Antitrust Regulator to Examine British Banks

Britain’s antitrust authorities said on Friday that they expected to open a formal investigation into the country’s retail banking industry, citing potential barriers to competition that include the control of a national network of branches by four big banks that offer free banking to many customers.

If the inquiry proceeds as expected, it could challenge the dominant role of Britain’s big four: the Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays. Together, these banks control more than three-quarters of the market in personal accounts despite the government’s concerted efforts to bring smaller rivals into play.

For years, policy makers have complained about a lack of choice in retail banking in Britain, where few customers are inclined to switch among big players that offer similar products and control most branches. Critics argue that the relationship of many Britons with their bank often outlasts their marriages.

Yet British consumers tend to like the fact that banks offer free banking to those who do not overdraw their accounts. And so the public might not welcome an inquiry into whether such a practice distorts competition.

On Friday, the Competition and Markets Authority, the antitrust regulator, published a preliminary report and said it would consult on its “provisional decision” that there should be a full inquiry into personal and business accounts which, it said, are together worth about 10 billion pounds, or $17 billion. Theoretically, that could lead to the breakup of the four big banks, although such an outcome is unlikely.

The document said that only 3 percent of personal customers switch banks each year and that the big four banks also provide more than 85 percent of current accounts for businesses and nine out of 10 business loans. Yet consumer satisfaction levels with the “big four,” the report said, are less than 60 percent.

Two of the four, R.B.S. and Lloyds, had to be bailed out in the financial crisis, which severely damaged the image of Britain’s banking sector.

Britain’s banks have consolidated rapidly over the last 15 years, leading to a much greater concentration in Britain than in the United States. Peter Hahn, senior fellow at Cass Business School in London, said that the top five retail banks in the United States had a much smaller market share than Britain’s biggest five — although some other Western nations have a banking structure more similar to Britain’s.

One of the deterrents to new entrants in the market, the antitrust regulator’s report said, is the cost of setting up a network of branches. In recent years, there have been newcomers, in particular Metro Bank, Tesco Bank and TSB, which the government recently forced Lloyds to sell. But together, the upstarts’ market share is just 5 percent, of which TSB represents 4.2 percent.

The regulator pointed to a possible distortion of the market through the offer of free banking for customers who keep money in their accounts and do not overdraw them.

And it highlighted the difficulty in comparing complex customer charges, particularly for those with overdrafts.

“That makes it hard for customers to choose the cheapest or most appropriate accounts for them, so limiting banks’ incentives to compete,” the authority said.

Despite the advance of online banking, the report said, new entrants still seem to need a branch network to be effective competitors.

“While there is significant evidence of consumers increasingly embracing Internet and mobile banking, it seems doubtful that large-scale entry is possible without branch networks,” the report said.

Anthony Browne, chief executive of the British Bankers’ Association, said the banks would “cooperate fully with this review and any subsequent investigation.”

“There are substantial changes currently under way across the banking industry to strengthen competition – which improves choice and service for customers,” Mr. Brown said. “Banks are pro-competition,’’ he added. “They compete for customers every day.”

The prospect of an inquiry was welcomed by the opposition Labour Party. Its spokesman for economic affairs, Ed Balls, called for “at least two new challenger banks and a market share test to ensure the market stays competitive for the long term.”

But some experts said they doubted the merits of a new investigation unless it has clearer objectives. Mr. Hahn, at Cass Business School, said that regulators had yet to define what they mean by more competition.

For example, he said, despite consolidation among the players in the sector, banks still offer a broad — if sometimes bewildering — array of mortgage products. As for free current accounts, he said, that is something most consumers desire. In the meantime, technology is rapidly changing retail banking in all sorts of ways, Mr. Hahn said.

“By the time this investigation is done,’’ he said, ‘’the industry will be on its way to change, and it won’t be relevant.”

Katja Hall, deputy director general of the Confederation of British Industry, the main business lobby group, said that, speaking on behalf of business customers, “there are already many measures under way to boost competition in banking.’’ Those, she said, include measures to allow customers who want to switch accounts to do so within seven days and a simpler registration process for new banks that come into the market.

“An investigation would take place against a moving backdrop,’’ Ms. Hall said, ‘’but it will provide an opportunity to address the question of competition once and for all.”

Source: nytimes.com