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Breaking the banks

Splitting up parts of Lloyds and RBS have been welcomed by mutuals and brokers who look forward to increased competition. Christopher Jarvis reports

Brokers are optimistic that the break-up of Lloyds Banking Group and Royal Bank of Scotland will boost competition and product availability, but given the three to four-year timeframe for the changes, it will not be an instant fix for the market.

Last week, the plans to break up the two taxpayer-supported banking giants were unveiled and Chancellor Alistair Darling made it clear he would like to see at least three new standalone banks opening on the high street as a result but it remains to be seen how broker-friendly these new banks will be.

The Building Societies Association has long railed against the competitive advantage of bailed-out banks over the mutual sector, which has remained independent of state support.

Director general Adrian Coles says: “It was unacceptable for Lloyds Banking Group to continue in its current position of being 43 per cent owned by the Government with 30 per cent of the mortgage market, current account market and other important markets.

“If left unchallenged, it gave the opportunity for dictatorial pricing power in the market. That is not acceptable for other institutions who ran themselves prudently and did not need a Government bailout.”

But beyond the £39bn of lending commitments the banks have already agreed to over the next three years, Coles says the move is not likely to increase lending as this is dependent on banks being able to secure funding.

Under the European Commission-fuelled shake-up, the new banks will represent nearly 10 per cent of UK retail banking by 2013. Lloyds will sell 600 branches, 4.6 per cent of its current account share and around 19 per cent of its mortgage share. RBS will shed 318 branches, including all Scottish NatWest branches, direct small business customers, RBS Insurance and Global Merchant Services. RBS is joining the Government’s asset protection scheme and will receive £25.5bn. The banks have agreed not to pay 2009 cash bonuses to staff earning more than £39,000 and executives of both boards will defer all bonuses due for 2009 until 2012.

Telos Solutions director Richard Farr says: “Consumers will benefit from this increased competition. Some may say competition got too hot in the bad old days but then again, the pendulum has swung too far the other way and there are not enough players in the market. I am fully behind this adjustment.”

Farr is also hoping the move could spell good news for brokers if the new banks decide to channel a substantial segment of their lending through IFAs.

He says: “People understand that if they go directly to a lender, they are being sold that lender’s products and associated products. If they go through an intermediary, then they shop around. Consumers understand the value of our service.”

Association of Mortgage Intermediaries director Rob Sinclair considers the move could boost product availability, although, due to the timescale for implementation, the market will not reap the benefits for some time.

He says: “There is a four-year time horizon and they have got to find either new or small organisations to take this on, so I do not see this happening quickly.

“The new organisations coming into the marketplace will want to differentiate themselves and we will inevitably see more products available.”

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