The move is a response to calls for competition to be injected into the sector, with the government hoping a host of new names will appear on the high street.
The OFT stressed the review is a “knowledge building” exercise and it has not launched a formal market study, which would have given it powers to dictate changes to banking practices.
The findings of the review will be reported in the autumn. It is likely the new banking commission will use the findings to guide its policy on banking reform.
Mandarins aiming for increased competition in the market hoped the sale of 318 Royal Bank of Scotland (RBS) branches would introduce new players.
Santander, Virgin Money and National Australia Bank are among those who signalled interest in the assets, which RBS is being forced to sell as punishment for accepting bailout money during the financial crisis.
However, Virgin Money has since pulled out of the running and Santander is the favourite to snap them up – a scenario that would only consolidate the banking giant’s position.
The review could set up the OFT’s first clash with high street banks since it lost its campaign against “unfair” unauthorised overdraft charges in the Supreme Court earlier this year.
WHAT IT MEANS
Q.What will the OFT’s banking industry review cover?
A.The review will be looking at barriers to entry, expansion and exit in retail banking services. At the moment there are massive hurdles for firms, especially small ones, to enter the banking industry.
Q.What is the difference between a review and a market study?
A.Market studies look at the wider market, studying whether it is working in favour of consumers. A review, as in this case, looks at a specific aspect of the market. It will focus exclusively on the barriers to entry with a view to advising how it can become more competitive. The OFT says it is a “knowledge building” exercise which will probably not in itself lead to regulatory changes.
Q.When will the final report be published?
A.The investigation will run for several months and the report will be be published in the autumn.
Q.How does this review relate to government's intention to introduce greater competition into the banking industry?
A.The review will build knowledge of how more competition can be encouraged to join the industry. The OFT will use the information to inform future decisions and investigations. The government will also pay very close attention to its findings. The new banking competition, in particular, will carefully study the findings as it seeks to stimulate competition in the industry.
Q.Is more competition not already being introduced by the sale of RBS branches?
A.It was hoped the forced sale of 318 RBS branches would encourage new firms to enter the industry. Virgin Money, for example, would have been ideal. However, it has now dropped out of the race and an established player – Santander – appears to be on course to snap them up.
Q.Is the OFT starting from scratch with the investigation?
A.It says the investigation will build on previous work undertaken surrounding barriers to entry. The difference is the focus on smaller firm entering the market, which the OFT says is under explored.