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 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.
Summary of the CMA’s concerns about competition in retail banking
The CMA has identified, in particular, 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 concludes that these concerns are caused by the following characteristics in retail banking:
- as it is difficult to access and compare information on PCA and SME charging structures and service quality across different banks and products, customers do not readily understand whether they could get better value and service from another bank or whether an alternative product might be more suitable;
- charging structures for overdrafts are particularly complicated, which further restricts the ability of customers to compare banks. Moreover, a lack of information and awareness means that many customers worry that switching might prevent them from obtaining an overdraft facility should they move their account to a new provider;
- personal and business current account relationships are open-ended and do not have regular trigger points that prompt customers to search for a better deal with an alternative provider;
- there is a perception that switching accounts is difficult and customers are either not aware of, or do not trust, the Current Account Switch Service (CASS) - this perception is particularly strong in overdraft users and SMEs;
- incumbent high street banks have a large advantage over new entrants in the market not only because of inertia amongst customers but also because they are able to take advantage of economies of scale and scope when gaining new customers;
- over half of start-up businesses open their current account at the bank where the business owner has their personal account. There is also a strong link between business current accounts and lending; and
- it is hard for small businesses to find out who is the best lender for them. As their existing bank already knows a great deal about them, it is usually easier and quicker to get a loan from their existing bank and harder for potential lenders to accurately assess and price lending.
The CMA’s remedies to tackle its competition concerns
Developing the Application Programming Interfaces (API) banking standard
One of the more widely reported changes is the CMA’s decision that an API banking standard should be developed by the largest retail banks to share a range of information types such as location of local branches and product terms and conditions. Banks must adopt an API standard for the least sensitive information by March 2017, and the remaining aspects of the API standard must be completed by the first quarter of 2018. For more information about the API banking standard remedy see our briefing on Reforming retail banking from June 2016.
Improving customer engagement
- Banks will be required to prominently display core indicators of service quality which should be made available as open data for use by third parties.
- PCA and SME customers should be provided with periodic triggers to remind them to review their banking arrangements, for example when receiving an annual statement.
Reduce barriers to current account switching
- The corporate governance of CASS is to be improved with the use of an independent chair for its management committee.
- Bacs is to undertake to increase customer awareness and confidence in switching.
- Banks must be able to provide customers with a copy of their transaction history after account closure.
- Banks will be required to alert customers when they start using an unarranged overdraft and all customers are to be automatically enrolled for this alert. Moreover, banks will be required to provide 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 banks must alert customers of this opportunity.
- Banks are to set a monthly maximum charge on all unarranged overdrafts which are to be set by each PCA provider individually. This must be in place by the third quarter of 2017.
- Bacs is to undertake to work with CASS to review the account switching process and the FCA is to research and test possible measures to increase customers’ engagement in overdraft usage and charges.
- Banks are to provide information about loan pricing and eligibility for unsecured loans and overdrafts of up to £25,000, including the publication of charges, terms and eligibility criteria.
- The Report found that there are currently very few price comparison tools that offer information on SME products. To tackle this, one or more comparison websites are to be created to enable SME customers to easily compare price and service quality.
- Banks are to adopt a standardised business account opening process to ensure that this process is less onerous for SMEs.
Whilst the timeframe for implementing each remedy differs, the CMA expects all elements to be in place by the final quarter of 2018.