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Break-up threat for banking sector

THE banking sector faces being broken up unless it shows a “step change” in competition, the head of the Office of Fair Trading has warned.

THE banking sector faces being broken up unless it shows a “step change” in competition, the head of the Office of Fair Trading has warned.

In a speech to bankers, John Fingleton said banks must provide the “right prompts” to help customers decide whether or not they should switch account provider.

The issue of bank account switching was flagged last year by the Independent Commission on Banking, which made several recommendations designed to make switching accounts more easy for customers.

Fingleton said: “It is not enough to make it easy to switch. Customers also need the right prompts to exercise their choice of provider.

“In banking markets consumers frequently face difficulties in understanding the true cost of running their account and comparing deals from alternative providers.”

He said the sector was at a “turning point” with the emergence of new banks such as Metro Bank, Tesco and Virgin Money, which last year bought Newcastle-based Northern Rock whose collapse in 2007 sparked the crisis. And he added that a “radical” approach would have to be taken if they did not change.

The OFT chief executive said he was prepared to hand the sector over to the Competition Commission and warned the industry could face the same outcome as airports operator BAA – a forced break-up.

Fingleton said: “A step change is needed in the banking sector. Going forward we need to see evidence which demonstrates that the market dynamics of entry and switching are sufficient to drive stronger customer-focused competition.

“Without this the obvious question is whether the concentrated market structure of UK banking is the problem. And one way to consider this question is a reference to the Competition Commission.”

Fingleton said the lack of competition had made it harder for those banks who do offer better deals to increase their market share.

The ICB last year recommended that people and businesses wanting to change banks should be able to switch accounts within seven days.

Problems with changing a bank account were one of the long-standing competition issues in UK retail banking, the ICB said, with the largest four UK banks having 77% of personal accounts and 85% of small business accounts.

Meanwhile the UK’s biggest banks suffered stock market falls after an influential credit ratings agency threatened more than 100 lenders with downgrades.

Barclays, Royal Bank of Scotland and HSBC were among 122 financial institutions to have their ratings placed under review by Moody’s, which cited difficult market conditions and the ongoing threat from the eurozone debt crisis.

Moody’s downgraded several European countries earlier this week and said the outlook for the UK’s gold-plated status had turned negative, which would have a knock-on effect on banks. It said increased regulatory burdens, with banks being required to store more cash to protect against future financial crises, had diminished their growth prospects.

 

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