A bad setback for one-time doyen of banking

Lloyds TSB; Banking muddle

Poor old Peter Ellwood, chief executive of Lloyds TSB. He was always going to find Sir Brian Pitman, who ruled Lloyds with a rod of iron during its glory years, a hard act to follow, and now he's going to get a roasting for pursuing a deal that from the outset always looked doomed to die at the hands of competition regulators.

Yesterday Mr Ellwood was naturally trying to put the best possible spin on the débâcle. It's better to have tried and failed than not to have tried at all, Mr Ellwood insisted and, if nothing else, Lloyds has performed the public service of clarifying exactly what the policy position is on further banking consolidation.

Unfortunately for Mr Ellwood, the episode cannot be brushed aside so easily. Lloyds has spent the best part of nine months pursuing a deal that never looked likely to succeed and, in the end, it even failed in the secondary objective of preventing the emergence of a fifth force in British banking. Abbey National is now on its own, but its favoured merger partner, Bank of Scotland, has since jumped into bed with Halifax, which looks like posing an even more potent competitive threat to the big four than the Abbey/BoS combination.

In terms of public relations, the whole thing is a disaster. On top of everything else, Lloyds emerges from the Competition Commission report as a pretty cynical organisation. In its submissions to the Commission, Lloyds admitted that all the cost and synergy benefits of the merger would have gone to investors. There seemed to be little, if anything in it for customers.

Embarrassingly, the bank's own internal strategy documents concede that customer inertia for banks is high, with "little difference between the offers of major banks" and the general perception that there was very little to be gained by changing bank. Lloyds also observed that customers remained relatively price insensitive for core banking services.

Had Mr Ellwood announced his policy as that of fleecing the customer, he could scarcely have been more blunt about it. And it gets worse. In a survey of customers, Lloyds was among the bottom five banks in terms of customers who would recommend their provider to a friend and scored among the top five for the proportion who would definitely not recommend it.

None of this sits easily with the idea of Lloyds TSB as a dynamo of continued profits and revenue growth. Thanks to Sir Brian, Lloyds already has one of the best cost to income ratios in the business, and with the possibility of recession looming, profits and income can only really go one way – down. Lloyds needs to do another deal, and if it is not allowed to do it in Britain, it must turn its attention to Europe. Here, the direct merger benefits would not be nearly as juicy as with a British counterpart, but with a Continental bank there may be a good deal more fat to work off more generally.

Which is why in the past the big Continental banks have always run scared of Lloyds' embrace. Sir Brian was widely regarded on the Continent as a cost-cutting asset stripper, red in tooth and claw. His replacement as chairman with a Dutchman, Maartin van den Bergh, gives the whole enterprise a more euro-friendly feel, but it's not going to be easy. Domestic consolidation remains the priority for most European bankers, and most of the time they can expect a more sympathetic attitude to it than Lloyds got in Britain. The cross-border stuff will come later, and the danger for Lloyds is that when it does, it may be seen as more a bank to be consolidated than one that does the consolidating.

Mr Ellwood can pretend all he likes, but yesterday's ruling was a pretty serious setback.

Banking muddle

Remember the Cruickshank report on banking, ordered in a fury by the Chancellor, Gordon Brown, after the Office of Fair Trading failed to follow through on the suggestion that banking should be subjected to a full competition act investigation? Not many people do, and least of all, it would seem, the Government itself. Since publication in March last year, virtually all of its key findings and recommendations have been either quietly dropped or played off into the long grass of government consultation and review.

Don Cruickshank, the report's author, may regard yesterday's veto of the Lloyds TSB bid for Abbey National as a vindication of his views, but in truth they had very little influence on the Competition Commission findings, and his key recommendation on this front – that all banking mergers be referred, rather in the manner of newspaper takeovers – was strangled at birth.

The Paycom idea – an independent regulator for the bank payments system – likewise fell on stony ground. A Treasury consultation on the idea recommended the Office of Fair Trading be made responsible for regulating payments instead, but the Government has failed to find legislative time even for this half-way house. As for the recommendations on small business lending and other services, these were parceled off into another Competition Commission investigation, which, by the look of things, will shortly be confirmed as a complete waste of time and money.

This week there has been further evidence of Mr Cruickshank falling on deaf ears. The Cruickshank report recommended that consumer codes on banking and mortgages be policed by the Financial Services Ombudsman. Not a word of that appeared in DeAnne Julius's review of banking services codes, published this week. Instead, she falls back on a strengthening of the current system of codes, nearly all of which are self administered by the financial services industry.

So much for Don, but there seems to be a drawing in of horns all round in the Government's approach to regulating these industries, as well as a good deal of confusion and fuzzy thinking. For instance, although the DeAnne Julius report opts for the voluntary, self-regulating approach to banking codes of conduct, she nevertheless recommends they be made universal and that everyone be forced to sign up to them. What's happened to voluntary?

Then there's the whole area of mortgage regulation, which used to be a big table-thumping issue for New Labour when it first came to power. In the body of her report, DeAnne Julius says she is concerned the Government's proposals for regulating mortgages don't go far enough. She wants to extend the statutory regime to cover mortgage advice and intermediaries, as well as disclosure. And yet this core recommendation is missing from both the executive summary and the summary of recommendations, presumably because the Treasury has no intention of implementing it.

What's going on here? Has Labour lost its nerve? Well, it all seems to be part of what Patricia Hewitt, the Secretary of State for Trade and Industry, this week referred to as "soft law". Stung by criticism that Labour is piling too much regulation on business, she wants from here on in to pursue a softly softly approach that keeps statutory regulation to a minimum. Presumably we are meant to feel grateful for the reprieve, but the Government cannot have it both ways. Ms Hewitt and her cabinet colleagues want to have their cake and eat it. They want the effect of statutory regulation without having to be responsible for it. Well, here's some news for you Ms Hewitt; it ain't going to work.

j.warner@independent.co.uk