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April 3rd, 2011

The influential House of Commons Treasury Committee has published a report this week that declares retail banking in the UK is not competitive enough with significant barriers for both individual customers and small businesses.

In coming to this conclusion, which many people will no doubt think a statement of the obvious, the cross-party group of MPs said there was a lack of price transparency between current accounts at different banks and it was too difficult for customers to move their accounts from one bank to another.

The MPs spoke to a range of interested parties, including top industry figures such as former Lloyds chief executive Eric Daniels, Barclays boss Bob Diamond and Royal Bank of Scotland head Stephen Hester. They also heard from smaller providers and new entrants, along with regulators and experts.

The CEOs (chief executive officers) of the large incumbents told the committee UK retail banking was enormously competitive, but a far larger range of witnesses described the industry as close to an oligopoly.

The report means that the mega banks may have already lost what they would see as the most important part of the argument about their future. This is because the MPs said they were pleased that the Independent Commission on Banking may propose that banks put strong firewalls between their retail and investment banking operations.

This would allow one part of a large bank to fail without needing to be bailed out by the state. However, this is the last thing the banks themselves want to do, because they think it will put them at a massive disadvantage compared with their overseas rivals.

Importantly, the committee also concluded that “so-called free banking is not free”. Consumers with positive balances paid through the opportunity costs of the increased return they could have earned by placing current account deposits into higher interest savings accounts.

Perhaps most importantly for the politicians, the report found that customers on lower incomes paid proportionately more in overdraft fees, meaning they often ended up subsidising higher-earning customers. These banking policies could therefore be seen as being regressive.

The committee noted that the importance of the local branch to UK customers meant that any bank without an extensive network of branches was at competitive disadvantage. Last year, Metro Bank became the first new UK bank with High Street branches in over 100 years.

The Treasury committee finally called on the government to make competition a primary objective of the new regulatory body, the Financial Conduct Authority.

Consumer Focus, the consumer affairs pressure group, responded to the report by pointing out that the Treasury committee has finally recognised what consumers have long known. ‘The banking sector is not sufficiently competitive and is failing many of its customers.’

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