6 November 2014

Barclays and HSBC say no thanks to competition inquiry

James Daley

By James Daley LinkedIn

The Competition & Markets Authority has confirmed it will launch an investigation into the UK banking sector. The negative responses from some banks are perhaps the clearest indication that reform is needed.

Today's confirmation that there will be yet another enquiry into the banking sector is both good and bad news. On the positive side, there is mountains of evidence to show that competition simply hasn't been working in our banking system for years - and a new enquiry will hopefully be the catalyst for that change.

On the downside, however, this will be the seventh major enquiry into the banking sector in 14 years - and is set to drag on for as long as 18 more months. The final report is not due until May 2016, and by the time any proposed remedies are introduced, we will be getting on for two decades of prevarication around how to fix the problems in our banking system. As I wrote a few months ago, when the Competition & Markets Authority began its consultation on whether it needed a full market investigation, there are a number of quick fixes that could be put into action today. The problems in the banking sector have been analysed to death - what's needed now is decisive policymaking, not yet another enquiry at considerable cost to the taxpayer.

A negative response

Nevertheless, if a CMA enquiry is what it takes to get some significant change, then of course I'm all for it. What's disappointing after reading today's report from the CMA is that it's clear that several of Britain's largest banks have spent the last three months arguing as hard as they can that no further inquiries are necessary, because change is already underway.

It's not hard to see why the CMA has only hardened in its view in light of such comments. While change has been taking place, it's been too little, too slow. Less than 2% of people switch their current account each year, compared to around 9% of phone users. There's still no simple, standardised way to compare overdraft charges and other fees for prospective banking customers. And new banks are still thin on the ground - in part due to the fact that it's so difficult to pick up market share in a sector where so many people are hesitant to switch.

Arguing black is white

Some banks' submissions to the CMA try to use the evidence to argue precisely the opposite. HSBC points to the entrance of Metrobank, Tesco and the planned launches by Virgin Money and Atom as clear signs that competition is alive and well. But these banks continue to represent a fraction of the market - and even as switching levels have increased from a very low base, it has been Halifax and Santander, two of the largest banks who have been the biggest winners. Metrobank is still losing millions of pounds a year - and is fortunate to have owners with such deep pockets. Tesco spent almost five years prevaricating about whether it wanted to launch a current account - and now that it has, it's talking about selling off its financial services arm.  Meanwhile, the big four banks continue to control 77% of the current account market.

Barclays has the chutzpah to suggest that low levels of switching are due to the fact that most people are happy - not because there's any problem with ease of switching or lack of competition. 

Thankfully, the two banks with significant government stakes - Lloyds & RBS - took a much more pragmatic approach to their responses. While both express some scepticism about the need for an inquiry, they do at least acknowledge the need for further change, and make some practical suggestions about how the CMA should focus its efforts if the enquiry goes ahead.

Crystal-ball gazing

Given the number of enquiries we've had over the past few years, it's not hard to guess some of the remedies that the CMA may come up with. What I'd like to see is some further pressure on the big four to break up their monopoly - selling more branches and making way for more new entrants in the market. I'd like to see a timetable for the introduction of portable account numbers - so that people keep the same account number throughout their life and can switch in a matter of hours, safe in the knowledge that their direct debits and standing orders won't go astray.

I'd also like to see some standardisation around how bank charges are displayed - to make it easier for customers to compare.

Much of this could be done without another 18 month equiry. But let's hope that these at least end up on the table when the CMA finally reaches its conclusions.