www.compliancemonitor.com
October 2016
The retail banking market investigation:
regulatory changes ahead?
After a two-year market investigation into the supply of
retail banking services to personal current account
customers as well as to small and medium-sized enterprises,
the Competition and Markets Authority published
its final report on 9 August 2016. Andrew Barber and
Emma Radmore examine the regulatory implications.
Overview
The investigation follows a number of reviews into the United
Kingdom banking sector and concerns raised about retail
banking. In light of the reviews, the CMA investigated areas
including whether:
a) a lack of engagement and/or barriers to searching and
switching reduces the incentives on banks to compete
on price and/or quality and/or to innovate;
b) there are barriers to entry and expansion in the market that has led to constraints on the ability of banks
to enter or expand in the market; and
c) the level of concentration is having an adverse effect
on customers.
Overall, the CMA found [1] that while the larger retail
banks, which account for the large majority of the retail
banking market, do not have to work hard to win and
retain customers, it is difficult for new and smaller providers
to attract customers. This has led to a lack of competition
and innovation in the banking sector, which needs to be
addressed through investment in new products and services
or reduction in prices and improvement in service quality.
Summary of the main concerns identified
The main concerns identified by CMA include that:
• the charging structures for current accounts are complex
and customers do not have enough knowledge about
the charges and service quality provided by other banks.
This makes comparisons difficult;
• personal and business current account relationships are
open-ended and do not have regular trigger points, which
might otherwise prompt customers to shop around;
• the Current Account Switch Service (CASS), which
makes it easy for customers to switch current accounts
from one bank to another, is not widely known;
• charging structures for overdrafts are complicated and
make it difficult to compare providers;
• most owners of small businesses obtain their business
loans from their main bank, with little or no shopping
around; and
• getting new customers is difficult and costly for
banks, which leads to established banks having an
advantage over smaller banks wishing to expand into
the market.
What CMA considered
CMA noted several relatively recent developments in the
banking world, all of which were relevant to the investigation,
and all of which have a regulatory impact. Among the
developments it identified were:
• the divestment requirements on the RBS and Lloyd’s
banking groups;
• the contraction in lending by larger banks creating
opportunities for new market entrants and non-bank
lenders;
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• implemented and ongoing regulatory requirements
(which relate to all kinds of products and services),
aimed at greater choice, flexibility and transparency
for the customer;
• continuous technical innovation through increased
use of internet and mobile banking, contactless, in
addition to mobile payment systems; and
• the effects of digitalisation of banking meaning
both that entry costs to the markets and parts of
them is cheaper and the way in which customers
use branches as well as engage with their accounts.
Regulatory changes already in place
CMA noted the various changes, mainly stemming
from EU legislation, that have recently affected banks,
or which are about to come into force. Not least, the
Payment Accounts Regulations implementing the
Payment Accounts Directive (although many aspects of
the directive’s requirements were already in place), and
the regulations under the Small Business, Enterprise and
Employment Act 2015 under which designated banks
must provide information about SMEs to designated
credit reference agencies, which must in turn provide
information to lenders.
Market players
CMA treated Northern Ireland as a separate market to
the rest of the United Kingdom, after examining the
habits of consumers in each constituent part of the UK.
It examined the largest market players, of which there are
five in Great Britain, with around 40 smaller banks and
building societies, as well as credit unions and alternative
finance providers. It identified five more key entrants to
the market since 2010, in addition to existing market
players who increased their presence. Finally, it noted a
number of very recently authorised banks, or applicants
in the process of becoming authorised.
Statistics
The report looked at the small percentage of accounts
that are basic bank accounts, or student/graduate
accounts. It also noted the significant increase in the
number of accounts being opened as reward accounts,
and the decrease in both ‘standard’ accounts and
packaged ones. Banks tended to have profitable
personal banking businesses, with packaged accounts
generally providing the greatest profits as the monthly
fee customers pay exceeds the cost to the bank of the
benefits the package provides.
An important theme running through financial
product choices is the ability to compare prices. A key
problem in enabling consumers to compare prices of
Personal Current Accounts (PCAs) is that prices depend
on usage, and that many banks offer several different
PCAs with significant differences in prices. A common
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theme is the cost of overdrafts, which just under half of
customers use. Indications from the survey were that
although the larger, longer-established banks offered both
cheap and expensive products, customers were more likely
to be using the expensive ones, and that the longer the
customer had been with the bank, the more expensive
their product tended to be. The newer market entrants,
on the other hand, generally offered cheaper products.
The CMA investigated whether customers were
perhaps happy to pay a higher price for a better customer
service, but the evidence did not suggest this. However,
banks offering better-priced products or better-quality
customer service were only gradually gaining a greater
market share. This could be explained by the high
percentages of customers who had been with their bank
for many years and who had neither searched for bettervalue accounts nor switched. The small percentage who
had searched or switched tended to come from higherincome, higher-value customers with higher levels of
education. The more frequently a customer used an
overdraft, and particularly if the overdraft was unarranged,
the less likely they were to switch, despite potentially being
the customers who would benefit most from doing so.
Engagement issues
The CMA noted several interesting points around
customer engagement, and how digitalisation could
have helped this. A key point was that because PCAs
have no end date, there is no trigger to prompt a
consumer to check whether it is the best product for
them. Many customers also thought they were satisfied
with their products, even where in fact many could
have gained by switching. Many customers who do not
incur charges did not think there would be much to be
gained by switching. Even if they wanted to switch, the
CMA found that, despite developments like the midata
initiative, it is hard to obtain and analyse information on
account usage and pricing structures of other accounts.
Moreover, despite the introduction of CASS (which
Financial Conduct Authority research in 2015 showed
nearly half of respondents had not heard of ), customers
still think switching is a hassle and that something was
likely to go wrong in the process. Overdraft users were
particularly unlikely to switch for a variety of reasons,
including difficulty in comparing, lack of understanding
of usage and timing of new overdraft approvals.
SME business
The issues small and medium-sized enterprises face are, of
course, different to those consumers face. They tend not
to switch because of the length and perceived difficulty
of the account-opening process, as well as concerns over
loss of data and access to lending. It is, if anything, more
difficult to get data and compare products for the SME
markets than for PCAs.
Volume 29 • Issue 2 • October 2016
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Barriers to entry
The CMA looked at a number of potential difficulties
that new entrants into the banking market may face
in comparison to those that are already established
within the market. Particular areas of concern include
capital requirements; the costs of funds for lending; and
information asymmetries between banks.
In assessing the barriers to entry, the CMA found that
while previous reviews concluded that the authorisation
process for banks was thought to be an issue, it is no
longer thought of as a barrier. The revised authorisation
process that the New Bank Start Up Unit has brought
has enabled a more flexible approach enabling banks to
become authorised with restrictions before committing
to large potentially irreversible upfront investment. In
addition, the CMA looked at anti-money laundering
regulations and did not find that these were a barrier to
entry and expansion.
Remedies
In an attempt to tackle the problems highlighted in
the report, the CMA introduced a wide-ranging and
integrated package of remedies.
Foundation measures
As part of its foundation measures, remedies include
open banking standards, service quality information
and customer prompts. Most notably, the open banking
standard includes the development and implementation
of open Application Programming Interfaces (APIs).
The APIs will permit authorised intermediaries to access
information about a bank’s services, prices and service
quality as well as customer usage, in anticipation that
new services delivered to customers will be tailored to
their needs. As this involves accessing customer data,
privacy and security will be of paramount importance.
In respect of customer prompts, the CMA has
recommended that personal and business customers
should receive occasional reminders to encourage them
to review their banking arrangement. In implementing
this remedy, the CMA has asked the FCA to undertake a
programme of customer testing to identify which prompts
will be most effective in changing customer behaviour and
then to implement these prompts.
Current account switching measures
The CMA wishes to increase customer confidence in
their ability to switch accounts. In doing so the CMA
states in its report that the performance of CASS will
need to be improved, and there should be growth in
customer awareness of and confidence in the service.
Overdraft measures
The report found that many customers find it difficult
to keep up with their use of arranged and unarranged
overdrafts and failing to do so can be costly. In order
© Informa UK Ltd 2016
to tackle this issue, the CMA is introducing additional
measures to enable personal customers to take more
control over their use of overdraft services. For example,
banks will be required to alert customers when they are
going into unarranged overdraft.
The CMA has recommended that the FCA explore
ways to make it easier for overdraft users to shop around
and switch banks, including online overdraft eligibility
tools. In addition, the CMA has asked the FCA to
undertake further research on overdraft alerts and grace
periods as well as to look at how the process to open
current accounts could be used to make customers more
aware of the features and overdraft costs.
Banking services for small businesses
The remedies relating to small businesses include the
development of a comparison website to allow them
to compare the price, quality of services and lending
criteria offered by different providers.
In addition, lenders will be required to publish their
prices for smaller, non-complex lending products, drawing
from the approaches used under the personal consumer
credit regime.
FCA’s response to the investigations
The implementation of a number of the remedies
included in the report requires the FCA’s involvement.
While the FCA is yet to publish its response to the
report, setting out details of the work it intends to
undertake to develop and implement the relevant
remedies, it is highly likely that the regulator will
be supportive of the recommendations set out in
the report.
In June 2016, the FCA released a statement [2]
in response to the CMA’s provisional decision on
remedies from retail banking market investigations;
it commented that it was supportive of the CMA’s
provisional decision to make recommendations to the
FCA to take forward a range of remedies, namely on
service quality information, prompts and overdraft
measures. These recommendations are reflected in
the report and are in line with the FCA’s key priority
of the treatment of existing customers and work on
competition in retail banking.
Regulatory consequences
The recommendations for remedies, of course, will
in some cases affect regulators. In fact, none of the
remedies go to the heart of regulation or will require
any fundamental changes to prudential regulatory
requirements. Ultimately, what the remedies need to
address is the willingness of customers to engage with
the switching process. So the FCA in particular has to
look at how to mitigate customer concerns – whether
this is because it is too hard to get information that
would allow an informed comparison, or because the
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process or consequences of switching would (or would
be feared to) be at best long-winded and difficult, while
at worst detrimental in terms of ongoing services such
as overdraft or lending limits. So the FCA’s ‘to do’ list
will focus on:
• what it can do, and what it should be getting
banks and others to do, to prompt consumers
to review their PCAs (and SMEs to review their
accounts), and make changes to its rules to require
additional customer information and reporting
requirements, maybe with standard forms and
information formats;
• further measures of providers’ service performance
to allow assessment of how different providers
perform – and indeed different packages offered
by the same provider, or even the same package
offered to different customers over time;
• how best to encourage customers to understand
their overdraft usage and charges. In principle,
this seems likely to need both a public awareness
campaign and require banks to provide customers
with more relevant, timely and comprehensible
information on the effects of authorised and
unauthorised overdrafts and charges for them;
• assessing the effectiveness of the monthly
maximum charge (MMC) that the review requires
PCA providers to set covering all unarranged
overdraft charges. The FCA will also have work to
do around disclosure of the charge;
• consider requiring providers of PCAs to offer
online tools showing overdraft eligibility. The
FCA will need to deliberate very carefully how
such tools should be calibrated, given the proven
variety of conditions that can apply to overdrafts,
to ensure the tools are used correctly and give
the right information in a meaningful manner.
Again, it seems likely the FCA would need to
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prescribe the format of tools to enable worthwhile
comparisons; and
• investigate how to engage customers more in
considering overdraft features during the PCA
opening process: the most difficult part of opening
a PCA is often the money laundering checks. That
apart, there is little need for personal engagement
with the customer, as the PCA opening process is
in many ways less personal than other processes for
what may be a long-term customer relationship in
the financial services sector.
In helping to implement the recommendations, the FCA
must be aware of the continuing need for regulation to
ensure firms continue to offer support and forbearance
for customers in financial difficulties.
Next steps
Now that the report has been published, the focus will be
on implementation of the remedies. The report includes
a timetable setting out the proposed deadline for putting
each of the remedies in place. Provided there are no
delays, it will take until summer 2018 for all elements
of the package to come into force. This means regulators
will need to move quite quickly, to consider actions,
consult and make the necessary rule changes.
Notes
[1] https://assets.publishing.ser vice.gov.uk/
media/57ac9667e5274a0f6c00007a/retail-bankingmarket-investigation-full-final-report.pdf
[2] www.fca.org.uk/news/response-to-cmasprovisional-decision-remedies-retail-banking-marketinvestigation
■ Andrew Barber is a partner specialising in financial
services regulation and Emma Radmore is legal
director at law firm Bond Dickinson. Contact them on
[email protected] and [email protected].
Volume 29 • Issue 2 • October 2016