You might have thought Britain’s banks had been pushed, prodded and shaken enough over recent years. That is certainly the plea that banks themselves make in their reaction to further suggestions of reform. And it is true that there have been reports and commissions aplenty since the financial crisis.
But for all the change on ring fencing and the proposals on culture change which are welcome, one issue has remained unchanged since even before the financial crisis. In fact it has become even more stark. And that is the concentrated nature of the UK banking market.
The big five banks now account for the vast majority of personal current accounts and small business accounts. This matters because in an oligopoly, the customer can easily be short changed. And between PPI misspelling and mistreatment of small businesses there is plenty of evidence that the customer has come second in recent years.
Few people switch accounts or change business loans, in part because of fears about direct debits and payments being disrupted, but also because the institutions and products all look very similar. When bank IT systems fail and people can’t make or receive payments, bank CEOs ought to be sweating over losing thousands of customers, but they don’t. That is not the sign of a healthy market.
Concentration is not a new problem. As far back as the year 2000 this problem was recognised with the Cruikshank report commissioned by the then Labour Government. It set out the stranglehold the big banks had on the system and the difficulties for new entrants. Yet when Don Cruikshank himself gave evidence to the Parliamentary banking Commission last year he said precious little had changed.
The Coalition Government has recognised the problem of concentration. It has repeatedly talked up the takeover of Northern Rock by Virgin Money and the sell off of branches by RBS and Lloyds, praising the competitive promise offered by new entrants. If these sales and divestments were such a good thing it is hard to see why more is being greeted as being beyond discussion.
Entry for new players is not the only problem. So too is exit of established players. If banks are so big they pose a systemic risk to the economy and have to be rescued if they topple over – as had to happen with RBS, HBOS and others during the crisis - the normal market mechanism of companies dying and new ones being born does not happen. The implicit taxpayer guarantee that underpins the big banks gives them an insurance policy unavailable to most businesses. That the problem of “too big to fail" remains unresolved is widely accepted, including by the Governor of the Bank of England who confirmed this in some of his less reported remarks to the Treasury Committee this week. Ed Miliband did not address this in his speech but until that is resolved, taxpayers will still, potentially, be on the hook.
Banks have been fortunate so far to escape a formal reference to the competition authorities. The Parliamentary banking Commission, on which I served, came close to such a recommendation. We said there was a strong case for a referral but did not recommend it because there was so much reform in the pipeline at the time. We did however recommend there be a study of the market with a view to a decision being made in 2015 and noted that Ministers had the power to make a referral if they chose. Ed Miliband has said he will make such a referral in 2015. This is not out of line with the recommendations of the Banking Commission.
The purpose of a referral to the Competition and Markets Authority would be to ensure that a concentrated market worked best for the consumer. It is ironic that some who normally style themselves as champions of free enterprise are railing against a move designed to introduce more competition.
The important thing is to recognise that Britain’s banking market is highly concentrated. It is hard in the wake of numerous conduct scandals and regulatory fines in recent years to argue this market is working in the best interests of consumers or that banks themselves have cleaned up their own act.
Financial services are very important to the UK economy. They provide crucial employment and a significant contribution to our GDP. They are also an important source of exports. London is the global financial centre. I want our banking sector to succeed and want this to be a continuing source of economic strength to the UK. But if we learn anything from the financial crisis it should be that taxpayers and consumers have a right to expect not just a big financial services sector but also a safe one which works in their interests.