Barclays 2006 Annual Report Download - page 69

Barclays PLC
Annual Report 2006 65
Operating review
1
Defending legal proceedings can be expensive and time-consuming
and there is no guarantee that all costs incurred will be recovered even if
the Group is successful. Although the Group has processes and controls
to manage legal risks, failure to manage these risks could impact the
Group adversely, both financially and by reputation.
Tax risk
The Group is subject to the tax laws in all countries in which it operates.
A number of double taxation agreements entered between countries
also impact on the taxation of the Group. The Group is also subject to
European Community tax law.
Tax risk is the risk associated with changes in tax law or in the
interpretation of tax law. It also includes the risk of changes in tax rates
and the risk of failure to comply with procedures required by tax
authorities. Failure to manage tax risks could lead to an additional tax
charge. It could also lead to a financial penalty for failure to comply with
required tax procedures or other aspects of tax law. If, as a result of a
particular tax risk materialising, the tax costs associated with particular
transactions are greater than anticipated, it could affect the profitability
of those transactions.
Effect of governmental policy and regulation
The Group’s businesses and earnings can be affected by the fiscal or
other policies and other actions of various governmental and regulatory
authorities in the UK, the European Union (EU), the US, South Africa
and elsewhere.
There is continuing political and regulatory scrutiny of the operation of
the retail banking and consumer credit industries in the UK and
elsewhere. The nature and impact of future changes in policies and
regulatory action are not predictable and beyond the Group’s control
but could have an impact on the Group’s businesses and earnings.
In the EU as a whole, these regulatory actions included an inquiry into
retail banking in all of the then 25 Member States by the European
Commission’s Directorate General for Competition. The inquiry
looked at retail banking in Europe generally and the Group has fully
co-operated with the inquiry. On 31st January 2007 the European
Commission announced that the inquiry had identified barriers to
competition in certain areas of retail banking, payment cards and
payment systems in the EU. The Commission indicated it will use
its powers to address these barriers, and will encourage national
competition authorities to enforce European and national competition
laws where appropriate. Any action taken by the Commission and
national competition authorities could have an impact on the payment
cards and payment systems businesses of the Group and on its retail
banking activities in the EU countries in which it operates.
In the UK, in September 2005 the Office of Fair Trading (OFT) received
a super-complaint from the Citizens Advice Bureau relating to payment
protection insurance (PPI). As a result, the OFT commenced a market
study on PPI in April 2006. In October 2006, the OFT announced the
outcome of the market study and, following a period of consultation,
the OFT referred the PPI market to the UK Competition Commission for
an in-depth inquiry on 7th February 2007. This inquiry could last for up
to two years. Also in October 2006, the Financial Services Authority
(FSA) published the outcome of its broad industry thematic review of
PPI sales practices in which it concluded that some firms fail to treat
customers fairly. The Group has cooperated fully with these
investigations and will continue to do so.
In April 2006, the OFT commenced a review of the undertakings given
following the conclusion of the Competition Commission Inquiry in
2002 into the supply of banking services to Small and Medium
Enterprises (SMEs). The Group is co-operating fully with that review.
The OFT has carried out investigations into Visa and MasterCard credit
card interchange rates. The decision by the OFT in the MasterCard
interchange case was set aside by the Competition Appeals Tribunal in
June 2006. The OFT’s investigation in the Visa interchange case is at an
earlier stage and a second MasterCard interchange case is ongoing.
The outcome is not known but these investigations may have an
impact on the consumer credit industry in general and therefore on
the Group’s business in this sector. On 9th February 2007 the OFT
announced that it was expanding its investigation into interchange
rates to include debit cards.
The OFT announced the findings of its investigation into the level of
late and over-limit fees on credit cards on 5th April 2006, requiring a
response from credit card companies by 31st May 2006. Barclaycard
responded by confirming that it would reduce its late and over-limit fees
on credit cards from 1st August 2006.
On 7th September 2006, the OFT announced that it had decided to
undertake a fact find on the application of its statement on credit card
fees to current account unauthorised overdraft fees. The OFT expects
this work to take up to six months, at which stage the OFT will consider
whether a further detailed investigation into unauthorised overdraft fees
is needed.
On 26th January 2007, the FSA issued a Statement of Good Practice
relating to Mortgage Exit Administration Fees. Barclays will charge the
fee applicable at the time the customer took out the mortgage, which
is one of the options recommended by the FSA.
Other areas where changes could have an impact include:
•the monetary, interest rate and other policies of central banks and
regulatory authorities;
•general changes in government or regulatory policy that may
significantly influence investor decisions in particular markets in
which the Group operates;
•general changes in the regulatory requirements, for example,
prudential rules relating to the capital adequacy framework
(page 59);
•changes in competition and pricing environments;
•further developments in the financial reporting environment;
•expropriation, nationalisation, confiscation of assets and changes
in legislation relating to foreign ownership; and
•other unfavourable political, military or diplomatic developments
producing social instability or legal uncertainty which in turn may
affect demand for the Group’s products and services.
Impact of strategic decisions taken by the Group
The Group devotes substantial management and planning resources to
the development of strategic plans for organic growth and identification
of possible acquisitions, supported by substantial expenditure to
generate growth in customer business. If these strategic plans do not
deliver as anticipated, the Group’s earnings could grow more slowly
or decline.
Competition
The global financial services markets in which the Group operates are
highly competitive. Innovative competition for corporate, institutional
and retail clients and customers comes both from incumbent players
and a steady stream of new market entrants. The landscape is expected
to remain highly competitive in all areas, which could adversely affect
the Group’s profitability if the Group fails to retain and attract clients
and customers.
Impact of external factors on the Group and peer group
The Group’s primary performance goal is to achieve top quartile Total
Shareholder Return performance for 2004 to 2007 (inclusive) against
a group of peer financial institutions. This goal assumes that external
factors will impact all peer group entities similarly. The Group’s ability