Labour's banking plan: will it work and what does it mean for you?

LABOUR leader Ed Miliband will today announce plans to end the dominance of the UK's largest retail banks by introducing a cap on market share. The speech is seen as Miliband's most important since Labour's autumn party conference and establishes the narrative he will pursue in the months to come as the battle lines are drawn ahead of the general election.

He is expected to cite the banking sector as an area that needs to be dramatically reformed to help increase living standards in Britain.

What does the plan involve?

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The Labour leader will pledge to break up the financial sector by imposing a cap on the market share of retail banks. This would limit the number of personal current accounts, business current accounts and business loans an institution can offer. Miliband would not be setting a specific figure for the cap himself: it would be decided by the Competition and Markets Authority (CMA) following a review. Once the cap is in place, any bank that exceeded the limit through a merger or acquisition would be ordered to cut branches, while any bank that exceeded it through organic growth will be referred to the CMA.

How will consumers be affected?

Under the plans, retail banks would be forced to shrink and sell off branches to keep in line with the cap. Labour believes that improving banking sector competition will help small businesses to grow, creating higher-paying jobs and raising living standards. However, critics have disagreed that the move will increase competition. Some believe a fresh round of upheaval for banks would also create more uncertainty for customers. They say that restricting the number of branches banks can have could ultimately lead to job cuts and inconvenience for customers.

What are the arguments in favour of the plans?

Miliband hopes to make it easier for new retail banks to take up a substantial proportion of the market. The big five banks – Lloyds, Barclays, RBS, HSBC and Santander – control 87 per cent of current accounts, reports The Guardian. Lloyds holds the largest share at 30 per cent following the rescue takeover of HBOS. Previous attempts to increase competition have not always succeeded. A new service to encourage customers to switch their current accounts between banks has not worked as well as it was hoped, says the Financial Times. While plans to increase Co-operative Bank's share in the market by buying hundreds of Lloyds branches were scuppered after a large capital hole was exposed at the Co-op last year. Labour believes a market share cap is one solution.

What are the arguments against the plans?

Mark Carney, the Bank of England governor, has rejected Miliband's plans, saying that breaking up an institution does not necessarily create competition. He pointed towards a cap on retail bank market share in the US which had, in part, pushed large Wall Street banks towards other types of revenue generation that were at the heart of the global financial crisis. John Cridland, director-general of the CBI, has said that an "arbitrary cap" on market share was not the way to boost choice in banking, while RBS chairman Philip Hampton said any forced branch sell-off would be "incredibly expensive". The FT points out that banks have struggled to sell large chunks of their retail arms in the past two years. Others say that blunt caps can actually deter competition, as it might force big banks to limit products such as current accounts and mortgages, giving smaller providers little incentive to compete aggressively on price.