Competition watchdogs could order the break-up of the UK’s ‘big four’ banks after revealing plans for a full-scale inquiry into a lending market which fails to meet the needs of business or the general public.
Regulators at the Competition and Markets Authority found measures to open up a market dominated by Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland had not been effective enough and still restricted the emergence of rivals.
It said the lack of competition failed to meet the needs of personal customers or the hundreds of thousands of small and medium-sized businesses which form the life-blood of the UK economy.
The CMA formally announced a consultation over its provisional decision to launch an inquiry which is expected to last at least 18 months and could result in a series of reforms designed to tackle serious and long-standing problems.
It said it would not rule out expensive enforced splits of existing banking groups, but remedies at its disposal also include banning complex fees, capping overdraft charges and forcing banks to allow smaller rivals to use their branch networks or payment systems.
“Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy,” said CMA chief executive Alex Chisholm.
“However, our studies have found that, despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.”
The announcement was welcomed by UK Business Secretary Vince Cable, who warned that constraints on competition in banking meant less choice for consumers and fewer finance options for firms seeking to expand.
“This is an issue that really matters for the real economy,” he said.
The action follows collaborative studies into the £8 billion personal current account market and the £2bn SME current account and lending sector alongside City watchdog the Financial Conduct Authority (FCA).
The largest four banks account for 77% of personal current accounts, the research found, alongside 85% of business current accounts and 90% of business loans in the UK.
But annual switching rates remain low, with only 3% of personal customers and 4% of business switching each year despite satisfaction levels of less than 60%.
So much business concentrated in the hands of the few make it harder for new challenger banks, the CMA added.
Colin Borland, head of external affairs for the Federation of Small Businesses’ in Scotland, said the body had campaigned on the issue for some time.
“For years, the FSB in Scotland has warned that too much of the Scottish small business market is dominated by too few players,” he said.
“We hope that this study will look at ways to lower the barriers for new entrants in the marketplace, especially in Scotland.
“The FSB in Scotland wants to see more players fighting for the small business community’s custom banks who offer genuinely different products and for these institutions to make our members feel like valued customers.”
British Chambers of Commerce director-general John Longworth and CBI deputy director-general Katja Hall said firms wanted more choice and transparency in the sector.
“There are already many measures under way to boost competition in banking, including seven-day switching and a simpler registration process for new entrants,” Ms Hall said, urging better promotion of alternative finance like peer-to-peer lending and private placements.
“The new credit data sharing initiative currently under discussion will also help.
“So an investigation would take place against a moving backdrop, but it will provide an opportunity to address the question of competition once and for all,” she added.