UK banking sector under investigation

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Scope of the reference

The Competition & Markets Authority (CMA) announced on 18 July that it was consulting on a provisional decision to refer the market for the supply of retail banking services to personal current account (PCA) customer and to small and medium sized enterprises (SMEs) for an in-depth, Phase II market investigation. The consultation on a reference is accessible here.

The CMA may make such a reference where it has reasonable grounds for suspecting that any feature or combination of features of a market in the UK for goods or services prevents, restricts or distorts competition. The Phase II investigation would be carried out by an independent expert group of CMA members. It 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.

The retail banking services subject to the threat of a reference are:

  • in respect of PCAs, provision of an account which provides the facility to hold deposits, to receive and make payments by cheque and/or debit card, to use automated cash machines and to make regular payments by direct debit and/or standing order, but excluding deposit accounts in a currency other than UK sterling and credit accounts offset against a mortgage or loan (other than an overdraft facility as this is in scope)
  • in respect of SME banking, provisions of services including (but not limited to) general purpose loans and liquidity management services such as business current accounts and overdrafts.

An SME business has annual sales revenue (exclusive of VAT and turnover-related taxes) not exceeding £25 million.

Review of 2002 undertakings on SME banking

In addition to consulting on a market investigation, the CMA is also consulting on whether to 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. The CMA is minded to retain the undertakings save potentially in respect of switching of supplier by smaller SMEs, which benefit from the seven-day switching service introduced last year.

Issues raised in previous market reviews

SME banking

A market study into SME banking was launched in June last year and was carried out by the competition regulators, originally the Office of Fair Trading (OFT) before the CMA took over in April, in collaboration with the Financial Conduct Authority. The regulators were particularly concerned about:

  • the state of competition in the supply of banking services to SMEs, particularly whether SMEs have access to services that meet their needs and represent good value
  • whether any lack of competition between banks is holding back lending or the provision of other finance (e.g. invoice discounting or hire purchase arrangements) to SMEs
  • whether there are types of SME (for example, start-ups or small financial firms) that face particular difficulties, and if so, why.
Personal current accounts

The PCA study follows a review by the OFT of the PCA market in January 2013. That review did not recommend a market investigation reference despite finding that a combination of customer apathy, a lack of competition and low levels of innovation were causing the market to not function well for consumers. The OFT did say that it would keep the sector under review, and the CMA launched a further market study in April 2014.

Findings of the recent market studies

The studies recognised that there have been steps towards increasing competition in the markets, including streamlining the authorisation regime for new banks, the introduction of the seven-day current account switching service and some new market entry. However, despite these developments, the survey identified a number of respects in which competition was not serving the interests of SME or PCA customers. These include:

  • barriers to entry and expansion for newer and smaller banks remain significant and the markets remain concentrated, particularly in Scotland and Northern Ireland
  • there is very little movement in the market shares of the largest banks (other than as a result of a merger)
  • many customers see little difference between the largest banks in terms of the services they offer
  • levels of shopping around and switching remain low (3 per cent per annum for personal customers and 4 per cent per annum for SMEs).  Possibly as a result of this those banks with the highest levels of customer satisfaction have not been making the market share gains that would one expect from a properly functioning competitive market
  • there is limited transparency and it is difficult for customers to make comparisons between banks, particularly in respect of overdraft charges for PCAs, which are very complex.  It is therefore difficult for customers to choose the cheapest or most appropriate accounts, which in turn limits the incentive for banks to compete.  This may ultimately lead to higher overdraft charges
  • it is also possible that, particularly for PCAs, there is a degree of cross-subsidy from other retail products between different customer groups, which may be distorting competition. The authorities are also concerned about the “free if in credit” model, under which no charge is made for the PCA when in credit but banks derive a significant proportion of their income from overdraft charges when the account is in debit, meaning that customers who use their overdrafts regularly may cross-subsidise those who do not.

Possible remedies

If, following an in-depth investigation, the CMA decides that there are one or more features of the market with adverse effects on competition, it must take such action as it considers reasonable and practicable to remedy, mitigate or prevent the situation and any detrimental effect on consumers resulting from it.

Hoping to short circuit the need for an in-depth inquiry, the four major banks (Barclays, HSBC, Lloyds and RBS) have put forward proposals to remedy perceived competition problems in the SME banking sector. The proposals include:

  • giving the CMA undertakings to set up a comparison website to improve transparency
  • establishing new account opening standards to facilitate switching
  • taking certain promotional measures to facilitate comparability and switching.

The CMA has made clear that it is currently disinclined to take forward the banks’ proposals and instead favours making the full reference but during its consultation, which is to run until 17 September 2014, the CMA will listen to views on proposals.

The CMA’s reports also suggest some remedies that may be appropriate. These include, for instance,

  • for PCAs: enhancing transparency through improvements to statements; requiring banks to text customers when they are about to go overdrawn; requiring banks to offer their customers the chance to opt out from overdrafts at no cost in all fee-free accounts
  • for SMEs: requiring particular steps to be taken when an SME is sold an SME banking product; obliging incumbents to provide competitors with access to their branch network and payment systems; divestment of branches; and remedies to address vertical integration issues, such as banks’ interest in payment systems (the design and timing of remedies in the payments sphere will require dialogue between the CMA and new Payments Systems Regulator, which is due for launch in April 2015).

Clearly, any remedies imposed by the CMA on the outcome of a market investigation are likely to be more draconian than those mooted by the banks (though they are very likely to include the proposals put forward by the major banks).


A reference of the UK banking sector has long been mooted but narrowly avoided with the 2011 review by the Independent Commission on Banking, the OFT’s Report on PCAs and the Report of the Parliamentary Commission on Banking in 2013. Expectations were of a potential reference in 2015, but with the advent of the CMA and the political impetus for this new authority to make a difference for consumers, the reference appears to have been brought forward.

Not everyone is convinced of the CMA’s timing. The sector has recently witnessed concerted efforts by the likes of the Halifax to promote and capitalise on the seven-day switching process, a significant advertising campaign behind the launch of TSB Bank, and strong competition from challengers such as Metro Bank, Santander and Nationwide Building Society. In SME banking, Aldermore, Shawbrook and Handelsbanken are all expanding. The PCA segment is not without its new entrants (and potential new entrants) with an ingrained consumer focus such as Tesco Bank, M&S Bank and Virgin Money and recent and pipeline innovations (smartphone apps, digital wallets etc.). Nonetheless, the CMA appears of the view that the dynamics of competition in the sector require a step change for these contenders to make a difference. The CMA has the power to make that happen.

How we can help

If your business is likely to be affected by these findings, or 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.