Break up UK’s big high street banks, say cross-party MPs

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A cross-party group of MPs is calling for the break-up of major high street banks, which they say are stifling competition and exploiting vulnerable customers.

The call is part of recommendations put forward by the all-party parliamentary group (APPG) for challenger banks and building societies after a two-year inquiry into competition across the UK banking sector. Together, six UK lenders – including HSBC, Barclays, Lloyds, NatWest, Santander and Nationwide building society – hold about 87% of the retail banking market, according to Reuters data from 2018.

The APPG report, which gathered evidence from industry associations, university professors, and challenger banks such as Monzo, concluded that the lack of competition meant big banks were able to “exploit more vulnerable customers at the expense of the better off”. It also found customers faced a loyalty penalty, where banks charged higher prices knowing that customers were unlikely to search for better deals.

“There was evidence of many poor practices by the major banks such as back-book price gouging, where institutions profited from predatory pricing models, luring in customers on good deals before exploiting customer inertia to profit from them,” the report said.

The UK’s one-size-fits-all regulation is partly to blame, the APPG argued, since upstarts face the same regulatory burden as larger established banks despite holding a fraction of the deposits and loans. “It is still virtually impossible for them to scale up,” the APPG chair and Conservative MP, Karen Bradley, told the Guardian.

While the Bank of England recently said it would consider tweaking regulations to level the playing field for smaller banks after Brexit, Bradley said it was not “sufficient to tinker at the edges”.

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“It would seem impossible for this situation to change without radical action,” she said.

Bradley and the rest of the APPG, which includes the Tory peer Lord Flight and the former Sunday Telegraph and Wall Street Journal editor Lady Wheatcroft, are now urging the government and competition watchdog to “examine a breakup and demerger of the major banks to drive more competition in the market”.

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Their recommendation comes amid fresh takeover talks across the banking sector. Sainsbury’s Bank has been approached by NatWest, while the Cooperative Bank has received a bid from the US private equity fund Cerberus. TSB’s Spanish owner Sabadell is considering a sale. Digital upstart Starling is also reportedly being circled by Lloyds and JP Morgan, according to the Times.

Bradley said it was proof that challenger banks were finding it virtually impossible to compete with larger banks. “It is worth bearing in mind that the successful tech sector in the US was a product of competition authorities in that country breaking up AT&T. A similar enlightened approach here in the UK could yield considerable dividends for consumers,” she said.

But some challenger banks are not supporting the APPG’s call for a breakup. The Metro Bank chief executive, Daniel Frumkin, said getting rid of disproportionate regulations – such as the threshold for loss-absorbing capital – would have the biggest impact on growth. “It isn’t the scale of the big banks that limits the ability of mid-tier banks or building societies to compete,” he said.

The Competition and Markets Authority (CMA) said it considered a breakup during a 2016 investigation into the retail banking market, but instead settled on a package of measures that included the launch of “open banking”.

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Open banking lets consumers share their financial data with third parties such as budgeting apps, which could recommend better deals on mortgages, overdrafts and insurance, and help boost competition.

However, there have been few signs of a shift in the dominance of main banks’ market share since open banking rules were launched in 2018.

The Treasury said it was “committed to boosting competition in banking”, pointing to programmes including the current account switching service and a referral scheme meant to match small business customers to alternative lenders if they are declined by their own banks. It also claimed open banking had “revolutionised the industry”.

The banking lobby group UK Finance did not comment on calls for a breakup, but said it was working with regulators to ensure regulation was proportionate for mid-sized and specialist lenders.