How do you solve a problem like banks?

The Competition & Markets Authority has unleashed a full investigation into the grip of the ‘big four’. But politics could monopolise the outcome

The banks bite back: Lloyds said the CMA’s view was ‘inconsistent with what we find on the ground’ (Getty Images)

They kicked, and they screamed, and they fought.

But the hammer came down all the same, and big banks now face yet another potentially bruising competition investigation by a watchdog.

This time that watchdog is the Competition & Markets Authority (CMA), which has unveiled an 18-month probe into current account and small business banking.

The stakes are high: the CMA has the option to force a break-up of the big banks – or at least to tell them to carve out large chunks of branches, as the European Union has already done with Lloyds and Royal Bank of Scotland.

Perhaps that’s why they took a conciliatory tone yesterday, deferring to the British Bankers’ Association to provide comments. The BBA’s chief executive, Anthony Browne, said: “All the banks will co-operate fully with any investigation. There are already substantial changes currently under way across the industry to strengthen competition, which improves choice and service for customers.”

Privately the big banks are spitting tacks. During the CMA’s initial review of the market – similar to what the Office of Fair Trading would have done under the old system before deciding on whether to call in the Competition Commission – they argued loudly that further action was unnecessary. The industry is already undergoing an unprecedented shake-up, they claimed, with the emergence of a host of new competitors, new rules, and the ring-fencing of retail banks from investment banks.

Douglas Flint, chairman of HSBC, for example, called for a stop to be put on new rules, because a CMA investigation could change the landscape again. Mr Flint suggested that this could threaten the retail and investment banking ring-fence.

The big four banks – Lloyds, RBS, HSBC and Barclays – also pointed to the emergence of the new “challenger banks” Virgin Money, Tesco, TSB and Aldermore. An they highlighted the advent of seven-day switching for current accounts overseen by the Payments Council.

During the initial review, Barclays said an inquiry “was not appropriate at this time”. Lloyds argued that the CMA’s view was “inconsistent with what we find on the ground”.

Underlining their case, TSB has said that is grabbing nearly 10 per cent of current account switchers; its existing share of the market stands at less than 5 per cent. Santander, which also likes to portray itself as a challenger, is making similar inroads into the market. It said that one in four switchers were coming through its doors in its third-quarter trading statement earlier this week.

They may be picking up business fast, but the challenger banks are still only too keen on the CMA’s probe, particularly if it helps them to make further inroads into the market.

Paul Pester, the chief executive of TSB, said: “Consumers have been crying out for a root-and-branch investigation like this for years, and we have previously said the CMA would be uniquely placed to carry out this complete review of the market. The big four banks have had a stranglehold on the market for far too long.”

That isn’t all that far removed from the prevailing view of a vociferous and vocal consumer lobby, which argues that the dominance enjoyed by the big boys means consumers will inevitably get a raw deal.

According to the CMA, the big four control 77 per cent of the current account market, 85 per cent of small business current accounts and 90 per cent of loans to them. Consumer and small business groups want that proportion cut.

If the CMA finds in their favour and opts for radical action, it won’t be short of political support – at least if the views expressed by Andrew Tyrie, chairman of the influential Treasury Select Committee and the Parliamentary Commission on Banking Standards, are anything to go by.

He said: “This is a crucial opportunity to put customers first and offer them more choice. The Treasury committee will monitor the CMA’s work closely to make sure that it is not yet another missed opportunity. Millions of consumers and small businesses have been getting a poor deal for decades because of a lack of effective competition and genuine choice in banking. Many people still don’t know how much their bank charges them, nor how the fees are obtained. The CMA’s decision today is a big step in the right direction.”

So act. Or else. The problem for the CMA is how to go about achieving the aim of fostering more competition. Radical action has been taken in the past, most notably in the case of the British Airports Authority, which was forced to sell Gatwick, Stansted and Edinburgh airports.

That’s not so easily accomplished with the banks. For a start, hiving off branches is prohibitively expensive. Ian Gordon, banking analyst at Investec, puts the cost to Lloyds of divesting the branches that have become TSB at £2.5bn. That’s taking into account the IT subsidy that Lloyds is providing to TSB, a further £450m IT migration dowry and the loss on disposal.

Mr Gordon argues that the investigation is actually far from good news for consumers, and could make banking more expensive because of the costs it might impose. “We really struggle to identify what new facts they [the CMA] may unearth,” he said.

But he added: “Although no timetable has been announced, we suspect that, in any case, the CMA’s eventual report may ultimately be lost in a sea of political gridlock in the aftermath of the election.”

The CMA might welcome that. It is aware that branches are no longer anything like as important as they were, with hundreds of thousands of customers abandoning them in favour of mobile and internet banking every month.

That may leave it reliant on banks agreeing to “behavioural undertakings” to achieve its aims. Critics are liable to describe them as a cop-out whatever they may be. And with voices like Mr Gordon’s a rarity, the pressure for it to take radical action is strong. Break ‘em up!

This review is turning into a test of the CMA’s credibility. And a really tough one.