Probe into hurdles facing bank hopefuls

The Office of Fair Trading said it was calling for evidence on barriers to entry for new retail banks, as well as looking at how easy it was for smaller groups to expand.

It said increased competition in the sector would lead to consumers and small businesses getting better service and cheaper products.

But there may be barriers preventing new banks from being launched, including difficulties in obtaining authorisation from the Financial Services Authority and capital and liquidity requirements.

Other areas the review will look at include the access new players have to payment systems and credit risk information, as well as the problems involved in developing branch networks.

The OFT will also look at the issues faced by banks that want to exit the market or sell off part of their business.

A number of new banks are in the process of being launched, including Virgin Money, which acquired a banking licence through buying regional bank Church House Trust.

Metro Bank, backed by US billionaire Vernon Hill, is planning to open its first branches during the summer, while Walton & Co and Home & Savings Bank, backed by US private equity giant Blackstone, are also planning to enter the UK market.

Tesco Bank has also made no secret of its plans to expand into current accounts.

But there is a high level of customer inertia, with only around 5 per cent of people switching their current account each year, despite banks actively competing for business in this area.

The OFT said the global financial crisis had also led to substantial change in the banking industry, including a series of mergers, the recapitalisation of some banks by the Government and changes to financial regulation.

It has decided to carry out the review in light of these changes to see if a more in-depth study is needed.

Clive Maxwell, the OFT's senior director for services, said: "The OFT is committed to encouraging competition within retail banking that benefits consumers through cheaper and better products or services.

"We have recently seen some new players enter retail banking and we want to understand whether there are any hurdles to this or to the expansion of smaller banks."

The review, which was announced earlier this year following the group's report into the personal current account market, will cover all parts of the UK, and will take into account the distinct banking markets in Scotland and Northern Ireland.

The OFT hopes to publish its findings by the autumn of this year.

But it said that as it was a review, rather than a market study, it did not anticipate it would result in "specific outcomes or

recommendations".

Financial Secretary to the Treasury Mark Hoban said: "The Government welcomes the work of the Office of Fair Trading.

"It is critical to understand the barriers to entry and exit, and the impact that this has on the structure of the UK retail banking sector."