured lending market, credit cards. You name it, we are in the markets and we are challenging the incumbent players and we are changing their behaviour. I believe, therefore, that we are giving customers real choice in pricing terms and product terms, and we are growing good business for our shareholders.

It follows, therefore, that our removal from the market would certainly have an impact on the competitive dynamics, but I am not willing, as you can imagine, to express a view on whether or not that is against the public interest. I will leave that to the Commission. I wish you well in your deliberations. Thank you.

THE CHAIRMAN: Thank you. Mr Fairey.

MR FAIREY: Thank you very much, Mrs Kingsmill, and members of the Commission. I have to say as the guinea pigs, I do not know how Ian and people from Abbey felt, but as the guinea pigs in this process we did wonder quite what we were coming to. I think, if I may say so, you have chaired it extremely well. I think it has been quite a stimulating and very, very interesting debate, and lots of very good points have been raised.

I am going to be equally brief. There have been, as I said, some very good points. On switching, and that has obviously been a high topic, I think Professor Llewellyn mentioned a third example of switching. I think there is actually a fourth and that is that switching is going on all the time. Customers are switching out of Lloyds TSB into other providers all the time. We have the minority of our customers' business. That means somebody else has the majority of it which we would very much like back.

I am afraid Phil has gone from the Consumers Association. I would like to have taken issue with him on one or two points. We in Lloyds TSB now have more first quartile products in our portfolio than ever before. As Ford Ennals said, their statistics on customer dissatisfaction, if I can refer to it that way, we would vehemently disagree with.

There has been a lot of talk about margins. As one in the industry, I can assure you margins are very much in decline, whether it is in savings, personal loans, credit cards or whatsoever. I mentioned a figure of a £200,000,000 adverse impact on my own company in my earlier presentation. We talked about jobs. We are very, very sensitive to the issue of jobs. Some figures have been quoted with which we would not agree. Our estimate is firmly that 9,000 jobs over a four- to five-year period would be lost as a consequence of this merger, but I believe our track record is, as I said earlier, second to none. Obviously we are more than happy to sit down with all union representatives and see if we cannot reach acceptable conclusions in that respect.

So really what is this proposed merger to us about? As I started out, it really is about improving our efficiency, improving our productivity and, as a consequence, therefore, improving our ability to compete even more effectively than before. To that extent, I think there is bags of competition out there. We feel it every day of every week. To that extent, I believe that a coming together of Lloyds TSB and Abbey would not alter the competitive landscape at all and, therefore, would not be against the public interest. As Ian said, that is not for me to judge. That is why we are here with the Competition Commission today. Thank you very much indeed.

THE CHAIRMAN: I think on that note we will draw the proceedings to an end. I would like to thank you all very much for the contributions you have made and to thank you for your presence here today.

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