HSBC 2007 Annual Report Download - page 40

HSBC HOLDINGS PLC
Report of the Directors: Business Review (continued)
Competitive environment
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Advances in technology
Customer transaction volumes continue to grow at a
rate considerably ahead of the growth in underlying
balances or accounts, leading many banks to seek to
reduce unit costs per service transaction in order to
maintain margins. The deployment of automated
secure transaction channels requires significant
investment, providing a competitive advantage to
banks with larger scale. Despite widespread adoption
by both banks and customers of new distribution
channels, the expected reduction in volumes of
transactions through traditional channels has been
slow to materialise and many banking customers
continue to prefer to use them. The younger
generation of customers, however, tends to be more
comfortable with system-aided self-service,
particularly for savings accounts, credit cards and
simple investments. HSBC expects the sophistication
of products sold in direct channels and adoption rates
to increase, as the use of 24-hour self-service
channels, such as ATMs, internet, mobile, and voice
response units becomes increasingly commonplace.
Regulation
Initiatives such as Basel II, together with the
increasingly international scope of financial services,
have raised the level of cooperation between
regulatory authorities in different countries.
Enhanced understanding of how risks are originated
and dispersed in modern financial markets has
reinforced the need to address how best to regulate
the increasingly integrated and international nature
of banking and financial services; this has been
evidenced most recently in coordinated discussions
on the global liquidity disruption. In addition, the
enlargement of the EU, the introduction of the
Markets in Financial Instruments Directive
(‘MIFID’) and the continued effort to endorse
consistent standards and enforcement has
encouraged regulatory bodies to work together more
closely. Interaction and cooperation have led to
competitive and regulatory issues emerging in one
country rapidly being taken up in other jurisdictions.
Uniform global standards, however, continue to be
complicated by differing local interpretations, or
additional local regulation.
Regional factors
Europe
Across Europe, in all sectors, HSBC competes with a
growing range of institutions. These markets are
characterised by rapid innovation, margin
compression through competition and a constant
flow of new entrants. Regulators monitor the
financial services sector closely and conduct reviews
into the long-term evolution of the industry.
Legislators are enforcing legislation with the aim of
improving competition and protecting consumers.
In November 2007, the European Commission
announced that in order to improve the
competitiveness and efficiency of European retail
financial services markets, reviews would be
undertaken to improve customer choice and mobility
within the single market; better facilitate retail
insurance markets; achieve progress towards
adequate and consistent rules for the distribution of
retail investment products; and promote financial
education, financial inclusion and adequate redress
for consumers.
Following a long running investigation, the
Competition Directorate-General determined that
MasterCard’s multilateral interchange fees for cross-
border payment card transactions violate EU
competition rules. MasterCard has six months to
comply or respond. HSBC is fully engaged in the
case through its membership of MasterCard.
A number of key EU measures intended to
facilitate development of the single market and
increase competition came into effect during the
year; principally, transposition of the Markets in
Financial Instruments Directive in November 2007.
Implementation of phase 1 of the Single Euro
Payments Area programme occurred in January
2008.
UK
Financial services, including retail banking, is a
highly competitive sector in the UK, led by several
national and international institutions which compete
on both price and service quality. Domestic
acquisitions or mergers are limited. The sector is
closely regulated, and a series of investigations with
particular relevance to Personal Financial Services
remain in progress.
In July 2007, a group of seven banks (including
HSBC) and one building society announced that they
had agreed with the Office of Fair Trading (‘OFT’)
that the legal status and enforceability of certain of
the charges applied to their personal customers in
relation to unauthorised overdrafts should be tested
in the High Court. Certain preliminary issues in the
case came before the High Court in a trial starting
in January 2008 and this part of the case concluded
in February 2008. At the date of this report,
judgement in the case is awaited. The OFT is also
conducting a market study into competition for
personal current accounts.