This article was first published on Lexis®PSL Financial Services on 20 November 2014. Click here for more information on Lexis®PSL.

Financial Services analysis: The Competition and Markets Authority (CMA) recently announced its decision to launch an in-depth market investigation into the personal current account (PCA) and small and medium-sized enterprise (SME) retail banking sectors. Rebecca Owen-Howes, senior associate at Dentons UKMEA LLP, considers the possible implications.

Original news

CMA market investigation: Personal current accounts and SME banking - Full competition investigation, LNB News 22/10/2014 20

An in-depth market investigation into the personal current account and SME retail banking sectors has been launched by the CMA, confirming its provisional decision of 18 July 2014 to make a market investigation reference. Responses to the July consultation largely supported the CMA's provisional decision, based on concerns about the effectiveness of competition in these sectors, including barriers to entry and expansion for newer and smaller banks, and the continued dominance of the largest banks. Also, the CMA is reviewing behavioural undertakings submitted by nine banks in 2002 and 2003.

What is the background to the CMA's inquiry?

Competition in retail banking, including banking services to SMEs, has been the subject of detailed consideration by the UK competition authorities over the last 15 years. Multiple competition concerns have been identified over the years and, despite attempts to remedy these, the competition authorities seem convinced that there are still issues that need to be resolved. In the past, several recommendations were made (including by the Independent Commission on Banking in the Vickers report in 2011) that a market investigation reference (MIR) should be considered before 2015.

The CMA announced its provisional decision to launch an MIR into PCAs and banking services to SMEs on 18 July 2014. Its decision was based on two strands of work that have been undertaken by the CMA (also published in July 2014):

  • an update on the Office of Fair Trading's (OFT) market study into PCAs, and
  • the CMA's joint study with the Financial Conduct Authority (FCA) into banking services to SMEs
  • The update report and study identified that there is not currently effective competition in these markets.
  • The CMA and the 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

Given recent developments in retail banking, specifically changes in the switching process, the CMA is also considering reviewing the undertakings given by the major banks in 2002 following a Competition Commission investigation into SME banking services. The undertakings included measures to facilitate closing and switching accounts, restrictions on bundling of products and the provision of more pricing information to customers to improve transparency.

What is the CMA seeking to achieve through the inquiry?

The CMA will be seeking to ensure that the PCAs market and the SME banking market are well-functioning competitive markets. It has stated that it is not certain the market studies and other work being undertaken by the FCA will offer comprehensive and timely solutions to all the concerns it has identified in the retail banking sector (see above for summary). The CMA believes that a 'joined-up' approach to the market features giving rise to competition concerns is needed and that the way to address these concerns is through a market investigation. This indicates that the issues arise as a result of the market as a whole, rather than the behaviour of any individual player.

The market investigation gives the CMA the opportunity to carry out detailed analysis of all aspects of the sectors under review and will allow it to impose a wide range of remedies, including structural, behavioural and regulatory.

What action could the CMA take?

If the CMA were to find adverse effects on competition, the potential remedies are wide-ranging. In terms of structural remedies, the divestment of assets is a possibility (and is a remedy that was imposed by the CMA (previously the Competition Commission) in its market investigation of BAA airports (published in 2009, upheld on appeal)). Indeed, the forced sale of assets in the retail banking sector is not new--see, for example, the decisions of the European Commission requiring Lloyds Bank and Royal Bank of Scotland to sell off part of their UK retail banking operations to ensure compliance with the state aid rules. Other lesser forms of divestment may include the sale of branches, SME businesses, or banks' interests in payment systems.

As far as behavioural/regulatory remedies are concerned, potential remedies for PCAs could include the requirement for banks to:

  • provide more standardised annual statements to PCA customers
  • make charges and other provisions easily available on their websites
  • send their customers text alerts if they are about to go into overdraft, and
  • give customers the option to opt out from overdrafts at no cost in all fee-free PCAs

For SME banking, such remedies could require banks to provide better information to SMEs about BCA costs and usage. They may also provide for the introduction of a comparison website (or other such tool) to show the different offers of various banks. It is possible that the CMA will attach stipulations to the sale of SME banking products, such as a requirement for specific advice to be given by banks selling products to SMEs.

A number of behavioural remedies could apply to SMEs and PCAs--for example, incumbent banks could be required to provide small entrants and new providers with access to their branch network or other assets, such as payment systems.

What advice should lawyers give their banking clients at this stage?

The CMA has announced that it intends to publish its final report in April 2016, ahead of the May 2016 statutory deadline. Banking clients therefore should not expect to see any immediate changes taking place in the retail banking sector. Having said that, clients should consider whether, and to what extent, they want to be involved in the information-gathering process. The deadline for responding to the Issues Statement (published on 12 November 2014), which explains the scope of the investigation and possible competition concerns, is only two weeks away. Clients may also be requested or required by the CMA to respond to detailed and lengthy information requests.

The views on the issues identified by the CMA will differ depending on whether a client is one of the large incumbent banks or a smaller bank or new entrant. Each has an opportunity now to obtain relevant up-to-date evidence and to marshal that evidence in an attempt to shape the investigation so as to benefit from it. Evidence may include economic analysis, including behavioural economics which looks at why customers act in certain ways.

Clients will need to be mindful of other initiatives being undertaken by different regulators (including the FCA and the Payment Systems Regulator) and will need to be able to resource appropriately, while ensuring that the various submissions they make are consistent and do not make particular actions difficult in the future. On a strategic level, all banking clients need to know that the competitive structure of the retail banking market could change as a result of the investigation and to factor this into their internal decision-making process.

Interviewed by Alex Heshmaty.