The report called for banks to hold greater capital reserves, whilst saying that retail banks should be ring-fenced from investment banks - although they should not necessarily be separate entities. Retail banks should be protected by their own capital reserves, whilst other parts of the business could be allowed to fail.
It said that depositors should get their money back before creditors should the worst happen, with taxpayers not being liable for any losses. It also said that it should be easier for customers to move their accounts around, creating competition within the sector. In a move to further encourage competition, the report also recommended that Lloyds sell off more of its branches.
The Federation of Small Businesses welcomed the report but urged the Government to look closely at its interim recommendations in order to open up competition in the sector.
Commenting on the report, John Walker, national chairman, FSB, said: "The report provides a measured view of the issues that face the banking sector in the UK. The FSB has called for more competition in the banking sector for over a decade and urges the Government to be bold and use this opportunity to bring greater competition to the sector.
"With the big four banks holding almost 90% of the market, it is imperative that we see a radical shift which allows greater competition to properly benefit the small business community. Only more competition will provide better service, better products and drive prices down.
"The sell-off of additional branches by Lloyds HBOS should be inextricably linked to the arrival of new entrants to the market. The FSB would be concerned if the branches were sold to other big players as this would not help to open up competition.
However - although the IBC is aware that the barriers to the formation of new banks need to be broken, there is nothing in the report which talks about incentivising new entrants to the market. This needs to be remedied if we are to see the end of the long-standing monopoly in the banking sector.
"One thing the FSB has long called for the a Post Bank to be established through the Post Office network and we urge the Chancellor to consider this recommendation to better serve small businesses locally."
The Institute of Economic Affairs said the proposals for higher bank capital could backfire. Responding, Prof Philip Booth, editorial director of the IEA, said: "Whilst some measures suggested in the report are welcome, the ICB focuses too much on regulatory mechanisms to ensure that banks have sufficient capital to prevent failure. A competitive market requires banks to fail and their orderly failure should be the key objective of reform.
“The Commission's proposals for higher capital requirements will run directly contrary to its desire for more competition. Higher capital requirements would make failure less likely and would therefore entrench large firms. Capital requirements are also a barrier to entry for new firms.
“It was also disappointing that the important issue of the over-taxation of equity capital, flagged by the chairman of the Commission Sir John Vickers in a recent speech, has been side-lined."
Kevin Mountford, head of banking at moneysupermarket.com said: "There is still a great deal of apathy when it comes to switching bank accounts in the UK, and I would hope any findings by the ICB will help tackle this issue and drive more switching. For many consumers, the movement of accounts is still problematic and needs to be addressed and made much easier.
“Consumers need to make sure they are getting real value from their banking products and services, and ensure they have the right products to suit their needs, and be prepared to switch to a more suitable product if necessary.“
Andrew Hagger of Moneynet believes lack of competition is not the main reason why consumers don’t switch their products. He said: “There is currently no shortage of competition in the current account market with some banks even offering financial handouts to switch, and that's the way it's been for a few years now.
“The process may be perceived as being a little cumbersome, but is this really the reason that people don't move their current account on a frequent basis or is it more down to media scare stories or perhaps that they don't see their current account as something they wish to move from provider to provider at a drop of a hat?
“Switching your energy, telephone or broadband provider may have become the norm to save a few pounds but switching current accounts in the same way or frequency just isn't going to happen.
“In a survey of Moneynet readers last month, 34% of consumers said they wouldn't switch their current account because they thought all banks were the same, whilst a further 29% said they didn't trust the transfer process to run smoothly. Therefore you really have to question whether a faster switching process or being able to keep the same account number will change consumers' attitude to changing banks.
“I'm not sure what the Treasury Committee would expect a new entrant to the banking arena to do differently; they too will still be strangled by consumer credit regulation which automatically doubles the word count of any customer literature.
“If there's no competition out there at the moment, I'd like to know what you call it, providers have been falling over themselves in the last 12-18 months offering loyalty incentives to their current account customers, realising at long last that looking after existing customers is equally as important as recruiting new ones.”
Which? disagrees. Chief executive, Peter Vicary-Smith, said: "Competition on the high street is at an all-time low, with the three biggest retail banking groups consisting of two that would have collapsed without taxpayer support and one that has a woeful record on customer services. This is not the template for a market that works well for consumers.
"The financial crisis has increased the market power of the largest banks, leading to a worse deal for consumers. We're pleased the commission recognised this, but need to consider whether the recommendations will go far enough to address the parlous state of competition in the UK."
The Commission’s final recommendations will be published in September.
