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The government today received the Office of Fair Trading鈥檚 (OFT) recommendations in its report on the impact of the divestments currently being made by Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS) in increasing choice and competition in the banking sector.

The Chancellor, in his Mansion House speech in June, asked the OFT to review the impact the LBG and RBS divestments (known as Project Verde and Rainbow respectively) will have on competition and to see what more could be done.

The OFT has written to the Chancellor laying out its findings and recommendations which are:

For Project Verde, which has taken the form of a re-launched TSB this week, the OFT recommended that LBG make some alterations to its current plan by:

• strengthening Verde鈥檚 balance sheet to improve its profitability and enable TSB to grow its market share more rapidly.
• ensuring that key services, like IT, that are being provided by Lloyds as part of the transfer do not limit TSB鈥檚 ability to compete in the future.

For Project Rainbow, the OFT found that, consistent with the original EU state aid agreement, RBS鈥檚 plan will result in a credible small and medium-sized (SME) bank, especially for businesses with a turnover of between 拢1 million and 拢25 million. The OFT expects it to have the ability to compete and grow over time and has not recommended any changes to the current divestment plan.

LBG has today committed to implement the specific changes that the OFT has recommended. The government supports LBG鈥檚 proposed actions, considers they address the concerns raised by the OFT and will pursue discussions with the European Commission accordingly.

The OFT is carrying out a separate wider market study of the SME banking sector, which will report in early 2014.

Commenting, the Chancellor, George Osborne, said:

This government is getting on with the biggest overhaul of our banking system for a generation, and more competition is a key part of our vision for the future.

Earlier this year, I asked the Office of Fair Trading to assess the impact that new 鈥榗hallenger鈥� banks created by Lloyds and RBS selling off some of their branches will have on strengthening competition, and to identify what more can be done. I welcome the OFT鈥檚 report, which we have received today.

I also welcome the strengthening of TSB as a challenger bank which, together with RBS who are proceeding with their plans to introduce a credible player to the market, will increase competition and choice for British businesses and customers.

Secretary of State for Business, Vince Cable, said:

We welcome the OFT鈥檚 green light for the TSB to develop as a strong competitor in the banking sector. We urgently need more competition for businesses and consumers.

There remain significant structural problems in the sector, especially in lending to small businesses. Next year鈥檚 OFT report will shed more light on this important issue. In the meantime we are supporting small businesses through the government鈥檚 拢4 billion business bank and forthcoming small business strategy.

We must not forget the potential implications of a 鈥榞ood bank/bad bank鈥� split of RBS. Today鈥檚 OFT report did not consider these, and work on a possible split is continuing separately.