The new competition probe into the banks has provoked dismay in the industry and demands from consumer groups for an end to allegedly opaque and unfair charges.
The Office of Fair Trading plans to draw banks, regulators and the government into the probe, highlighting its potential commercial effects and its possible impact on official policies such as increasing access to banking services.
One competition lawyer predicts the sweeping and potentially contentious investigation “will turn into a wider debate about the future of the UK banking system”.
The OFT announced details of the probe on Thursday, almost a month after it revealed it planned to widen its study of overdraft default fees into an “in-depth study of retail bank pricing”.
John Fingleton, OFT chief executive, is no stranger to controversial probes into the banking industry, having undertaken one in his previous job as the head of Ireland’s competition authority.
Many banks and the competition lawyers who work for them are unsurprisingly nervous about the probe, with some expressing concern and dismay in private.
One banking insider said Thursday’s announcement was “outrageous”. He accused the OFT of pre-judging its work by saying it shared public concern about the level and incidence of charges on unauthorised overdrafts.
The banks were more measured. HSBC reflected the general mood by welcoming news of the detail of the OFT’s work while defending its overdraft charges as “fair and reasonable. They are certainly not hidden,” it said. “They are very transparent.”
By contrast, Doug Taylor, personal finance campaigner at Which?, said the OFT investigation was necessary only “because the banking sector seems incapable of creating a fair deal for its customers”.
“Banks could save a lot of time, money and effort if they just opened up their books and showed us how they work out their charges,” he said.
The OFT argued the probe was the “the next logical step” of work long done on the banking industry by it and others, dating back to the Cruickshank report in 2000 and covering areas such as switching, payments systems and overdraft charges.
The OFT said areas to be examined in the latest probe would include overdraft default charges, transparency of fees and the ability of customers to make informed choices about whether they are getting good value.
Perhaps the biggest question asked by the OFT is whether the British model of offering “free-if-in-credit” current accounts – in contrast to charges imposed elsewhere in Europe – offers consumers the best deal.
Any change to that approach could have an effect on political initiatives such as the Treasury’s efforts to increase the availability of bank accounts to people on low incomes.
No doubt aware of the sensitivities, the OFT stressed its desire to talk to the government, the Financial Services Authority and the financial ombudsman, as well as the banks.
Other complexities the expanded OFT probe will examine will be the so-called “water-bed” effect, under which the squeezing down of overdraft charges causes new fees to pop up elsewhere.
The OFT will also look at whether banks give customers enough information to decide if they might get a better deal at a rival financial institution. One example of the problem was the failure of some banks to give clients data on their average balances for the year, which are used to calculate the amount of interest payable.
An important clue to the OFT’s possible conclusions – and the remedial action it might take – comes from an investigation into Northern Ireland’s banks published last month by the Competition Commission.
The probe concluded that competition was restricted by lack of clarity on fees, unduly complex charging structures and a reluctance among customers to switch providers.
The commission plans to announce remedies next month, which could include requiring banks to provide more information to customers, more notice on charges and more favourable arrangements for clients who move to other institutions.