In  a ‘the gloves are off’ move, the UK’s Competition and Market Authority has launched an investigation into the state of competition within the British banking industry, pledging to do whatever it takes to bring real competition.

Concerned that the UK’s biggest banks are not properly meeting the needs of consumers and SMEs, the UK’s Competition and Market Authority (CMA) has kicked off a full scale inquiry into aspects of the industry, which could ultimately force a partial break-up of the main banks.

In early December, the CEO of the CMA, Alex Chisholm, told attendees at a BBA conference in London that his organisation had good reason to believe that competition within personal current accounts and SME banking has “features preventing, restricting or distorting competition”. Attendees were also told that the situation was serious enough to warrant a full market investigation of these sectors.

In his speech, Chisholm suggested that the lack of competition among current account providers is the reason so few British consumers bother switching accounts. Data from the UK Payments Council show that only just over a million British consumers  switched current accounts in the first 12 months of the seven-day switching initiative, which, given there are almost 50 million current accounts in Britain, isn’t nearly as much as was originally anticipated. The general consensus is that consumers don’t switch because they don’t believe there’s any point – in most consumers’ eyes, all current accounts are more or less the same. Similarly, only around 4 percent of SMEs switch banks each year, which, again, is because they don’t see any difference between providers.

There was also a suggestion that overdraft charges are deliberately complex, making it difficult for consumers to find the best deals. In the CMA’s assessment, there is a crippling lack of transparency.

There’s an uneasy awareness that just four banks – Lloyds, RBS, Barclays and HSBC – control more than three-quarters of the personal current account market in the UK, a situation that isn’t in the interests of consumers, SMEs or the broader economy. Even before the inquiry was announced, the British Labour Party leader, Ed Miliband, claimed that, if elected prime minister, he would force these banks to sell off branches so as to “dismantle the big four”. These same banks also control 85 percent of business accounts and 90 percent of business lending.

“In his speech, Chisholm suggested that the lack of competition among current account providers is the reason so few British consumers bother switching accounts.”

As well as investigating whether competition is being deliberately curtailed or restricted, the intention is to determine what measures are needed to kick-start competition in the industry. In issuing recommendations, the panel conducting the inquiry could go as far as calling for the main banks to be forced to sell off chunks of their business so as to create ready-made competitors. If this happens, the most likely focus would be business banking in Scotland, which is effectively dominated by just two banks: RBS, which controls 39 percent of the market, and Lloyds, which controls 30 percent. 

The less ‘nuclear’ option – and, some would say, more likely option – would be to call for behavioural remedies, which could include better communication and clearer information when dealing with customers. At the same time, though, there have been a number of attempts over the past 15 years to make banking in the UK more competitive, but the situation has scarcely improved. There’s little appetite now for further promises or undertakings from the main banks. 

While the announcement drew an exasperated sigh from the four dominant institutions, it was welcomed elsewhere. The British Chambers of Commerce described it as “undoubtedly the right decision”, taking the opportunity to criticise what it described as “Britain’s dysfunctional banking system” for impeding the growth of young British companies with potential. Not surprisingly, banks outside of the big four were also pleased with announcement.

The inquiry is expected to take around 18 months to complete, so it will be mid-2016 before we learn the outcome.