Out-Law News 2 min. read

Treasury Committee: 'structural reform' of UK banking sector may be needed to improve competition


The UK's Competition and Markets Authority (CMA) must include "detailed examination" of whether breaking up some of the country's biggest banks is needed to improve competition as part of its ongoing market investigation, according to an influential committee of MPs.

Reporting on 'conduct and competition' between lenders to small businesses (124-page / 1.3MB PDF), the Treasury Select Committee (TSC) said that a number of previous market reviews and government interventions had not "resulted in a transformational improvement" in competition. The CMA announced that it would investigate small business and consumer banking competition in November 2014.

"Millions of consumers and small businesses have been getting a poor deal for decades because of a lack of effective competition and genuine choice in banking. This problem is particularly acute in the SME banking market," said TSC chair Andrew Tyrie.

"The government and regulators have both been trying to improve competition, not least by implementing the recommendations of the Treasury Committee, the Vickers Commission and the Parliamentary Commission on Banking Standards. Nonetheless, greater competition remains crucial to raising standards across banking," he said.

Most of the previous banking competition studies and recommendations for remedy had "ended up in the long grass" and it was "crucial that the CMA's work [did] not suffer the same fate", he said.

However, banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said that there was little scope for further reform of the banking sector following recent regulatory changes.

"Given the plethora of new regulation that banks now have to digest including the ring-fencing provisions of the Banking Reform legislation, and the introduction of the Payment Systems Regulator with objectives including increased competition and innovation, I am not sure what additional 'structural reforms' could be introduced to banking," he said.

"We are seeing a number of new 'challenger' banks appearing in the high street and, increasingly, technology companies now offering retail banking services. Further structural reform of the banking sector on top of what is in the pipeline is a current popular sound bite, but is more likely to lead to economic uncertainty rather than enhanced choices on the high street," he said.

The CMA announced in November 2014 that it would proceed with an in-depth inquiry into whether there is effective competition amongst banks that offer personal current accounts and retail banking services to small businesses. The UK's main competition watchdog is concerned about the low numbers of customers shopping around and switching providers; how difficult it is for customers to compare products; barriers to market entry and expansion for smaller and newer providers; and the fact that there has been little change over time in the market shares held by the four largest banks.

From 1 January 2019, the UK's biggest banks will be required to formally separate their deposit-taking activities from their riskier investment banking activities, as recommended by the Independent Commission on Banking chaired by Sir John Vickers in 2011. Affected banks will have to 'ring-fence' their core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities "associated with trading and financial interconnectedness" of the wider banking group.

According to the TSC, many of the market problems identified by these groups continue to exist in the UK SME banking sector, which remains dominated by four major banking groups holding a combined 85% share of the market in England and Wales. These large firms also have the lowest satisfaction scores. Although new 'challenger' banks and the growth of peer to peer and other 'alternative' forms of lending had the scope to increase competition in the future, there was currently "little evidence to suggest that new entrants ... and existing measures to improve competition will deliver the transformation in competition that the industry needs".

"The CMA has concluded that concentration in banking is part of the problem," the TSC said in its report. "It must now also decide whether reducing concentration would help to address it."

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