May 11, 2017 / 1:23 PM / 3 months ago

UK watchdog opens broad review into retail banking

* Free banking comes under the spotlight again

* Review won't consider if excessive profits being made

* Initial findings due in Q2 2018

By Huw Jones

LONDON, May 11 (Reuters) - Britain's markets watchdog said it will review how retail banks make money, echoing a probe last year by the country's competition agency which left lawmakers angry that too little was being done to reform a sector dominated by a handful of lenders.

The Financial Conduct Authority (FCA) said it was reviewing business models of high street banks, building societies and credit unions, a sector where the "Big Four" -- HSBC, Lloyds, RBS and Barclays -- provide most accounts.

"In view of the large share of the UK market served by the larger retail banking groups, we will inevitably place most focus on these firms, but we are also keen to draw from the experiences of other firms," the FCA said in a statement.

A flurry of new "challenger" banks such as Virgin Money and Metro Bank have so far made only modest inroads.

The watchdog will study how banks make money at a time when interest rates are likely to stay low for a long time and most high street accounts are free.

The watchdog announced in its annual business plan last month that it would review the sector, and FCA Chief Executive Andrew Bailey told reporters at the time that he wanted to "get under the skin" of retail banking returns,

Critics have said banks are under pressure to pay for free banking by bumping up prices for products, leading to mis-selling scandals like payment protection insurance or PPI, which has cost lenders over 25 billion pounds ($32.2 billion) in compensation so far.

"This could pit the traditional versus the challenger bank business model against each other and could even lead to the end of 'free in credit' accounts that we've long known," said Jake Green, a regulation partner at law firm Ashurst.

The retail banking sector has just undergone last year a lengthy Competition and Markets Authority review of personal and business accounts.

"The focus of our review is broader than that of the CMA’s because we have a consumer protection objective as well as a competition objective," the FCA said.

The CMA review stopped short of splitting up banks or calling an end to free banking, saying banks should share customer data with new entrants to spur competition.

Lawmakers tore into CMA officials after the report was published, accusing them of a "derelition of duty" and of "passing the buck" to the FCA.

The FCA will publish initial findings in the second quarter of next year. ($1 = 0.7777 pounds) (Reporting by Huw Jones; Editing by Keith Weir)

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