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Personal banking in 2012

    In the eighth of the CPS' 'UK Policy Resolutions for 2012' series, Andrea Leadsom, Conservative MP for South Northamptonshire, examines how to increase competition in the personal banking sector. Yesterday, in the seventh in the series, Nigel Knight called for a Treasury study of a flat tax on personal income.

    UK Policy Resolutions for 2012:

    • Break up RBS and reverse the Lloyds-HBOS merger
    • Require the banks to share a single clearing system

    The recent report from the Financial Services Authority (FSA) on the scandalous behaviour at RBS is just the latest reminder of how decadent parts of the banking system became under the last Government’s ‘light-touch’ regulation that turned into a ‘soft-touch’ regime.

    Significant and substantial action is underway to address this but, rather than despairing at our capitalist system, I believe we should instead return to our free market principles.

    Capitalism is not anarchy. Far from being built on a complete absence of rules, it depends on the enforcement of contracts and the protection of property rights. Nor can capitalism function without effective competition – the consumer must be able to exercise choice if they are to enjoy all the benefits of a free market.

    Choice and competition is far less evident than it should be in the banking sector. Whereas in 2000 420 banks were authorised to take deposits in 2010 there were only 322. Similarly, there were 41 major British banks and subsidiaries in 2000 but in 2010 just 22.

    Both of these trends are in the wrong direction, yet this should not come as a surprise. The FSA has issued a distinctly miserly total of one new ‘full banking licence’ in the last hundred years, to Metro Bank. The likes of Virgin Money, Marks and Spencer Financial Services and Tesco Bank offer limited services and are not in a position to become ‘Challengers’ to the high street banks, whose assets have grown by an average of four-fold over the last ten years.



    Fortunately, the government has a unique opportunity. It could and should break up RBS and reverse the Lloyds-HBOS merger. However, there is another, highly innovative policy it could adopt that would revolutionise the rights of the consumer.

    Moaning about the ‘bad service’ provided by banks is a common pastime; changing bank is a rare phenomenon indeed. Inevitability this has bred complacency among the four or five major market leaders, who already enjoy a structural advantage. Surveys show customers, both personal and SME, are often highly dissatisfied with their bank, and yet switching is still unpopular. 

    A radical way to address this would be by requiring the banks to share a single clearing system. A major project that could be owned by the Bank of England, it would hold all bank accounts centrally with a code establishing which commercial operator each account is held with.

    It would not be cheap. It is, though, possible with modern technology and it would mean that any authorised commercial bank would be able to buy a licence, so removing the unfair advantage of the largest banks.

    New competitive life would be breathed into the market. People could quite literally switch between providers at the click of a button - they would not have to change their account number, which is currently the major reason for ‘stickiness’ among bank customers.  We know that retaining their mobile phone number makes people less reluctant to change provider, and the same would surely apply in banking.

    It would have another free market advantage: the failure of a bank would look less like a national disaster because a common clearing system would radically reduce the chances of a run on a bank – the Bank of England would be able to transfer accounts from the failed provider to a solvent bank.

    Those who would have us throw away capitalism because of the financial crisis are throwing the baby out with the bathwater. The answer to banking’s woes lies in returning the sector to the true free market principles of honest endeavour, competition and choice.


    Andrea Leadsom is the Conservative MP for South Northamptonshire. In 2011 she authored ‘Boost Bank Competition’ for the Centre for Policy Studies.

    This article represents the views of the author only and does not necessarily represent the policy outlook of the Centre for Policy Studies, its board, staff or affiliated members.

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