Regulators say they want competition but actions speak louder than words

WHAT does the FSA want? Like all of us, the regulator wants to have it all: a high street banking sector that is both competitive and ultra-safe.

But when push comes to shove, it is clear where the watchdog’s priorities lie. Its commitment to competition has been sorely tested by Lloyds’ branch sale.

First there was the bank’s decision to sell to the Co-op instead of Lord Levene’s buy-out vehicle NBNK. It may be that the Co-op’s offer was overall more generous than its rival’s. But that was not the reason Lloyds gave for its choice.

The bank said that it had a better chance of getting the deal done if it sold to an existing lender because of the regulatory nightmare and costs of setting up the branches from scratch for a newbie.

There could hardly be a clearer indictment of the FSA’s influence on the competitiveness of British retail banking. Setting up a new bank is simply not worth it under the FSA and Bank of England’s ground rules.

It is now hitting Lloyds’ negotiations with the Co-operative Group. It is fair to question whether the Co-op’s management has the chops to run a huge retail bank. But the regulator has made it almost impossible to recruit talented, experienced executives prepared to build a new entrant to a shrinking industry in a poisonous political environment. Who on earth wants to take it on?

Then there is the maze of ever-changing capital and liquidity rules that make it increasingly difficult to offer a unique proposition for customers (although it is still just about possible for very specialised firms with a banking license, like Aldermore Bank).

Lloyds’ branch sale is required, under EU law, to create a new banking competitor. But UK authorities are in danger of creating a banking sector so regulated that proper competition becomes impossible.