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Personal current accounts and small business banking not working well for customers

18th July 2014 Print

Essential parts of the UK retail banking sector lack effective competition and do not meet the needs of personal consumers or small and medium sized enterprises (SMEs), two studies by the Competition and Markets Authority (CMA) have found.

The SME banking market study is the conclusion of a joint project with the Financial Conduct Authority (FCA), and represents the first formal collaboration between the organisations. The FCA also provided input into the CMA’s study of the personal current account (PCA) sector.

The CMA is now consulting on its provisional decision that there should be a joined up in-depth market investigation into the markets for personal current accounts (with revenues of over £8 billion) and SME banking (including the over £2 billion business current account market and business loans).

The CMA and FCA have carefully considered a wide range of recent regulatory initiatives and other developments designed to improve competition. These include initiatives to make the authorisation regime for new banks simpler and faster, to make switching easier and also to improve transparency. However, despite these important developments, and evidence of new entry, the market studies have identified a number of common concerns, together with evidence that competition is not effectively serving the interests of SMEs or PCA customers. In particular:

Barriers to entry and expansion for newer and smaller banks remain significant and the markets remain concentrated, particularly in Scotland and Northern Ireland.

There is very little movement in the market share of the largest banks (other than as a result of mergers and acquisitions).

Many customers see little difference between the largest banks in terms of the services they offer.

Levels of shopping around and switching between banks remain low. Perhaps as a result, very limited market share gains have been made in recent years by those banks with the highest levels of customer satisfaction – not what would normally be expected in well-functioning competitive markets.

Limited transparency, and difficulties for customers in making comparisons between banks, particularly for overdraft charges on PCAs which are very complex. This makes it hard for customers to choose the cheapest or most appropriate accounts for them, so limiting banks’ incentives to compete. This may result in higher overdraft charges than would otherwise be the case.

It is also possible that, particularly for PCAs, there is a degree of cross-subsidy, both from other retail banking products and, on the ‘free-if-in-credit’ model, between different customer groups, which may distort competition.

During the consultation, the CMA will be interested to hear views about these issues in particular and the impact of recent developments. The CMA is also particularly interested in hearing views on the ‘in principle’ proposals to remedy suspected problems in the SME banking sector that have been put forward by Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland Group, which they consider should be implemented instead of a market investigation reference being made. These proposals would involve those banks giving the CMA undertakings to set up a comparison website to improve transparency; to establish new account opening standards to make it easier for SMEs switching banks to open accounts; and to take certain promotional measures to facilitate comparability and switching. We provisionally consider that it would be more appropriate to conduct a full investigation than to accept these proposals. However, we remain open to views on this issue before we take a final decision regarding a market investigation in the autumn.

Alex Chisholm, CMA Chief Executive, said:

Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy.

However, our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.

Our provisional view is that a full market investigation by an independent, expert CMA group is necessary to look at this market in detail and identify appropriate measures if competition concerns are found. However we very much welcome views, which we will carefully consider, before taking a final decision.

The CMA has also conducted a preliminary assessment of the undertakings given following the Competition Commission’s investigation into SME banking in 2002, which were intended to facilitate switching and improve transparency. While the CMA considers that these undertakings remain valuable, it is minded to review whether they need to be varied given recent changes in the switching process. The CMA therefore also invites comments on whether such a review is required. In the meantime, the CMA is reviewing submissions received by banks one week ago regarding compliance with the 2002 undertakings, as announced by the Office of Fair Trading on 11 March 2014.