FCA review of retail banking business models

Credit Cards Print publication


On 11 May 2017 the FCA announced that, prompted by significant economic, technological, social and regulatory changes that have occurred over recent years and are expected to continue, it is reviewing the business models used in the retail banking sector, so as to assess their impact on competition and conduct.  The FCA stated that the aim of the review is to ensure that its regulatory approach remains fit for purpose. Phase 1 will entail assessing profitability across the full range of retail banking products, including current accounts, cash savings, mortgages, secured and unsecured lending, credit cards and general insurance. As its analysis progresses, FCA may choose to focus on specific areas in more detail. The FCA is targeting banks, building societies and credit unions.

Specifically, the review will entail the FCA improving its understanding of:

  • retail banking business models and whether these models raise any competition or conduct issues;
  • how free-if-in-credit banking is paid for, and whether it leads to any distributional concerns between different types of consumers; and
  • the impact of changes such as increased digital channels and reduced branch usage – in particular on consumer protection and competition.

This will be achieved by:

  • Phase 1
    • understanding profitability within retail banking, including which product types and which parts of the value chain are more profitable and which are less so, and why;
    • examining the distribution of profits around the various participants in the market, and the reasons for any pattern;
    • considering how revenues and costs in one business area may be linked to those in any other and shedding light on inter-relationships, cross-subsidisation and incentives to cross-sell different products;
    • understanding the role of free-if-in-credit banking and how different types of customers generate different profits from their current accounts; and
    • probe how emerging business models may differ from traditional business models.
  • Phase 2
    • evaluating the impact of economic, technological, social and regulatory changes on business models and implications from a competition and conduct regulatory perspective.

In certain respects, this review will be broader in scope than the CMA’s retail banking market investigation, as the FCA has consumer protection as well as a competition objective and is considering a broader range of products and services. However, the FCA draws several distinctions between this exercise and the recent in-depth review by the CMA, noting (for example) that the FCA will not examine in detail the customer journey nor (at least in the first phase of the review) whether firms are making persistent excess profits over time.

Next steps

The FCA will engage during May and June with various firms and other stakeholders to help inform the FCA’s information gathering exercise, with a view to issuing information requests shortly thereafter. The FCA then aims to produce a project update in the second quarter of 2018, to report its preliminary analysis and conclusions from Phase 1.

How Walker Morris can help

Walker Morris’ competition, regulatory and retail banking specialists advise in the round on FCA processes and potential implications for business. If you should like to understand more about the FCA’s review of business models, the potential outcomes and opportunities for your business, please speak with any of the partners mentioned below.