Five years on, 'banks still run a monopoly'

Five years on, 'banks still run a monopoly'

Don Cruickshank, who conducted a sweeping review of the banking sector for Gordon Brown, believes that nothing has changed to boost competition among banks and that, five years on, it might be time for the government to act.

Mr Cruickshank told the Guardian that the banks' sustained profitability was a sign that they were operating in a complex monopoly.

His investigation, which culminated in his 300-odd page report in March 2000, infuriated the high-street banks at the time, particularly his claim that they were making "super-normal profits" of £3bn to £5bn a year. His comments almost five years later come in the middle of the bank reporting season. By the time the last of the biggest banks reports next month, the industry is expected to have totted up a record £30bn of profits.

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Mr Cruickshank said the government did not act on his report because of a "regulatory contract", which in effect exists between the banks and the government. This contract, he said, had prevented successive governments - not just those run by Tony Blair - from making significant changes to the way the banks are regulated.

But, he said: "Sustained [and] very high profitability is an indication that they are operating in a complex monopoly and that on balance this is bad for an economy.

"In most sectors you would expect to get new entrants but in the UK if you want to become a bank you've got to be a bank," Mr Cruickshank said.

His comments come ahead of a speech he will deliver next week at an event organised by the London Business Forum. He dismissed entrants to the sector such as Tesco because the supermarket's banking licence is actually held by the Royal Bank of Scotland.

His report made three main recommendations: that banking for businesses was uncom petitive and needed radical changes; that the mechanism moving money around the system should be regulated, and that the Financial Services Authority should be required to promote competition.

While the government did ask for a competition commission review into small business banking, Mr Cruickshank said the price remedies imposed - forcing banks to pay interest on accounts - did not go far enough. He believed there should have been divestment of businesses.

The chancellor also backed the creation of a regulator for the payments system - PayCom - but this was watered down and the powers given to the Office of Fair Trading. The FSA is also not required to promote competition.

Mr Cruickshank blamed the "regulatory contract" for preventing his recommendations being implemented in full. He said civil servants in the Treasury eroded Mr Brown's commitment to PayCom.

Five years on, Mr Cruickshank said that if a review was started now, "all you'd need to do is change the date". He acknowledged that the so-called regulatory contract had a purpose, particularly before 1992 when banks were suffering losses after being encouraged to lend to small businesses.

"Post-92 we've had a run of non-boom-and-bust times, growth has been higher in the economy, interest rates lower and so the banks have had a run of 13 years in economic circumstances which we used to experience only two years out of five. But the regulatory contract hasn't changed," he said.

"Logically, the government should be getting harder but it hasn't responded to better economic circumstances," he said.

But he is opposed to a windfall tax on profits. "I've concluded five years later that PayCom and the FSA competition objective, along with the new merger rules in place, probably represents the shift that needs to take place."

Guardian Unlimited © Guardian Newspapers Limited 2005