Banks face mounting threats to profits, FSA chief warns

HOWARD DAVIES, the chairman of the the City watchdog the Financial Services Agency, warned last night that banking profits are likely to come increasingly under threat as a result of new competition, particularly from Internet banks.

Mr Davies, speaking at the Chartered Institute of Bankers, said that banks' exceptional profits were a result of a combination of a benign economic backdrop, strong cost cutting and good strategic choices, rather than lack of competition. But he questioned whether such profits were sustainable, as competition is growing.

"High profits naturally attract new entrants and a striking feature of the British banking scene in the last couple of years has been the entry of new players: supermarket banks, banks started by insurers and so on," he said. "The Internet lowers barriers to entry ... In particular it removes the need to build a branch network. So for an industry with high profitability and already attracting new entrants, the Internet may well speed up the process of profit erosion."

Mr Davies remarks come ahead of a series of announcements by Melanie Johnson, the Economic Secretary to the Treasury, on measures designed to combat social exclusion in the financial sector. His remarks are in sharp contrast to the more combative tone of recent attacks by ministers on "rip-off Britain", particularly on the mortgage banks. They also appear to fly in the face of the views of of Don Cruickshank, the head of the Government's banking review, who has argued unsuccessfully for the FSA to be given a specific mandate to encourage competition in the banking sector.

The measures included in the Policy Action Team 14 (PAT) report to be unveiled today are expected to include government backing for special money transmission accounts. These would allow electronic cash withdrawals and automatic payment of bills, but would not let holders issue cheques or go overdrawn. The PAT report also recommends measures to make it easier for the homeless to open bank accounts.

The Government is also expected to announce measures to help credit unions - self-help savings and lending organisations that target the jobless and low paid. Banks will also be expected to produce annual reports on what they are doing to combat social exclusion.