1. UK Financial Investments Ltd (UKFI) owns 41% of Lloyds Banking Group, 84% of Royal Bank of Scotland Group and the whole of Northern Rock and Bradford and Bingley. In November 2008 when UKFI was set up, the Labour Government said the aim of the company would be to “protect and create value for the taxpayer as shareholder, with due regard to financial stability and acting in a way that promotes competition.”
In December 2008 Robert Peston of the BBC thought it was no exaggeration to say that the UKFI would be as important to all of us as the Treasury, or the Bank of England or the Financial Services Authority.
Undeniably, two and a half years after it was set up the UKFI has power over a vast amount of taxpayer assets and the difficult responsibility of gaining the best value for the publicly owned shares which it owns. What is the best way to do that? As the financial sector appears determined to get back to ‘business as usual’ proposals are starting to emerge – last week the Centre for Policy Studies suggested that every tax payer in the UK be given £1000 worth of shares.
In my own view, quite apart from making sure taxpayers get their billions back, a key job of UKFI must be to dramatically improve the competitive outlook for UK banking. I wrote a paper recently for the CPS – http//www.cps.org.uk – explaining why competition is key – Britain’s bank lending to small and medium enterprises and in personal current account business is currently concentrated in just five big banks…the competitive incentive to provide a better and cheaper service is just not there.
I believe UKFI can enhance banking competition in the UK at a stroke on behalf of the taxpayer by requiring the boards of those banks where it is a significant shareholder to sell off significant numbers of branches in parcels to applicants who demonstrate that they intend to set up new local branch networks. Potential contenders might be Virgin Money, Metro Bank, Marks and Spencer, Tesco, even a credit union – any group outside the big five banks which is keen to enter the market and increase competition for the benefit of the consumer but has experienced difficulty in entering the arena due to the stranglehold currently operated by the big five.
Only when there is a level playing field of competition within the industry with big, global banking players and smaller, more specialised banks will the consumer benefit from keen pricing, the offering of efficient banking products and the combative struggle for customers which a true free market brings.
2. The Independent Commission on Banking published its Interim Report last month and set out a number of reform options. I applaud its suggestion that all systemically important banks should hold equity relative to their assets of at least 10% and also the proposal that capital in retail banking operations should be ring-fenced.
I think, however, that the IBC does not go far enough in promoting competition within the retail banking industry. A key difficulty for consumers is the problem of trying to switch Personal Current Accounts between banks. The process is inefficient and takes weeks, even months, rather than days. Customers are understandably concerned at the prospect of standing orders not being paid on time.
There is a solution that would be cheap and easy to implement and would mean customers can change banks at the drop of a hat, in an instant forcing a far more competitive approach to the current account business that generates billions of pounds of profit for the banks. I suggest that banks should be required to carry out switches within 10 working days or pay a fine to the customer. I believe that anything which enables the customer to seek out the best deal more easily will promote the competition that is essential to a more stable banking industry.
3. The Government has announced its intention to launch two new banks: the Big Society Bank and the Green Investment Bank. Each is intended to promote and support the rebalancing of Britain’s economy, the BSB through a greater focus on social enterprise and community projects and the GIB through financing a dramatic growth in new businesses whilst realising our ambition to be the greenest Government ever.
Both banks should have a natural focus on funding small and medium businesses for the longer term, meeting precisely the needs of our economy to ensure growth for the future.
Each has the potential to become a huge new source for competition in the banking industry in the SME sector. A simple way to achieve this aim would be through a careful structuring of the new banks. I suggest that each should be established as public companies and listed on the London Stock Exchange and that the Government should retain a 10% shareholding with representation on the Boards until the first AGM. The high street banks could own up to 20% each, but with 25% to be placed with the taxpayer through a subscription scheme. This would ensure a AAA credit rating and access to international capital markets at the lowest possible rates.
The existence of these banks would surely shake up the SME banking sector overnight!
My 3 proposals offer 3 simple and effective ways of dramatically increasing competition in the retail Banking sector. Greater competition is essential for two reasons: Firstly, to offer customers real choice in a competitive market place, where the bank has to fight for custom. Secondly, only when new players are able to enter the market place and failed banks are able to fail without the meltdown of the entire banking system will the taxpayer be protected from having once again to bailout the banks.