Britain’s largest banks face a full investigation into small-business lending and checking accounts as antitrust regulators said the industry lacks effective competition.
The four largest lenders control more than three quarters of the U.K. consumer banking industry and there are significant barriers to new banks, the Competition and Markets Authority said in a statement today. The regulator said that it would review whether to start an in-depth investigation.
British lawmakers want to loosen the grip of Britain’s four biggest lenders -- Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc -- which control more than 90 percent of the market for small-business lending and have been hit by scandals including improper sales of interest-rate swaps and payment protection insurance.
“The financial sector has been in the spotlight in the U.K. since the early 2000s with a number of reports concerning the competitive conditions in this industry,” said Ioannis Lianos, director of the Centre for Law, Economics and Society at University College London. “There was some concern that the banks hadn’t implemented some of their commitments back in 2002 to not bundle the business current accounts with lending so that somehow you locked in some of the customers.”
Newer and smaller banks face “significant” barriers to entry and markets “remain concentrated,” particularly in Scotland and Northern Ireland, the CMA said. The largest banks’ market share has shifted “very little.”
“Levels of shopping around and switching between banks remain low,” according to the results of two CMA studies. “Perhaps as a result, very limited market share gains have been made in recent years by those banks with the highest levels of customer satisfaction.”
The British Bankers Association said lenders would cooperate with the probe.
“There are substantial changes currently underway across the banking industry to strengthen competition -– which improves choice and service,” BBA Chief Executive Officer Anthony Browne said in a statement.
The banks submitted proposals to head off a full market probe, the CMA said, including setting up a comparison website and establishing new standards to make it easier for small businesses to switch lenders.
Lloyds and RBS have already announced divestments in response to European Union regulators’ demands in the wake of government aid during the financial crisis. Lloyds sold a 35 percent stake in its TSB retail arm and RBS plans to sell shares in its Williams & Glyn consumer bank network.
‘Get on With It’
RBS CEO Ross McEwan welcomed the probe, saying “let’s get on with it.”
“It’d be good to have the inquiry,” McEwan said in an interview with radio station LBC. “We can see if there’s anything else we should be doing and thinking about from an industry perspective.”
Lianos said he’d be surprised if the U.K. regulator forced the sale of branches or other structural remedies, which he described as a worst-case scenario for the banks. He expects “more behavioral-type of remedies, conduct constraints to the way banks will operate and possibly some obligation to have more transparency.”
Several new banks have started up in an effort to challenge the country’s biggest lenders. New entrants in recent years include Metro Bank Plc, Tesco Bank and TSB Banking Group Plc. Their combined market share is around 5 percent, of which TSB represents 4.2 percent, the CMA said.
The CMA, which is leaning toward opening an in-depth probe rather than accepting the commitments, says it’s “open to views” on the matter before making a final decision later this year. CMA officials will address the U.K. Parliament’s Treasury Select Committee on Monday to discuss lending to small businesses.
The government has said it wants increased competition and choice among retail lenders, amid criticism that the costs of accounts aren’t clear to customers and that switching banks is difficult.
“The government is determined to increase competition in the banking system, to ensure individuals and businesses have more choice and can get the best deal,” the Treasury said in a statement.
The opposition Labour Party also said the industry needs more scrutiny.
“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,” said Ed Balls, the Labour party’s spokesman on financial issues.
The CMA provisionally decided that a joined up market investigation would review the markets for personal current accounts with revenues of more than 8 billion pounds ($13.7 billion) -- and small to medium enterprise banking, including the over 2 billion-pound business current account market and business loans.
“The goal should be to deliver a market structure that encourages far more dynamism, choice and innovation,” John Allan, national chairman of the Federation of Small Businesses said in a statement. “That should encourage the major high street banks to up their game for the small business customer.”
The regulator is also scrutinizing the energy market to determine whether the six biggest utilities are unfairly profiting from their market power. The CMA’s report may recommend splitting power generation businesses from units that supply consumers and businesses.
Previously, the four-month-old CMA’s predecessors have struggled with attempts to regulate the finance industry. In January 2013, the Office of Fair Trading decided not to probe personal checking accounts, saying there had been progress that made it easier for consumers to compare and switch providers.
In 2009, the U.K. Supreme Court blocked the OFT’s efforts to challenge fees that lenders charged customers who exceeded overdraft limits.