The Competition and Markets Authority (CMA) has set out proposals to reform retail banking, improve competition and get a better deal for customers.
In its provisional decision on remedies, the CMA outlines a wide-ranging package of proposals to tackle the issues hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs); its proposals include new protections for overdraft users.
Alasdair Smith, Chair of the Retail Banking Investigation, said:
“For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees”.
The CMA believes it is hard for bank customers to work out if they are getting good value due to the complicated and opaque nature of charges, exacerbated by the perceived riskiness of changing banks:
- 60% of personal customers have stayed with the same bank for over 10 years
- 90% of SMEs get their business loans from the bank where they have their current account
The CMA considered whether the largest banks should be broken up but it came to the view that this would not address the fundamental competition problems. It also considered whether to get rid of ‘free if in credit’ (FIIC) current accounts but concluded that even though FIIC accounts are not really ‘free’, they do work well for some customers.
The CMA remains concerned however that competitive pressures are weak and that to transform the market, customers should be provided with the right information so that they can determine which bank offers them the best value. This includes the development of new online comparison tools and an improved current account switch service (CASS).
Its proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts; in 2014 this contributed £1.2 billion to bank revenues. Going forward, banks may need to set a monthly maximum charge and to alert customers they are going into unarranged overdraft in order to give them the opportunity to avoid the charges.
The CMA also wants to harness big technology to empower customers to compare and switch accounts e.g. the ability for bank customers to click on an app and get comparisons tailored to their individual circumstances and information on that bank offering the best deal. It estimates that personal and SME bank customers could benefit to the tune of £1bn over 5 years.
No doubt the Financial Conduct Authority (FCA) will be watching closely as many of the issues being tackled by the CMA also fall under the heading of Behavioural Economics i.e. some errors made by consumers are persistent and predictable.
The FCA believes that consumers do not always make choices in a rational and calculated way. In fact, most human decision-making uses thought processes that are intuitive and automatic rather than deliberative and controlled.
Academic literature identifies ‘behavioural biases’ as specific ways in which normal human-thought systematically departs from being fully rational.
For its part, the FCA is particularly interested in how:
- consumers make predictable mistakes when choosing and using financial products
- firms respond to these mistakes
- behavioural biases can lead firms to compete in ways that are not in the interests of consumers
Firms play a crucial role in shaping consumer choices. Product design, marketing and/or sales processes can exacerbate the effects of biases and cause problems. Biases can also create de facto market power.
Making financial services work well for consumers is an overall strategic objective for the FCA. And as firms will be aware, the CMA and the FCA have a MOU in respect of their concurrent powers to enforce consumer protection legislation in financial services.
Boards and senior executives need to ensure their actions do not result in customer detriment and/or a distortion of competition. Conduct Risk has not gone away. If anything it has a sharper focus under the Senior Managers (Certification) Regime.
The CMA invites submissions in writing by 7 June and will publish its final report on the retail banking market investigation by 12 August 2016.
See BRG white paper: The Behavioural Regulators’ Agenda
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.