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Time for radical reform of retail banking, says Augar
Now is the perfect time for the Government to step in and carry out root and branch reform of the retail banking sector, says leading commentator Philip Augar.
Addressing a lecture exploring responsible business at MBS, Augar said nothing short of “really radical action” was required. “We have to step in and try and get this market working. There is widespread dissatisfaction with the retail banking industry, yet only 3% of UK customers changed their bank last year.”
Augar, who is also a non-executive director of TSB and stressed he was making personal views during his lecture, said there were specific reasons why now was the perfect time for reform.
In particular, the growth of online banking was gradually making the branch network less important and the Government could accelerate this digital revolution by opening up the banking infrastructure – and especially its payment system - to all players, thereby taking ownership of the digital network. “If there was a centrally owned banking system there is the potential for mobility, flexibility, and a generally more competitive market that is properly functioning.”
Another reason was that the Government still owned vast chunks of the retail banking market. “The state owns 85% of RBS, a book of mortgages from the legacy of Northern Rock and Bradford & Bingley, as well as NS&I and Post Office bank. Why not break up RBS into a series of regional banks? Why not use NS&I to challenge existing banks? Why not use the mortgage assets more?”
He added that the Competiton and Markets Authority could also look at breaking up the banks, capping market share, and even introducing price caps. “If the Government has the courage it could be the beginning of the end of British banking as we know it and the dawn of a new era. We need fundamental reform.”
So is this truly the start of a new era? Augar was less sanguine. “I think bits might be applied, for instance a cap on certain banking charges. There needs to be a political will to make this happen, but I do not see appetite at Westminster to roll the dice.”
A former Natwest executive himself, Augar conceded that the retail banking industry was trying hard to change its spots, part driven by regulators. “The tone at the top is now very different and all the banks have top to bottom cultural programmes, while pay reforms have been put in place too. Regulators are beginning to have an effect on the industry. For instance new rules require senior managers to be personally responsible and accountable for business loans. These changes will help drive better behaviour and make banks more stable.”
However without worthwhile consumer choice there was no way of consumers assessing what banks were making from customers. “Analysts tell me that the return on equity from large scale retail banking is 30%, yet the cost of capital is less than 10%. That is an astronomical return.”
Augar said a fundamental issue remained the ownership structure of banks. “Banks are trying to walk a better talk but the problem remains that they are owned by shareholders who want returns. We might be in for a period of relative calm, but what happens when memories fade?”
Indeed he questioned whether the mindset, particularly in investment banking, had changed at all, pointing to regulators who fined 10 investment banks $43m for breaking rules on new share issues only seven years after they came into place. “Why should it be different this time around?” he mused.