Bank Break Ups are Bad for Customers

Last Updated Nov 12, 2009 1:03 PM EST

In the name of competition, two of Britain's big banks are being broken up to create new financial forces. This is being sold as consumer choice, but it is actually compulsion.

More than five million customers will be told they can no longer continue with their favourite bank.

It is a worrying move for any business that has worked hard to build a customer base -- and worrying for consumers who thought the competition watchdogs were there to protect their interests.

The break up of Lloyds and Royal Bank of Scotland is being forced on them by the European Commission and backed by the UK government as a punishment for accepting state aid.

Although Lloyds took over Halifax and Bank of Scotland, it is not simply a punishment for having too high a market share -- Royal made no UK acquisitions and other big banks that accepted no state aid are unaffected.

But it's an ironic blow for Lloyds -- the HBoS takeover was encouraged by the UK government, which waived competition rules. It is Lloyds's own fault that it bought a pig in a poke because of inadequate due diligence, but without the takeover it would not have needed the state aid. The government would've had to rescue HBoS instead.

The result is the two banks must sell nearly 1,000 branches, including the customers and their accounts. For Lloyds, that means a fifth of its mortgage borrowers and one in seven current account holders, including some small businesses.

As buyers must be newcomers to British banking, these customers that are sold on may end up with a bank they have never heard of and certainly a bank they never chose.

All big business should be concerned. It is one thing to block a proposed merger but another to break-up an existing business. BAA is already a victim and has to divest itself of Gatwick and other sites. An airports monopoly that was acceptable when it was nationalised, acceptable when it was a London-quoted company, suddenly became an unacceptable monopoly when bought by Spanish investors.

What next? Telling a big supermarket group such as Tesco to sell stores because its market share is too high? A company that grew by offering consumers the choice they want has already had that growth curtailed by allowing councils to block planning permissions for stores to give less popular groups a chance. Yet ironically, despite being branded "too big to grow" by the Competition Commission, Tesco is seen as a saviour of the banking market by expanding the choice of financial services.

It is a muddled message from the competition controllers. It's unfair to damage successful businesses by forcing sales -- even when those companies are publicly-owned -- and it is unfair to deprive consumers of choice. Especially if it means telling them they cannot shop at Tesco but must bank with it.