1 Introduction
1. The Independent Commission on Banking (the Vickers
Commission) was established by the Government in June 2010 to
"consider the structure of the UK banking sector, and look
at structural and non-structural measures to reform the banking
system and promote competition". It will formulate policy
recommendations with a view to:
- "reducing systemic risk
in the banking sector, exploring the risk posed by banks of different
size, scale and function;
- mitigating moral hazard in
the banking system;
- reducing both the likelihood
and impact of firm failure; as well as
- promoting competition in both
retail and investment banking with a view to ensuring that the
needs of banks' customers and clients are efficiently served,
and in particular considering the extent to which large banks
gain competitive advantage from being perceived as too big to
fail."[1]
2. The ICB will publish its interim report in April
2011. At that stage we will call Sir John Vickers, Chair of the
ICB, and his fellow Commissioners to give evidence on their developing
conclusions. The Government has said that it has yet to set a
timetable for responding to the Commission's final report which
is expected to be published by the end of September this year.[2]
3. Much of the debate about the financial crisis
has been framed in terms of the effect on the economy as a whole,
or on the impact on taxpayers. These are extremely important issues,
but although bank customers have largely been sheltered from the
direct effects of the financial crisis, consumers will ultimately
suffer if the banking system operates in a way which inhibits
effective competition in retail banking. For this reason, in July
2010 we launched an inquiry into competition and choice in the
retail banking sector. The terms of reference were to:
- Assess the impact of the financial
crisis on competition and choice in both retail and wholesale
banking;
- Assess the impact of widespread
consolidation among banks and mutuals;
- Examine the key barriers to
entry inhibiting increased competition, including regulation;
- Examine whether competition
is inhibited by difficulties faced by consumers in accessing information
about products;
- Explore the Government and
competition authorities' strategy to increase competition in banking,
including the likelihood that new entrants will successfully enter
the market;
- Consider the relationship between
competition and financial stability;
- Consider the impact of free
banking on effective competition; and
- Look at the role of foreign-based
operators and whether they are likely to return to the UK.[3]
4. Our inquiry spanned twelve oral evidence sessions.
We heard evidence from a wide range of institutions, including
consumer groups, banks and building societies as well as the regulatory
and competition authorities.
5. We are grateful to Adam Phillips, Chairman of
the Financial Services Consumer Panel, Peter Vicary-Smith, Chief
Executive, and Dominic Lindley, Principal Policy Advisor, Which?,
Philip Cullum, Deputy Chief Executive and Ms Sarah Brooks, Head
of Financial Services, Consumer Focus, Lord Turner and Hector
Sants, Chairman and Chief Executive at the Financial Services
Authority, Sir Donald Cruickshank, Eric Daniels, then Group Chief
Executive, Helen Weir, then Group Executive Director, and Patrick
Foley, Chief Economist, Lloyds Banking Group, Stephen Hester,
Chief Executive and Brian Hartzer, Chief Executive, UK Retail,
Wealth and Ulster, RBS, Benny Higgins, Chief Executive, Tesco
Bank, Vernon W Hill II and Anthony Thompson, Vice Chairman and
Chairman respectively at Metro Bank, Bob Diamond, Chief Executive,
and Antony Jenkins, Chief Executive Global Retail Banking, Barclays
Plc, Ms Jayne-Anne Gadhia, Chief Executive, Virgin Money, Ms Ana
Botin, Chief Executive, Santander UK, John Fingleton and Clive
Maxwell, Chief Executive and Executive Director respectively at
the Office of Fair Trading, Douglas Flint, Group Chairman, and
Joe Garner, Deputy Chief Executive UK, HSBC plc, Neville Richardson,
Chief Executive, and Rod Bulmer, Managing Director, Retail, The
Co-operative Financial Services, Graham Beale, Chief Executive,
and Chris Rhodes, Executive Director, Group Product and Marketing,
Nationwide and Mark Hoban MP, Financial Secretary to the Treasury
for sharing their views on this important subject with the Committee.
We are also grateful to those who submitted written evidence.
6. We heard evidence from such a wide and diverse
range of institutions to ensure a full understanding of the state
of competition in the UK retail market. All the witnesses we heard
from came with their own position and interests to defend. For
example, the large banks stressed how competitive retail banking
in the UK was and how the system delivered choice and value for
consumers. Conversely, consumer groups and new or growing entrants
to the market focused on how uncompetitive UK retail banking was
and the negative impact this had on consumers.
7. We would also like to thank Dr Pinar Bagci, Senior
Consultant with the Brattle Group for her expert advice and assistance
in this inquiry and Mark Falcon, Head of Economic Regulation,
Hutchison 3G UK ('Three').[4]
Competition: an overview
8. Competition cannot be divorced from wider regulatory
issues, including the 'too important to fail' problem. The banking
crisis of August 2007 onwards revealed major structural flaws
in banking systems around the world. In particular it exposed
the reality that Governments felt unable to allow systemically
important financial institutions to default on, for example, their
bonded debt. This exposed the implicit subsidy to these financial
institutions, as their cost of credit was reduced to take account
of probable Government bail outs. The 'too important to fail'
problem is an important barrier to competition, but it is not
the only such barrier.
9. We believe effective competition cannot take place
in an environment where firms which are perceived as 'too important
to fail' are both protected from the discipline of the market
place and derive tangible benefits from this status. This moral
hazard distorts competition and places new or growing firms at
a serious disadvantage. Banks which are perceived as small enough
or not systemically important enough to be allowed to fail not
only face normal difficulties in breaking into the market. They
face higher funding costs compared to those who benefit from this
implicit subsidy. Financial stability is also imperilled, as the
absence of the threat of failure can actively encourage greater
or excessive risk-taking—the moral hazard problem. However,
this Report does not deal with these issues in detail. The Vickers
Commission is examining the too important to fail problem. They
were also examined by the Treasury Committee in Too important
to fail—too important to ignore.[5]
10. This Report focuses on competition. As the ICB
has noted, in a well-functioning market existing suppliers not
only compete with each other, but have to deal with the threat
of potential new entrants. This gives them the incentive to provide
a choice of products to well-informed consumers. Those who succeed
in attracting and retaining customers—by offering cheaper,
higher quality and/or innovative products or services—prosper,
whilst poorer quality or over-priced products are forced out of
the market, and firms which persist in trying to sell such products
ultimately fail.[6]
11. Concerns about the effectiveness of competition
in the banking market go back many years. In 1998, the then Chancellor
invited Sir Donald Cruickshank to undertake a review of the retail
banking sector in the UK. In March 2000, Sir Donald Cruickshank
published his report Competition in UK Banking. The report
examined whether competition was effective in the markets for
money transmission, services to personal customers and services
to small and medium sized businesses (SMEs). Its conclusion was
that "competition problems were found in all markets investigated."[7]
12. Since then the Office of Fair Trading (OFT) and
Competition Commission (CC) have conducted almost twenty inquiries
into competition in different parts of the retail banking market.
Many of these inquiries and investigations have focused on particular
segments of the market, such as the personal current account market
(2008), Cash ISAs (OFT, 2010) store card credit services (OFT,
2004, CC, 2006). There have been two studies specifically on SME
banking, by the Competition Commission in 2002 and the Office
of Fair Trading in 2007. Most recently the OFT conducted a market
study Review of barriers to entry, expansion and exit in retail
banking.[8] There have
also been a number of EU inquiries into the banking sector, including
the European Commission's 2007 inquiry into retail banking. The
sheer number of inquiries and investigations suggests long-standing
and widespread concern about the effectiveness and nature of competition
in the banking sector.
13. The market for retail banking is not like that
for restaurant meals, groceries, clothes or newspapers, where,
as Lord Turner has noted, "the philosophy of free competition
and free customer choice easily produces good results". In
such markets the customer can assess the quality and price of
what is on offer and make an informed choice. In contrast, retail
banking sells many products such as long-term investment and insurance
products which are:
- long-term in nature, only revealing
their quality many years hence;
- purchased only once or twice,
thereby ruling out learning from repeat purchases;
- complex, which makes it difficult
for consumers to assess.
Added to this—as in many other product markets—there
is asymmetry of information and knowledge between consumers and
producers.
14. These characteristics mean regulation will always
have an important role to play in the retail banking market. However,
policymakers should put competition at the forefront of regulation
of the retail banking sector. A properly competitive market can
drive firms to provide choice and deliver better outcomes for
consumers in a way which reduces the need for costly and heavy-handed
regulation. The Government has said it believes enhanced competition
can deliver better outcomes for consumers. Indeed, Mark Hoban,
Financial Secretary to the Treasury, has gone further and stated
that "competition is probably the best way of getting the
right outcomes for consumers."[9]
15. Competition depends on a number of factors. David
T Llewellyn, Professor of Money and Banking at Loughborough University
noted that "when considering the nature and structure of
competition in banking and retail financial services, three alternative
concepts need to be identified: competition, contestability and
effective competition". He detailed these as:
- Competition—"consider factors such
as the number of suppliers, the market share of the dominant players"
- Contestability—"a market is said to
be contestable if entry and exit barriers are low"
- Effective competition—"competition
is only effective in practice if consumers are able:
1) to make rational and informed choices between
competitors, and
2) to exercise choice at low transaction costs."[10]
16. The Cruickshank report on competition in UK retail
banking expressed concern about the high levels of concentration
in UK retail banking, particularly in the personal current account
and SME markets. The financial crisis—which has resulted
in consolidation across the sector through mergers and exit from
the market—has led to a significant increase in concentration
in many parts of the retail market. Concentration levels in the
personal current account market are now higher than at the time
of the Cruickshank report.
17. We also received a large body of evidence suggesting
that competition was proving ineffectual in certain parts of the
retail market. Whilst the CEOs of the large incumbent banks told
us UK retail banking was "enormously competitive", a
far larger range of witnesses and organisations variously described
retail banking as a "limited oligopoly" or as a "sort
of oligopoly."[11]
Equally, we received much evidence about low levels of consumer
satisfaction, poor treatment of consumers and what Lord Turner
has described as "a series of waves of major customer detriment".[12]
18. For competition to be effective, customers need
to know what they are buying and how much it costs. They also
need to be able to transfer their custom from one provider to
another. Our inquiry has led us to conclude that these pre-conditions
for effective competition in the retail banking market are not
present.
19. First, we are concerned at the continuing lack
of price transparency and comparability in the personal current
account market. Without such clear information it is impossible
for consumers to distinguish between the offers made by rival
providers and indeed lack of transparency reduces the incentives
for those providers to make distinctive offerings. Second, we
are concerned that the switching process—despite improvements—remains
cumbersome and does not always work smoothly. We believe that
effective competition will remain a chimera unless urgent steps
are taken to improve price transparency and comparability and
the switching process. In this report we set out the evidence
which has led us to this conclusion.
1 http://bankingcommission.independent.giv.uk/bankingcommission/terms-of0reference/ Back
2
Q 1073; HM Treasury Press Notice, Sir John Vickers to chair
the Independent Commission on Banking, 16 June 2010 Back
3
Treasury Committee Press Notice, New Inquiry announced into
competition and choice in the banking sector, 13 July 2010 Back
4
Relevant Interests of the specialist advisers are as follows:
Dr Pinar Bagci: Economic consultant
advising companies on competition and regulatory matters. Clients
have included regulators, competition authorities, companies,
securities exchanges and investment and retail banks. I am currently
not advising any banks on any matter but am working with Visa
on the matter of interchange fees
Mark Falcon: Head of Economic Regulation,
Hutchison 3G UK Ltd ('Three'), a mobile telecoms operator Back
5
Ninth Report of Session 2009-10, HC 261-I Back
6
ICB, Issues Paper: Call for Evidence, para, 3.8, p 21 Back
7
Competition in UK Banking: A Report to the Chancellor of the
Exchequer, by Don Cruickshank, p viii, para 10, March 2000 Back
8
Ev 241-243 Back
9
Q 1069 Back
10
Ev w37 [note: references to 'Ev wXX' are references to written
evidence published in the volume of additional written evidence
published on the Committee's website] Back
11
Q 631 Back
12
Lord Turner speech to British Bankers Association Conference,
Protecting Consumers and Winning Trust, 13 July 2010 Back
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