Government plans to force UK banks to ringfence their retail operations from their investment arms are likely to push up the cost of banking services and mortgages. The plans, set out in the banking reform white paper, are designed to prevent the government from having to safeguard the deposits of retail customers with taxpayer money to prop up any banks that collapse as a result of their riskier investment activities. But Kevin Mountford, head of banking at Moneysupermarket.com, said the proposals could have a sting in the tail, as they could mean "institutions will no longer be able to cross subsidise their businesses with profits from investments funding retail operations".
This could not only result in banking charges being introduced for all customers, but higher charges for borrowers, he said. "If banks cannot use this revenue to subsidise their retail businesses, we could expect to see the cost of consumer borrowing driven up, and this could even signal a move towards the end of free banking as we know it. There is no doubt that the cost of adopting these policies will mean the customer will likely pay more for their services."
He said that under the rules, banks will be expected to hold a minimum of 17% capital as protection against losses, "and the burden of raising these funds will most likely fall on ordinary customers".
However, the move could be good news for savers. "I would also expect to see further competition for customer's savings as banks try to entice consumers to increase the inflow of deposits to help strengthen the balance sheets of their retail operations," Mountford said.
Anthony Thomson, chairman of Metro Bank, warned that ringfencing would not necessarily prevent future banking crises. "We must bear in mind that the banking liquidity problems of four years ago weren't a result of investment banking errors, but errors made by retail banks' overreliance on wholesale funding," he said. "The banks borrowed huge amounts of money from the markets and once that source of liquidity dried up, their overreliance led to their demise. While ringfencing will protect depositor's money, it won't stop another crisis by itself."
The plans, which the government hopes to implement by 2015, also include measures to make switching current accounts easier as part of a drive to increase competition between banks. Consumer Focus welcomed the move to increase transparency across retail banking products, but Sarah Brooks, director of financial services for the consumer organisation, said: "Unless the Financial Conduct Authority (FCA) is given the powers to tackle the use of unpredictable and unfair charges, consumers will continue to lose out and find it difficult to compare accounts.
"There are also one million people living without bank accounts. More must be done to encourage everyone to enjoy the benefits that mainstream financial products can offer. Basic Bank Accounts form the cornerstone of financial inclusion. It is important that the these accounts are protected in the face of recent moves by banks to downgrade the products, such as restricting access to the Link ATM network."
Andrew Bailey, the Bank of England's executive director and acting head of the FCA, recently argued that legislation should be introduced to ensure banks start charging for current accounts simultaneously. A survey by the Institute of Customer Service found that 90% of consumers would switch from their existing bank if it started charging for current account services to one which still offered "free" accounts.