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Banking sector faces wide-ranging review by finance watchdog Banking sector faces wide-ranging review by finance watchdog
(about 9 hours later)
Britain's big four high street banks could be forced to break themselves up after the competition watchdog signalled its intention to launch a sweeping investigation into the £10bn-a-year sector. Britain's big four high street banks could be forced to break up after the competition watchdog signalled its intention to launch a sweeping investigation into the UK's £10bn-a-year banking business.
Setting out its proposals for an 18-month investigation into the major banks, the new Competition and Markets Authority has gone further than its precedessors, which said they would wait until 2015 before considering such a move. Setting out its proposals for an 18-month inquiry, the new Competition and Markets Authority has gone further than its predecessors, who said they would wait until 2015 before considering such a move.
The big four – the two bailed-out banks Lloyds Banking Group and Royal Bank of Scotland, along with HSBC and Barclays, control 77% of current accounts and 85% of small business (SME) current accounts The big four – the two bailed-out banks Lloyds Banking Group and Royal Bank of Scotland, along with HSBC and Barclays – control 77% of current accounts and 85% of small business accounts. These market shares are little changed despite 10 investigations in the last 15 years.
The CMA, launched in April to replace other competition watchdogs, has launched a consultation until mid-September on its provisional conclusion that both small business customers and personal current account customers do not have good service from their banks. The CMA, created in April to replace other competition watchdogs, will consult until mid-September on its provisional conclusion that both small business and personal current account customers get a poor service from their banks and cannot tell the difference between products provided by the main players.
"Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy. However, our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks," said Alex Chisholm, chief executive of the CMA. The watchdog will be looking at the impact of free in-credit banking, which could be cross-subsidising the industry, as some banks insist that running current accounts loses them money. The banks generate £8bn a year in revenue from current accounts and £2bn from small business accounts, and there are fears that the investigation will conclude with new charges for accounts.
The investigation comes at a time when political scrutiny of the banking sector is intensifying. Ed Miliband had pledged to launch a competition investigation if elected next May. The shadow chancellor, Ed Balls, said on Friday: "As we said earlier this year, in the next parliament we need to see at least two new challenger banks and a market-share test to ensure the market stays competitive for the long term." Alex Chisholm, chief executive of the CMA, said: "Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy. However, our studies have found that, despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks." Chisholm has been called before the Treasury select committee on Monday to discuss the inquiry.
The coalition has embarked on a series of attempts to bolster competition, including making it easier for new banks to be set up. Bank shares slipped back on a stock market more concerned by wider geopolitical concerns.
The new investigation – if it is formally launched when the consultation ends on 17 September – will run beyond the next general election. It comes as the government plans to ask the public to buy shares in Lloyds, in which the taxpayer still has a 24% stake. It is not clear what impact this may have on the sale of shares in Lloyds, or RBS, in which the government owns an 80% stake. The investigation comes at a time when political scrutiny of the sector is intensifying. The inquiry will run beyond the May 2015 election. Ed Miliband had pledged to launch a competition investigation and shadow chancellor Ed Balls said: "In the next parliament we need to see at least two new challenger banks and a market-share test to ensure the market stays competitive for the long term."
The banks have been aware of the threat of a competition investigation since the 2011 report by Sir John Vickers and have attempted to head off a full-blown investigation by the CMA. The CMA could adopt structural remedies, such as forcing banks to carve new banks out of their existing branch networks, or it could recommend behavioural remedies – forcing them to become more transparent with charges or to send text alerts to customers as they go overdrawn.
The watchdog has rejected these ideas, which include: As it is, Lloyds and RBS are already being forced to reshape their branch networks as a result of the state-aid terms imposed by the EU during their bailouts. Lloyds has created a new TSB bank on the high street, which is the process of being floated on the stock market, while RBS must break out 314 branches as a new bank aimed at small business customers.
• setting up a comparison website to improve transparency The two state-owned banks have the largest market shares, partly because the banking crisis led to a wave of takeovers with names such as Alliance & Leicester and Bradford & Bingley disappearing from the high street and "challenger bank" HBOS being rescued by Lloyds.
• establishing new account opening standards to make it easier for SMEs switching banks to open accounts Chisholm said structural remedies were costly – creating TSB has cost £1.3bn – but should nevertheless be considered.
• making it easier to compare bank accounts and switching. David Mann, Head of Money at uSwitch.com, welcomed the proposed inquiry. He said: "This is potentially great news for anyone who has a bank account. The CMA has the clout to fix the broken banking industry once and for all, and lay the foundations for a competitive market that works for, rather than against, customers.
Chisholm said the two-month consultation launched on Friday would be an opportunity for these so-called remedies to be considered. Stephen Ibbotson of the Institute of Chartered Accountants England and Wales also welcomed a full investigation: "It is right that the CMA is conducting a full-scale investigation into the business lending sector," he said. "If the economic recovery is to be sustainable, fast-growing firms need access to finance to push them to the next level and enable them to expand further." But he warned: "It is crucial that this inquiry does not over-complicate the market."
The CMA found that customer satisfication levels for the big four banks is 60%, but despite this there is very little shopping around by customers. A new switching service launched by the industry in September had not made much of a difference. The coalition has already embarked on a series of attempts to bolster competition, including making it easier for new banks to be set up. And the banks had hoped a new seven-day switching service for current counts would stall any competition investigation.
"We note, in particular, that the larger banks, with relatively lower satisfaction levels, have not significantly lost market share, while banks with higher satisfaction levels have not been able to gain significant market share, which is not what one would normally expect to find in well functioning, competitive markets," the CMA said. A Treasury spokesman said the government supported an inquiry even though it comes as George Osborne prepares to ask the public to buy shares in Lloyds, where the taxpayer still has a 24% stake. It is not clear what impact this might have on the sale of Lloyds, or of RBS, in which the government owns an 80% stake.
The watchdog signalled that it would looking at free in-credit banking, which could be cross-subsidising the industry as some banks have insisted that current accounts are lossmaking. The banks generate £8bn a year in revenue from current accounts but there have been fears that they will start to charge for all accounts. The industry has been aware of the threat of a competition investigation since the 2011 report by Sir John Vickers, and last month attempted to head off a full-blown investigation by proposing a number of "remedies" to the CMA.
This is the 10th analysis of the market since Don Cruickshank was commissioned to look at the industry by Gordon Brown, when he was chancellor in 1999. John Allan, national chairman of the Federation of Small Businesses, said: "Since Cruickshank's report, a few very large banks have dominated the market for small business accounts, which suggests that competition has remained limited. In addition, there continue to be a range of barriers to entry that either potentially deter entry to the market or block new entrants' growth. The watchdog has rejected these ideas, which include: setting up a comparison website, establishing new account opening standards and making it easier to compare accounts.
"This means small firms have not seen the full benefits of reduced costs, increased choice and better access to finance had these structural issues not been in place". Chisholm said the two-month consultation would be an opportunity for these proposals to be reconsidered. But few expect the industry to be successful in seeing off a full-blown investigation after the CMA found that customer satisfaction levels for the big four banks is 60%. Even after a new switching service were launched, only 3% of personal account customers and 4% of small business customers switch every year.
The CMA said it could adopt structural remedies such as forcing banks to carve out new branch networks or force them to become more transparent with charges, and send text alerts to customers as they go overdrawn.
Lloyds and RBS are already being forced to reshape their branch networks as a result of the state-aid terms imposed by the EU during their bailouts. Lloyds is floating TSB on the stock market while RBS must break out 314 branches aimed at small business customers.
The CMA said that new entrants into the current account market such as Tesco and Metro had taken a 5% market share but that 4.2% of this was TSB. Metro was the only noticable new entrant into small business banking.