Government warns banks

Barclays led a campaign to charge non customers for using cash machines

UK Chancellor Gordon Brown has unveiled a package of measures designed to improve competition in the banking sector.

The recommendations follow a report in March by the government-appointed watchdog, Don Cruickshank, which criticised the lack of competitiveness in the industry.

The government accepted most of his recommendations and is considering legislation to create a payments regulator, which would oversee the payments system for cheques and credit cards.

It is also to encourage banks to provide league tables comparing banking products and complaints.

Competition crackdown

The Treasury plans to introduce Cat Standards for credit cards and look at extending these standards for other financial service products.

It plans to review self-regulatory measures such as the Banking Code.

Banking services, like every other sector of the economy, need to be exposed to the full rigours of competition

Gordon Brown

It added that it is to set out its proposals for merger reform in the banking sector shortly. Until the law is reformed, it is to continue to refer bids to the Competition Commission.

It is unclear whether the new regulator - which will operate in addition to the Financial Services Authority - will have teeth.

Does it go far enough?

The appointment is unlikely to win favour with banks, although the Treasury has said it will consult them.

On Thursday, Barclays chief executive Matthew Barrett said: "I'd be less than candid if I didn't say that I don't welcome the idea of another regulatory bureacracy piled on top of what we already have."

Consumer advocates may however question whether the government is moving fast enough or has gone far enough to address their concerns.

The government has stopped short of introducing immediate steps to further regulate banks, prompting some analysts to describe the measures as "lukewarm".

"I can't believe we are ever going to see this new regulator. They'll consult with Europe, the world, the galaxy and the universe before passing it," said Edward Frith at brokers Credit Lyonnais Securities Europe.

Leading bank shares rose after the announcement.

Unpopular banks

"Banking services, like every other sector of the economy, need to be exposed to the full rigours of competition. We aim to achieve this through reforming regulation, opening up payment networks and eliminating any special treatment," Chancellor Gordon Brown said in a statement.

"In accepting the report's recommendations, we are determined to drive competition forward and deliver real improvements for personal and small business customers," he said.

Controversies over branch closures, cash point charge and poor service have made banks increasingly unpopular in recent months.

News on Thursday that Barclays had doubled its profits reigited controversy over whether banks put profits before service.

Cruickshank criticism

Mr Cruickshank headed a government enquiry into banking. The investigation lasted 16 months, culminating in a report in March.

Main points of Cruickshank Report

Banks operate 'complex monopoly'

Small businesses disadvantaged

Charges for cash machines too high

Low income consumers hit hardest

The report accused the industry of making excess profits from its customers.

Customers could pay between £3bn and £5bn less for their banking services if there were full competition, the report found.

And it says there is even less competition in the small business market, where just a few banks dominate.

The big four High Street banks made profits last year of more than £12bn, which Mr Cruickshank condemns as "unduly high". Banks claim that they are already competitive and listen to their customers.

As competition grows with the arrival of telephone and internet banking, the big High Street banks are continually striving to raise revenues and cut costs.

The Independent Banking Advisory Service, which campaigns on behalf of customers in disputes with banks, welcomed the government's plans.

Chief executive Eddy Weatherill said he was pleased there was now some serious "forward momentum" to addressing banking problems.