On 9 September 2013, the Financial Conduct Authority (the ‘FCA’) announced its intention to carry out a market study into the UK cash savings market. This study will be part of a programme of work where the FCA will look across financial services markets and assess whether or not competition is working effectively in the best interests of consumers.
The FCA’s new “competition objective”
Following amendments made to the Financial Services and Markets Act 2000 (‘FSMA’) by the Financial Services Act 2012, the FCA have been set a new “competition objective” to ensure that markets for regulated financial services are operating competitively. Section 1E of FSMA gives examples of the factors the FCA must consider in achieving this objective. For example, the FCA must have regard to:
- the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices;
- the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them; and
- how far competition is encouraging innovation.
The interests of consumers and how consumers are affected by competitive strengths or weaknesses of the relevant market are central features of section 1E.
Christopher Woolard, Director of Policy, Risk and Research of the FCA delivered a speech at the Regulatory Policy Institute’s Annual Competition on 9 September 2013. In this speech he described in detail how the FCA itself was proposing to achieve its new “competition objective”. In particular he stressed that the FCA’s “whole outlook will be shaped by the impact for consumers – both individuals and businesses.”
The message both from FSMA and from the FCA itself is clear: in order to be considered “competitive”, participants in markets for regulated financial services must put the interests of consumers first.
Primarily, the FCA will be investigating competition in markets for regulated financial services through conducting market studies. The FCA has already started a market study into general insurance add-ons and is working closely with the Office of Fair Trading (the ‘OFT’) on its study into SME banking.
In addition to its market study into the cash savings market, the FCA has announced its intention to look into (i) the market for retirement products; and (ii) how effectively competition is operating in the wholesale banking markets. These reviews will be started towards the end of this year and spring next year respectively.
Christopher Woolard explained that, in conducting these market studies, the FCA will examine markets from all angles, so as to understand the interactions between both demand and supply-side competition weaknesses. Once a market study has been concluded, the FCA will either use its regulatory powers to make changes to improve the effectiveness of competition or will refer issues to the OFT.
Cash savings market study
Over 80% of all adults in the UK have a savings account and total household savings are worth around £1 trillion. The FCA is concerned that, especially given the low interest rate environment, this market is not operating competitively.
In particular it is concerned about consumer inertia leading to a lessening of competition. It believes that consumers are not switching away from firms offering ‘teaser’ introductory rates, once that introductory rate is raised, and therefore that they are not getting the best deal. Further, it is concerned that the larger firms, which are able to offer a more discounted introductory rate than the smaller firms, squeeze the smaller firms out of the market, with the result that there is less choice for consumers.
Additionally, it is concerned that, by changing the rate on and/or withdrawing their savings products each year, firms are making it hard for consumers to compare and choose good value products.
This market study will be launched formally next month.
The FCA has only been in existence since April 2013. Announcing these market studies in such a short space of time clearly indicates that the FCA will be proactive in tackling competition issues in the regulated financial markets.