Cruickshank report lashes UK banks

"There isn’t effective competition in banking services for small businesses, where I’m recommending there be a complex monopoly reference to the Competition Commission," Cruickshank told BBC radio after releasing his report.

The UK’s big four banks – Lloyds TSB, HSBC, Barclays and National Westminster, now owned by Royal Bank of Scotland – control more than 80 per cent of this market.

HIGH PROFITS AND HIGH PRICES: "The result of this market structure is high profits and high prices, in particular for money transmission services".

Cruickshank said the monopoly probe should bring with it the threat of the break-up of the big four’s businesses in that area. "I would expect that the Competition Commission would consider whether certain banks should be obliged to sell off viable businesses to someone else," he told BBC Radio.

Analysts’ views on what the report meant for banking stocks were mixed, with some saying it was worse than expected and others saying it was slightly better than expected.

"There’s some fairly dramatic headlines in there,"Charterhouse Securities analyst Simon Willis said. "It does look punchier than expected," he said as bankingstocks fell about one percent in the first two hours of trade.

But other analysts said investors would take a benign view of the report, given many had expected such a lashing and had built it into share prices already.

Banking stocks recovered through the late morning and theFTSE banking index was up 1.5 percent by 1200 GMT, stronger than the overall market’s rise of 1.0 percent.

"It’s slightly milder than it was expected to be," said FoxPitt Kelton analyst Jon Kirk. "He’s left personal customer banking reasonably well alone and I’M Surprised he hasn’T gone further into the portability of personal accounts," he said.

Merrill Lynch analyst Martin Green said Cruickshank decisionnot to refer personal banking to the Competition Commission showed he recognised competition was building fast there anyway.

"We thought it was going to focus a bit more on the personalmarket, but he has said that since he started the report competition has been coming in thick and fast," Green said.

Analysts said Cruickshank’s recommendations on a smallbusiness banking probe could also be redundant by the time they are brought in after a year or two.

"The landscape of how the banks treat their SMEs could alsochange dramtically in the next year to two," said Green.

CASH MACHINE CHARGES

Cruickshank criticised the level of charges for AutomaticTeller Machines (ATMs) in the UK and called for a new regulator — Paycom — to supervise this system as well as charges for current accounts.

"What we’re looking at here is the control of a umber ofnetworks by a few banks and I’M Recommending that this needs consistent and persistent supervision — that there be a new regulator Paycom," he said.

Paycom would license banks operating the payments system andhave the power to punish any non-compliance.

Cruickshank reiterated that new charges for using cashmachines proposed by UK banks last month should be set at 15 to 30 pence, reflecting the actual cost of withdrawing money.

"I’M Saying that the banks that have market power shouldonly be allowed to charge the cost of each transaction — 15 to 30 pence — and if I’M Banking with a small bank, that bank should be able to pick that cost up for me if it so chooses."

NEW REGULATORY FRAMEWORK

Cruickshank, who began his investigation some 16 months ago,called for tougher regulation across the board in banking, including moves to prevent anti-competitive mergers in the banking industry.

Cruickshank said all mergers of large UK banks should bereferred to the Competition Commission.

He recommended that the government should not approve anymerger where the Competition Commission had produced an adverse report unless the takeover promoted competition and did not make it harder for new entrants.

The last big UK bank merger, between the Royal Bank ofScotland and National Westminster Bank, was approved without any monopoly investigation.

Bank sector shares have slumped in relative terms over thelast six months on investors’ fears that government regulation and a flood of new Internet competitors could cut into their high profits.

Lloyds fell two percent in early trade before rebounding tobe up 4.5 percent at 626 pence by 1200 GMT.

Chancellor of the Exchequer Gordon Brown launched the probe16 months ago in the face of mounting criticism that British banks were anti-competitive and making excess profits at the expense of customers.

Cruickshank has no statutory powers but can urge governmentaction on his recommendations under new competition legislation that can impose fines up to 10 percent of companies’ turnover. ($1=.6353 Pound)