UK regulator reviews business models at retail banks

LONDON (Reuters) - The financial regulator has begun a study of how Britain's high street banks make money and said the initial findings due next year would help determine if their approach had to be changed.

The study would apply lessons from the 2007-2009 financial crisis when Northern Rock collapsed because of an unsustainable business model, Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), told a conference on Thursday.

It coincides with government efforts to increase competition in a sector dominated by HSBC, Lloyds, Royal Bank of Scotland and Barclays.

Bailey said 16 new banks had been approved over the last five years and 38 were considering seeking authorisation.

"My hope is that we can lay out a body of evidence from which conclusions can start to be drawn," Bailey told the British Bankers' Association (BBA) conference, adding that evidence would be gathered into the first half of next year.

The study will initially focus on different products and services and their profitability as fewer customers visit bank branches, preferring to use the phone or Internet instead.

BBA Chief Executive Anthony Browne told the conference that apps were now the most popular way to access accounts. But he said there was a "public interest" in access to bank branches, after many have been closed as more customers bank online.

Bailey said the study "should enable us to assess better the impact of changes – for instance in technology – on retail banking business models."

In a separate review to be published in coming months, the FCA has been examining so-called high-cost credit including overdrafts, after lawmakers criticised banks for charging hefty fees for people who overdraw on their accounts.

"We will then be able to decide if we need to intervene further," Bailey said.

Britain has capped high interest rates on "payday" loans, where customers borrow money against their next monthly wage and usually face steep rates.

Critics say the cap risks making it tougher for the most vulnerable to access credit and could drive them into the arms of unregulated "loan sharks".

Bailey said this had not been the outcome so far.

Some lawmakers have called for a wider use of caps, but Bailey said "capping everything" was not the right approach.

Findings from a third review by the regulator, examining how banks assess customers' understanding of their products and services, are also due to be published soon.

Some lawmakers have called for the banks to end what they call "free banking" for those in credit because they say it simply means other services, such as overdrafts, are charged more heavily and that often hurts the less well off more.

"I do not advocate ending free-if-in-credit banking. Why? Because there is no such thing to start with," Bailey said, adding that it simply meant some customers paid more or less than others depending on what products they used.

(Editing by David Clarke and Edmund Blair)