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Banks could face competition probe if they do not improve service, OFT warns

The UK's 'big four' lending banks could face a referral to the Competition Commission (CC) and potential break-up if they do not change their approach to consumer banking, the head of regulator the Office of Fair Trading (OFT) has warned.

In a speech (9-page / 92KB PDF), John Fingeleton said that positive changes in the banking sector had been "too slow and incremental" over the last decade to address fundamental concerns about the structure and performance of the banks - despite numerous investigations by Government, regulators and consumer bodies.

"We cannot just continue working with business on incremental change if this does not deliver results," he said.

Unless banks introduced more innovative payment services and made it easier for customers to switch accounts a reference to the CC could follow within the next three years, he said.

Fingleton said that the "longstanding lack of competition" in the sector had made it more difficult for those banks that did offer a better deal to increase their market share and extended particular challenges to new entrants.

"While there has been stronger competition for certain types of consumer, across the market as a whole there has been little incentive for innovation, efficiency or consumer focus," he said.

In 2010, Metro Bank became the UK's first new high street lender in more than 100 years, while Virgin Money's acquisition of Northern Rock earlier this year has strengthened its own position on the high street. Supermarket Tesco has also signalled its intention to enter the consumer banking market, although it has recently announced a delay to its plans.

The regulator's upcoming review of the personal current account market, scheduled to take place in the second half of this year, along with the work of the Independent Commission on Banking (ICB) on breaking up the retail and investment arms of larger banks, would allow it to decide if further action was necessary, Fingleton said.

A report on competition in the UK banking sector in 2000 found that banks were making "substantial excess profits" from both personal and small business customers, he said. In addition, there was a lack of information provided to both types of customer and the perception of barriers to switching. Ten years on, many of the problems highlighted in that report remain, he said.

The Government has expressed its commitment to legislating to implement the ICB's recommendations in full before the end of this Parliament. The ICB proposed that consumers and businesses wanting to change banks should be able to switch accounts within seven days. They should also be able to take advantage of an automatic redirection service to ensure all transactions and direct debits are redirected to the new account.

Fingleton said that annual switching rates were currently "very low" in the personal current account market and only slightly higher for small business customers and savings accounts.

"It is not enough to make it easy to switch. Customers also need the right prompts to exercise their choice of provider. In banking markets, consumers frequently face difficulties in understanding the true cost of running their account and comparing deals from alternative providers," he said.

He added that a previous OFT market study found that consumers paid "little attention" to unarranged overdraft charges and forgone interest despite the fact that these factors make up the bulk of banks' revenues.

He also welcomed indications that the new Financial Conduct Authority (FCA), which will take over the regulatory ambit of existing regulator the Financial Services Authority (FSA) later this year, would attach greater importance to "customer experience".

"Many of the issues that competition authorities have been grappling with stem from a lack of 'customer focus' on the part of providers. Putting the customer experience at the heart of regulation and taking account of the benefits of dynamic market change through competition, gives an opportunity for the FCA [to] use its rule-making powers to tackle the longstanding problems in the market," he said.

He cited the bank-controlled Payments Council's decision to abolish cheques last year, on which it has recently reversed its position, as one which "raises questions about the extent to which consumers' views are adequately reflected" in the current system.

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