Competition tops bank commission agenda

When the commission publishes its interim report in just over a week’s time, it will nevertheless lay out far-reaching measures to shake up what many see as one of the most highly concentrated banking markets in the world.

Most attention has so far focused on the commission’s main objective to make banks safer. In pursuit of that goal, the industry faces a potentially radical restructuring that would forcebanks to ring-fence their retail operations.

However, consumers are likely to be more concerned with how the five-member body is handling the second part of its remit: to improve competition, which has been sucked out of the market by consolidation since the financial crisis.

People familiar with the commission believe it will stop short of introducing formal caps on banks’ market share or on the size of their overall balance sheets. However, in a sector with such large market share imbalances – the state-backed banks, Lloyds Banking Group and Royal Bank of Scotland, now control almost half of all current accounts and small business loans – the banks are braced for some tough remedies.

Even if the commission decides not to recommend a full break-up of Lloyds and HBOS – a move that would be disastrous for the bank because it has spent billions integrating the businesses – other radical structural changes are on the table.

At the extreme end of the options would be forcing Lloyds to sell more branches than the 600 already demanded by the European Commission. Such a proposal could be problematic given that it would come up against strong resistance from shareholders – and require a long legislative process.

Alternatively, the commission could recommend a tighter rein on which organisations are eventually allowed to bid for the state-backed assets – the Lloyds business and the nationalised Northern Rock .

In a separate report into retail banking competition out today, the Treasury committee urges the commission to ensure that disposals of these businesses create more competition in the market rather than simply satisfying the government’s desire to maximise revenue.

One of the biggest obstacles to competition is the barriers new entrants must overcome.

The commission is also expected to tackle this by setting out proposals aimed at encouraging newcomers by making it easier for customers to switch and compare accounts. Building on the proposals put forward by the Treasury committee, one focus is expected to be ease of moving current accounts.

“The focus really seemed to be on switching,” said a person involved in talks between the commission and the banks. “The market share cap was not really in the debate at all.”

One solution is an overhaul of the switching process to create a portable personal current account number that customers can move between providers, much as they can with a telephone number.

However, the costs of this are about £5bn and the process is complex.

Lloyds has proposed a cheaper redirection service that it says would enable customers to move their account in seven days rather than four to six weeks. This would effectively bounce direct debits to the new account, meaning customers would not have to rely on companies such as utility groups and credit card providers updating their records.

While still a cost to the industry, this kind of move would be welcomed by the banks compared with more stringent recommendations, such as formal market share caps. These have been mooted as a way to reduce banks’ dominance in overly concentrated areas.

The risk, however, is that such prescriptive measures could worsen competition, as banks approaching the limits would be likely to withdraw the best deals for customers.