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UK retail banking: windfall tax proposed for big profit banks

24th January 2006

A big rise in retail banks' net income has drawn accusations of profiteering.

UK banks are once again expected to reveal record profits of more than GBP34 billion for 2005, a rise of 15% from the previous year. Many critics have condemned the surge in profits, prompting talk of implementing a windfall tax on banks. Yet such a move is likely to hurt the UK's reputation as a place to invest, as well as damage consumer confidence.

In a repeat of last year's turn of events, UK high street banks are set to reveal record profits, the Evening Standard has reported. Banks will begin reporting their 2005 results on Wednesday, when Northern Rock is forecast to reveal profits of about GBP500 million, up from GBP431 million in 2004. Lloyds TSB excluded, the Big Five are expected to reveal significant surges in profits. HSBC in particular is due to set a new record for a British-based bank in March, when it will report pre-tax profits of close to GBP11.5 billion.

Such profits have been condemned by a range of critics. Many consumer groups believe that banks offer poor customer service and charge disproportionately high fees. A report by the Centre for Economics and Business Research published in October 2005 stated that overdraft charges and other penalties had grown by 15% in just 12 months. Some financial institutions have also come under fire for mis-selling and overpricing payment protection insurance, and scaling up penalty charges linked to credit cards

However, while some critics believe such profits to be the result of a market that is not competitive enough, it is worth noting that while these banks are making large profit gains, in many cases, much of this profit is gained from overseas markets rather than the UK, where competition is tougher and margins lower.

For a number of years now consumer representatives and the UK government have discussed implementing a windfall tax similar to the two made on oil companies by Gordon Brown in the last three years. Consumer groups argue that such a tax would be a powerful weapon to encourage banks to treat customers better, while the government would benefit from a boost to its coffers.

Yet the implementation of such a windfall tax would not help matters. In fact, it could make things worse. Such a tax would likely be damaging to the stock market and to the UK's reputation as a market to invest in. Indeed, a tax of this kind could hurt business confidence and end up affecting not only those who work in the banking industry, but other areas of the economy as well.

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