Labour leader Ed Miliband says there should be limits on the size of the big five high street banks, with the creation of two new lenders and the forced sale of branches to create more competition.
In a keynote speech on the economy, Mr Miliband said there would be a “reckoning” with the banks if Labour won the next election.
He said that the financial services industry had been “an incredibly poor servant of the real economy” and blamed lack of competition mis-selling scandals and a drop in lending to business since 2010.
With Ed Miliband emphasising Britain’s “cost of living crisis”, Chancellor George Osborne attempted to take the wind out of his sails on Thursday by pledging his support for a significant rise in the minimum wage.
But Mr Miliband said the “crisis” was “the biggest challenge our country faces” and was about more than “the pound in people’s pockets”. It encapsulated low pay, job insecurity, a lack of affordable housing and a banking system that was not working.
The Labour leader promised to introduce a legal maximum threshold for any bank’s share of the market in personal accounts and small business lending, with powers to force the sale of branches and block mergers and acquisitions to prevent it being breached.
The reforms are designed to improve the deal individual customers and small businesses receive from the banks, along with the creation of two new “challenger” banks.
Mr Miliband said: “This is not about whether we should have new banks – the question this government is still asking – but about how. It is not about creating new banks that control some tiny proportion of the market, but new banks that have a substantial proportion and can compete properly with existing banks.
“And we are not asking whether existing banks might have to divest themselves of significant number of branches. We are asking how we make that happen.”
In his speech at the University of London, he added: “We need a reckoning with our banking system, not for retribution, but for reform.
“If we carry on as we are, we will end up stuck with the same old banks dominating our high street – the old economy. In America, by law, they have a test so that no bank can get too big and dominate the market.
“We will follow the same principle for Britain and establish for the first time a threshold for the market share any one bank can have of personal accounts and small business lending.”
Mr Miliband’s proposals are controversial. Shadow business secretary Chuka Umunna told the BBC Today programme he accepted that the share prices of taxpayer-backed banks Lloyds and RBS could fall in the short term. But he said the reforms “will in the longer term be in the public interest”.
Sajid Javid, financial secretary to the Treasury, said: “This government is fixing the banking system to make it safer. But the only way to ensure a more financially secure future for people who work hard and for their families is to continue working through David Cameron’s long-term economic plan – reducing the deficit, creating jobs, cutting taxes, giving young people the skills they need to get on and fixing the welfare system so that it pays to work.”
On Wednesday, Bank of England Governor Mark Carney said that a cap on banks’ market share “would not result in substantial improvement to competition”.
CBI chief policy director Katja Hall said it was “not for politicians to dictate market structures – they must allow competition authorities to do their job”.
Richard Lloyd, executive director of consumer group Which?, said that while more competition was desperately needed, enforced branch sales was not a “silver bullet”.
“After all, someone has to want to buy them,” he said. “The real priority for the regulators is to use their new powers to make it easier for new challenger banks to give people a genuine choice, make sure the payments system is fit for purpose and make banks release data to help consumers find the right bank for them.”
Business Secretary Vince Cable told BBC Newsnight he agreed with Mr Miliband’s desire for increased competition but insisted that “many of the things he is calling for have actually happened”.
He added: “Two new banks have been created out of RBS and Lloyds – Williams and Glyn’s and TSB, new banks that have been carved out and are already up and running.”