We reported on 6 November that the Competition and Markets Authority (CMA) has opened a market investigation into personal current accounts (PCAs) and SME banking (retail banking market investigation). On 12 November, the CMA published details of the members of the investigation group and the timetable for the investigation, as well as publishing the Issues Statement which explains the scope of the investigation and possible competition concerns which the CMA will investigate. The deadline for comments to be submitted to the CMA on the Issues Statement is 3 December.

Timetable going forward

The main steps in the CMA's investigation are summarised in the table below. As we noted in our earlier report, the CMA is also reviewing the undertakings given by nine banks in 2002 relating to SME banking. Although this is a separate investigation, the CMA has said that its reviews of both the retail banking sector and the SME banking undertakings will be carried out concurrently by the same investigation group and that where possible both will be dealt within the same information requests to parties.

Click here to view table.

Key points

In the Issues Statement, the CMA reiterates and expands on a number of points which it made in its reference decision of 6 November. In carrying out its investigation, the CMA  will take particular account of the following factors:

  1. Co-operation with the regulators — there is a danger that a lack of co-ordination between regulators may impose an unnecessary burden on banks - the CMA intends to ensure effective co-operation with other regulators, namely the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR), who are themselves involved in ongoing work in this sector to address this concern.
  2. Wealth of evidence — the sector has already been the subject of in-depth reviews since 2000 (for example, the 2000 Cruickshank report, the 2002 Competition Commission market investigation into SME banking and the 2008 Vickers Report) and the CMA has said that it will take account of the findings of previous reviews and reports, as appropriate.
  3. Changes in the industry — the CMA recognises that competition in in the retail banking sector is developing and will continue to do so. Recently, there have been bank and branch divestments under the EU state aid rules, the introduction of current account switching services (CASS), the establishment of the PSR and the increase in online and mobile banking. The CMA will need to anticipate how these changes will affect the markets in considering possible remedies to address any competition concerns it identifies.
  4. Market definition - it seems likely that PCAs, BCAs and SME business loans constitute separate product markets and that the geographic scope of each of these will be at least as wide as (i) England and Wales; (ii) Scotland; and (iii) Northern Ireland, if not Great Britain or the UK.    

Harm to consumers 

At this stage in its investigation, the CMA has identified the following three theories of harm which it believes could lead to poor outcomes for customers:

  • impediments to customers' ability to effectively shop around, choose and switch products/suppliers;
  • concentration giving rise to market power of some banks; and
  • barriers to entry and expansion.

These three theories are interrelated. They are based on the CMA's understanding of key market characteristics, including the importance for customers of a long-term relationship with their bank, the extensive local branch network of the four largest banks and the reliance by new entrants and smaller banks on the larger incumbent banks for key inputs, such as finance, IT and customer creditworthiness information. 

Lack of switching by customers 

Possible impediments to customers' willingness to switch banks include the lack of accessible and transparent information on the price, quality and service  of competing PCAs, BCAs and other SME products. The product and pricing structures offered by banks may also be impediments to switching in that they may exploit customers' conservative  behaviour leading to higher prices or reduced quality and account differentiation. This may also result from the actual or perceived costs and risks of switching and the rolling contract nature of PCAs and BCAs.

Market power of incumbents

The CMA has confirmed that, since the July 2014  market studies found no evidence of co-ordinated behaviour by banks, it will not consider this aspect further. The investigation will therefore concern banks' market power that arises as a result of  acting independently. The CMA is likely to make use of international comparisons as part of its analysis.

Barriers to entry and expansion

The interrelationship between the different theories of harm can be seen here as barriers to entry can lead to market power (theory of harm 2), and impediments to customer switching (theory of harm 1) can be a significant barrier. Additional potential barriers to entry/expansion include the following: regulation (such as the capital and liquidity requirements for PCAs and BCAs); economies of scale (including the need for a branch network); the need to access finance and payment systems; cross-selling of other products by the incumbents and other practices adopted by the incumbents, such as cross-subsidising between products and bundling of products. The CMA's analysis will focus in the first instance on case studies of past entry and expansion in the industry.


The CMA must work to a tight timetable if it is to meet the statutory deadline of May 2016. This initial stage of the investigation is an intensive information-gathering period in which the CMA will be meeting with interested parties and analysing many responses to detailed and lengthy information requests, as well as the comments it receives on its Issues Statement. The annotated Issues Statement in the first half of 2015 will reflect the views it will have received and the evidence it will have reviewed between now and then.

That evidence is likely to be informed by behavioural economics to understand the most likely effective remedies given the biases demonstrated by customers. The importance of cognitive limitations and behavioural biases is made clear in the section of the Issues Statement dealing with possible impediments to customers' ability to effectively shop around, choose and switch products or banks.  The argument is that the free core current account services for PCAs and equivalent initial offers on BCAs cause customers to behave in certain ways which inhibit switching (for example, underestimating their chances of going into overdraft and not as a result considering overdraft charges when choosing their bank and account type and generally give rise to a belief that there is no incentive to switch, a belief  from which the major banks benefit to the detriment of new entrants).  If the CMA requires this to change, banks may no longer  be able to exploit these behavioural biases.  A number of the smaller banks, including Virgin Money and Tesco Bank, are advocating a move away from  the "free if in credit" current account banking model which they view as a major impediment to the success of new entrant banks. Is there an argument to say that behavioural economics could be interfering too much with personal choices?