On Monday 19th the government will announce its response to the Independent Commission on Banking's recommendations. All this week Andrew has been blogging about the challenges UK companies are facing around accessing the finance they need to grow; and what the government and the banks are doing to address this.
There have been encouraging moves on the part of government and banks, but we have long argued that increasing competition in the banking sector is a key part of improving access to finance. Vickers' recommendations – as well as those around the more publicised ring-fencing measures – laid out steps that could be taken to improve competition.
It is crucial that government responds positively to these recommendations to enhance competition in the banking sector and thereby aid access to finance.
The key recommendations are:
1. Improve market structure by creating the conditions for a strong new challenger, and reducing barriers to entry
2. Improve choice by easing switching and transparency
3. Pro-competitive regulation
1) Improving market structure
The ICB report states that strong “challenger banks” have the potential to exert pressure on incumbents, but there has been a reduction in “challenger banks” following the financial crisis, which has reduced competition in the banking sector.
While improving the ability of customers to move banks (more on this later) is an important step, the ICB write that this is likely to have a modest effect, and only make a difference in the longer term.
What is crucial is the development of strong new challenger banks
“in order to deliver a significant effect in the near to medium term it is highly desirable to secure the emergence of one or more strong new challengers”
Part of the process of improving competition is the Lloyds divesture, or ‘Project Verde'. Co-op has been announced as the preferred bidder for the Lloyds branches, and the business has the potential to be a genuinely strong contender.
However, the second part of the recommendations on market structure was to reduce barriers to entry for new contenders.
This blog from Robert Peston explains, NBNK, another company looking to buy a bank was put at a disadvantage in the Lloyds divestiture process because of its regulatory status. Peston adds that due to risk-aversion at the FSA it is unlikely NBNK will receive advanced status on any set timetable. Not only is this problematic for NBNK, but also for any other potential new entrant to the market.
2) Improving choice and transparency
We have previously blogged about the impact that a lack of competition between banks has had on manufacturers.
Improving customers' ability to move between banks could help exert competitive pressure. But neither switching nor finding the requisite information to make a switch is easy.
It needs to be easy to move banks and switch accounts. Positively, banks are already taking steps to address this, but so far most of the focus has been on current accounts. It must be recognised that companies often have multiple products with a bank – and in many cases these products are bound up together – so there may need to be further action allowing companies to pick and choose which products they want to have with particular banks.
3) Pro-competitive regulation
The ICB report argues that ongoing reform of the financial regulations presents an opportunity to change the nature of regulation in a way that enhances competition and consumer choice. The report recommends giving the Financial Conduct Authority (FCA) a primary duty to promote competition in the financial sector.
Finally, the ICB report also lays out three conditions which – if they are not met by 2015 – would warrant a reference to the Competition Commission by the Office of Fair Trading. These are: the Lloyds divestiture resulting in a strong challenger; if ease of switching banks is enhanced; and the FCA has been established and is making progress towards improving transparency and reducing barriers to entry.
We will be looking for a positive response on these points when government announces its response to the ICB's report on Monday.