The Competition and Markets Authority (CMA) has published an addendum to its provisional findings in the retail banking market investigation. The CMA’s provisional findings found that there are a combination of features of the markets for personal current accounts (PCAs), business current accounts (BCAs) and SME lending that give rise to adverse effects on competition. These features relate to low levels of customer engagement, barriers to accessing and assessing information, barriers to switching and incumbency advantages, and linkages between PCAs, BCAs and SME lending products.
The regulatory capital requirements regime exists to protect customer deposits, banks’ trading counterparties and the economy from the effect of banks becoming insolvent. It does this by requiring banks to hold a minimum amount of capital against their assets to protect against credit, market and operational risks. The provisional findings report identified, among other things, that there are significant disparities in the risk weights for credit risk on residential mortgages applied to different banks depending on the approach they are authorised to adopt to calculate their risk weight under this regime. These disparities have the potential to distort competition and to act as a barrier to entry and expansion as some banks have to hold significantly more capital on certain loan-to-value (LTV) residential mortgages than other banks. The CMA has undertaken further analysis to understand the impact of the regulatory capital requirements regime on competition between banks in the provision of PCAs, BCAs and lending to SMEs and more widely across banks' retail banking businesses.
The CMA has provisionally found that the capital requirements regime places banks on the standardised approach to calculating risk weights at a competitive disadvantage in lower LTV mortgages than banks on the internal ratings-based approach. The majority of the CMA inquiry group considered that further evidence was needed in order to be sufficiently confident about the scale of the impact on banks' costs and returns. The group, however does not intend to undertake further analysis to determine whether the disadvantage in lower LTV mortgages gives rise to a barrier to entry and/or expansion in retail banking.
The CMA invites interested parties to submit reasons in writing as to why the addendum to the provisional findings should not become final (or, as the case may be, should be varied), by 6 May 2016. The CMA is planning to publish its provisional decision on remedies in May 2016 and to publish the final report in July/August 2016.