The “Big Four” – Barclays, RBS, HSBC and Lloyds – may be forced to part ways as a result of the competition regulator’s inquiry.
The competition watchdog asserts that Britain’s banking industry is no good for small businesses and consumers, and is characterised by anti-competitiveness.
The successor of the Office of Fair trading, the newly established Competition and Markets Authority (CMA), have outlined proposals for an 18 month investigation into Britain’s largest banks. This has given banks reason to be fearful as the predecessors of the CMA were unwilling to launch an inquiry of this nature at this time.
What are the Indicators of Lack of Competition in the Sector?
Lloyds Banking Group, Royal Bank of Scotland (RBS), HSBC and Barclays hold a dominant position in the UK’s banking sector, which is worth £10 billion per year.
All of these banks have been involved in some kind of scandal in recent years, however they still manage to overwhelmingly dominate the market, having collective control of:
- 77 percent of the UK population’s current accounts;
- 85 percent of UK small business’ current accounts;
- 90 percent of UK business loans.
The CMA published two studies which showed that essential elements of the UK’s retail banking sector were lacking on ‘effective competition’ and in this respect fail to meet the needs of consumers and SMEs.
The report shows that public satisfaction of the banks is less than 60% and yet they continue to maintain a substantial market share. This is in contrast to smaller banks with a higher level of customer satisfaction who are unable to increase their market share. This is a good indicator of lack of effective competitiveness in the market.
The CMA’s Chief executive, Alex Chisholm 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.”
Support for the Inquiry
The CMA’s inquiry plans have coincided with great political support for an inquiry into the industry. Labour leader Ed Milliband has made clear he will support a competition investigation if elected and Ed Balls has outlined the need for reform.
John Allan, National Chairman of the Federation of Small Businesses has warned about the effective monopoly held by the big four:
“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. 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.”
Change on its Way?
The British Bankers’ Association (BBA) has responded by saying that substantial changes are underway in the UK banking sector.
The BBA recently published various proposals designed to encourage and facilitate the growth of smaller, new and emerging UK banks. The association is hopeful that regulators, politicians and decision makers will be open to their suggestions. However, the CMA opted to pursue a full scale inquiry.
What are the Potential Outcomes?
In theory, the inquiry could potentially order a break-up of the Big Four, however this is unlikely as such comprehensive reform is very rare. The most likely outcome is that subsequent to the reform, the CMA will force banks to create new networks of branches and ensure greater levels of transparency with respect to their charges.
A leading researcher at Move Your Money campaign group, (MYM) on the topic of whether the inquiry will result in real change, said:
“The CMA is a new regulator being reformed from the OFT so the jury is out in terms of the CMA’s effectiveness. We know Britain’s largest banks have substantial lobbying power, and will spend the next 18 months trying to water down this inquiry and any subsequent recommendations. At MYM we consider financial reform too important to be left in the hands of politicians, and believe real change will come when people are empowered to move their money – voting with their feet to demand a financial system that serves people and the planet.Recent promises to reform bank culture and stop the fraud and mis-selling from the likes of Barclays’ Antony Jenkins have largely gone unfulfilled, and politicians and the public have lost patience.”
Conclusions
This will be the 10th analysis of the banking market since the examination by Don Cruikshank in 1999 of the market under Prime Minister Gordon Brown. It is anticipated that banks now “have much to fear” according to Financial Times former investment banking correspondent Chris Hughes. However, the real factor affecting the outcome will be the efficacy, comprehensiveness and independence of the CMA in carrying out the inquiry.
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