There have been many false dawns in the quest to inject more competition into UK banking. Reform has been a tenet of government policy since the financial crisis in 2008. This week marks the second anniversary of one such initiative: Open Banking. Launched by the Competition and Markets Authority in January 2018 as part of sweeping EU legislation, the new measures were intended to reduce the advantages of incumbent high-street lenders. These would give smaller rivals access to their valuable customer data, encouraging consumers to switch. Two years later, awareness remains low; three-quarters of people surveyed by Which?, the consumer group, had not heard of it. Like previous banking reforms it promised much more than it has delivered.
Competition in the retail sector remains poor. Consumer trust in banks has risen since the crisis but only a small percentage of those with accounts tend to switch banks. Latest data from the Current Account Switching Service showed it completed close to 1m switches in the 12 months from October 2018. The number of “challenger banks” has risen, but they have struggled to gain meaningful market share. And while millennials are more likely to open an account with a digital bank, they are still reluctant to use them as their main bank account.
The woes of Santander UK, the Spanish bank that bought mortgage specialist Abbey National in 2004 and describes itself as a “scale challenger”, are a case in point. Despite expanding rapidly through a string of acquisitions over the past decade, profits growth has proved elusive. The bank last year took a €1.5bn writedown on its UK business. A much-heralded public offering is off the table. Others have also struggled. Capital concerns at Metro Bank helped trigger an exodus of senior managers last year. The newly-combined Virgin Money-CYBG has seen its market value suffer.
Management failures are among the reasons for the poor performance but the government must share some of the blame. Policy had been dictated by the need to fix the problems created by the 2008 bank bailout. Some of the largest challenger banks did not emerge naturally but were created by forced divestments from the incumbents, such as Lloyds.
Challenger banks have also been hit by another set of rules: “ringfencing”, introduced after the crisis to protect retail banks from the risks of investment banking. One effect has been to leave big lenders such as HSBC with billions of pounds in excess customer deposits that can be used only in the UK. HSBC has piled the cash into the mortgage market, driving down prices and hurting profit margins at rivals.
Other policies look misguided. The decision in 2015 to apply the bank levy to all players, including challengers, damaged profits. A decision by the Bank of England to set a low threshold when applying European regulations that demanded a new “minimum requirement for own funds and eligible liabilities”, or MREL, also harmed nascent players. In the eurozone, the requirement to raise expensive loss-absorbing debt applies only to banks with assets over €100bn. In the UK, the requirement starts at just £15bn, driving up costs even for relatively small lenders. Metro Bank’s aborted bond sale last year was a case in point.
Policymakers appear to be waking up to some of the issues. The Bank of England’s recent stability report suggested smaller banks could be excused from tougher new capital rules. Open banking was always going to take time to succeed but Britain’s challengers do not need any more barriers to growth.
