On 9 August 2016 the Competition and Markets Authority (CMA) published the report of its investigation into the supply of retail banking services to personal current account (PCA) holders and SME customers in the UK. In relation to personal consumers the investigation focussed on PCAs (including accounts with overdrafts) but did not extend into other retail banking products while for SMEs the remit was a little wider and included business current accounts (BCAs) and some lending products. However, products such as insurance hedging and foreign exchange were excluded from the review.
1. The CMA's aim
The CMA investigation was carried out against the background of a stricter regulatory environment following the financial crisis (including the increasing prudential requirements for banks) and the developing fintech sector. The aim of the investigation was to ascertain whether or not the retail banking market was working well for PCA holders and SME customers by looking at three broad areas, namely:
- customer engagement levels;
- possible barriers affecting the ability of banks to enter or expand into the market; and
- the effect of the level of concentration in the market on customers.
The CMA was also tasked with devising a package of remedies for any issues it uncovered.
2. Overall findings
The CMA came to the view that the retail banking sector is currently not working well for these customers. In relation to PCA holders, the CMA found that customer engagement levels were still very low, despite a slight increase in recent years, and remained significantly lower than the level of customer engagement in savings accounts, for example. Other issues identified for PCA holders included:
- difficulties for customers with comparing prices across PCAs (especially for overdraft users);
- the fact that while banks offer different PCAs with substantially different prices, only a small proportion of a bank's customers tend to be using the cheaper product; and
- the concentration of PCA markets, particularly since recent mergers in the market.
In relation to the SME sector, the CMA found that:
- the "stability in market shares despite variations in price and quality" indicated that there is no effective competition;
- BCA holders had difficulty with comparing prices across banks; and
- practicalities such as the lengthy account-opening process and potential loss of historic account information were barriers to switching.
3. Barriers to entry in the SME market
The report identified three key barriers to entry into the SME market for new and smaller banks:
- the capital requirements for banks entering this market;
- the costs of funds for lending; and
- information asymmetry.
It is clear that capital requirements make it more difficult for new and smaller banks to compete effectively with larger, more established banks, but as the CMA does not have the power to change the capital requirements regime - and indeed recognises the regime's importance to the stability of the UK's banking system – the report does not undertake any further analysis on this. However, the CMA does note that the PRA, Bank of England and HMT are considering this issue.
In relation to the costs of funds for lending, the CMA found that larger incumbent banks enjoy cost advantages over new and smaller banks. In particular, since investors consider those banks viewed as "too big to fail" to be lower risk, such banks accordingly benefit from lower wholesale funding costs. However, this is changing as a result of post-financial crisis regulatory interventions, and the forthcoming ring-fencing of the retail part of such banks will help address this imbalance.
The information asymmetry issue arises because a bank with an extensive and established customer base will have instant access to a significant pool of information, which will allow the bank to develop and target products more easily and effectively. A new or smaller bank, on the other hand, will not have access to this kind of information which would help with product development and marketing. Similarly, access to such information also gives an SME's existing BCA provider an advantage in relation to "pricing and assessing default risk" for any new loan, as opposed to any alternative SME loan providers. The CMA addresses this in its package of proposed remedies.
4. Proposed remedies
The CMA has an extensive programme of remedies to improve both the PCA and SME market, mainly focussed on "measures to engage, empower and inform personal and business customers".
One of the most eye catching of the proposed changes is the development of open application programming interfaces (APIs) which will help address the information asymmetry issue. The largest banks will be required via an independent entity to develop common API standards through which they will share data with other banks and third party service providers. The new standards will require banks to share information on prices, charges, terms and conditions for PCA and BCA products, eligibility criteria for loan products and certain reference data. While clearly data privacy and security issues will need to be dealt with the CMA believes this remedy will reduce or remove many of "the main barriers to accessing and assessing product and provider information" and materially increase competition between banks.
Other remedies include:
- the development of a set of service indicators to be displayed prominently by banks which will help customers understand the level of service the bank is offering. The FCA will be working with banks to see how this can be best achieved;
- a requirement for banks to prompt customers to consider reviewing their PCAs and BCAs. Again, the FCA will work with banks to ascertain what the appropriate triggers for such prompts should be;
- a requirement for banks to provide transaction histories on old closed accounts (this is a significant issue for SMEs);
- amendments to the Current Account Switching Service (CASS) to encourage customer confidence in the system and appropriate switching; and
- further safeguards for PCA overdraft users including automatic unarranged overdraft alerts and a maximum monthly charge (to be set by the banks themselves) for the use of an unarranged overdraft facility by PCA holders.
Interestingly, the CMA does not propose splitting up banks to remedy the lack of competition in these markets. While it considers that the concentration may have an effect on the performance of the markets, the CMA does not believe that the breaking up of such banks would a cost efficient or effective remedy.
5. Who will this package of remedies apply to?
It is worth noting that certain banks will be exempt from the CMA's remedies. A number of the remedies will apply only to the largest providers (such as the obligation to develop an open standard API), while others will only apply above a de minimis threshold (such as the service quality indicators and the customer prompts).
Further, the remedies will not apply to private banks meeting certain criteria. In terms of what constitutes a private bank, the CMA is to consult on the precise definition but has said that it believes "private banks where customers are required to have over £1 million of investable assets" should be excluded from the application of the remedies package.
Regarding the de minimis threshold, the CMA intends that the "remedies will apply to those providers (ie banking group rather than individual brand or division) that have 150,000 active PCAs and that have 20,000 active BCAs." In the CMA's view this means that the remedies package will be effective as it will cover the vast majority of the market, but will not place undue burdens on the smallest banks where such requirements are considered unnecessary.
6. Next steps
The CMA plans to introduce these remedies in two ways, by legally binding undertakings or by order and the implementation timetable is quite rapid. There will be informal consultations with key parties between now and November 2016 in relation to the drafting of the orders and legal undertakings with the draft orders and undertakings to be published and formally consulted on during November and December 2016. The final orders will be made and the undertakings will be accepted by February 2017. Most of the remedies, such as the CASS related remedies and the PCA maximum monthly charge are due to be implemented during 2017. In relation to the open API remedy, the CMA expects the least sensitive data (such as prices, branch location and terms and conditions) to be released by banks by the end of March 2017. However, because of data and security implications certain elements of the open API have approximately a further year before they are required to be implemented with the CMA expecting all aspects of the open API remedy to be functioning by early 2018. Certain other remedies such as the provision of transaction histories and service quality indicators also have a slightly longer implementation period but all the remedies set out in the report are due to be implemented by the end of Q3 2018.
Affected banks should review customer documentation and service standards to ensure that both meet the requirements set out in the report. Private banks should prepare for the consultation regarding the definition of a private bank which the CMA will be carrying out shortly. Smaller banks, those below the de minimis requirement, should be conscious of the CMA's approach and where relevant consider adopting measures or procedures which are consistent with the report.
If you require further information on anything covered in this briefing please contact Fiona Lowrie ([email protected]; 020 3375 7232), Grania Baird ([email protected]; 020 3375 7443) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Compliance & Regulatory page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2016
 Royal Bank of Scotland Group, Lloyds Banking Group, Barclays, HSBC Group, Nationwide, Santander UK plc, Danske Bank, Bank of Ireland and AIB Group are covered by the CMA's order as the largest banks in Great Britain and Northern Ireland.
 The largest banks will fund this entity, although the CMA will approve the composition, governance arrangements, budget and the funding arrangement proposed by the banks.