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Submissionby UNIFI to the House of Commons Treasury Select Committee Inquiry intoBanking. Submitted April 2002
SUMMARY
UNIFI is a TUC-affiliated trade union representing some160,000 workers across the finance sector. This submission responds to theTreasury Select Committees request for evidence into its inquiry into banking.A summary of the key points made is presented below :
UNIFI acknowledges the role of effective competition, butwishes to ensure that enterprise is combined with fairness and transparency.
We are concerned that banks may use the remedies proposed inthe recent Competition Commission report as the rationale to further cut costs,staff and branches. In the last five years thousands of jobs have been lost inbanking and the branch network has contracted by nearly 20%.
The banks response to the proposed remedies needs to bemonitored to ensure that it does not lead to the detriment of customer service,access to financial services or employment relations.
There needs to be a broader and more sensitive test for theapproval of mergers. The recently published Enterprise Bill causes someproblems in this regard in that merger policy will be governed solely bycompetition concerns.
There has been a growth in the range of distributionchannels and these present excitingopportunities. However, more consideration needs to be given to the effects ofbranch closures.
Initiatives such as the sharing of bank branches andUniversal Banking Services are welcome. However, they will need to be evaluatedcarefully.
If the finance industry is not capable of providing accessto affordable and appropriate products and services in the current regulatoryenvironment, the Government should address how regulatory policy can bestencourage it to do so.
Community Reinvestment Act type legislation such as thatused in the USA should be considered as a policy option. Consideration shouldalso be given to the potential for a Universal Service Obligation to beplaced on financial institutions for the provision of basic financial services.
There needs to be greater recognition of the impact thatemployment practices can have on productivity and profit. The way employees aretreated at work has clear consequences for the quality of service delivered to customers.
There needs to be a forum to allow examination of theinter-relationship between finance sector regulation and employment practicesand the impact for staff and customer service.
Introduction
1. UNIFI is aTUC-affiliated trade union representing some 160,000 workers across the financesector. The Union represents staff in all grades and all occupations, not onlyin the major English and Scottish banks, but also in investment banks, the Bankof England, insurance companies, building societies, finance houses andbusiness services companies. UNIFI canbe contacted via John Earls, Joint Head of Research, UNIFI, Sheffield House, 1bAmity Grove, Raynes Park, London, SW20 0LG or john.earls@unifi.org.uk.
2. We welcomethe opportunity to give evidence to the Committee on banking services followingthe Competition Commissions recent report concerning SMEs and the TreasuryCommittees earlier report on Banking andthe Consumer. We particularly welcome the opportunity to inform theproceedings from the perspective of employees in the industry.
3. UNIFIacknowledges the role of effective competition in promoting economic growth andimproving customer service. However, we also have concerns that too narrow afocus detracts from proper consideration of other important issues. We wish to ensure that enterprise iscombined with fairness and transparency.
Supply of Banking Services to SMEs
4. The recent CompetitionCommission Report into The Supply ofBanking Services to Small and Medium-sized Enterprises finds that the four largest clearing groups Barclays, HSBC, Lloyds TSB and RBSG -are together charging excessive prices (including interest forgone onnon-interest-bearing current accounts) and therefore making excessive profits,in England and Wales, of about 725 million a year over the last three yearswith adverse effects on SMEs or their customers [1]. Remediesare proposed to address this issue and these have been accepted by theChancellor of the Exchequer and Secretary of State for Trade and Industry.
5. UNIFI is concernedthat the banks named in the report may use the proposed remedies, including theintroduction of current account interest and free banking, as the rationale tocut costs, staff and branches, and to increase charges elsewhere to customers.
6. It is important, wefeel, that the situation is monitored so that while the issue of excess profitsis addressed, this does not lead to the detriment of customer service, accessto financial services or employment relations.
7. We note thatthe Forum of Private Business in its Survey2000 Report on Private Businesses and Their Banks reports a fall in theperformance of the banks as perceived by their smaller business customers[2]. The Forumfinds that Bank cost reductions combinedwith access to information and communication technology (ICT) have promptedstructural changes that appear to have caused the reduction in businesssatisfaction (Executive Summary). In addition, the report finds that bank restructuring and greatercentralisation have made many customers feel disengaged and more remote fromthe decision making process.
8. As the majorspecialist finance sector trade union, we have direct experience of thedetrimental effect that rationalisation and restructuring, when poorly managed,can have on employee performance and customer service. We explore this furtherin paragraphs 40-44 of this submission.
9. We are alsoconcerned that the relentless concentration on shareholder value in the Cityleads to short-termism in business planning and activity. One manifestation ofthis can be found in takeover and merger activity.
Market Concentration andMergers
10. We note that the Competition Commission found thereto be a considerable degree of market concentration, and in particular that 90%of small businesses used the big four banks for their banking and financialservices. There is also significantdensity in terms of current accounts, where again the big four hold in theregion of 75% of business.
Current Account Market Share |
|||
|
|
FRS Data |
CC Data: All PCAs |
CC Data: Full PCAs |
|
Big Four banks |
72.1% |
71.9% |
76.0% |
|
All traditional banks |
77.9% |
77.1% |
80.8% |
(Source : Competition Commissions report on the proposedmerger between Lloyds TSB and Abbey National, 2001. N.B. All PCAs refers toaccounts offering ATM payment in and out, cheque book, debit card, ATM access.
FRS refers to research carried out by FRS, and CC to theCompetition Commissions own research).
11. We have concerns about any future concentration ofthe market, especially through mergers and take-overs. We also note thefindings of the Cruickshank Review of Banking Services which concluded that further action is necessary in particularto prevent anti-competitive merger and that relatively few mergers among the top ten banks in the UK couldpresently be argued to be in the public interest [3]. UNIFI concurs with this view and we supported thereferral of the proposed merger between Lloyds-TSB and Abbey National.
12. UNIFI contends thatthere is a social dimension to mergers which needs to be acknowledged. Mergers have an impact on employees,customers, communities and regions, and therefore it is appropriate that theimpact a merger has upon these be taken into consideration when a merger isproposed. UNIFI would suggest that acompanion test to the competition test be developed which considers the socialimpact of a merger and what the impact of the merger will be on the efficiencyand development of a company.
13.UNIFI would like the rationale for a merger to bescrutinised for the economic and social benefits the merger will produce asthere is a growing body of evidence that suggests that mergers do not deliverthe benefits claimed of them. Mark Sirower in his book The Synergy Trap studied 168 mergers between 1979 and 1990 andconcluded that 67% of mergers actually destroyed shareholder value[4]. Morerecently, KPMG have noted that only 17% of all international mergersadded value to the combined company, while as many as 53% actually destroyedshareholder value[5].
14.Professor Hans Schenk at Tilburg University has suggestedthat between 70% and 85% of banking mergers in Europe fail. He finds that thereis generally no change in profitability (if anything, there is a decrease),returns on equity and investment decrease, productivity trails, and especiallylarge banks do not improve efficiency even with cost-cutting[6].
15. We accept that competition is a key factor in theanalysis of economic development, and in particular of mergers regulation.However, we suggest that competition becomes a more meaningful measure if it isplaced alongside other factors which address the concerns of a wider range ofstakeholders.
16. There needs to be a broader and more sensitive testfor the approval of mergers. We note that the Competition Commission reportfinds that Royal Bank of Scotland Group, formed by the merger of Royal Bank ofScotland and NatWest, itself has a scalemonopoly situation in that it supplies over 25 percent of the referenceservices and that the commission foundthese practices to be against thepublic interest [7]. However, this was a merger approved on competitiongrounds just three years ago.
17. We would like to express concern here about thealmost exclusive focus on competition in respect of the regulation of mergersin the recently published Enterprise Bill. The policy on mergers will begoverned solely by the effect of a particular transaction on competition,rather than, as at present, the effect on the public interest (which whilstemphasising effective competition, can also include effects on employment,regional policy, etc.). Ministers will have reserve powers to intervene only onthose merger cases affecting national security/defence, plus otherexceptional cases, subject to parliamentary approval.
18. Our concernis that no consideration will be given to the social implications of mergers.We would argue that the consequences of mergers do sometimes need to beconsidered beyond the economic and that the proposed reforms do not allow amechanism for that consideration.
19. Consideration could be given as to whether the newsuper-complainant procedure (that will enable certain consumer organisationsto have the right to compel initial investigation by the OFT into specificmarkets) should be extended to other third parties such as trade unions.
Staff and the Branch Network
20. There have been thousands of job losses in thebanking sector over recent years. The British Bankers Association report areduction in employment in retail banks of 11,300 in the year 2000 (althoughthis is said to have been partly offset by increases in overseas banks andsmaller British banks)[8].
21. Of the big four banks only HSBC increased UKemployment in 2000. Royal Bank of Scotland Groups Report and Accounts for 2000report that the number of staff had been reduced by 13,000 (18,000 job lossesare planned by 2003). Lloyds-TSB in its Annual Report and Accounts 2000 states since the merger in 1995 there has been anunderlying reduction of 20,076 staff.
Number of Staff:
|
|
1999 |
2000 |
Change |
|
Abbey National |
21,000 |
19,400 |
-1,600 |
|
Alliance & Leicester |
8,600 |
9,200 |
+600 |
|
Bank of Scotland |
13,000 |
12,800 |
-200 |
|
Barclays |
60,600 |
56,500 |
-4,100 |
|
Halifax |
30,200 |
26,100 |
-4,100 |
|
HSBC |
46,100 |
48,000 |
+1900 |
|
Lloyds TSB |
58,000 |
57,400 |
-600 |
|
NatWest |
56,300 |
46,500 |
-9,800 |
|
Northern Rock |
2,700 |
3,100 |
+400 |
|
RBoS |
19,200 |
19,700 |
+500 |
|
Woolwich |
7,200 |
7,700 |
+500 |
|
TOTAL |
322,900 |
307,300 |
-15,600 |
|
All BBA Retail Banks |
354,900 |
343,600 |
-11,300 |
(Source: British Bankers Association Abstract of BankingStatistics 2001, Table 5.01. for headcount staff employed at end of December2000, including part-time staff.)
22. The rate of bank branch closures has eased overrecent years, but the bank and building society branch network has contractedby over 25% in the last decade. Between 1995 and 2000 the UK bank branch networkhas lost over 2,500 branches, a fall of 19%.
UK Branch Networks
|
|
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
|
Abbey National (includes National and Provincial after 1996) |
678 |
867 |
816 |
791 |
765 |
755 |
|
Alliance and Leicester |
397 |
345 |
319 |
316 |
319 |
309 |
|
Bank of Scotland |
411 |
385 |
349 |
359 |
350 |
334 |
|
Barclays |
2 050 |
1 997 |
1 975 |
1 950 |
1 899 |
1 727 |
|
Halifax (includes Birmingham Midshires after 1999) |
1 083 |
971 |
897 |
813 |
909 |
832 |
|
HSBC Bank |
1 701 |
1 702 |
1 668 |
1 663 |
1 662 |
1 668 |
|
Lloyds TSB |
1 776 |
1 731 |
1 610 |
1 499 |
2 122 |
2 013 |
|
TSB |
892 |
865 |
837 |
811 |
||
|
NatWest |
2 215 |
1 920 |
1 754 |
1 727 |
1 712 |
1 643 |
|
Royal Bank of Scotland |
687 |
665 |
673 |
652 |
648 |
648 |
|
Northern Rock |
156 |
138 |
120 |
107 |
76 |
76 |
|
Woolwich |
462 |
422 |
414 |
406 |
405 |
402 |
|
Total (BBA Major British Banking Groups) |
13 621 |
12 793 |
12 200 |
11 846 |
11 497 |
11 026 |
(Source: British Bankers AssociationAbstract of Banking Statistics 2001, p.53, Table 5.02.)
23. It is worth recalling that in his Annual Report1995-1996 the Banking Ombudsman stated that some of the worst cases of bankingmaladministration stemmed from attempts to achieve greater efficiency. He askedwhether some blame (can) be attributedto the closure of smaller branchesto staff reductions and to other movestowards rationalisation? [9] This risk has not disappeared.
24. The Competition Commission report identifies thebranch network as vital to small business as an entry point for finance and forthe running of their businesses. The report also notes that small businessesnow play a significant part in the economy as a whole, and we would suggest thatto see further branch closure programmes could have a harmful impact upon thedevelopment of the sector.
25. We would further add that local branches are vitalto communities and to customers wishing to have access to financial services.We note that the Office of Fair Trading in its report into Vulnerable Consumersand Financial Services published in 1999 stated that To the extent that banks present social benefits, there could be anargument for some public policy response to bank closures. [10]
Financial Inclusion
26. The TreasuryCommittees Report on Banking and theConsumer raises the issue of financial inclusion. UNIFI has been interestedin this issue for some time, believing that access to basic financial serviceshas increasingly become an essential part of social well-being in a moderneconomy.
Branch Closures
27. Weacknowledge that financial exclusion is not just about branch closures and thatthere has been a fantastic growth in the range of distribution channels, notleast those brought about by technological developments. But more considerationneeds to be given to the effects that the closure of local branches can have oncustomers and local communities. A report into Social Exclusion in Wales published by the House of Commons WelshAffairs Committee in November 2000 (and to which UNIFI gave evidence)recommended that the Government require banks to conduct, and publish, socialimpact assessments before closing branches.[11]
28. The NationalConsumer Council has also expressed concern about the way in which bankbranches are closed arguing that Fullconsultation, rather than simple notification, should take place, to giveconsumers the opportunity to highlight significant difficulties [12]. They go onto argue that the requirement to consultshould be extended beyond full closures to include substantial reductions inservice, such as opening for fewer days.
29. We believethat what customers want is choice in the form of access to a variety ofchannels depending on their personal circumstances and the type of transactionthey wish to carry out.
Shared Branches
30. The Government has accepted the CompetitionCommissions recommendation that banks examine the scope for the sharing ofbranches.
31. We also note that at the start of this year theBritish Bankers Association launched a Shared Banking Services pilot schemeinvolving the big four banks. Under the scheme personal customers andselected small business customers of the participating banks are able to payin, make withdrawals and exchange notes and coin through a competitor banksbranch in 10 locations where there is only a single bank branch and no otherswithin approximately five miles.
32. The sharedbranch proposal is a welcome initiative. However, it will need to be evaluatedcarefully in respect of its promotion and implementation. Issues of particularconcern include the extent of initial consultation, the training and resourcesavailable to deal with extra workload and systems, and the potential for theshared branch arrangement to be used as a licence to close more branches.
Universal Banking
33. As with theshared branch project, the Universal Banking proposal is also a potentiallyvaluable initiative. Self evidently, access to financial services through apost office is better than no access at all. But again, proper evaluation isrequired in order to ascertain its effectiveness. Many of our concerns inrespect of training and resources and the potential to precipitate furtherclosures also apply here. In addition,
The post office network is itself under threat;
Will the accumulation of customers from the participatingbanks result in increased congestion, queuing and lack of privacy?
What are the security implications of so much community cashhandling being focused in one vulnerable shop?
34. We thinkthere is also an issue here about what role other banks will play in theseprojects and the wider financial exclusion debate. Whilst we can be critical ofthe established banks, it is only fair to also ask about the new entrants,those without a branch structure to maintain, who we know cherry pick themore affluent customers. What role will they play in addressing what is anindustry problem?
Regulation and Legislation
35. Financialservices providers need to be encouraged to take greater responsibility forproviding services to the whole community. There needs to be a review of themechanisms by which this may be achieved.
36. There may be scope in the industry Codes of Practiceand recent reviews in the Banking Code have made some advances. However, wewould share some of the concerns outlined by the National Consumer Council inits response to the independent review of the banking code[13]. In particular, the fact that coverage is notuniversal, whether there should be a statutory underpinning for the Code, andmore effective monitoring and compliance processes.
37. However, if the industry is not capable of providingaccess to affordable and appropriate products in the current regulatoryenvironment, the Government should address how regulatory policy can bestencourage it to do so.
38. In the United States of America, the 1977 CommunityReinvestment Act (CRA) encourages financial institutions to fulfil theircontinuing and affirmative obligation to meet the credit needs of theircommunities. The Act requires theregular evaluation of the community lending performance of financialinstitutions and for this performance to be taken into account when consideringmerger, acquisition or branch relocation proposals.
39. We note thatin a Report to the Chancellor in October 2000 the Social Investment Task Forcealso proposed greater disclosure of individual bank lending activities inunder-invested communities[14]. Ifvoluntary disclosure did not come about quickly, it recommended that theGovernment introduce CRA type legislation. In addition, it said that suchlegislation should not be limited to banks but should address other financialinstitutions providing services to individuals and small businesses.
40. Consideration should also be given to the potentialfor a Universal Service Obligation to be placed on financial institutions forthe provision of basic financial services.
Productivity and Quality of Service
41. UNIFIsupports the drive towards a competitive and efficient industry. Whilstinitiatives in technology, processes and products clearly have an importantrole to play, all too often not enough consideration is given to the hugeimpact that people-based practices can have on productivity and profit.
42. The wayemployees are treated at work has clear consequences for the quality of servicethey are able to deliver to customers.
43. Results fromthe UNIFI Members Survey conducted by Jeremy Waddington at UMIST highlightsome important areas in this regard[15]. 81% ofmembers said that their job was stressful. 50% of respondents work at least 1hours unpaid overtime per week. 20% do 5 hours or more.
44. Interestingly,where employers were positively involved with the union members reported lessstress, felt that their skills were better utilised, that there was opportunityfor the future development of new skills, and that there were opportunities foradvancement in their company.
45. Productiveorganisations are those that engage properly with their staff. It is also ourexperience that work re-organisation is most likely to succeed when it allowsfor the participation of affected employees and their representatives.
Regulation and the Employment Practices
46. We would alsolike to take this opportunity to raise the issue of finance industry regulationand employment practices. We understand that employment relations is not withinthe remit of the Financial Services Authority. However, we have experienced occasions when the strict demarcation between thetwo has created a vacuum whereby it is very difficult to pursue issues oridentify accountability. Employers justify practices on the basis that theregulator requires them and the regulator does not get involved in employmentrelations issues.
47. Among the regulatory issues that impact on the work environment of theindustry's employees and have implications for consumer protection arereferences, disciplinary policy and remuneration systems.
48. The Financial Services Authority already has 'practitioner' and'consumer' panels. There needs to be a forum to allow examination of theinter-relationship between regulation and employment practices and the impactfor staff and customer service.
Conclusion
49. UNIFIacknowledges the role of effective competition, but wishes to ensure thatenterprise is combined with fairness. We want a banking sector that issuccessful and responsible in the way that it deals with all its keystakeholders, including its employees. We want to work with all appropriatepartners towards this goal.