Major banks face competition probe
A full-blown competition investigation is to take place into the dominance the major banks have over personal and business accounts, the Competition and Markets Authority has announced.
The CMA said there has been "very little movement" in the market shares of the four largest banks, which are Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland (RBS).
The levels of customers shopping around and switching current accounts are "low" amid limited transparency in the sector, it said.
Previous studies by the CMA have found that essential parts of the retail banking sector "lack effective competition and do not meet the needs of personal consumers or SMEs (small and medium-sized enterprises)".
The current account market generates revenues of more than £8 billion, while the CMA's investigation into SME banking will include more than £2 billion of business current account market and business loans.
Some 65 million active personal current accounts exist in the UK, while there are more than 3.5 million business current accounts.
The big four banks collectively supply more than three-quarters (77%) of the personal current account market in the UK, and the CMA has previously found that despite moves to make it easier to switch banks, the number of people who do so remains low.
The big four also account for more than 85% of business current accounts and 90% of business loans. The CMA has said that SME switching levels remain low, with just 4% changing their bank every year.
The CMA said it is concerned about continuing barriers of entry and expansion in the sector, which limit the ability of smaller and newer providers to develop their businesses.
The investigation will be conducted by a market reference group, drawn from the CMA's panel of independent members.
The group will be appointed shortly and will publish a timetable for the investigation. Investigations of this kind can take up to 18 months.
The CMA also intends to look again at agreements put in place following a report by its predecessor, the Competition Commission, in 2002 into SME banking.
The agreements were intended to help SMEs shop around by stopping them from feeling forced to take bundles of financial products together. The CMA will examine whether there has been any change of circumstances which means the agreements should be changed.
The CMA's announcement was welcomed by the business sector.
John Longworth, director general of the British Chambers of Commerce, said: "For many years Britain's dysfunctional banking sector has struggled to meet the needs of SMEs, impeding the growth prospects of some of our most promising young companies."
John Allan, national chairman of the Federation of Small Businesses (FSB), said the CMA is "right to put business banking under the microscope".
He said: "The market has a number of unwelcome features. It remains worryingly concentrated.
"There are a range of structural issues that have long been identified that potentially restrict competition and choice for small firms seeking much-needed finance and other banking services."
Business Secretary Vince Cable said: "Britain needs a more competitive and effective banking market that works for the real economy. One that gives consumers more choice, encourages genuine innovation and works for small and medium-sized businesses.
"This is a well-documented problem, which is why I set up the Business Bank two years ago to increase the supply of finance and support alternatives to the big high street banks.
"But the problem remains that the market is still dominated by the big banks, and that's why this morning's announcement is so important, because this investigation will now look at how to address this."
Before today's announcement, the CMA had invited banks to put forward their own suggestions to tackle its concerns about the SME banking sector.
These alternative proposals would have involved banks giving undertakings to set up a comparison website to improve transparency as well as establishing new standards around account opening. But the CMA said in July that while it remained open-minded about the suggestions, it was minded to conduct a full investigation rather than just accept these proposals.
An initiative to make it easier for people to ditch their old bank and switch to a new one was launched by the Payments Council in September last year.
The service has cut the length of time it takes to switch from up to 30 working days to just seven. Outgoing and incoming payments are automatically transferred over to the new account and the customer is guaranteed not to be left out of pocket if something goes wrong.
Figures released by the Payments Council have shown that more than 1.2 million current account-holders swapped to a new provider in the first year of the switching initiative, a 22% increase on the same period a year earlier.
However, consumer group Which? said that according to the City regulator's figures, current accounts were the most complained about product in the first six months of this year after payment protection insurance (PPI).
The Financial Conduct Authority (FCA) received 319,505 complaints about current accounts in the first six months of this year, more than 11% higher than the same period last year.
Richard Lloyd, executive director of Which?, said: "It's now crunch time for the biggest banks that dominate a market blighted by a lack of trust and poor customer service.
"We want the Competition and Markets Authority to expose the cost to consumers of a lack of competition in the current account market and to pave the way for reform.
"In the meantime the banks should seize the opportunity to demonstrate that they can put their customers' interests back at the heart of their business, whatever the outcome of this inquiry."
The British Bankers' Association (BBA) pointed out that advances in technology and the greater use of the internet are helping to shake up banking, with the number of branches that a bank physically has on the high street being less significant than previously in terms of how many customers it is able to attract.
It said that while branches can still play an essential role, they are not the barrier to growth that they once were.
The BBA pointed to newer players such as M&S Bank and Tesco Bank as evidence of the changing face of banking.
BBA chief executive Anthony Browne said: "All the banks will co-operate fully with any investigation. There are already substantial changes currently under way across the banking industry to strengthen competition, which improves choice and service for customers.
"Banks are pro-competition - they compete for business every day."
Smaller players welcomed the prospect of the stranglehold of the major banks being challenged.
Paul Pester, chief executive of TSB Bank, said: " The big four banks have had a stranglehold on the market for far too long.
"TSB believes the CMA investigation should focus on achieving greater transparency in banking, along with more choice and competition, so consumers get a better deal."
Craig Donaldson, chief executive of Metro Bank, said: "Competition in the UK banking sector is heavily distorted. No market where such a small number of players hold such a large percentage of the market share should be described as efficient or competitive.
"We need a level playing field in banking, where all banks can compete in a transparent and innovative market. Without a level playing field, innovation and competition are stifled, and consumer choice will continue to be limited."
Martin Lewis, creator of MoneySavingExpert.com, said the people who shoulder the real costs are those who are overdrawn, adding that at least two million people in the UK pay more than £400 a year for their banking.
He said: "The biggest problem for the CMA is many in the industry believe we should end the 'fees free in credit' banking and charge realistic fees to end the cross-subsidy from the poorest who are overdrawn to the richest who aren't.
"This would make a more transparent market, something many policy-makers favour - yet they'd be brave to do it, as it is incredibly unpopular with the public."
Some of the "hassle factor" could be taken out of switching bank accounts by allowing people to take their old account number with them when they move banks, Mr Lewis suggested.
The FCA is looking into whether more people could be tempted to switch if they could carry their existing number over to a new account, as well as the likely cost this would involve.
Shadow chancellor Ed Balls said: "Ed Miliband and I have repeatedly called for an inquiry into bank competition, so we welcome this announcement from the CMA.
"Ministers claim there is no problem to solve, but everyone else recognises that we have a lack of competition in our banking sector.
"As we said earlier this year, in the next parliament we need to see at least two new challenger banks and a market share test to ensure the market stays competitive for the long term, which is why we now welcome this independent CMA inquiry."