On the 18th January David Ruffley MP questioned Jayne-Anne Gadhia, the Chief Executive of Virgin Money on Competition and Choice in the Banking Sector.

Mr Ruffley: Good morning.

Jayne-Anne Gadhia: Good morning.

Mr Ruffley: I think many of us believe that one of the problems of British banking is that it is insufficiently competitive, so I for one certainly welcome your participation in the market. Could you just explain to us, from your perspective, how the perception that the big four banks are too big to fail has acted as a barrier to new entrants? What are the particular advantages and benefits of being seen as too big to fail? How does that operate in their favour to the detriment of other banks and potential new players?

Jayne-Anne Gadhia: I think that switching of banks has become even less over the time of the crisis and thatÕs been unfortunate. As trust has been eroded, I think people have been less ready to take the risk of switching accounts, so that, perhaps, has locked the market still further.

I think, too, that when customers effectively get a sovereign guarantee on a big bank, why wouldnÕt they put their money in that bank while the market is in flux? I think that, as a consequence of the necessary response to the financial crisis-I have to say clearly, in terms of financial stability, it was very important-competition and the movement of customers have been reduced.

Mr Ruffley: ItÕs mainly that is it-the switching point?

Jayne-Anne Gadhia: Yes, itÕs mainly the switching point, but itÕs also to do with the fact that current accounts enable big banks to cross-sell to customers. And, to my mind, the reason that banks want to attract current account customers-big banks do-and want to talk about free banking is because a lot of profitability comes off the analysis that is subsequently undertaken to enable big banks to sell different products to customers. For example, if I happen to have a large balance in my account, I might expect a call to see whether or not I want an investment product. I think it starts with current accounts, but it broadens out into the wider syste

Mr Ruffley: There are reports this morning that Paul Tucker at the Bank-and also, I think, Mr Diamond last week-said that it will, in the future, be a good thing if banks fail-in other words, we get rid of the idea that any institution is too big to fail. How do you see that playing out?

Jayne-Anne Gadhia: I think itÕs very important-IÕve fully agreed with Bob Diamond that banks are allowed to fail. Clearly, we can allow them to fail only within a smaller systemic consequence, so I think we need clearly to address the systems and structure of banking before that can be allowed to happen. But I think that once everybody is very clear that banks are allowed to fail, risk-taking will be reduced considerably and the reduction in risk will protect the system for us all.

Mr Ruffley: Just expanding on that, risk-taking will be lower, but what consequences do you think that will have for customers, retail or corporate?

Jayne-Anne Gadhia: You see, from my perspective I am-

Mr Ruffley: From VirginÕs perspective?

Jayne-Anne Gadhia: Yes. I am only, and very proud to be only, a retail banker, so our view is very much consumer focused. Inevitably, there is a lot of risk management thatÕs essential in making sure that retail banks perform appropriately, but I do believe-I think we all believe-that many of the risks that have been taken in the investment banking arms of big banks have meant that the capital consequences there have bled over into the retail divisions and, as a consequence, have led to under-investment in retail, potentially, and a risk thatÕs been a retail risk and a risk to the consumer. I think that that would be eradicated from the system if banks realised that they would be allowed to fail.

Mr Ruffley: Just one question. YouÕre a big advocate of splitting up the big banks so that their investment banking arms are separated from retail. DonÕt you think thatÕs a rather extreme, dislocatory step to take? How would you justify it?

Jayne-Anne Gadhia: For me, itÕs extremely important that competition is introduced to the system-to build trust, to improve financial stability as a consequence, to give consumers a better deal and to avoid the issues that having banks that are too big to fail created over the last two or three years. From my perspective, making sure that we have a range of smaller banks is much more likely to give us an active market where there is choice of product, choice of provider and transparency, and, as a consequence, people will have to make a decision based on price and service, and I think thatÕs where healthy markets operate effectively.

Q647 Mr Ruffley: Do you think the current Government is minded to do that? Are you picking up those messages when you speak to Ministers and civil servants-that they have a plan-or are they actively examining the option of splitting up the banks?

Jayne-Anne Gadhia: IÕve not talked to them about splitting up the banks. I talk to them occasionally about my own business and all I can say is that-as you would expect, and many people are in the same place-I feel a lot of encouragement to all the new entrants to grow competition in the market.

Q648 Mr Ruffley: This is my final question: what is the appetite among the policy-makers you meet for splitting the banks so that the investment banks become one thing and retail banks another? You are in a very good position: you are a respected bank, youÕve been very brave as a new entrant and youÕre advocating something thatÕs quite radical. IÕm trying to understand what pressure is coming from banks like your own and smaller players for this and whether it has any traction, because thatÕs what weÕd like to know.

Jayne-Anne Gadhia: ItÕs not an issue that IÕve discussed with any Minister, so I, as a retail bank, am very focused on retail. ThatÕs what I discuss, to the extent that I have those sort of discussions, but on your point, Mr Ruffley, that itÕs perhaps an extreme solution, I think weÕve seen extreme times, and rightly everyone is looking at what sort of policy interventions could be made to avoid a similar problem for the future. I suspect that extreme problems that weÕve had require some extreme solutions.

Mr Ruffley: But there is no evidence that I see that this is a runner-that this is being actively proposed and articulated and argued for-apart from yourself; you make the point. But is this really a serious runner or just an interesting bit in business editorsÕ editorials? Who is arguing for it? Who is practically saying, "This will be good for competition"? You are, but who else?

Jayne-Anne Gadhia: As I say, my own position is very much on the retail side of things. I heard a number of people talking about the need to separate out retail and investment banking. I support that, although, just to be really clear, as I think I said at the beginning, I support that perhaps less radically than you are implying in that I do believe that single banks-any of the incumbents-could run separate balance sheets within their corporate structure for their retail and their investment banking, which would protect the risk without being as extreme as I think you are implying I am trying to be.

Mr Ruffley: Okay, thank you.