A fall in the diversity of the financial services sector is potentially both damaging the resilience of the financial system and reducing effective competition for consumers, according to an Oxford University study for the Building Societies Association.
The report, Measuring Diversity in Financial Services Markets: A Diversity Index, is authored by academics at Oxford University's Centre for Mutual and Employee-owned Business. It examines both the savings and mortgage markets since 2000 and considers the diversity of supply using four different measures:
Size of firms – examining the number and size of firms
Location of firms – examining geographical spread across the UK
Approach to funding – extent of reliance on wholesale versus retail funding
Corporate ownership structures – whether plc, mutual or state
The overall conclusion of the report is that by all of these measures, across both the savings and mortgage markets, diversity has dropped by about 20 per cent since 2004 and this decline started well before the start of the financial crisis.
Between 2004 and 2009 there was a general shift towards a market concentration of larger, wholesale-funded, plc banks based in London. Using a benchmark of a diversity index of 100 in 2000, by 2011 the index stood at 82 in the mortgage market and 85 in the savings sector.
Study co-author Jonathan Michie, Professor of Innovation and Knowledge Exchange at the University of Oxford, said: 'Growing and maintaining diversity within the financial services industry is crucial to reduce the risk of future market shocks infecting the whole financial system, as difference promotes resilience.
'It is also important that we have a diverse market to increase the effectiveness of competition on behalf of consumers. By both measures, the shape of the UK financial services sector has become less healthy since 2004. All the evidence points to the existence of a serious concentration risk, which is bad for consumers and market stability.'
Adrian Coles, Director-General of the BSA said: 'The 2010 Coalition pledge to "foster diversity in financial services" is clearly still a work in progress and action by the Government is still needed. This is not only to promote and facilitate the arrival of new entrants, but to provide the right environment for the growth of existing challengers such as building societies and other mutuals.
'Now is the time for the Government's stated intent to be brought to life, as MPs consider the content of the Banking Reform Bill. Care will be needed to ensure that Government policies don't unintentionally distort competition.'