On Tuesday 11 January 2011, Bob Diamond and Antony Jenkins gave evidence to the Treasury Select Committee's inquiry into Competition and Choice in Banking. At that hearing, the Committee asked for additional information in the following areas:
- Corporation Tax paid in 2009;
- Barclays fiduciary responsibilities with respect to maximising tax efficiency;
- Ratios of investment and retail banking employee variable remuneration; and
- Account number portability.
In 2009, Barclays paid over £2bn to HM Revenue & Customs. Of this, £113m constituted Corporation Tax, given Barclays (like other banks) had UK losses brought forward principally arising from credit write downs.
Fiduciary responsibilities and tax efficiency
Barclays takes its tax obligations very seriously and has agreed to the HM Revenue & Customs (HMRC) Code of Practice for Taxation of Banks (“the Code”). Barclays has confirmed to HMRC that it will have regard to the spirit of the law and the intent of Parliament in managing its tax affairs. The Code includes some of the key principles that Barclays applies to ensure proper compliance with the law. This includes respect for and transparency in dealing with HMRC in explaining its tax affairs.
This is a practice Barclays has adopted for many years, and it has long maintained an open and transparent relationship with HMRC.
Foreign incorporated entities
As a global bank, Barclays has a significant number of foreign operations that are incorporated locally. It also uses foreign incorporated companies for securitisations, fiduciary services, and wealth fund management purposes. UK and foreign subsidiaries are reported as part of an Annual Return filed with UK Companies House, as required by the Companies Act 2006. The number of foreign incorporated entities disclosed in that Annual Return filed in October 2010 is in line with the figures referred to by Mr Umunna at the hearing on 11 January 2011.
All foreign subsidiaries have been included in returns to HMRC either because they are UK tax resident and file UK tax returns or because they are listed on returns giving information on income earned that may be subject to UK tax under what is referred to as the controlled foreign company (CFC) legislation.
Barclays Wealth, part of Barclays plc, has a number of subsidiaries incorporated in the Crown Dependencies, offering banking, investment management, fiduciary and brokerage services. The principal subsidiaries are long established major local employers. The total number of companies incorporated in the Crown Dependencies increased significantly as a result of Barclays 2007 acquisition of Walbrook, a competitor with fiduciary operations. The division has made efforts to reduce the number by liquidating a number of the acquired entities.
The commercial relationship between Barclays UK companies and the Crown Dependency subsidiaries is governed by arms' length transfer pricing arrangements.
Barclays Wealth takes into consideration the terms of the Code and the requirements of the UK disclosure regime in dealing with its own and its client affairs. The division also ensures that it complies with all other fiscal disclosure requirements, including the European Savings Directive, the US Qualified Intermediary reporting programme and, where required, specific disclosures of client information to HMRC.
As regards Cayman Islands incorporated companies used by Barclays, the majority of these are managed and controlled in the UK and are therefore subject to tax in the UK. Income arising in a company that is non UK resident is subject to UK taxation under the UK CFC legislation unless the company fits within a specific exemption.
The UK tax position in respect of the income earned in CFC's is agreed with HMRC as part of Barclays tax filing obligations. There is an annual review process which looks at the number of legal entities and as part of that programme Barclays is committed to reducing a significant number of Cayman companies during 2011.
Ratios of investment and retail banking remuneration
The Committee requested an approximate split of bonus pools between investment banking staff and other employees, recognising that the provision of an exact amount could be commercially sensitive for Barclays. The distribution varies over time in line with performance and between jurisdiction according to Barclays presence, business mix and extent of deferral. However, in the UK, the investment banking share of the bonus pool ranges from 60-70 per cent.
Account Number Portability
Committee members were keen to explore whether portable account numbers would aid the switching process for customers and thus increase switching levels, in turn facilitating greater competition in the sector. Barclays is pleased to provide the Committee with some additional information on this issue as requested.
It is worth noting that whilst absolute switching levels do appear low, at around 6 per cent, these numbers represent only part of the picture. Many consumers „try before they buy‟ and so run current accounts in parallel and manage the switching of direct debits and other regular payments over time.
Since there is no cost to the customer of holding a current account with a zero or credit balance, there is no incentive for customers to close old accounts when they open a new one. Switching numbers cannot, therefore, be relied upon to paint an accurate level of current account switching.
It is also worth noting that many customers multi-bank permanently. Research shows, for instance, that customers in the UK hold more than one bank account (2.4 on average). Another explanation for apparent low switching levels is the high level of customer satisfaction with their existing bank account provider. In October 2010, an independent survey identified that 91 per cent of Barclays customers were satisfied, with only 4 per cent dissatisfied.
On the question of whether portable account numbers would make switching easier, Barclays considers that the financial and convenience cost of the necessary systems changes would be prohibitive and far outweigh any incremental benefit which might or might not result from higher levels of switching. It is worth noting that the Office of Fair Trading (OFT) has examined the issue of account number portability and concluded that the cost of introducing portability would not warrant the assumed benefits.
In addition, in 2002 the then Monopolies and Mergers Commission (MMC) looked at switching as part of its inquiry into small and medium sized banking and concluded:
“We also mentioned...the possibility of introducing portable account numbers. Having discussed this with the parties, we believe it likely that this would require major investment and significant changes to the operation of the current clearing systems. As the inconvenience of changing account numbers is only one of many constraints on switching, the costs of such a development are very likely to exceed the benefits.”
Some have drawn comparisons between the concept of portable account numbers and the mobile phone industry and argued that since mobile phone numbers can be switched between providers the technology exists and could be applied to bank accounts. However, comparisons between bank account portability and switching mobile phone providers are misleading and irrelevant as the payment systems infrastructure is much more complex than simple mobile voice or short message service (SMS) data.
Implementing account number portability would require an overhaul of every payment system (CHAPS, FPS, BACS, Link, cheques) together with all banks having to change their accounting systems and delivery channels. Debit cards would also need to be reissued to all customers unless a change to the international standards for BINs (the first six digits of the card number) was possible. So the implications would reach beyond the UK.
No estimate has been made of the likely costs (and to make an estimate would in itself be a costly exercise), however, they are expected to be very significant. One recent calculation that might serve as a useful comparator is an estimate of the industry's cost of completely rebuilding the cheque clearing process. This was in the region of £700 million. The introduction of account number portability would at least require a re-build along similar lines and an overhaul of every other payment system taking costs well into billions of pounds.
Beyond the financial cost, which cannot be accurately quantified, consumers would be considerably inconvenienced. The systems changes necessary would mean changing every record of these numbers to a new portable number. Whilst this might be considered a one-off cost, the inconvenience to consumers and businesses (small and large alike) should not be underestimated.
There is a further risk of instability and insecurity in the payment systems, leading to a loss of confidence and unquantifiable problems for consumers in carrying out their day to day transactions, of which there are millions in the UK every day.
Recent improvements to switching
Much has changed over the last few years to make switching easier. Bacs (Bacs Payments Schemes Ltd) and their members, including Barclays, introduced a manual switching service in 2004 and this was automated in 2007. Bacs have since introduced further enhancements and information to assist consumers in switching their account providers. Indeed, the OFT has recently written to Bacs commending their improvement to the switching process. The OFT also commended Bacs and its members, as part of their investigation into Personal Current Accounts, on improvements they have made to switching.
Barclays is currently reviewing and simplifying its current account opening processes to make it quicker, clearer and more convenient for customers. This work includes activity to understand what we can do to increase consumer understanding of and confidence in the switching process, as well as to make the process as simple as possible for customers.