The Competition and Markets Authority (CMA) said its investigation
into the retail banking market found "no strong evidence" that a
corporation tax surcharge (CTS) on all banks making profit of more
than 25 million pounds ($34.6 million) would deter new entrants,
stifle growth or force small lenders out of business.
"The six largest retail banks will continue to pay higher effective
rates of tax than smaller banks," the CMA said, rejecting concerns
of the so-called challenger banks, who claim that the new system
hits them disproportionately.
"The 25 million (pound) threshold for the CTS has resulted in many
smaller banks and most mutuals being exempt," the CMA added.
The new regime replaces an unpopular 0.21 percent levy on bank
balance sheets, which was introduced in the wake of the 2008
financial crisis and applied to large banks deemed to present
material risk to Britain's economic stability.
Finance Minister George Osborne last year announced plans to reduce
the annual levy and introduce an 8 percent surcharge on profits in
response to calls for a revamp in the way Britain taxes the sector's
biggest players, including HSBC, Lloyds Banking Group and Barclays.
News of the CMA's position comes as a blow to recent entrants to the
market, who say the new system contradicts the government's
commitment to giving borrowers greater choice and broadening the
number of capital providers in Britain's economy.
Personal banking and lending to small-to-medium businesses is
dominated by Lloyds, RBS, Barclays and HSBC, which control more than
three quarters of personal current accounts and provide nine out of
every 10 business loans.
A slew of new and niche banks are bidding to poach market share from
the blue-chip lenders, including Secure Trust, Virgin Money,
Aldermore, Shawbrook, Tesco Bank, Sainsbury Bank, Paragon and Metro
But Rishi Khosla, CEO and founder of OakNorth Bank, said it is
inevitable that the CTS will make it tougher for challengers to
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"Any new player considering entering the market, or any investor
considering investing in the sector, will be deterred because it has
suddenly become 8 percent less attractive," Khosla said.
In submissions to the CMA investigation, one unnamed lender said the
changes would reduce the investment appeal of new banks relative to
more tax-efficient financial technology start-ups. Another lender
warned that product prices might have to rise to offset the higher
tax liabilities and provide the returns demanded by investors.
The CMA acknowledged that the full impact of the changes may take
time to emerge and said it would monitor how smaller lenders cope
with the new tax regime.
"In our opinion, this is the wrong way round. The CMA has recognized
that it could have an impact and that smaller banks would be most
affected, so it should address this proactively and get on the front
foot before it has a detrimental impact," OakNorth's Khosla said.
($1 = 0.7217 pounds)
(Editing by David Goodman)
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