On 13 July 2010, the Treasury Select Committee (“TSC”)1 announced the launch of its inquiry into competition in the banking sector.
The chairman of the TSC, Andrew Tyre, made the announcement during a speech at the British Bankers’ Association’s (BBA) annual conference, arguing that concerns about inadequate competition in retail banking are widespread. The TSC intends to review the commitments already made by retail banks to improve competition in order to determine whether they go far enough, while examining other routes to improve competition in the sector.
Specific issues the TSC will examine as part of the inquiry are:
- the impact of the financial c risis on competition and choice in both retail and wholesale markets;
- the impact of widespread consolidation among banks;
- the key barriers to entry inhibiting increased competition;
- whether competition is inhibited by difficulties faced by customers in accessing information about products;
- governments and competition authorities’ strategy to increase competition in banking, including the likelihood that new entrants will successfully enter the market;
- the interaction between competition and financial stability;
- the impact of free banking on effective competition; and
- the role of foreign-based operators and whether they are likely to return to the UK.
Widespread consolidation amongst banks and building societies during the financial crisis has given rise to concerns that competition in the sector is not working, as highlighted by the ongoing Office of Fair Trading (“OFT”) investigations into unauthorised overdraft charges and equity underwriting. In May this year, the OFT also launched a review of barriers to entry, expansion and exit in retail banking and is expected to publish its findings in the autumn of this year.
In the meantime, government is expected to dispose in the near future of large stakes it acquired in nationalised banks’ assets during the financial crisis. Andrew Tyre is reported to have said that he supports the break up of partly state¬owned banks to improve competition in the sector. He is also reported to have commented on the inherent conflict of interest for the government – it has an interest in maximising the yield from these disposals, but at the same time it has a duty to maximise competition in the retail sector to benefit the consumer.
The TSC inquiry will run alongside the work to be undertaken by the Independent Banking Commission, recently set up by the government in June 2010 under the chairmanship of Sir John Vickers, former Chairman of the OFT, to formulate policy recommendations to promote stability and competition in the banking sector.
The deadline for submissions of evidence to the TSC is 6 September 2010. The date on which the TSC will issue its findings and recommendations has not been specified, but it is likely to be ahead of the recommendations of the Independent Banking Commission, which is expected to report to government in September 2011.
The TSC is expected to recommend to government a number of measures to improve competition in the banking sector. These could include a recommendation that the Secretary of State makes a market reference to the Competition Commission (“CC”) for a more detailed investigation, on the basis that one or more features of the retail banking market may be restricting, preventing or distorting competition. If it confirms the existence of such features, the CC has wide ranging powers to determine what, if any, remedies should be imposed and it would in particular have the power to order the break up of some banks.