CMA publishes Final Report on Retail Banking Market Investigation

On 9 August 2016, the Competition and Markets Authority (CMA) published its long awaited final Report in relation to its market investigation into the personal current account (PCA) and small and medium enterprise (SME) banking markets (the Report). The Report sets out how the CMA will tackle the competition issues it has identified in these markets.

The CMA has identified in the Report that a combination of low customer engagement, a lack of product information, and poor transparency, are barriers that affect customers’ ability and willingness to search and switch between banks; and that customers do not appear to be responding to changes in price and quality – a common warning sign that competition is not working effectively.

The Report listed a number of characteristics which it believes to be causing competition issues in retail banking, including the following:

  • difficulty in accessing and comparing information on PCA and SME charging structures and service quality across different banks and products. This results in a lack of customer understanding as to whether they could get better value and service from another bank or whether an alternative product might be more suitable;
  • particularly complicated charging structures for overdrafts. As a consequence, the customers’ ability to compare banks is further restricted;
  • lack of regular trigger points in personal and business current accounts, which would act as a prompt to customers to search for a better deal with an alternative provider;
  • the incumbent advantage current high street banks have over new entrants in the market. This is primarily caused by inertia amongst customers, but is also a result of the larger incumbents ability to take advantage of economies of scale and scope when gaining new customers; and
  • the correlation between start-up business accounts and owners’ personal accounts, where over half of start-up businesses open their current account at the bank where the business owner has their personal account.

What this means for you

The Report broadly follows the CMA’s provisional findings and provisional remedies decision as detailed in our briefing on the CMA’s Retail Banking Sector Investigation and on Reforming retail banking.

The CMA’s proposed remedies to tackle the identified competition concerns include the following:

  • developing the Application Programming Interfaces (API) banking standard;
  • improving customer engagement;
  • reducing barriers to current account switching;
  • requiring banks to alert customers when they start using an unarranged overdraft on their PCA and ensuring that all customers are automatically enrolled for this alert, in addition to providing customers with a grace period during which they can take action to avoid or reduce all charges that have resulted from an unarranged overdraft; and
  • requiring banks to provide information about loan pricing and eligibility for unsecured loans and overdrafts of up to £25,000 to SME customers, including the publication of charges, terms and eligibility criteria.

All of the proposed remedies are required to be in place by summer 2018, although certain remedies are due to be in place by Q1 2017 (including the first stage of the release of information under the API remedy and the development of comparison services for small businesses.

FCA issues Payment Accounts Regulations policy statement

On 1 August 2016, the Financial Conduct Authority (FCA) issued a policy statement on the Payment Accounts Regulations 2015. The statement includes a summary of feedback received in response to Consultation Paper 16/7: Payment Accounts Regulations 2015 – draft Handbook changes and draft guidance. Appendix 1 of the policy statement includes the final Handbook changes and the final guidance is available in Appendices 2 and 3.

What this means for you

In addition to some minor amendments to improve clarity, the FCA has made the following changes as a result of the consultation:

Guidance on packaged accounts:

  • Clarification of the scope of the PARs provisions on packaged accounts, including what "other products and services" may include.
  • Addition of guidance on the timing and method of providing information on the costs and fees of purchasing the other products and services separately.
  • Regulatory reporting requirements:
  • Total number of refusals of switching applications to be reported (rather than the proportion of total applications refused).
  • Total number of refusals of applications for basic bank accounts to be reported (rather than the proportion of total applications refused).
  • Reporting deadline extended to two months (instead of one month) after the end of the reporting period.

The final text of the FCA's rule changes comes into force on 18 September 2016 (the same day as the relevant provisions of the PARs come into force).

UK payments infrastructure in need of reform

On July 28, 2016 the Payment Systems Regulator published the final report on its market review into the ownership and competitiveness of infrastructure provision supporting three payment systems – Bacs, Faster Payments Service and LINK.

The PSR concluded that there is “…currently no effective competition in the market for the provision of central infrastructure services for Bacs, FPS and LINK”.

Together with the full report the PSR has released a factsheet summarising the key findings and suggested solutions outlined in the report. The three solutions recommended are:

  • Competitive procurement exercises – ranging from issuing guidance through to requiring operators to follow a prescribed procurement process;
  • Enhanced interoperability, including a common international messaging standard, for Bacs and FPS; and
  • Divestment by the four largest VocaLink shareholder PSPs of their interest in VocaLink – it is noted that the acquisition of VocaLink by MasterCard could address some of the issues identified by the PSR as restricting competition.

Feedback on these proposals is requested by September 22, 2016.

What this means for you

By making these changes, the PSR wishes to open up the provision of infrastructure services to Bacs, FPS and LINK to different infrastructure providers, including international players. It remains to be seen to what extent the solutions proposed by the PSR, if confirmed, will lead to new providers coming forward to bid for this work, and whether they will lead to increased competiveness in the long term.

It will not be possible for some providers to bid to supply these services until the international messaging standard has been agreed and implemented, and existing contracts for infrastructure provision will need to run to term. It is likely to be some time, therefore, before the impacts of the proposals, if confirmed, are felt. The Payments Strategy Forum, the payments industry’s strategy setting vehicle, has been tasked with selecting the appropriate messaging standard. In its proposed strategy, which it is currently consulting on, it has proposed the introduction of ISO20022 within the next 1-3 years. The Payments Strategy Forum consultation on its draft strategy closes on 14 September 2016.

Once the new standard has been confirmed, the payment systems operators will have to implement the new standard, which is likely to be a complex and time-consuming task, although one that at least one of the systems, FPS, has already begun work on. There could be short term impacts of implementing the changes, such as increased costs and there are likely to be concerns around risks to the stability of the systems. The Bank of England, as supervisor of these systems from a financial stability perspective, and the PSR will be keen to see are such risks are managed.

Overall the PSR has taken an interventionist approach with these proposals. However, it looks unlikely that it will be required to flex its muscles in relation to the most interventionist of its proposals, to use its powers to force firms with an interest in a payment system infrastructure provider to divest all or part of that interest. The MasterCard deal, if it proceeds, is likely to mean that the PSR’s concerns, which this proposal was designed to address, are allayed. Nonetheless, the point has been made that the PSR is not afraid to ‘show its teeth’.