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LONDON (Alliance News) - The UK's competition watchdog on Thursday ruled out any major structural reform of the UK retail banking market, and said there should be no end to free if-in-credit banking, leaving the larger banks relieved and their smaller competitors disappointed that the regulatory proposals did not go further.
The provisional findings of the investigation, which examined the supply of personal current accounts and of banking services to small and medium-sized enterprises, had been highly anticipated after the probe was confirmed by the Competition and Markets Authority in November 2014.
The four largest UK banks - Barclays, HSBC, Lloyds, and Royal Bank of Scotland - in 2014 held more than 70% of personal current accounts and between 80% and 85% of business current accounts.
Big structural changes, such as forcing the break-up of large retail banks, have been provisionally rejected, according to the CMA, which said that it was decided that such a radical step would be unlikely to address the competition concerns it has raised.
The traditional lenders on the high street have seen new challenges arise in the form of new lenders, such as Virgin Money, while Lloyds was forced to carve out and establish TSB Banking Group as a new presence on the high street as a condition of receiving state aid during the credit crisis of 2008-09.
Similarly, RBS, which received a GBP45 billion bailout, is preparing to launch the Williams & Glyn brand on the high street in 2016 ahead of an initial public offering set for the fourth quarter of that year. Meanwhile, a variety of specialist lenders and online-only banks are hoping to gain traction in some segments of the UK market.
"Overall, today's findings will probably be seen positively by the larger banks as the CMA have not found evidence of excessive profits, have steered clear of proposing an end to free banking and have not suggested further divestments. The challenger banks may, however, be disappointed that the proposed remedies do not go further," Simon Hunt, UK banking and capital markets leader at audit firm PwC, said.
The CMA said there was "no convincing evidence" that free if-in-credit accounts distort competition.
"The lack of focus by the CMA on free, if in credit, current accounts could be a missed opportunity to really shake up a model which is arguably unsustainable and stifles competition through its lack of transparency," PwC's Hunt said.
In parallel, the CMA said that creating new, smaller banks would be unlikely to to resolve its competition concerns. The competition watchdog said that the "underlying issue" of a lack of switching between account providers that must be addressed.
"We don't think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control," Alasdair Smith, chairman of the retail banking investigation, said in a statement.
Under the CMA's list of potential remedies, banks could be required to prompt customers to review their service and to raise public awareness of switching.
In addition, the CMA wants it to be easier for people and businesses to compare bank products, including the establishment of a new price comparison website for SMEs. Credit reference agencies, banks and financial advisors are set to be told to embark on "better sharing of information" to make it easier for SMEs to shop around for loans.
The CMA said that low levels of customer switching mean that banks don't face enough competitive pressure in the GBP16 billion current account and business banking sectors. It said also that new products and new banks do not attract customers quickly enough.
The CMA said that people who use an overdraft to borrow from a bank are even less likely to switch from their personal current account provider. "Heavy overdraft users, in particular, could save up to GBP260 a year if they switched. On average, current account users could save GBP70 a year by switching," the CMA said.
One particular issue raised by the CMA is that many SMEs open their business current accounts at the same bank where they hold their personal current accounts, which causes them to stay with the same lender for their business loans. More than 50% of start-up companies looking for a SME account choose the bank where their owners hold their personal current accounts.
OakNorth, a new bank founded by entrepreneurs Rishi Khosla and Joel Perlman, aims to grow in the market for lending to small and medium sized companies. Khosla, the bank's chief executive, said the CMA's proposed remedies will "not foster greater competition and innovation" to deliver better banking for small businesses.
"There needs to be real and tangible change, not just a PR campaign, to ensure small businesses are aware of their options and to encourage people to shop around, because the habit of borrowing from your day-to-day business bank is deep-seated, stubborn and the major banks enjoy significant advantages that stifle competition," Khosla said.
"The main restriction in supply is in tailored loans, which involve detailed consideration of the customer's business. These cannot be accurately reflected in a price comparison website, as there are too many variables and attempts to do so could actually distort the market towards generic, one-size fits all lending that we want to avoid and re-inforce the tendency among major banks to only lend to small companies if property can be offered as collateral," Khosla said.
According to the case website for the retail banking investigation, the final report is to be published in April 2016.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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