Leaders: Curbs on banks will not allay fears

Banks’ sizes should be capped to curb their power over the market and to ensure consumers get a better deal, according to Ed Miliband, the Labour leader.

Lloyds was ordered by the EU to sell branches as part of its punishment. Picture: Jane Barlow

Many, counting the cost of the failures of RBS and HBOS during the financial crisis, and still more who have lost money because of financial products mis-sold to them by the big banks prior to the crisis, may well cheer loudly.

But it is questionable whether Mr Miliband’s proposals would actually lead to banks which serve their customers a whole lot better than they did prior to the crisis.

He proposes that the Competition Commission should examine the banking market and determine a maximum number of individual and small business customers banks should have. Any over that limit would be compelled to slim down by selling branches complete with their customer base. In this way, new banks and more competition would be created.

Ensuring proper competition in private business is certainly the government’s job. But several inquiries over the years, while they have said that more banks would be a good thing for competition, have stopped short of saying that the current structure whereby the big five banks have 85 per cent of personal accounts is demonstrably anti-competitive.

But let’s assume that more banks would give consumers a better deal. The first objection is that the process Mr Miliband proposes to achieve that is not simple. More than four years ago, Lloyds, which took over the ailing HBOS, and RBS, was ordered by the EU to sell branches as part of its punishment for having to be bailed out by the government. Nothing has yet been sold. On that timetable, Mr Miliband, if he were able to implement this policy, would be seeking re-election before it took effect.

A second objection is that branches are probably the bits of the banking business which are losing value fastest. Telephone, internet, and now mobile phone banking is taking over and it is dubious that any new or small bank which wanted to grow to challenge the big five would want to start by acquiring a load of bricks and mortar which would erode the cost advantage over the big five a challenger would need to be able to offer potential consumers a better deal.

It is also hard to see how wholesale branch transfers would tackle the biggest issue that troubles consumers – the fear that banks see them as sources of income to be extracted by fair means or foul, and not as customers with needs to be served.

The big problems in trying to encourage more competition are the cost of getting into the banking business and the difficulty of persuading consumers to shift their accounts. Tackling the first problem and then aiming to persuade people that they have the power to change banks by moving accounts might be a better, if less headline-grabbing, strategy.

Curbs on banks will not allay customers’ fears

Banks’ sizes should be capped to curb their power over the market and to ensure consumers get a better deal, according to Ed Miliband, the Labour leader. Many, counting the cost of the failures of RBS and HBOS during the financial crisis, and still more who have lost money because of financial products mis-sold to them by the big banks prior to the crisis, may well cheer loudly.

But it is questionable whether Mr Miliband’s proposals would actually lead to banks which serve their customers a whole lot better than they did prior to the crisis.

He proposes that the Competition Commission should examine the banking market and determine a maximum number of individual and small business customers banks should have. Any over that limit would be compelled to slim down by selling branches complete with their customer base. In this way, new banks and more competition would be created.

Ensuring proper competition in private business is certainly the government’s job. But several inquiries over the years, while they have said that more banks would be a good thing for competition, have stopped short of saying that the current structure whereby the big five banks have 85 per cent of personal accounts is demonstrably anti-competitive.

But let’s assume that more banks would give consumers a better deal. The first objection is that the process Mr Miliband proposes to achieve that is not simple. More than four years ago, Lloyds, which took over the ailing HBOS, and RBS, was ordered by the EU to sell branches as part of its punishment for having to be bailed out by the government. Nothing has yet been sold. On that timetable, Mr Miliband, if he were able to implement this policy, would be seeking re-election before it took effect.

A second objection is that branches are probably the bits of the banking business which are losing value fastest. Telephone, internet, and now mobile phone banking is taking over and it is dubious that any new or small bank which wanted to grow to challenge the big five would want to start by acquiring a load of bricks and mortar which would erode the cost advantage over the big five a challenger would need to be able to offer potential consumers a better deal.

It is also hard to see how wholesale branch transfers would tackle the biggest issue that troubles consumers – the fear that banks see them as sources of income to be extracted by fair means or foul, and not as customers with needs to be served.

The big problems in trying to encourage more competition are the cost of getting into the banking business and the difficulty of persuading consumers to shift their accounts. Tackling the first problem and then aiming to persuade people that they have the power to change banks by moving accounts might be a better, if less headline-grabbing, strategy.