The long-awaited final report from the Independent Commission on Banking was released this morning. The headlines have focused on the timing and costs of the proposed structural reforms. But it is the lack of competition in the UK banking sector where the real frustration amongst many companies lies.
In recent weeks we have heard from a company which approached a High Street bank and was told it would not even provide a quote for banking services. A number of others have advised us that another bank will not do business with their sector. The SME finance monitor also recently showed that around one in seven companies with a successful application for external finance were seriously considering switching banks, but we know that switching rates are considerably lower than this. All in all, none of these are the hallmarks of vigorous competition in the banking sector.
We've been consitently looking for government provide a boost to competition in UK banking. Our recommendations include:
- Committing to stronger competition in the UK SME bank lending market by following through on the Commission's call for a greater number of Lloyds' branches to be sold;
- Looking seriously at impediments for SMEs (larger than micro) switching between banks, including the lack of difference between banks' offers;
- Improving sources of finance beyond the banking sector for growing SMEs, including equity finance and non-bank debt, for example through extending the Enterprise Investment Scheme to debt;
- Greater transparency and publication by banks of the factors behind certain lending policies and conditions and increased transparency on ancillary costs associated with lending.
So what did the ICB have to say?
There are three main recommendations with respect to improving the competitive landscape. A strong new challenger in the market as a result of the Lloyds divestiture, improving switching and increasing transparency for consumers.
On switching, the Commission is recommending that a current account redirection service is established by September 2013 to smooth the process for individuals and SMEs. The Commission also regards transparency as a 'crucial couterpart' to improving the switching process. It is recommending that the Financial Conduct Authority and the Office of Fair Trading works with banks to improve transparency in costs and pricing across all retail banking products, including those for small businesses.
The ICB has provided some clear direction on where action needs to focused and this should broadly be welcomed by businesses.
So what now?
Well, government had already broadly endorsed the Commission's interim finding in April that some form of separation was necessary between retail and investment banking. If there is genuine concern about credit conditions for SMEs and real ambition to make the UK the best place in the world to grow and finance a business then we need to hear much more about implementing the Commission's recommendations on boosting competition. As a first step this will require government now to equally endorse the Commission's proposed reforms to boost competition and set about implementing these recommendations with urgency.