An additional £40billion of taxpayers’ money will be pumped in to the banks but they have agreed to curb bonus payouts to staff and sell-off parts of their businesses as part of the deal.
What’s been announced?
RBS will sell 318 branches over the next four years – these will include the sale of RBS-branded branches in England and Wales and NatWest Scotland north of the boarder.
The bank’s insurance business, which includes Direct Line, Churchill and Green Flag, will also be sold as will its card payment business Merchant Card Services.
The government’s stake in RBS will increase to 84% as £282billion of bad debts will be underwritten by the Government Asset Protection Scheme, Gaps, (although its shareholding will remain at 7.3%). This is an insurance scheme that was set up to help stabilise the banking system. RBS will pay £700m a year for this protection and there will be a £2.5billion exit fee. If these debts are ever crystallised it could mean losses for the taxpayer. However, if they aren’t the scheme could prove profitable for the taxpayer because of the premiums RBS will pay for the insurance.
Lloyds has announced plans to sell-off 600 branches over the next four years. The brands it is seeking buyers for are Lloyds TSB Scotland, Cheltenham & Gloucester and Intelligent Finance, the online brand which used to be part of HBOS before the two banks merged.
Lloyds has always fought to minimise the government’s stake in the bank – it owns 43.5% of the group - and unlike RBS which has signed up for Gaps, it is staying out of the insurance scheme. Instead it will seek to raise an additional £21billion, £13.5billion of which will be done through a rights issue.
Why is this happening?
The main reason for this major restructure at RBS and Lloyds is competition. We’ve seen numerous bank and building society mergers over the last year or so because of the instability caused by the financial crisis. However, the European Commission is concerned about the affect on market competition. For example, following the merger with HBOS, Lloyds Banking Group now controls about 30% of the current account market and mortgage markets.
It is hoped that breaking the banks up will result in more competition and in turn, a better deal for consumers.
What will it mean for existing customers?
In the short-term it’s business as usual. If you have a mortgage, savings or current account with one of the brands RBS or Lloyds is looking to sell, your accounts will be transferred over to the new provider automatically. If it’s an insurance policy you have, this will continue under your existing terms although things may change when you come to renew.
However, while you won’t be forced to switch providers because of the sell-offs it’s vital that customers keep an eye on the rates they are being offered. The terms of your account may well alter over time and you may find you’d be better off moving elsewhere.
Will the break-ups result in more competitive products?
One of the prime reasons for this shake-up is to increase competition, but experts warn that this won’t necessarily result in a better deal for the consumer.
Kevin Mountford, moneysupermarket.com’s head of banking said: “The planned shake-up of RBS and Lloyds doesn’t necessarily guarantee a better deal for consumers and many will be aggrieved if they are forced to switch providers as a result of a sell-off. If new brands are to make a cut-through and impact on the market, focus will need to be given to product innovation and improving the switching process. Let’s not forget, it’s not only about branches: the brand and customer relationships are what matters most.”