Executive summary

The CMA has provisionally determined that there should be a full market investigation reference (MIR) into the markets for the provision of personal current accounts (PCAs) and the provision of banking services to small and medium-sized enterprises (SMEs). 

On the basis of two separate market study reports and a large number of submissions from the industry, the CMA has provisionally concluded that there remain reasonable grounds to suspect that features of these markets prevent, restrict or distort competition.

In coming to this view, the CMA has rejected submissions by the four largest UK retail banks offering ‘in principle’ proposals for behavioural  ‘undertakings in lieu of a reference’ in respect of  the provision of banking services to SMEs.

As required under the Enterprise Act, the CMA is now consulting on whether it should make an MIR.  At the very least, a market investigation would be expensive for the firms being investigated; at worst, the CMA “cannot rule out the possibility that structural remedies” – remedies which could even mean breaking up banks.

Responses to the consultation are required by 17 September 2014 and the CMA expects to make its final decision on whether or not to make a market investigation reference “later in the autumn”.

What is happening?


On 18 July 2014 the Competition & Markets Authority (‘CMA’) (which replaced the Office of Fair Trading (‘OFT’) and Competition Commission on 1 April 2014) published a Consultation [on] personal current accounts and banking services to small and medium-sized enterprises: Provisional decision on market investigation reference.

On the same day the CMA also published a joint market study with the FCA on banking services to small and medium-sized enterprises and a short update on the OFT’s 2013 market study into personal current accounts; both of these provide further background to the CMA consultation document.


The consultation notes that the Competition Commission conducted a market investigation into SME banking in 2002; this was followed by an OFT market review in 2007. Personal current accounts were the subject of an OFT market study in 2008 and a review in 2013 (which hasrecently been updated). The Independent Commission on Banking and Parliamentary Commission on Banking Standards had also expressed similar concerns about competition failures in these two sectors.

The FCA has recently been using its new competition powers to conduct market studies into retail banking products such as credit cards and cash savings products. In a 2013 speech on ‘Competition and conduct regulation in financial services’, one FCA director observed that “you are still more likely to get divorced than switch from the bank which reeled you in with a free railcard at 18”.

The CMA consultation notes “certain initiatives and developments” being carried out by the FCA and PRA; but the CMA “do not consider that these, while important, are likely to be by themselves sufficient to address comprehensively the long-standing aspects of competition concern that we have identified”.

Ironically, given that the CMA cites barriers to entry as one of the potential causes of competition failure, on 7 July 2014 the FCA and PRA jointly published ‘A review of requirements for firms entering into or expanding in the banking sector: one year on’, which sought to highlight the effectiveness of changes introduced in 2013 by the regulators to reduce barriers to entry and encourage new market entrants. The CMA does acknowledge “some new market entry” among “various positive developments”, along with the seven-day current account switching service; nevertheless, the CMA does not consider these developments to be enough to counteract the level of long-term competition failure observed.

Why is the CMA considering a market investigation reference?

Test for competition failure

The test for whether the CMA will make a market investigation reference is whether there are “reasonable grounds to suspect” that certain factors are preventing, restricting or distorting competition in a sector. The CMA has provisionally determined that this test has been made out for both the SME banking and personal current account sectors.

The CMA lists the following features (shared by both sectors) that give rise to the suspicion of market failure; these include both supply-side and demand-side problems:

  • concentration of market share;
  • banks’ market share is relatively stable – in particular, large banks with low customer satisfaction levels have not significantly lost market share to smaller banks with higher customer satisfaction levels;
  • high barriers to entry in both sectors (including customer inertia);
  • a market structure in which there are close links between
    • personal current accounts and SME business current accounts (with more than half of SMEs obtaining the latter from the same bank where they hold their personal current account); and
    • business current accounts and general purpose business loans;
  • customer inertia: customers struggle to understand pricing structures or differentiate banks, with the result that they do not shop around or tend to switch providers; and
  • low levels of customer satisfaction (less than 60% for personal and SME current account holders at the four largest banks).

Discretionary criteria

Once the test for making a reference described above is made out, the CMA will go on to consider four additional criteria in deciding whether to exercise its discretion to make a reference:

  1. scale: the CMA notes that SME banking and personal current accounts sectors are substantial markets, and the problems identified are long-standing and widespread;
  2. remedies available: following a market investigation, the CMA would have access to both behavioural and structural remedies (see below); the CMA notes that it is “not saying that structural remedies are probable”, but it “cannot rule out the possibility that structural remedies may be necessary”;
  3. possibility of accepting undertakings in lieu of a referencethe four largest banks had previously proposed to make ‘undertakings in lieu of a reference’ - voluntarily accepting certain behavioural reforms in the SME banking (but not personal current accounts) sector in order to avoid a market investigation reference; however the CMA have rejected this offer, on the basis that it would have ruled out the possible use of structural remedies later;
  4. alternative powers: the CMA has provisionally concluded that “alternative powers alone” – including the powers available to the FCA and PRA – “are unlikely to be sufficient” in the circumstances.

What will happen if the CMA does begin a market investigation?

Market investigation

A market investigation can be very expensive for the firms being investigated: co-operating with the regulator can take up a large amount of time and resources.

Draft terms of reference for the prospective market investigation are provided in Appendix B to the consultation.

Once a reference has been made, the market investigation must be decided within 18 months (which may be extended to 24 months). It will decide whether there is in fact an adverse effect on competition in the sector, and what action is “reasonable and practicable to remedy, mitigate or prevent” this, and the corresponding detriment to consumers.

After the final report of the investigation has been published, the CMA has a six month period (which may be extended to 10 months) in which to implement any remedies.

Behavioural remedies

For more background information on the use of behavioural economics in financial services sector competition regulation, please see our recent RegZone report ‘Behavioural economics – a new basis for FCA intervention’.

At the end of a market investigation, the CMA has the power to impose Orders applying a wide range of possible remedies. (The precise powers are listed in Schedule 8 of the Enterprise Act 2002 as amended.) The consultation does not propose any specific remedies at this stage, although it does provide a number of examples.

‘Behavioural’ remedies broadly refers to those which involve:

  • improving the information provided to consumers (e.g. “requiring banks to make more charges … transparent and more easily available on their websites”);
  • changing the ‘choice architecture’ in which consumers make purchasing decisions, so they are less likely to be misled by extraneous factors and more likely to make an informed decision based on relevant facts (e.g. “introduction of comparison and choice tools”); and
  • other ‘nudges’ (e.g. “requiring banks … to send their customers text alerts to warn them if they are about to go into overdraft”).

The CMA might also consider more traditional regulatory interventions, such as banning or restricting certain products or features (e.g. “prohibiting certain charges that are particularly complex for customers to assess”).

Structural remedies

Much of the press comment on the CMA consultation has focused on the possible use of ‘structural remedies’: ‘UK banks face break-up threat as watchdog plans competition probe’ (Reuters), ‘UK banks face break-up as competition inquiry looms’ (Telegraph), ‘UK banks to face "in-depth" competition inquiry that could see major lenders broken up’ (City A.M.)

Structural remedies are major, one-off measures altering the competitive structure of the market. “These remedies can often be costly and affect the property rights of the parties subject to them, and so they are not imposed lightly.” The costs involved are not just those suffered by firms, but also those faced by consumers forced to switch providers.

Structural remedies might include:

  • divestment of assets;
  • divestment of branches;
  • divestment of SME businesses; and
  • addressing ‘vertical integration issues’ such as banks’ interests in payment systems.

The CMA acknowledges the “challenges” associated with Lloyds divesting TSB – and the enormous costs of other forced divestments – but also notes that “the features we have identified appear to us to be potentially serious in nature and long-standing, and may require interventions either to address market structure or consumer behaviour or both”.

What happens next?

Responses to the consultation are required by 17 September 2014.

The CMA expects to publish its final decision on whether or not to make a market investigation reference “later in the autumn”.