RBS leads the banking losers on the FTSE 100 after the CMA announcement
RBS leads the banking losers on the FTSE 100 after the CMA announcementReuters

British banking stocks dropped in the early trading session after the Competition and Markets Authority opened an inquiry into five of the UK's biggest High Street lenders for lack of effective competitiveness.

The Royal Bank of Scotland (RBS) led the decline in the sector's shares by dropping 1.33% to 319.40p while Barclays, HSBC and Lloyds Banking Group hovered in negative territory.

"Traders are marking down shares in the UK Banks this morning, with RBS hurting most, due to the CMA launching a full inquiry into what is increasingly regarded as a frustrating UK high street banking sector," said Mike van Dulken, head of research at Accendo Markets.

"The big four banks cater for 75% of current accounts; more for small business loans, advising it be broken up in order to reduce barriers to entry, level the playing field and encourage more healthy competition."

Analysts said that it comes as no surprise that the RBS stock is being hit worse than others in the sector.

"Ahead of the announcement, Britain's Business Secretary Vince cable wrote to the CEO of RBS to tell him to get a move on with the partial break-up of its UK business which is planned, like TSB, to involve the sale and IPO of a group of branches.

"It is understandable that RBS is hurting more than Lloyds today given that the latter has already dealt with TSB to comply with European State aid rules regarding its 2008 bailout, however, with the CMA's full review not starting until the Autumn and expected to last more than 18-months (taking us past the 2015 election) the long-running cosy-gopoly isn't done for just yet."

The CMA stopped short of launching a full-scale market investigation and naming the lenders. It added that Britain's 'Big Four' banks - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - will be helping the regulator with an industry solution.

"Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy," said Alex Chisholm, CEO at CMA.

"However, our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.

"Our provisional view is that a full market investigation by an independent expert CMA group is necessary to look at this market in detail and identify appropriate measures if competition concerns are found. However we very much welcome views, which we will carefully consider, before taking a final decision."

The CMA found that many customers reported that they saw little difference between the largest banks in terms of the services they offer.

The CMA's initial findings also showed that some banks were making it difficult for customers to customers to make comparisons between lenders because of limited transparency.

It also said current account overdraft charges were found to be very complex.