The CMA’s proposed reforms of retail banking

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The Competition & Markets Authority (CMA) has published its provisional decision on remedies following its investigation into the retail banking market. This is the culmination of almost 18 months’ work. The provisional decision can be accessed here. In essence, the provisional decision is a package of proposals designed to tackle the issues that the CMA has identified as hindering competition in the market for personal current accounts (PCAs) and in banking services for small and medium-sized enterprises (SMEs). The proposals are not final – the CMA is inviting submissions until 7 June and will publish its final report not later than 12 August this year.

The CMA has proposed a wide-ranging package of remedies, which along with technological changes that are happening in the market, it believes will support innovation and increased customer engagement. This should result in increased competition in the market.

The main problems indentified by the CMA are set out below.

The lack of competitive pressures in the market

The CMA’s starting position is that it is hard for bank customers to know if they are getting good value for their banking services. In particular, bank charges are complicated and lack transparency and many customers are deterred from changing bank by the perceived difficulties and risks involved.  This is reflected in the CMA finding that almost 60 per cent of personal customers have been with the same bank for at least 10 years and more than 90 per cent of SMEs get their business loans from the same bank where they hold their current account.  The consequence of this, the CMA maintains, is that banks do not feel compelled to compete on price or service quality.

Transparency of information

It follows that the CMA’s proposed remedies focus on enhancing the quality of information provided to consumers. The proposed remedies include measures designed to ensure that consumers get much better information as to service quality than they have at present.  Banks will be required to display prominently a number of core indicators of service quality, based on customer willingness to recommend their bank to friends, family or colleagues. Data will be collected twice a year to facilitate customer comparison.

A particular package of measures is proposed to enhance transparency of information for SMEs taking out loans. These include:

  • lenders providing unsecured loans and overdrafts to SMEs will have to display on their websites rates showing the costs of their products up to the value of £25,000. These rates will have to be displayed in a form used under the existing personal consumer credit regime
  • lenders will have to make available charges and terms and conditions and show how annual percentage rates (APR) and equivalent annual rate (EAR) vary with loan size and length as open data to third parties, for example on comparison websites
  • lenders who advertise prices for SME lending in marketing materials should do so using the APR/EAR rate from the existing personal consumer credit regime.

Greater transparency as to costs of and eligibility for SME loans will be welcomed by business.

Comparing value

The second element of the CMA’s strategy to enhance transparency of information is to facilitate value comparison by individual consumers and businesses. It is proposing:

  • a requirement that banks move swiftly to introduce an Open API (application programming interface) banking standard which will enable personal and SME customers to share their transaction history with other banks and trusted third parties.  This will enable customers to, for example, click on an app and get  a comparison that is tailored to their particular circumstances, pointing them to the bank that will offer them the best deal
  • a requirement that banks be obliged to prompt their customers on a regular basis to shop around and check they are receiving good value from their provider.

The CMA believes that a combination of transparency on products and pricing, coupled with easy access to comparison services, can redress the competition deficiencies for both PCA holders and SMEs.

The CMA has also considered particular facets of retail banking including overdraft charges, the market power of the largest banks and provision of “free” banking.

Containing overdraft charges

The CMA observes that the banks derived £1.2 billion from unarranged overdraft charges in 2014 and it is the CMA’s proposals to contain such overdraft charges that are hitting the news headlines. In particular, the CMA is proposing:

  • a requirement that banks set a monthly maximum charge for unarranged overdrafts on PCAs
  • a requirement that banks alert their customers when they are about to go into an unarranged overdraft, to give them the opportunity to take action and avoid overdraft charges.

A number of the larger banks do already cap overdraft charges or offer text alert services for customers. Which? considers that the CMA has not gone far enough and has called for further action on overdraft charges by the Financial Conduct Authority.

Breaking up the banks?

The big four banks (Barclays, Lloyds, HSBC and RBS) account for around 75 per cent of the market. The CMA sees no merit in breaking up these banks in order to dilute their market power.  The existence of new and smaller banks will not, in the CMA’s view, help to address the core competition deficiencies in the market, namely the lack of transparency around fees and charges.

“Free if in credit” (FIIC) current accounts

The CMA also considered getting rid of FIIC current accounts on the basis that these are not really “free”. However, it rejected that idea for the reason that they do work well for many customers and banning a particular type of product, such as FIIC current accounts, would only serve to reduce choice for consumers and run the risk of the overall costs of products rising as a consequence.

Behavioural remedies

The remedies proposed by the CMA are influenced by insights from behavioural economics, which are essentially aimed at equipping the consumer with the tools to take action. The CMA stated that it had drawn on its own and others’ customer research in developing its proposed remedies. This approach reflects the recent trend for economic regulators to put a stronger focus on behavioural economics and move away from structural remedies. In particular, before the market investigation had begun, the pleas involved more draconian solutions such as the breaking up of banks.

What happens next?

The CMA is inviting submissions on its provisional package of remedies by 5 pm on Tuesday 7 June 2016. The CMA is planning to publish its final report in early August 2016, with the statutory deadline being 12 August 2016. Should you wish to respond to the CMA, for example, in the event that having the CMA include certain technical matters in its final order would be beneficial for your business and for competition or if you feel the remedies could be further improved to the benefit of consumers, please contact Trudy Feaster-Gee, Partner (Barrister) and Head of Competition.