MENTION BANKS AT a dinner party, and it’s not just the government bailouts and excessive bonuses that people are talking about. Abysmal levels of customer service, opaque pricing structures, and archaic, inefficient systems are just some of the gripes that dinner party guests often bring to the table.

 

It’s hardly surprising, then, that many British bank consumers are looking forward to the prospect of a radical shake-up of the retail banking industry. Earlier this month, chancellor Alistair Darling announced plans to sell off parts of three government- rescued banks to new entrants to the industry in an effort to recoup some of British taxpayers’ funds used in the banks’ bailouts last year.

 

The proposed sale of Northern Rock and the European Union-ordered divestments of parts of the Royal Bank of Scotland (RBS) and Lloyds Banking Group could result in three new High Street banks in the UK within the next four years, Darling said, thus increasing competition in the market. The prospect of new entrants in the industry — including the likes of supermarket giant Tesco and Richard Branson’s Virgin Money — is a breath of fresh air for consumers.

 

Existing players in the market have been up in arms about this, however, particularly since those considered to have too large an existing market share — such as HSBC and Barclays — are banned from bidding for the RBS and Lloyds assets that are up for sale. Antony Jenkins, Barclays’ new global head of retail banking, even expressed doubt as to whether the new, non-bank entrants had the right skills to run a bank. He said in the Financial Times that the new competitors may be underestimating the difficulties of breaking into the market.

 

Jenkins may not be entirely wrong; the UK banking sector has been described as being an unattractive market, especially for foreign banks, as it is mature and expensive to get into. And while there are hopes that cashrich foreign investors in the form of private-equity firms and sovereign wealth funds could be ready buyers for these assets, they may initially be put off by the uncertainty about UK banking reforms and the cost and scope of new regulations, The Guardian reports.

 

The impending break-up of the UK’s “monolithic” banking sector and increasing competition is just one element of change that the country’s banking landscape is seeing. The calamitous effects of the financial crisis has also resulted in what the Financial Times describes as an industry split into two tiers, with successful commercial operators on one level and struggling part-nationalised ones on another. While HSBC and Barclays posted strong 3Q pretax profits, bailed-out banks RBS and Lloyds continue to register losses and are receiving a further £40 billion ($92.2 billion) in taxpayers’ money for their restructuring.

 

This begs the question of throwing good money after bad, especially when potential buyers eyeing the proposed sell-off of Lloyds and RBS’s assets are expected to drive a hard bargain, thus the sale is unlikely to adequately compensate the government for the bailout. So, to avoid having to use taxpayers’ money again to save failing banks in the future, new laws proposed last week under the Financial Services Bill are requiring financial institutions to prepare “living wills” that will enable them to be wound up easily in the event of failure.

 

In other words, no bank should be “too big to fail”. As JPMorgan Chase CEO Jamie Dimon said in The Washington Post last week, there should be a regulatory system that enables financial institutions to meet customers’ needs “while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk”.

 

As to the future of UK banking, regulation seems to be the key in the push for further industry reforms. The proposed bill will grant more powers to the Financial Services Authority in various areas, including veto rights over bankers’ remuneration contracts that are deemed too risk-oriented. Provisions are being made for the setting- up of a Council for Financial Stability tasked to help prevent a repeat of a financial crisis, while consumers will be given the right to take class-action suits against financial institutions in the event of large-scale misconduct.

 

In his commentary late last month, The Times business editor David Wighton described how, in an ideal world, competition is the optimal, most elegant way of pressuring companies into more consumer-friendly behaviour. But sometimes, he adds, “the blunt instrument of hard rules is more effective”.

 

Whether this turns out to be true remains to be seen. Consumers were widely seen as victims of the credit crunch, although there remains ongoing debate as to whether the crisis was due to the careless action of profligate borrowers, as well as greedy bankers and ineffective regulators.

 

Regardless of whether the industry will become more competitive in the future, consumers might still end up paying a higher price in the form of more expensive products and services as there is a huge likelihood that the costs of regulatory reforms will be passed on to them.