British banks are propped up by the public purse, so they should be made to serve the public interest

As long as banks continue to occupy a privileged position as the primary creators of money in the UK economy, backed up by hefty taxpayer guarantees when they mess up, the public is in a much stronger bargaining position than policymakers currently seem to realise

Over the past week we’ve seen the failures of Britain’s banking industry laid bare.

The Financial Ombudsman Service reported that the number of complaints about current accounts is surging, while an inquiry by the Treasury Select Committee revealed how banks are excluding large sections of the population from vital services.

On Thursday, RBS and Barclays were ordered by the European Commission to pay their share of €1.1bn (£960,000,000) of fines after traders were found to have colluded to rig currency markets.

Despite a plethora of voluntary agreements and industry commitments to protect the vulnerable, millions are being left behind as branches close, ATMs disappear and the fruits of technological innovation are limited to the better-off.

If this was the experience of consumers in any other industry, it would be a serious cause for concern. But the fact that it is happening in the banking system – one of the most heavily subsidised sectors of the economy – represents a major policy failure.

A decade ago, Britain’s banks were bailed out by the public, to the tune of more than £130bn. Britain’s banking sector continues to receive billions of pounds in effective subsidies each year as a result of taxpayer-backed protections and an ability to conjure money out of thin air, calculated at over £23bn annually. The top four banks are now posting bumper profits; the biggest since the financial crash.

Given the support we give our big banks, most people might think that they should be under an obligation to provide the public with basic services and not to rip us off. But right now, they’re going in the opposite direction.

The last five years have seen a surge in consumer complaints about banking and current accounts, with over 40,000 people complaining to the Financial Ombudsman Service in 2018-19, a 27 per cent jump on the previous year. Meanwhile, banks have closed over 3,000 branches in the last four years alone. Free cash machines are disappearing at a record rate after banks lobbied to slash funding for the network.

It’s time for a new settlement with Britain’s banks. If they’re to continue receiving such substantial taxpayer backing, they must justify it by – at the very least – providing basic services to the public. And if they’re unwilling to change their behaviour then regulators must be much more willing to step in on our behalf.

The new settlement with Britain’s banks must also recognise the need for systemic change regarding banks’ wider role in the UK economy

The Treasury Select Committee’s proposal to give banks a legal duty to act in customers’ best interests is a welcome start. Other measures could include a new requirement that when a bank refuses a customer’s application to open an account, it must direct them towards an alternative, even if it means recommending another provider.

Banks are required to provide fee-free basic accounts to people who don’t qualify for other types of accounts – for example because of a history of bad debt. This is a key mechanism to reach the 1.3 million UK adults who are unbanked. But the Treasury Select Committee found that some banks are doing “next to nothing” to promote them.

Banks’ voluntary agreements to protect communities from branch closures have clearly failed. The increasing regularity of IT failures has shown that banks cannot rely on their online and mobile channels to replace a physical presence. Close to nine in 10 people have used a branch in the last year, and the Treasury Committee is right that a regulatory intervention is likely to be necessary to ensure that the network is maintained.

Urgent action is also required to protect access to cash. The recent Access to Cash review warned that Britain’s cash infrastructure is on the “brink of collapse”. The cash network is currently funded by fees paid by banks, but their lobbying has seen those fees reduced, making a large part of the cash network unviable. The government’s recent commitment to “safeguard cash for those who need it” was welcome, but will be meaningless unless a sustainable funding model for the cash system can be found.

The new settlement with Britain’s banks must also recognise the need for systemic change regarding banks’ wider role in the UK economy. Currently, less than 10 per cent of new bank lending goes towards productive purposes. The vast majority is lent to property and financial markets, resulting in an economy skewed towards housing bubbles, finance and asset price inflation.

The Bank of England could be much bolder in steering lending towards SMEs, the green economy and communities which have been starved of funds. The bank already uses regulation to limit banks’ lending for risky mortgages, and could apply to same tools to meet broader societal objectives.

Such measures will meet massive industry resistance. The banking lobby will threaten to leave the UK, while RBS Chief Ross McEwan recently warned that consumers may start having to pay for current accounts. But the truth is that as long as banks continue to occupy a privileged position as the primary creators of money in the UK economy, backed up by hefty taxpayer guarantees when they mess up, the public is in a much stronger bargaining position than policymakers currently seem to realise.

David Clarke is policy director for Positive Money