CMA rules out breaking up Britain's biggest banks and defends free banking practices

By Nicole Miskelly | 22 October 2015

The Competition and Markets Authority (CMA) published the preliminary results of its 18-month in-depth investigation into the retail banking sector this morning and has ruled out breaking up Britain's biggest banks and defended free banking practices.

The watchdog said that it has analysed personal current accounts (PCAs), business current accounts (BCAs) and small and medium-sized enterprise (SME) lending and initially launched the investigation due to concerns over the four biggest banks, HSBC, Lloyds, RBS and Barclays having over 70 per cent of active current accounts in the UK, which could be limiting choice for customers and is not encouraging competition.

The investigation has identified issues with competition in PCAs and SME banking market, and found that low levels of customer switching means that banks are not under enough competitive pressure.

However, despite initial concerns and the proposed plans to break up the banks to encourage greater competition, City A.M reports that the CMA has provisionally rejected plans to break up big banks because it has been deemed not likely to be effective in addressing competition concerns. “The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.”

The investigation also highlighted the lack of competition in SME banking because 50 per cent of start-ups looking for a SME account choose the bank they already hold a personal account with, 90 per cent stay with their business current accounts after the free banking period ends and around 90 per cent choose their business current account provider for business loans.

The CMA also rejected calls to end free banking, which is the period where transaction fees are waived by banks, which is popular for consumers, but experts at PwC have said is unsustainable and may increase the likelihood of mis-selling in the future, City A.M reports.

However, according to the CMA the investigation did find a number of positive developments such as a rise in the number of new entrants into private current account and SME banking, availability of innovative banking products and digital innovations such as online and mobile banking.

But the watchdog said that despite these encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.

Speaking about the results, Richard Mossman, director of business change consultancy Certeco says, "The so called ring fencing legislation meant banks were looking down the barrel of massive organisational change. So no doubt they will be welcoming this news with open arms. The industry has been in a tail spin wondering what ring fencing legislation would look like and trying to plan accordingly. HSBC has threatened to move its HQ to Birmingham, Barclays is apparently planning to place its high street operations under the temporary ownership of its investment banking arm. The fact that the CMA has said it has provisionally rejected breaking up the big banks will mean a likely reprieve on any big structural and operational changes they thought they would have to make."

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