UK banks to face competition inquiry

The inquiry is expected to take 18 months, the CMA says

A competition inquiry that could result in a major shake-up of banks' current accounts and small business banking has been launched.

The probe, first proposed in July, has now been confirmed by the Competition and Markets Authority (CMA).

It will investigate the difficulties customers face in switching banks, the lack of smaller competitors to the "big four" banks, and lending to businesses.

Some large banks said the probe was unnecessary.

Theoretically, the inquiry could conclude that a break-up of the biggest banks is required, although such a move is unlikely.

Other potential outcomes could include a demand for more transparency over fees, such as overdraft charges, branch networks being split up, and proposals that could affect the future of "free" banking.

'Backward looking'

In a submission to the CMA, Barclays said it felt the review was "not appropriate at this time".

"Various developments, innovations and stimuli are changing the competitive landscape in in relation to both [personal current accounts] and [small and medium enterprises] banking, and these must be given time to mature," it added.

Lloyds Banking Group, which is still partly owned by the taxpayer, said that although it would work with the CMA, it did "not consider that such a reference is necessary", while HSBC, in its submission, said it was concerned that the CMA had previously "taken a backward looking view" of both current accounts and small business lending.

But the BBA, which represents the banking sector, said the industry would "co-operate fully with any investigation".

"Banks are pro-competition - they compete for business every day," said BBA chief executive Anthony Browne.

Business group the British Chambers of Commerce said it welcomed the review.

"For many years Britain's dysfunctional banking sector has struggled to meet the needs of [small and medium enterprises], impeding the growth prospects of some of our most promising young companies."

Some of the smaller players have also called for the inquiry to highlight the dominance of the big four banking groups - Lloyds, RBS, Barclays and HSBC.

"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," said Craig Donaldson, chief executive of Metro bank.

Analysis: Kamal Ahmed, BBC business editor

When the Competition and Markets Authority talks about lack of "transparency" in banking, they are highlighting one of the key anomalies of the banking market - that current accounts are ostensibly free.

A "free" upfront product raises all sorts of tensions in any market as commercial operators have to make their profits elsewhere. This is often in hidden charges and - in the case of banking - what is called forgone interest (that is interest not paid on deposits).

I am sure the issue of "free in-credit banking" will be part of this review. If customers paid up front for accounts would they demand a better service? Would they be more likely to switch if they were not satisfied with their bank? If customers are charged for bank accounts, what does that mean for people on lower incomes, would they be priced out of full service banking?

These are difficult issues, and ones which the CMA will be looking to answer.

Concerns

The image of the bank branch has changed over the decades

After carrying out a consultation with members of the public, banks and other industry bodies, the CMA outlined four main concerns about banking services in the UK:

• Few customers switching banks or shopping around for the best rate

• Lack of transparency and difficulties in comparing services from different banks

• The barriers faced by smaller banks trying to enter the market

• The continued dominance of the "big four" banks which control 77% of the current account market and 85% of business current accounts

The submissions to CMA included views from bank customers. One suggests that the "switching task appears more massive and expensive than it probably is".

The latest figures show that since a new, quicker switching system was introduced a year ago, 1.2 million current accounts have been switched.

Current account holders can now move their bank account to another provider within seven working days instead of up to 30 days under the previous regime.

There are 65 million active personal current accounts in the UK, and 4.5 million current accounts used by small and medium sized businesses.

The BBA suggested that branches were no longer the barrier to growth for challengers that they once were.

There are still millions of transactions in branches, but many banks are competing with other banks and internet giants over digital banking via tablets and smartphones.

The competition inquiry will take 18 months to complete. The CMA also said it would review the 2002 report by its predecessor, the Competition Commission, to see if its findings were still relevant.