Today, 80 per cent of the UK’s retail banking market is controlled by just five of our largest banks. 85 per cent of the business lending market is also dominated by the big five with high barriers to entry. New entrants need to be encouraged; this means clearing the way for start-ups and fostering smaller competitors. Competition is crucial, and it works. For example, until recently the five large electricity companies held over 99 per cent of the British household market. Today their market share has fallen to 85 per cent, as the regulator brought in new rules to encourage competition. Customers can save hundreds of pounds each year, as they have a greater choice of contract and tariff. We need the same in the financial services sector.
My colleague on the All Party Parliamentary Group (APPG) for Fair Business Banking, Lord Cromwell is Chairman of Banking Competition Remedies, which is set to distribute £775m in grants to challenger banks. Clydesdale and Yorkshire Bank, Metro Bank, Nationwide, Santander UK, TSB and Virgin Money are all expected to apply, in addition to a number of smaller financial technology firms.
There are still over two million people without access to a bank account, which effectively excludes them from accessing financial services—financially excluded people pay a poverty premium of £1,300 each year. The All Party Parliamentary Group on Poverty, which I co-chair, has recently heard evidence on the poverty premium.
“Many of the banking scandals have had a catastrophic effect on thousands of individual lives and livelihoods”
One recommendation is that the Payment Systems Regulator should ensure Direct Debits and Faster Payments are accessible to small organisations and new entrants. Another is to place a statutory duty on the Financial Conduct Authority to promote financial inclusion.
The Commission recommends transparent pricing, to encourage competition. And, following on from that, as we encourage more people to access financial services it is important that consumers trust banks and the banking system. In 2014, Accenture claimed that only half the population think that their bank is “fair and transparent” or “trustworthy.”
The Financial Ombudsman has told me that fraud and scams are getting more sophisticated and fraudsters are using more complicated techniques. I am concerned at the perceived unwillingness of the police, the Serious Fraud Office and the National Crime Agency to investigate financial frauds that have led to bankruptcies of viable companies. Unauthorised fraudulent transactions, for example, totalled in excess of £730m in 2017. Consumers are often left without reimbursement.
Since 2014, cases of authorised push payment fraud are estimated to number 200,000 totalling an estimated £1bn. The Payment Systems Regulator is currently undertaking a consultation on a new reimbursement model together with an industry code which will be used to consider complaints from late-2018 or early-2019 onward. However, this new scheme does not provide a solution for historic cases.
The 2008 financial crisis contributed to a lack of confidence in banks, banking and bankers. This lack of confidence means firms are reluctant to borrow to grow; this then has a knock-on impact on the entire economy.
Many of the banking scandals have had a catastrophic effect on thousands of individual lives and livelihoods. Some of the most well-known examples include the Royal Bank of Scotland’s mistreatment of SMEs transferred to its Global Restructuring Group (GRG) and the Halifax Bank of Scotland (HBoS) Reading fraud. There is a systemic failure, as many of those firms that suffered from mistreatment and malpractice were denied access to justice. Not only are our banks too big to fail, they are also often too big to take to court. Affordable, independent dispute resolution is critical to business confidence.
The Fair Business Banking APPG launched our report, “Fair Business Banking for All,” in July; it is one of a number of pieces of research investigating dispute resolution for businesses.
The report identifies a series of flaws in the current regime by which SMEs can gain access to justice, with a significant gap between the claims that can be dealt with by the Financial Ombudsman Service and those which need to be settled in court. The report makes a series of recommendations, including that SMEs should get the same legal protections as “private persons” and that a new Financial Services Tribunal should be established for the simple, low-cost resolution of financial disputes.
Enterprise and entrepreneurship are the lifeblood of the British economy. To prosper further, we need banks, business and consumers to maintain a healthy, supportive relationship and to have confidence that when disputes arise, they are dealt with fairly, efficiently and effectively. With the development of technologies, we must also encourage new entrants into the financial services sector while placing a premium on protecting consumer data and reimbursing victims of fraud when it is not their fault.
Read more from our financial inclusion supplement
Banking on Change is a publication which examines how we can develop a comprehensive policy approach towards financial inclusion. The report features contributions from the likes of John Glen MP, Peter Dowd MP, Anne Pieckielon, Chris Pond and Guy Opperman MP.
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