Miliband Pledges Limits on U.K. Banks to Boost Competition

A Labour government would limit the market share of banks in the U.K. by forcing them to sell branches to boost choice and increase lending to small businesses, opposition leader Ed Miliband said today.

The lack of competition is one of the main causes of poor service, a breakdown of trust, mis-selling and a drop in business lending, Miliband said in a speech in London.

“There can be no bigger test of whether we are serious about building a new economy and tackling the cost-of-living crisis than reforming Britain’s banks,” he said. “To really change our banking system, we have to get to the root of the decades-long problem in British banking: too much power concentrated in too few hands.”

While Britain’s recovery is strengthening amid a surging housing market, lending to small businesses is only starting to pick up after years of contraction in the wake of the financial crisis. Chancellor of the Exchequer George Osborne has said he wants to spur competition by making it easier for new banks to enter the industry.

Miliband proposed a U.S.-style system that prevents banks from getting too big and dominating the market. Labour would introduce a threshold for the market share of personal accounts and small-business lending that any one bank can control, and prevent mergers that would breach the limit, he said.

Branch Selloff

Miliband said he’d instruct the Competition and Markets Authority to report within six months of the election on how to create at least two “sizeable” banks to challenge the dominant lenders.

“We are not asking whether existing banks might have to divest themselves of a significant number of branches. We are asking how we make that happen,” he said. “After decades of banking becoming more and more concentrated, Labour will turn back the tide.”

With the election due in May 2015, Miliband is seeking to cast Labour as the champion of ordinary voters against big business. In September, he pledged to freeze energy prices for 20 months if he wins power. Recent opinion polls give Labour a lead of about 5 percentage points over Prime Minister David Cameron’s Conservatives.

Labour’s plans would mean breaking up state-controlled Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, potentially complicating the task of returning them to the private sector. The two banks together hold almost half of the U.K. checking-account market, based on Mintel International estimates. Miliband said that four banks in the U.K. control 85 percent of small business lending.

Carney Blow

The proposals received a blow this week when Bank of England Governor Mark Carney suggested that breaking up large banks did not always boost competitiveness. A U.S. rule limiting banks to a 10 percent share of deposits had not prevented the creation of “large, systemic financial institutions,” he told Parliament’s Treasury Committee. “You need to look at the entire business model and risk profile,” he said.

They also drew criticism from the British Bankers’ Association, which said today that small businesses would find it no easier to obtain finance.

“Capping the number of customers that the biggest banks are allowed to compete for will undermine the service that people receive,” BBA Chief Executive Officer Anthony Browne said in a statement. “Banks who are approaching their market cap would be stripped of incentives to invest and improve their services.”

Business Secretary Vince Cable, a Liberal Democrat, told BBC television that setting “arbitrary limits” was not the right way to tackle the over-concentration of business lending.

A Labour government would also introduce a National Credit Register for small and medium-sized businesses with the aim of improving lending by allowing all banks to access comprehensive data about a business’s credit history, Miliband said.

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