Customers punished in shake-up of banks

THE switching of millions of bank accounts to new organisations looks set to cause upheaval and inconvenience for customers. Yet current confusion could be followed by widespread pandemonium if the government decides to radically overhaul the entire industry.

The debate about the future of banking intensified last week when the appointment of investment banker Bob Diamond to the top job at Barclays led to renewed calls for retail banks to be split from high-risk "casino" operations. Yet former chancellor Alistair Darling predicted the day would never come when the banks were broken up.

Meanwhile, the various inquiries into banking moved up a gear. Last week was the deadline for written responses to the Treasury Select Committee's inquiry into banking, with public hearings due to start shortly. The Treasury committee has a separate investigation under way into government plans to transfer much of the regulation of the banks from the Financial Services Authority to the Bank of England.

Bank governor Mervyn King has admitted publicly his concerns about banks which are "too big to fail".

Later this month, the Independent Commission on Banking, set up by the government, will publish an "issues" paper outlining the risks of the current system and seeking comments on potential remedies.

But amid all this controversy, inquiry and conferring, who is listening to customers? More to the point, what appetite is there among consumers for their accounts to be endlessly churned?

Taxpayers have a central interest in the debate over the future of banking, having just bailed out the industry with a support package which the National Audit Office put at 850 billion. Against such a background, arguments in favour of splitting up the big banks look not so much compelling as non-negotiable.

Dominic Lindley, a banking policy adviser at the consumer lobby group Which?, said: "Our big banks are larger than the UK economy. We can't allow this to happen again. The country could not afford a second bail-out."

Against this, some of the banks have indicated they would quit the UK if forced to divide up their retail and investment operations.

There are sound reasons to take them at their word. Strapping a retail bank to "casino" operations cuts the cost of borrowing funds to gamble with. The security of knowing the government will bail them out if their luck runs out gives peace of mind to bondholders and other creditors.

Investment banks would face significantly higher funding costs if they were on their own and wholesale markets realised they would be allowed to fail and investors could lose significant sums. This would curtail their activities and hit profits.

Yet continuing with the status quo is also not viable. The wave of rescues, takeovers and mergers triggered by the financial crisis has concentrated the control of banking into a very few hands.

Never in our history have institutions faced less competition and pressure to keep prices keen. According to Which? the five largest banking groups now account for 85 per cent of the current account market, compared with 74 per cent before the credit crunch. They dominate 69 per cent of savings accounts, compared with 56 per cent in 2006. And they control more than three-quarters of all mortgages, compared with 53 per cent four years ago.

According to Moneyfacts, overdraft rates are at an all-time high, with more than a quarter of banks recently increasing authorised overdraft rates, despite no change in the bank base rate.

Millions are now paying interest at 18 or 19 per cent, despite base rates at 0.5 per cent. Barclays Additions Active customers have seen an 8.4 per cent increase in the last 18 months

Lindley said: "The Cruickshank Report into banking more than a decade ago criticised the industry for lack of competition, and it is now significantly less competitive than it was then.

"We have seen profit margins on mortgages and other financial services grow, and this is no coincidence. We have too much power concentrated in too few hands, and they use this competitive advantage to increase their margins at the expense of consumers.

"For any market to work properly consumers need choice and competition."

But any major sell-off, on top of those already planned at Lloyds Banking Group and Royal Bank of Scotland, would see potentially tens of millions of accounts switched between institutions, and trap countless customers in bungles and inefficiencies.

Which? believes that a major opportunity was lost when RBS was given the green light to sell accounts, which the EU ordered it to dispose of, to Santander.

Lindley argues: "Customers have simply been switched from one organisation with a not particularly good record for customer service to another with a not particularly good record for integration."