MSPs demand probe into Scottish banking sector

A formal investigation into competition in the banking sector was today demanded by MSPs.

Members of the Scottish Parliament's Economy Committee said they were "disappointed" the Office of Fair Trading had not yet carried out a probe.

The call came in a report published after the committee carried out an in-depth inquiry into banking and financial services.

The committee warned individual banks should never again be allowed to become so important that their failure could endanger the real economy and allow them to "hold a gun to the collective heads of the tax payer".

MSPs on the committee have written to the OFT requesting it investigates competition in Scotland for personal current accounts, home loans and business banking.

And they also called on the Scottish Government to ask the OFT to look into the issue.

The report said the global financial crisis had a "profound" impact on the industry in Scotland.

The country's two largest banks, the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) both needed "massive UK government intervention" to survive, and HBOS also merged with Lloyds TSB.

The Scottish Parliament Information Centre estimated RBS and the Lloyds Banking Group were provided with 470 billion – three times the annual Scottish GDP .

And while the committee said the bail-out prevented a larger economic crisis, MSPs insisted: "The state should not be required to intervene ever again on this scale to prevent the failure of private financial institutions.

"It is not acceptable that losses have to be met by the public sector when so much of the profit remains in private hands."

MSPs carried out the inquiry in a bid to establish the impact of the financial crisis and to help provide a "clear vision" for the way forward.

In their report they argued for more competition in the banking sector, stating: "The banking market must be opened up for both personal and business customers."

The MSPs added: "Not only will this offer more choice, but it will help to disperse the critical risk that became so apparent in October 2008 when Scotland's two largest banks simultaneously collapsed."

The committee wants to see the development of a sustainable banking sector in order to avoid the risk of the state having to again step in and save banks.

It added it was of "fundamental importance" the regulatory regime be designed "to prevent a crisis of this scale happening in the future".

They hit out at the bonus culture, saying this could encourage excessive risk-taking for short-term gain.

And the committee said it "deplores the award of millions of pounds in bonuses at a time when the real economy is only just emerging from a recession precipitated by the banking crisis".

MSPs urged banks to stop the aggressive marketing of loans and said they should make lending decisions at a local level.

They also called on banks to improve their corporate governance and keep head office functions in Scotland to protect jobs.

The committee urged action from the Scottish Government, saying it should monitor the ease with which small and medium sized firms can access funds, and recommended ministers review the make up of the Financial Services Advisory Board.

But the committee concluded there was a "once in a generation" chance for the financial sector to be reformed.

Committee convener Iain Smith said: "Banks are there to serve the economy. It is not for the economy to serve the banks."

He added: "It's important that the Scottish Government has a clear strategy for the type of banking sector Scotland needed to meet the needs of individuals, businesses, communities and the wider economy."

Mr Smith went on: "The financial crisis and the resulting recession have undermined the economic growth agenda in Scotland. The legacy of the crisis must be managed to ensure it never happens again."