Banking analysis: Reforms don’t solve the ‘too big to fail’ issue

It’s not that simple, however. The banking sector is already undergoing change, albeit not necessarily in the interest of consumers, and in many cases the ICB reforms would merely add to existing momentum.

For the humble bank customer the most obvious result of the reforms is more expensive products as banks pass on the costs of the changes. Those with the biggest investment operations – Barclays, RBS and HSBC – are among the UK’s biggest lenders, so homeowners can expect mortgage costs to rise.

Another likely outcome – the end of free banking – is already a work in progress as banks seek to migrate their most profitable customers into fee-based accounts. Banking services are already being restricted for those considered unprofitable and the best products made available only to a select band of customers.

Predictably, the banks are threatening higher charges if the reforms are pushed through. But does that imply that if the reforms are blocked, their charges won’t rise? The clampdown on payment protection insurance and on overdraft charges in recent years has already left banks looking for new sources of revenue and that is reflected in new charges, wider margins on certain products and the shift to fee-based accounts. The ICB also calls for greater competition, yet Virgin and Tesco are already preparing for an assault on the high street, following the launch of Metro Bank south of the Border last year. It’s not difficult to envisage a more competitive market over the coming years, enabling measures making it easier to switch bank have a real impact.

As it stands, almost three quarters of us have never switched our account and 77 per cent of accounts are with the biggest four banks. In a bid to redress that the ICB wants a re-direction service that would smooth the switching of accounts by sending all payments to and from an old account into a new one.

Switching is already a relatively painless process, yet the perception that it takes too much hassle and the fear of payments going wrong is a real barrier to higher switching levels. However, there are more substantial hurdles to overcome. Trust in the banks is less to do with products than their approach to customer service. Until there is reform of a remuneration culture that encourages misselling and fails to reward genuine customer service, and until banks begin to take complaints seriously, real improvement will remain elusive and switching levels will remain low.

Ultimately, bank customers should hope the government stands up to the vested interests calling for the reforms to be delayed. The ICB doesn’t tackle all of the problems that led to the banking crisis. It fails to satisfactorily address the “too big to fail” issue, for example. If, say, the investment arm of one of the big four were to hit the rocks, how would its high street customers respond? While ring-fencing may offer reassurance, it may not be enough to prevent customers from clamouring to get their money out.

But it does broadly give the taxpayer greater protection in the event of future banking difficulties.