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No big bang

22 October 2015 By Dominic Elliott

Big banks 1, good sense nil. The British investigation into banking competition that concluded on Oct. 22 after 18 months has let large lenders off the hook, and done little for their smaller rivals. The UK’s Competition and Markets Authority decided against breaking up the country’s four dominant players – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland. Nor did the watchdog have the pluck to ban “free” current accounts, which would have boosted transparency.

The CMA’s main conclusion is that UK banking isn’t too concentrated. But it would like banks to make it easier for customers to compare products, which it thinks could prompt them to switch providers more often. Its proposals may have some effect in the small-business market, where data collection is poor and the regulator reckons the big four have an 85 percent market share of current accounts. It’s unlikely to move the needle much in retail banking, where an industry-wide price comparison website already exists. Despite the launch of half a dozen new banks in the last few years, the largest lenders still have 77 percent of the market.

Ending free banking for individuals in the black would have been a fairer and simpler fix. At present, customers that pay charges for overdrafts effectively subsidise everyone else. That’s regressive given the system tends to penalise the poorest or those with uncertain income streams. At Barclays, for instance, only 9 percent of retail customers use overdrafts, says a person familiar with its business. It also means that there’s obfuscation about what services actually cost.

Trouble is, free banking is addictive, and the withdrawal from removing it could be politically toxic. It’s also possible that the biggest lenders would still be impregnable, even if it were scrapped. Previous reviews of UK banking have found that even dissatisfied customers rarely change accounts. That inertia is born of a hatred of the requisite administration and insufficient financial incentives. Perhaps it will take new technology to eventually shake things up.

The sum total of the CMA’s recommendations should make banking less opaque. Smaller banks won’t find it much easier to grow, though, especially when a new 8 percent tax on profits above 25 million pounds takes effect. As for bank account holders themselves, they will, as ever, find themselves hard pressed to care either way.

 

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