CMA market investigation of retail banking

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The Competition & Markets Authority (the CMA) announced on 6 November its decision to make an in-depth “Phase 2” market investigation reference in relation to the supply of retail banking services to personal current account (PCA) customers and to SMEs.

What is a Phase 2 market investigation?

A Phase 2 investigation is carried out by an independent expert group of CMA members and is the phase of the investigation that used to be carried out by the Competition Commission, before its functions (like those of the Office of Fair Trading) were assumed by the CMA in April. It is an information gathering and analysis exercise to assess if/why a market is not operating in the best interests of consumers and what, if any, action should be taken to address concerns. It involves the engagement of principal suppliers within the market and other interested parties. A reference for a Phase 2 investigation may only be made where the CMA has reasonable grounds for suspecting that any feature or combination of features of the market is restricting, preventing or distorting competition.

Why the reference?

Earlier market reviews have foreshadowed this investigation so the reference should not come as a surprise. In particular, in 2011, the Independent Commission on Banking recommended that a reference be considered in 2015 but the advent of the CMA has brought this date forward.

In making the reference the CMA noted the number of structural, regulatory and technological changes that have recently taken place or are taking place in the sector but the CMA is clearly of the view that more needs to be done to enable the challenger banks to compete on an equal (or at least, more equal) footing.

Scope of the reference

The reference relates to the supply of “retail banking services” to PCA customers and SMEs. The definition is important. In respect of PCA customers, this means the provision of an account marketed to individuals rather than businesses, which provides the facility to hold deposits, to receive and make payments by cheque and/or debit card, to use automated teller machines and to make regular payments by direct debit and/or standing order (but not including accounts in which the money is not held in sterling or current account mortgages). For SMEs, it is the provision of banking services, including the provision of business current accounts, overdrafts, general business loans and deposit accounts, but excluding the provision of non-lending products like insurance, merchant acquiring, hedging and foreign exchange.

In addition to the market investigation, the CMA will review undertakings given by several of the major banks in 2002/03 to improve transparency of costs and charges, facilitate switching and restrict bundling of products in SME banking.

Principal areas of concern for the CMA

The principal concerns identified by the CMA are:

  • low levels of customers shopping around and switching
  • limited transparency, and difficulties for customers in making comparisons between banks, particularly for complex overdraft charges on personal current accounts
  • continuing barriers to entry and expansion into the sector, limiting the ability of smaller and newer providers to develop their businesses
  • very little movement over time in the market shares of the four largest banks, which provide over three-quarters of personal and business current accounts.

An issues statement will be published shortly which will set out in more detail the focus of the investigation.

Possible remedies

The investigation will identify what, if any, action is needed to improve competition in these sectors. In this regard, the CMA has at its disposal an impressive panoply of remedies, which broadly can be broken down into the behavioural/regulatory and the structural. The former might include, for instance, insisting on changes to information given to PCA customers on their bank statements, texting customers when they are about to go overdrawn or introducing account number portability when a customer changes their bank. In the SME context, it might include requiring the introduction of comparison tools or obliging certain steps to be followed when an SME is sold a new product. In terms of structural remedies, this could include divestment of branches or account relationships to smaller rivals or remedies to address vertical integration, notably banks’ interest in payment systems. (We note that the Payment Systems Regulator wrote to the CMA during the consultation to advise that they will work closely with the CMA during the investigation).

What happens next?

Affected banks will be required and encouraged to work closely with the CMA in its investigation and, in particular, will be required to produce detailed documentary evidence covering their business activities. “First day” letters will shortly be sent, seeking initial information such as reports and accounts. These will be followed in due course by detailed questionnaires, seeking information about the market, business activities, economic data, how products are marketed, relations with third parties, etc. The CMA also normally conducts site visits, consultation with third parties and private hearings with main parties and commentators. Later on, there will be the opportunity to consult on remedies. The process is detailed and considered, not to mention time-consuming for the parties involved.

More positively, depending on one’s view point, the investigation will provide an opportunity to allay some of the myths regarding competition in banking and for a dispassionate view to be taken of the complexities, not least of customer behaviour.

Equally, the investigation presents an opportunity for challenger banks to give vent to any frustrations on their part and to seek to influence the CMA’s final remedies package and tackle perceived barriers to growth.

The CMA has 18 months in which to conclude the investigation, although this can be extended by six months. It has indicated that it hopes to be in a position to publish an interim report during the summer of 2015.

How we can help

If your business is likely to be affected by the CMA investigation, or you may wish to take advantage of potential market opportunities, Walker Morris can help. We have extensive experience in banking and the wider financial services sector. We have proven expertise in advising on market studies and investigations, including currently acting before the CMA on the in-depth inquiry into payday lending. We work together with in-house regulatory specialists and with the leading economics consultancies and have significant experience of external engagement with competition authorities, sector regulators and other stakeholders on sensitive and complex competition issues.