The Competition and Markets Authority (CMA) has decided to make a market investigation reference (MIR) into personal current accounts (PCAs) and banking services to small and medium-sized enterprises (SMEs).

Background to the decision

Following its provisional decision on 18 July 2014, the CMA conducted a consultation regarding its provisional conclusion to make an MIR. The CMA received over 120 responses and most respondents endorsed the CMA's conclusion.

The CMA and the Financial Conduct Authority (FCA) have found that the SME banking and PCA sectors face similar issues, namely:

  • persistently high levels of concentration and relatively stable market shares (and for SME banking, a market structure characterised by close linkages both between PCAs and business current accounts (BCAs), and between BCAs and general purpose business loans);
  • continuing high barriers to entry and expansion;
  • demand-side issues, such as low levels of customer shopping around and switching; and
  • limited transparency, and difficulties for customers in making comparisons between banks, particularly for overdraft charges on PCAs which are very complex.

As a result, very limited market share gains have been made in recent years by those banks with the highest reported levels of customer satisfaction – not what would normally be expected in well-functioning competitive markets. However, the CMA did not find any evidence of infringements of competition law (although there was some suggestion of cross-subsidy for PCAs which may distort competition), suggesting that the problems are of a deep seated, structural nature.

Reasons for the decision

  • various respondents agreed with the CMA’s analysis regarding potential competition concerns; several of them noted that these features were long-standing and led to poorer outcomes for customers and the wider UK economy. Which?, for example, submitted that it did not consider the sector to be "functioning in the way we would expect of effective competitive markets", leading to "poorer outcomes for consumers";
  • some smaller banks also agreed that a full, objective investigation of the sector was required to address competition concerns and propose solutions if necessary. Santander, for example, suggested that such an investigation was a "critical opportunity" to address long-standing concerns and TSB said that "the CMA is uniquely placed to conduct a thorough, objective analysis";
  • most respondents considered that the undertakings offered by the largest banks as an alternative to an MIR being made, while welcome, would not be sufficient to address concerns in the sector partly because they were only designed to address concerns related to SMEs. Most respondents that provided submissions on the issues at stake concluded that the proposed undertakings were insufficient to address the fundamental and long-standing concerns regarding the SME banking sector;
  • a small number of respondents, including the four largest UK banks and the Institute of Directors, expressed reservations about the appropriateness of an MIR;
  • after considering the various consultation responses, the CMA’s overall analysis remains unchanged. It still considers that it has reasonable grounds to suspect that these features prevent, restrict or distort competition in the UK, and that an MIR is the most appropriate way of proceeding.

The CMA therefore confirmed its provisional decision of 18 July 2014 and on 6 November launched an MIR in relation to PCAs and to aspects of SME banking. The terms of reference for the MIR  reflect changes made in the light of consultation responses (for example, clarifying the definition of SMEs and that PCAs exclude current account mortgages).

The CMA has 18 months to conclude the reference, although it can be extended by six months (in exceptional circumstances). Once the investigating group has been appointed, it will publish the precise timetable to which it will operate and, shortly afterwards, an issues statement which will explain how the investigating group sees the scope of the investigation and the specific questions it will be addressing.  It will then gather evidence in writing and a series of hearings with banks and other interested parties will be held. In about 12 months, provisional decisions on findings and remedies will be published, upon both of which the banks and others will have an opportunity to comment in advance of the publication of the final report. The CMA has stated that it cannot rule out structural remedies (such as divestment) being imposed, although it will also consider behavioural and regulatory remedies, and, in any event, a structural remedy would only be a proportionate outcome if other behavioural and regulatory remedies could not achieve the same end.

The same panel will also review the behavioural undertakings given by banks following the Competition Commission report in 2002 into SME banking to consider whether any subsequent change in circumstances warrant their being varied or terminated. On 22 October 2014, the CMA determined that First Trust Bank and HSBC had breached the provisions of the 2002 undertakings which prevent banks from requiring SMEs to open a BCA as a condition of taking out a business loan.

Too many cooks?

Various sources, including the European Commission and the Vickers Report, have previously identified structural concerns in this sector. The European Commission has also become involved —for example, the divestment of TSB from Lloyds was ordered by the European Commission using its State aid powers to investigate UK Government support given to Lloyds' takeover of the struggling HBOS and to extract concessions in order to minimise distortions to competition created by this support.

There is a clear risk of too many cooks. Indeed, while the FCA welcomed the MIR in its response to the consultation, the Payment Services Regulator (PSR) (while not expressing a view on the MIR) warned of the risk of "regulatory arbitrage". The CMA's decision acknowledges the risk of duplicating the work of other regulators and notes that the group carrying out the investigation will need to liaise with the FCA, the PSR and HM Treasury (which is currently consulting on payment systems) and will aim to avoid duplicating the work of other regulators and creating unnecessary burdens on the businesses concerned. The CMA has also said that it will be in contact with the Prudential Regulation Authority (PRA) in relation to the timetables for ring-fencing reforms (aimed at preserving the essential retail operations of a bank, should it fail). While these reforms would not preclude any of the structural remedies which the market investigation may lead to, they will amount to yet another regulatory burden on retail banking in the name of consumer protection.

The contrast between retail banking and the mobile phone market

In its decision the CMA cites the example of the UK mobile phone carrier market as one that is highly competitive. In contrast to retail banking, the CMA notes that there are high levels of switching by customers and innovative pricing structures. Indeed, the market for mobile phone carrier services is very similar to that of retail banking: the majority of the market is held by a small number of incumbents and the core service (calls, texts and data) is undifferentiated. Furthermore, the providers in both markets offer extremely similar tariffs and vary in the quality of coverage in different areas (be it through the presence of local branches or mobile masts). Yet one market has characteristics that the CMA regards as competitive and the other does not.

One similarity between the mobile phone and current account markets is that there is a regulated mechanism for switching. Mobile phone account holders can keep their phone number through the Porting Authorisation Code system and, similarly, customers can move their regular payments in and out of their current accounts through the Current Account Switching System (CASS). However, switching a mobile phone number takes effect on the next working day, whereas switching a current account takes seven working days.

Despite this disadvantage, CASS has, as the CMA notes, resulted in a 22 per cent increase in current account switching since its introduction in September 2013, albeit from a small base. It seems that it can only grow further, as more consumers become more familiar with CASS, and it is perfectly possible that the growth in switching will continue at this rate. Furthermore, the CMA rejected the view that new entrants, such as Tesco, Virgin Money and TSB, as well as new methods of payment, such as via PayPal and Google Wallet, also mean that competition in the sector is increasing.

Timing and politics

The Vickers Report (published 2011) and the Parliamentary Commission on Banking Standards (published 2013) recommended that consideration should be given to making an MIR by 2015, if not before, unless there had been sufficient changes in the state of competition in the sector. Rather than wait and see for another year whether CASS will continue to increase switching rates and whether the recent entrants will shake up the market once they secure a foothold, the CMA has made its decision now. It may be too soon.

This brings us to a key factor in the decision to make the MIR: politics. MIRs are expensive and the CMA, like the OFT and Competition Commission before it, has kept its powder dry for cases which have a high profile with consumers. Like energy, also currently the subject of an MIR, banking remains a bête noire worldwide for the public six years on from Lehman, in part thanks to high-profile LIBOR cases and, in the UK, the PPI scandal. In this environment, a cynic could be forgiven for saying that an MIR was a foregone conclusion, regardless of the reasons.