Metro bank
Challengers like Metro Bank are worse off because of the surcharge, they argueGetty

The leading MP of the Treasury Select Committee, Andrew Tyrie, has asked a UK financial regulator to ensure that the new banking surcharge will not hurt competition in the industry. In a letter to Andrew Bailey, chief executive of the Prudential Regulation Authority, Tyrie raised concerns about George Osborne's 8% surcharge on banks.

The Tory MP wrote: "In the PRA's view, does the new corporation tax surcharge for banks make the retail banking sector more open to competition from new entrants, or does it further entrench the large incumbents?"

After Osborne announced the surcharge of 8%, imposed on banking profits of more than £25m (€34m, $38m), challenger banks criticised the decision saying that it would hit smaller, alternative banks disproportionately. This would cause the big UK banks to have an even bigger advantage to alternative lenders.

This would replace the bank levy, introduced after the 2008 financial crash, which only applies to the large banks. In the summer budget, Osborne announced he will gradually reduce and then abolish the bank levy. Multi-billion pound profits often offset this charge, but the new surcharge will affect smaller banks as well.

Britain's big banks have criticised the bank levy because of the high costs. HSBC even threatened to move its headquarters to Hong Kong because of the effect the levy has on its balance sheet.

In September, ten smaller UK banks called on the treasury for a break on the 8% tax, but after a meeting with all parties, the pleas were largely rebuffed. With the rise of challenger banks such as Metro, which shook up the banking sector, competition increased and resulted in a fairer banking sector.

To keep risks low, smaller banks have to hold onto a relatively larger capital than bigger banks and, as the financial institutions are younger, they possess less data and have higher overhead costs.

Rishi Khosla, the chief executive of OakNorth, a new bank lending to entrepreneurs, commented that the bank welcomes Tyrie's plea, and agrees with his position.

"Replacing the Bank Levy, which only applied to large banks, with the surcharge, which applies to all banks, sends mixed messages given that the government is keen to encourage banking competition and encourage lending to commercial business," Khosla said.

Stating that there are thousands of different banks lending and borrowing in the US and Germany but that 90% of the UK market is held by five big banks, he argued that the lack of competition is unfair for smaller banks as well as customers.

"While the Competition and Markets Authority's investigation into the banking services offered to small and medium sized businesses will go some way towards improving competition in the sector, the efforts need to be supported by government," Khosla added.