Barclays Share News (BARC)

(ShareCast News) - Consumers and small businesses are still suffering from a lack of competition in the UK banking sector, competition authorities said in a report on Thursday that called for banks to retain free bank accounts and making proposals to force banks to help customers to shop around for better deals.An interim report on the state of competition in retail banking from the Competition and Markets Authority (CMA) found that insufficient competitive pressure in the sector from the fact that hardly any retail banking customers and small-business customers were switching their bank accounts despite the potential benefits.But the CMA has provisionally decided not to recommend the end of free bank accounts, nor to call for the break-up of banks, as the underlying lack of account switching was unlikely to be resolved.Some analysts said the report was good news for the large incumbent banks as the proposed remedies are relatively 'light touch' but could also be welcomed by challenger banks.The watchdog found that while the average current account user could save £70 a year by switching, only 3% of customers switched their personal current account (PCA) in 2014 and just 16% looked at alternative accounts."Low levels of customer switching mean that banks are not put under enough competitive pressure, and new products and new banks do not attract customers quickly enough," the CMA said.It highlighted a particular problem in SME banking where many SMEs open their business current accounts at the same bank where they have their PCA, then stick with that bank for their business loans, with 57% of consumers sticking with their PCA provider for more than 10 years, and 37% for more than 20 years, despite the setting up of the Current Account Switch Service (CASS) to make the process easier.As a result, the CMA recommended potential remedies that included forcing banks that raise charges or cut interest rates to notify customers that they could shop around for a better deal.Another proposal was the creation of a new price comparison website for SMEs, as there is currently "nothing effective" in the market that fulfils this role.Banks may also be required to help pay for the raising of public awareness of, and confidence in, switching bank accounts, as well as forcing them to share more information with credit reference agencies, other banks and financial advisers to make it easier for SMEs to shop around for loans and cutting out the need for multiple application form filling.The CMA's final report is due in April 2016.ResponsesThe report is good news for the large incumbent banks, said broker Shore Capital."Overall, we think that the CMA's provisional findings will come as light relief to the large incumbent banks, and particularly Lloyds Banking Group and Royal Bank of Scotland, with the proposed remedies being relatively 'light touch' in our view, while the mainstream challenger banks will no doubt welcome the proposals but will probably stop short of claiming an outright victory," said analyst Gary Greenwood."Ultimately, therefore, we do not anticipate that these proposals will lead to a major shift in market shares in the UK PCA and SME banking markets, albeit at the margin it is probably helpful to the challengers."Ratings agency Standard & Poor's was fairly dismissive of the effect of this and other regulatory reviews in the country and said the investigation will not affect its counterparty credit ratings on UK banks."While we will continue to monitor the authority's extensive publications and assess the ratings impact, we remain skeptical that the final outcome will lead to material market changes. Numerous similar reviews have occurred periodically in the UK over several decades, which, while well intentioned, have not fundamentally altered the competitive landscape."Small businesses will not take much succour from this report either, according to the manufacturers' trade body, the EEF. George Nikolaidis, a senior economist there, said there were some steps in the right direction but more needed to be done. "Competition issues in the UK's retail banking sector are still widespread and continue to hit businesses hard - especially SMEs - by restricting their access to finance."He pointed out that the CMA was focusing its remedies on comparison and switching, which have had negligible impact in other failing markets, such as energy."These remedies are unlikely to be the magic bullet that will solve the underlying competition issues in the financial sector," he said.