Is it Groundhog Day for British Banking?

19^th August 2014

With the news that HSBC will be closing accounts for certain Muslim organisations, James Watkins questions if the banking system is working for the benefit of its customers

After the debilitating financial crisis, the opprobrium heaped upon bankers and taxpayers obliged to bail out the banks, you would be forgiven in thinking that the banking sector was now open, transparent and offering good deals to customers.

After all, surely bankers would not again risk the wrath of customers, politicians and regulators following the extraordinary period of drama, turmoil and angst in what was once seen as the staid world of banking.

But, it seems, old habits die hard. In a little noticed document issued at the height of the summer holiday season, concerns were expressed by the Competition and Markets Authority (CMA) that personal and business customers were still not receiving a fair deal.

The CMA, the successor organisation to the old Competition Commission and charged with ensuring fair and open competition in the markets, questioned why customers were not receiving good services. In its own words, the CMA noted that there “remain sectors which do not appear to be functioning in the way we would expect of effective competitive markets. This leads to poorer outcomes for customers – holders of personal current accounts and small and medium sized enterprises – and also, given the key importance of retail banking, to the wider economy”.

The CMA’s initial research has found:

• Problems for small and medium sized businesses to “access, assess and act on information about the banks’ offerings”
• Just 13 per cent of small and medium sized businesses trust their banks
• In 2013, there were 600,000 complaints from personal current account holders about their banks.

Despite the widespread regulatory changes introduced by the Government – from the introduction of the Prudential Regulatory Authority and the Financial Conduct Authority through to the capital reserve requirements that banks must now meet – this does not seem to have shifted in any fundamental sense the way banks continue to operate in retail markets, if the CMA’s concerns are to be taken on board.

Nervousness regarding the perceived closed structure of banking, worries over the low levels of customer satisfaction rates, plus the lack of liquidity for small businesses despite evidence of the arrival of the nascent economic recovery, pervades the CMA report.

This is clearly not the first time that the structure of today’s banking system has been questioned. Business Secretary, Vince Cable, has expressed worries at the lack of long term “patient” capital for Britain’s small and medium sized businesses whilst the Bank of England have long called for a “structural re-configuration” in the banking sector so that the needs of small and medium sized firms are met.

In July, ResPublica joined the debate in its report, Virtuous Banking. It called for a range of measures to put the banking system back on track for the benefit of customers such as codes of conduct to place customers at the heart of ethical standards, all bankers to swear an oath to uphold such standards and for the Financial Conduct Authority to ensure banks meet high customer satisfaction rates.

However, the opaqueness of the banks’ decision making processes was on display yet again when the Guardian newspaper reported that HSBC was closing accounts for Muslim organisations, with no reasons being offered as to why this was happening. This was yet another example of how the decisions of banks are not open to full scrutiny. It raised the question of whether subjective decision making for a swathe of customers now had primacy over consideration of ethical standards of behaviour as well as whether an analysis of the financial robustness of account holders was really being considered at all.

Whether it is obscure decision making or customers not getting the quality of services they rightly expect, the problems bedevilling the banking sector are still with us. The emergence of so-called “challenger” banks in response to the dominance in the market of the main high street retail banks may lead to greater competition and openness in British banking.

However, after all the regulatory changes that have so far been witnessed, it may – in fact – be the conclusions of a little noticed consultation document issued during the summer holiday season that may unlock transparency and good customer conduct. If not, then without major changes in the structure of British banking, the problems we have witnessed so far may well be repeated for some years to come.