Outlook: Rip-off bankers

IRONIC, isn't it? NatWest's plans to buy Legal & General, the most ambitious bancassurance deal so far to have been attempted in Britain, have come to light in the very same week that Which? magazine accused high street banks of "ripping off" loyal customers through grossly overpriced cross- sold financial products.

Is this what NatWest has in mind - to ram as many Legal & General policies down its customers' reluctant throats as they are capable of taking in the quest for ever greater profit? This may seem an exaggerated way of describing the strategy, but there is also a large dollop of truth in it. There would not be much point in cross financial services mergers if there were no opportunity for cross-selling. What shareholder value enhancement is derived from this marriage will come largely from from this quarter.

Banking customers are notoriously loyal - it is often said that it is more common to get divorced than move bank - and in theory they offer a splendidly captive market for the sale of other financial services.

Use of NatWest's branch distribution network ought to provide a powerful boost to L&G's business, which in turn will mean lower unit costs, higher productivity and greater profits. If these benefits are shared with the customer, all's well and good, but the temptation, as Which? demonstrates, is always to crunch and exploit him.

So are not mergers between traditionally quite distinct parts of the financial services industry of equal concern to the competition authorities as straight bank-to-bank mergers?

Some consumer groups argue that banking in the UK is already so highly cartelised that it demands the creation of a banking watchdog, an Ofbank that would look after customer interests and if necessary impose price caps on particular products, rather in the way utility regulators do. This seems a trifle over the top in an industry which is meant to be open to competition and where there is no natural monopoly, but the point is none the less well made.

As things stand, there is little chance of the Financial Services Authority taking on that role. Admittedly, the FSA has a limited competition objective, but its main purpose is not that of ensuring price competition. Rather it is prudential supervision and investor protection.

As Don Cruickshank, the former telecoms regulator charged by the Government with investigating whether the banks are failing the wider economy, pointed out in a recent report to the Government, this prudential purpose works in the other direction by imposing very high barriers to entry.

Indeed, Mr Cruickshank even goes so far as to suggest that excessive supervision and regulation may be the root of the problem - that you would get a lot more competition and therefore much lower prices if the FSA reduced its requirements.

Old hands at the business of banking supervision regard these suggestions with horror. A free for all would almost certainly result in a series of collapses a few years down the line, they believe. The alternative - FSA or some other form of statutory price control - is scarcely seen as much better.

Already the Government has moved to impose a 1 per cent per annum charging limit on its new stakeholder pension. Some ministers would like to see the principle extended in a manner which, for instance, might impose a maximum spread between borrowing and deposit rates.

Again this is regarded as pretty much anathema by banking and financial regulators. Bankers and building societies might give up lending to high credit-risk categories altogether if they were not allowed to charge a premium for doing so. Would a government already concerned about social exclusion in financial services really welcome such an outcome? It can readily be seen that there are no easy answers or magic wands in addressing this area of "Rip-off" Britain.

The commercial logic of NatWest's bid for Legal & General is hard to fault. Traditional retail banking is under siege as never before from low-cost newcomers - though admittedly it is hard to tell this from the ever-rising level of banking profits - and the boundaries between formerly quite distinct areas of the financial services industry are being more and more blurred. So the City will welcome the deal with open arms. But, from a public policy point of view, there's plenty to chew on here.