You may or may not be aware that massive changes to the banking system are on the horizon – if not you should be.

On 16 June 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking. The purpose of the commission is to consider reforms to the structure of the banking sector. They have been tasked with making recommendations to the Government to promote financial stability and competition with the aim to avoid the need for another bail out.

Why are the changes to the banking system needed?

The events of the financial crisis that started back in 2007 highlighted the need for changes to be made to the way banks operate. Lenders and borrowers took excessive risk while banks were lending too much money out without having the assets to support it. This is why the Government had to step in and inject vast sums of taxpayers’ money to avert crisis. The basic goal of the commission is to make the UK bank system stable and make the marketing of banking services more competitive. The final report is due at the end of September 2011.

The reforms put forward within the interim report broadly break into two parts:

1.    Increase competition between banks
2.    Reduce the risk to the public if banks collapse,

The question on everyone’s lips is “how will this affect me?”.

1.    Increased competition between banks

• Switching services – The general opinion seems to be that switching bank accounts is slow and complicated and only ever done if needs must or if a particular bank is running an attractive switching incentive. The commission want to make this a simpler, faster process which is more appealing. This will be great for consumers as the banks will need to be far more competitive in terms of products on offer and general service if they want to keep customers. They would also like to look at introducing portable account numbers to aid consumers and simplify the re-directing of regular bills after switching. Consumers would have one account number that would stick with them regardless of what bank they choose to move to. Customers wouldn’t be required to transfer direct debits or standing orders as the account number would remain the same.
• Making it easier for customers to compare current accounts – The commission wants the banks to label and price products clearly so that customers can compare easily and without confusion.
• Lack of competition within the current account market – Up to 70% of Brits bank with one of the ‘big four’, those being Lloyds TSB, Barclays, HSBC and RBS. Lloyds TSB, after its merger with HBOS back in September last year, dominates this market and the commission fears that this is stifling competition. It has suggested more branches to be sold off in order to get back in line with the likes of RBS, Barclays and HSBC. This in turn could lead to the emergence of entirely new banks.

2.    Reducing risk to public if banks collapse

• The final recommendation stated the need for Britain to have ‘stronger, safer banks’. This would involve separating, or ‘ring-fencing’, retail banking and separating it from riskier investment banking. By doing this the commission feels that it would protect retail customers from any future crisis and reduce the need for state-sponsored bailouts. Another suggested step here is for banks to hold more capital. At present, banks hold back £7 for every £100 that is free to lend; the commission suggests upping this to £10.

With customers being able to switch current accounts more easily, it is expected that the banks may take this opportunity to increase promotion of their best packaged accounts. These accounts normally charge between £10 and £15 a month but do come with benefits such as travel insurance and breakdown cover. Consumers wishing to seek an alternative should perhaps look into prepaid cards which offer a simple, cost-effective way to manage money. Wages can be paid directly on to the card and then used like a standard debit card. With many cards offering features such as ‘Credit Builders’ and ‘Budget Masters’, these products could work well for users looking to get their finances in order.

Whether you choose to stay with the banks or try out prepaid products, it’s clear that there are going to be some big changes on the horizon for both the banking sector and bank account holders. Now we just have to see what the final outcome will be.