On 9 August 2016 the Competition and Markets Authority (“CMA”) published its long-awaited Final Report on its investigation into the retail banking market (the “Final Report”). The Final Report sets out the CMA’s analysis of the shortcomings of competition in the personal current account (“PCA”), business current account (“BCA”), and small and medium sized enterprise (“SME”) lending sectors.
The legally binding remediation measures that the Final Report contains aim to shake up competition in the retail banking sector, change customer behaviour, decrease price, and increase innovation and service quality. At 708 pages long before appendices, it can be easy to get lost in the detail. This e-alert sets out the ten remediation measures that we think are most likely to cause substantial changes in the industry.
Before commencing the top ten countdown, it should be noted that the Final Report doesn’t just apply to banks. While banks are undoubtedly the main subject of the Final Report, the CMA’s terms of reference made “retail banking services” the subject of the investigation. This means that alternative finance providers, such as crowdfunders and P2P lenders that offer unsecured loans and overdrafts to SMEs for less than £25,000 will be subject to one of the CMA’s remediation measures.
The Top Ten
- Development and adoption of an open API standard. The largest banks in Great Britain and Northern Ireland are required to develop a new open API banking standard that will enable customers and SMEs to share information with third parties. Such third parties may include price comparison websites and the third party payment service providers created by the new Payment Services Directive 2 (account information service providers and payment initiation service providers). The least sensitive information (for example, about prices, charges, terms and conditions and customer eligibility criteria) must be released by 31 March 2017.
- Publication of service quality metrics. All banks (subject to a de minimis threshold linked to the number of BCA and PCAs held) must prominently publish service quality metrics on their websites, in branches, and in promotional leaflets (in a manner specified by the CMA). The CMA requires the data to contain a “comparative element” comparing each brand’s score (the format and content of this is also to be determined). The metrics will be based on customers’ willingness to recommend their bank to friends, family or colleagues.
- Identification of “prompts”. The “evergreen” nature of PCAs and BCAs means that customers are not prompted to consider whether they should switch providers. The CMA therefore wishes personal and business customers to receive appropriate occasional reminders to encourage them to consider their position vis-à-vis their banking arrangements (such a prompt might occur, for example, on the issue of the customer’s annual statement). The CMA is requesting the FCA to identify which prompts would be most effective. All banks (subject to a de minimis threshold linked to the number of BCA and PCAs held) must cooperate with the FCA in its research.
- Publication of SME lending product prices. To increase price transparency for SME loans, all lenders offering unsecured loans and overdrafts of up to £25,000 must publish their standard rates (as well as other “contextual” information) on their websites and make that data available as open data to intermediaries. The information should be published in the form of representative APRs for loans and EARs for overdrafts (i.e. in the form used under the UK’s consumer credit regime). Lenders will also be required to use the APR/EARs in marketing and advertising materials.
- Development of an SME unsecured lending and overdraft comparison tool. The CMA is supporting Nesta’s “challenge prize” that it hopes will bring fresh impetus to the development and delivery of these comparison services. The largest banks in Great Britain and Northern Ireland will be required to provide financial backing and technical support to this project.
- Enhancement of the Current Account Switching Service (“CASS”). Low levels of customer confidence in the CASS act as a barrier to customers switching their accounts. The CMA has therefore requested undertakings from Bacs that it will carry out a raft of measures intending to increase customer confidence. These range from strengthening CASS’ governance and increasing consumer awareness through a long-term promotional campaign, to improving specific aspects of the switching process, such as ensuring that customers’ incoming payments will be redirected to their new account for as long as the customers need it.
- All PCA providers must set a monthly maximum charge (“MMC”) for the use of an unarranged overdraft facility. The MMC must be disclosed in a manner “no less prominent than the presentation of other information on overdraft fees and interest”. To the consternation of some industry groups, the CMA has not set a cap on the MMC, preferring the banks to do this so that they remain accountable for the overdraft charges they choose to impose. The regulator is concerned that if it were to set a cap, some providers would set their MMCs at the level of that cap. Rather, it is hoped that by forcing PCA providers to make their MMC public, competition between the providers will result over time in a gradual decrease in the charges.
- Issue of unarranged overdraft alerts with grace periods. The CMA requires all PCA providers (subject to a de minimis threshold linked to the number of BCA and PCAs held) to offer customers a “grace period” “during which they can take action to avoid or reduce all charges resulting from unarranged overdraft use”. When this grace period is triggered, the providers must alert the customers in a manner that complies with the providers’ legal and regulatory obligations (so, for example, the communication must be clear, fair and not misleading).
- BCA opening procedures must be standardised in order to shorten the time it takes to complete an application to open a BCA (the time this currently takes, and the forms’ complexity, currently constitutes a barrier to time-poor customers switching accounts). The CMA states that “the focus of this remedy should be on the core set of standard information and evidence requirements to open a BCA rather than having a standard account opening form or a common set of questions”.
- Increased availability of transaction history. The CMA requires customers’ transaction histories to be made available even after the current account has been closed (a reasonable fee may be charged for this service).