The Cruickshank report: Competition in the banking industry under scrutiny

Don Cruickshank's report on competition in the UK banking industry was published on 20th March, 2000. The report is the result of an independent review of the banking industry (excluding investment banks) commissioned by the government in November 1998. The scope of the review included the examination of the levels of innovation, competition and efficiency both within the industry and in comparison to international standards. An interim report was published in July 1999 (Competition and Regulation in Financial Services: Striking the Right Balance; see also PLC, 1999, X(8), 51).

Conclusions

The main problem highlighted by the report is that banks are benefiting from high profits by overcharging up to £3-5 billion a year for banking services to the detriment of their personal and small business customers. The criticisms include:

• The current policy framework for banks and other financial services firms: this has allowed a lower level of competition scrutiny in comparison with other industries. The report points in particular to the regulatory restrictions on entry to the market and the fact that banks are represented on the board of the industry's regulator, the Financial Services Authority (FSA).
• The ability of the major banks effectively to control the money transmission systems (these consist of the ATMs and credit and debit card payment networks, cheques and direct debits, standing orders and high value payments). The report considers that the currently unregulated systems are resulting in limited competition within the marketplace and high charges for retailers and customers.
• The lack of information provided to personal customers and small to medium sized business customers (SMEs) about banking services and banks' accountability.
• The lack of access to banking services for lower income earners.
• Market concentration in favour of the big banks in respect of SMEs' banking business.

Recommendations

The report gives a number of recommendations including:

• A strengthened policy framework to increase transparency in banking supervision, eliminate regulatory distortions and prevent anti-competitive mergers within the banking industry whilst retaining prudential regulation. To help achieve this, the report calls for the FSA to assess in its annual report the level of competition within the banking industry. The Financial Services and Markets Act should also be reviewed two years after it comes into force in order to check its impact on competition and the Treasury should ensure that its scrutiny of the economy includes banking and financial services.
• The introduction by the government of primary legislation to establish an independent payment systems commission (PayCom). The Treasury would set up a licensing regime for the money transmission systems which would be monitored by PayCom.
• More information for personal customers about the banking options and remedies available to them, together with wider access to banking services, particularly for those on low incomes. Products such as current accounts and mortgages should remain unregulated.
• A monopoly reference for SMEs under the Fair Trading Act 1973 in order to identify the existence of complex monopolies within the banking industry. More information and increased access to the Financial Services Ombudsman should also be provided and government support to small businesses should focus on the supply of small scale equity by means of the government's venture capital fund programme rather than loans. The current scheme is considered inefficient and does not meet the needs of new and innovative businesses.

Government response

The Chancellor of the Exchequer broadly endorsed the report in his Budget speech on 21st March, 2000 and announced that legislation would be introduced to open the payment systems to increased competition. The Association for Payment Clearing Services (APACS), which operates the cheque clearing, BACS and CHAPS money transfer systems, has subsequently disclosed plans to speed up standard and online payment systems over the next year or so.

Joanna Morris, PLC.

A copy of the report "Competition in UK Banking: a Report to the Chancellor of the Exchequer" can be found at www.bankreview.org.uk