Ring-fencing retail banking plan aims to protect SMEs

An interim report was first published in April.

 

According to the IBC, the report’s recommendations aims to create “a more stable and competitive basis for UK banking in the longer term. That means much more than greater resilience against future financial crises and removing risks from banks to the public finances.

 

“It also means a banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, efficiently channelling savings to productive investments, and managing financial risk.”

 

The report claimed businesses with a turnover of less than £25m usually do not have an alternative banking provider, and that “Therefore, it is appropriate for only ring-fenced banks to be able to take the deposits of all companies classified as SMEs under the Companies Act”.

 

Under the Companies Act, SMEs are companies that satisfy two of three requirements: a turnover of less than £25.9mn; a balance sheet of less than £12.9mn; and fewer than 250 employees.  

 

The “high ring-fence” recommended by the Commission should see contained banks contain all deposits from both individuals and small businesses (along with any overdrafts supplied to them), and disallow ring-fenced banks from engaging in trading or other investment banking activities, or provide services to financial companies, or services to customers outside the European Economic Area.

 

According to the report, ring-fenced retail banks should also be allowed to take deposits from larger companies and provide non-financial larger companies with other intermediation services such as simple loans; and where they form part of a wider corporate group, have independent governance, be legally separate and operationally separable, and have economic links to the rest of the group no more substantial than those with third parties – but allowed to pay dividends as long as they maintain adequate capital levels, which will preserve diversification benefits.

 

Besides ring-fencing the retail arms of banks, the IBC’s report claims there are “long-standing competition issues in UK retail banking,” and that the largest four banks account for over three-quarters (77%) of personal current accounts and 85% of small and medium-sized business current accounts.

 

The report also says competition between banks on current accounts is “muted by the difficulties of switching between providers and by lack of transparency about banking services on offer”.

 

The IBC cited figures from the Office of Fair Trading, which revealed over a quarter of SMEs (27%) said the main reason for choosing a particular bank was that “its branch location was closest to their business”. Over one-third (approximately 35%) of small businesses said it was because they already held a personal current account with that bank, showing that “banks without a presence in personal banking face an additional barrier in attracting SME customers”.

 

A further obstacle to business customers switching accounts was the difficulty in switching secured borrowing between banks – a barrier first identified by the Competition Commission in its inquiry into small and medium business banking back in 2002.