TSC lays UXB for ICB

I hate acronymns, but these are three good ones:

• TSC is the Treasury Select Committee;
• ICB is the Independent Commission on Banking; and
• UXB is an UneXploded Bomb.  

UXB is something that the TSC just laid for the ICB.

By way of explanation, the TSC published a 100-page report titled “Competition and choice in retail banking”, last week.

The report is a precursor to the recommendations being published next Monday, April 11th, by the ICB.  

The ICB was established by the Government in June 2010 to “consider the structure of the UK banking sector, and look at structural and non-structural measures to reform the banking system and promote competition”.

It will formulate policy recommendations with a view to:

• “reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function;
• mitigating moral hazard in the banking system;
• reducing both the likelihood and impact of firm failure; as well as
• promoting competition in both retail and investment banking with a view to ensuring that the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.”

Some of you may remember that I attended one of their briefing sessions recently.

Due to the concerns of the TSC under their chair Andrew Tyrie – a man with a mission – a separate Treasury Select Committee ran alongside this program.  

Why two committees investigating the same thing: competition in retail banking?

I guess, it was to ensure that the analysis came to the right conclusions.

“In July 2010, we (the TSC) launched an inquiry into competition and choice in the retail banking sector. The terms of reference were to:

• Assess the impact of the financial crisis on competition and choice in both retail and wholesale banking;
• Assess the impact of widespread consolidation among banks and mutuals;
• Examine the key barriers to entry inhibiting increased competition, including regulation;
• Examine whether competition is inhibited by difficulties faced by consumers in accessing information about products;
• Explore the Government and competition authorities’ strategy to increase competition in banking, including the likelihood that new entrants will successfully enter the market;
• Consider the relationship between competition and financial stability;
• Consider the impact of free banking on effective competition; and
• Look at the role of foreign–based operators and whether they are likely to return to the UK.”

Interestingly, what the TSC found is the following (Page 7):

“For competition to be effective, customers need to know what they are buying and how much it costs. They also need to be able to transfer their custom from one provider to another. Our inquiry has led us to conclude that these pre–conditions for effective competition in the retail banking market are not present.

“First, we are concerned at the continuing lack of price transparency and comparability in the personal current account market. Without such clear information it is impossible for consumers to distinguish between the offers made by rival providers and indeed lack of transparency reduces the incentives for those providers to make distinctive offerings.

“Second, we are concerned that the switching process—despite improvements—remains cumbersome and does not always work smoothly. We believe that effective competition will remain a chimera unless urgent steps are taken to improve price transparency and comparability and the switching process. In this report we set out the evidence which has led us to this conclusion.”

And their conclusions (pages 84-90):

“We disagree strongly with the assertion that the UK retail banking market is contestable. A market is contestable if entry and exit barriers are low and whilst this may be the case in certain parts of the retail market, it does not appear to be the case in parts of the personal current account and SME markets. Furthermore, the financial crisis has demonstrated that exit barriers in the UK banking market are anything but low.” (Paragraph 44)

“Banks which are seen as too important to fail are also too big for fair competition. They receive an implicit subsidy to their funding costs placing them at an unfair competitive advantage to other smaller and less systemically important banks. It also means that providers who offer poorer quality or over–priced products face little threat of being forced out of the market, as they would do in any other industry.

“Solving the too big to fail problem is critically important from a competition as well as a financial stability perspective. The Independent Commission on Banking must address this problem which is crucial to achieving the objectives outlined in its terms of reference. We are encouraged by signs that it is already considering ring fencing as a possible solution which would provide a more level playing field to all market participants. Furthermore, we expect the Government to respond to our predecessor Committee’s Report on this issue when it responds to the ICB.” (Paragraph 222)

and

“We would urge the Independent Commission on Banking to also seriously examine whether there is a case for further structural reforms, over and above the RBS and Lloyds Banking Group divestments, to reduce concentration and promote competition.”

It’s worth a read and begs the question: why publish such a report just before the ICB publish theirs?

Maybe because, in the words of Labour MP John Mann who sits on the Treasury Committee, the ICB’s report to be published next Monday is “a whitewash”, published with conclusions made by “a bunch of elites coming up with something palatable to banks.”

After all, the ICB comprises two bankers, an economist, regulator and a columnist with the Financial Times.

As fellow commentator Ian Fraser  opines, this is hardly “maverick”, and definitely “not thinking out of box”.

It will be interesting to see what the ICB come up with next Monday in response.