David questions Chancellor on banking competition

Wednesday, 11 January, 2012

David has questioned the Chancellor on what he is doing to encourage more competition in the SME banking market. Small and medium-sized enterprises (SMEs), including those in East Anglia, are having an increasingly tough time securing financing from their banks. More competition is needed, so that new banks with a greater knowledge of the SME sector can offer a greater choice of terms for SMEs. One of the things stopping this is the huge switching costs: if you change your bank account provider, you have to change your bank account number and switch all of your direct debits. The Government believes it is too costly to change the IT infrastructure so that people can keep their bank account number when they switch accounts. But it will not publish any research it has done on these costs. Here is David's exchange with the Chancellor:

Q601 Mr Ruffley: Chancellor, how many new entrants to the retail banking market have there been in the last 20 years?
George Osborne: I don't know.

Q602 Mr Ruffley: You do not think there is seriously inadequate levels of competition in retail banking?
George Osborne: I do think there are, absolutely.

Q603 Mr Ruffley: You have talked about Northern Rock and you have talked about a deal that the Co-op might be doing, but why do you think it is that the big four banks' market share in the PCA market has been pretty constant over the last decade or so? What is your personal assessment of that?
George Osborne: I think it is because it is a business where-we were just having a discussion about IT-scale gives you an advantage, where there is a huge consumer resistance to switching accounts. I think it is less than 5% of people switch their accounts. We are trying to make that easier for people. It is quite difficult for a new entrant to get knowledge of, for example, a small business' banking relationship with another firm, that small business is extremely nervous about moving and breaking that relationship to try and create a new one. So there are a lot of barriers to entry.
I think the other truth is that if you look at what has happened in recent years, the big new challengers were some of the biggest casualties of the banking crisis, HBOS and Northern Rock. HBOS in commercial lending particularly, but also personal lending, and Northern Rock in mortgages were the big challenger, they were the big entrants. Of course they were running, as we now know, big risks to be the big new entrants and they were trying to break into the monopoly of the big four, as you put it. Although I would just draw your attention to, I think, Santander UK has been a powerful new entrant on the high street, and Nationwide has made a very welcome recent announcement that it is going to be getting into the small business lending business.

Q604 Mr Ruffley: Do you think there is enough competition in the SME banking market?
George Osborne: Again, I don't think there is and we are trying to increase it.

Q605 Mr Ruffley: What were the ICB proposals you have endorsed and want to enact? What do those proposals look like to enhance SME banking competition?
George Osborne: I think, for example, insisting that when it came to the divestment of Lloyds branches that we should consider that creating a powerful new challenger, I think that is a helpful recommendation in that respect, and as I say, I think the way they have constructed their proposals on the ring-fence makes it quite easy for people to engage in small business lending. It is good news, as I say, that Nationwide are getting engaged in this activity. There have been big casualties in the last four or five years, and some of them were the most aggressive lenders to small businesses. The Royal Bank of Scotland remains a very, very big player in the small business lending business in the UK and that is because it took a vast market share in the-

Q606 Mr Ruffley: The question is, Chancellor, can you point to anything in the ICB proposals that you have endorsed that are going to improve and enhance competition in the small business banking market?
George Osborne: As I say, I think the very specific recommendations we have had on competition that the Government should ensure-as a minority shareholder, and using what levers it can-that the divestment of the Lloyds branches that was required by the European Commission went to create a new challenger bank or expand a small bank rather than go to one of the existing banks, I think is a specific recommendation.

Q607 Mr Ruffley: So you are just hoping that those new entities will lend more to small businesses?
George Osborne: Well, those branches and that business is not going to Barclays or HSBC.

Q608 Mr Ruffley: Did you ever consider breaking up RBS to create a new challenger bank?
George Osborne: Well, obviously on coming to office and in discussions I looked at the Government strategy-inherited, from my point of view-towards RBS and in the last 18 months that strategy has changed. The management themselves have made proposals that I welcome, so I think you can see in what RBS is doing partly what the Government thinks is the right thing to do.
Mr Ruffley: So you didn't consider breaking up RBS?
George Osborne: I don't think it is helpful to speculate about individual firms, even ones where the Government has a very large shareholding, about all the options we have ever considered in private, but I think people can see in public that RBS is changing its strategy, dramatically reducing the scope of its investment banking and I think that partly speaks for itself.

Q609 Mr Ruffley: A final question. On Andrea Leadsom's point about shared infrastructure, and you talked about what John Vickers said about the cost, that at this stage the costs would outweigh the benefit. We have had evidence in this Committee from Don Cruickshank, who first argued for this around 2000, and he suggested that the Treasury had objections, that they basically put the kibosh on the idea, and he regrets, ten years on, that this has not been done. Is there a piece of work you could make available to this Committee that your officials have put together explaining why the costs would outweigh the benefits? As my colleague, Andrea Leadsom, has said, some people would doubt that the IT costs would be prohibitive. Could you make that available to this Committee?
George Osborne: Yes. I think what I will undertake to this Committee is that in the conclusion of the consultation and the White Paper we produce that we give very serious treatment to the account portability proposal. We set out the costs and the benefits, and indeed, if the benefits outweigh the costs, we will look very favourably at it, but let us hear the evidence and see the evidence. What I promise the Committee is that we will give our full consideration.