OFT to monitor impact of FSA’s capital rules on new entrants

The Office of Fair Trading says it will be monitoring what impact the Financial Services Authority’s new capital requirements have on firms and whether they are blocking new entrants.

The OFT has today released a report into barriers to entering the UK retail banking sector.

From its feedback it says there are concerns that certain changes proposed by the FSA are likely to reduce opportunities for new entrants.

It says by banning certain products and changing the way in which providers that do not take deposits are regulated it is making it harder for new entrants.

In its report, it says: “It may be appropriate to monitor the changes in order to check that competent firms are not being prevented from entering the market.”

The OFT says new entrants to the retail banking sector face significant challenges in attracting customers and expanding their market shares.

It has established a body of evidence relating to the size and significance of potential barriers, based on extensive consultation with the industry, including established incumbent banks and building societies, new and prospective entrants and consumer and industry groups.

A copy of the review will be submitted to the Independent Commission on Banking which is examining issues of competition and stability in the banking market.

The OFT says existing capital requirements may disproportionately affect new entrants and smaller banks by requiring them to hold proportionally more capital than incumbents.

It adds: “As capital and liquidity requirements are updated, it may be appropriate for the prudential regulators to consider and monitor their impact on competition.”

Clive Maxwell, executive director for goods, services and mergers at OFT, says: “Vigorous competition in retail banking is vital for personal and small business customers and helps support growth and productivity in the economy.

“If firms face significant difficulties in entering and competing in the market, incumbents have less incentive to reduce costs, innovate and price competitively.

“A number of firms have recently entered the market, and more are expected to follow. While we found few barriers to setting up, new firms trying to grow in this market face difficulties due to customers’ low levels of switching, loyalty to incumbent providers, and attachment to a local branch.

“We hope that this review will be of value to the Independent Commission on Banking, and contribute to the wider debate on the future of banking.”