9 Aug 2016 02:30pm

CMA announces retail banking shake-up

The Competitions and Markets Authority (CMA) has released its final report following its investigation into the retail banking market, outlining measures designed to boost competition in the sector, accelerate technological change and benefit personal and small business customers

The report found that older and larger banks do not have to compete hard enough to win and retain customers, while smaller and newer banks find it difficult to grow.

Because large banks do not have to compete particularly hard for business, customers end up paying more than they should, without benefiting from new services.

The CMA has proposed a package of reforms that will ensure banks work harder for customers so that smaller providers and new entrants are able to compete more fairly and customers benefit from technological advances.

The changes will ensure personal customers and microbusinesses “get a better deal from their banks”, according to Alasdair Smith, chair of the retail banking investigation.

“We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.”

The main reform announced by the CMA is the Open Banking Programme, which banks will be required to implement by early 2018.

The programme will enable personal customers and small businesses to share their data securely with other banks and third parties, allowing them to manage their accounts with multiple providers through a single digital app. This will allow customers to take better control of their funds and compare products based on their individual requirements.

Banks will also be required to publish information on quality of service on their websites and in branches, and publish and make available a range of other quality measures through Open Banking, so that customers can see how their own bank shapes up.

Banks will also have to keep their customers updated on changes, such as the closure of a local branch or an increase in charges, by sending out periodic and event-based prompts to remind their customers to review whether they are getting the best value from their current account so they can then switch banks if not.

“We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs,” Smith said.

“This is backed up by a wide package of measures to improve the current account switching service, to make it easier for small businesses to shop around and open new accounts or get a loan, and to see how the quality of service provided by your bank compares with other providers,” he added.

At the moment only 3% of personal and 4% of business customers switch to a different bank in any year, the report highlighted.

“We are also taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them,” Smith said.

Banks will be required to send alerts to customers going into unarranged overdraft, and inform them of a grace period, to avoid charges.

The report highlighted research by the FCA, which found that this type of alert, when combined with mobile banking, can heavily reduce overdraft charges.

Banks will also have to set a monthly cap on unarranged charges, and tell their customers about it.

The CMA found that small businesses lack tools providing comprehensive information about bank charges, service quality and credit availability.

The CMA is supporting an initiative by independent charity Nesta, requiring banks to provide Nesta with financial backing and technical support, alongside introducing a range of other measures targeted at small businesses such as a loan eligibility tool.

The CMA will work with the Treasury, the FCA, Bacs and Nesta to ensure the proposed remedies are put into place.

Anthony Browne, chief executive of the BBA, welcomed the package of measures, which "gives individuals and businesses greater power to pick the products that are best for their needs".

“Customers and businesses have already found digital banking hugely convenient and have taken advantage of mobile technology that is allowing us to bank round the clock. We are pleased the CMA has reflected that in its recommendations,” he said.

Suren Thiru, head of economics and business finance at the British Chambers of Commerce, said, “The CMA’s final report is likely to be met with a mixed response from the business community."

While the BCC welcomed initiatives aimed at promoting competition such as Business Banking Insight, Thiru said the report "fails to address the structural problems in the provision of business finance, which are holding back some of our most dynamic young firms”.

He cautioned, "the CMA must also tread carefully in the sharing of data by finance providers via the Open Banking programme, to ensure that businesses retain control over who has access to their data – otherwise any trust between lenders and businesses could be destroyed.

“This report must be the start, rather than the end, of the drive to improve competition and greater choice in SME banking,” Thiru added.

"The government must also address some of the deep-rooted problems in the provision of finance, such as the availability of long-term patient capital. Finance providers should actively promote the initiatives endorsed by the CMA too, if we are to see real change on the ground for business banking customers.”

Mike Cherry, national chairman of the Federation of Small Businesses, said, “The CMA’s recommendations will help to create a more customer focused retail banking market by tackling some of the challenges small firms face.

“We are pleased the CMA has taken forward our recommendations of greater communication and support to affected small business customers, but we now want ministers to look at further options to protect small businesses’ access to their local bank.

“We welcome the package of measures aimed at improving the Current Account Switching Service (CASS) and reassuring small businesses it is a quick, easy and safe way to switch accounts.”

ICAEW also hailed the recommendations, particularly reducing the asymmetry of information, whether  through making transactional data available to customers or enabling easier comparison, as a step in the right direction.

However, as ICAEW head of enterprise Clive Lewis points out, transparency and access to data is only a small part of the challenge for most small businesses. "They also need to understand how to use that information. Just 9% of First Time Applicants for an overdraft  and 15% of First Time loan applicants sought advice before making their application.


“Chartered accountants already help two million small businesses by providing advice on the best sources of finance and optimal financing strategies.  If banks are prepared to work more closely with us on how to channel advice and help businesses choose the right advisers, small and medium sized businesses should find it easier to get affordable advice.


“Ultimately, however, the remedies proposed by the CMA will be judged on whether they make it easier for new entrants to successfully enter the personal and SME banking markets, and whether this leads to bank customers getting better quality services.”

Isabelle Jenkins, PwC’s UK banking leader, said, "The CMA has stuck to its guns and kept its remedies materially unchanged from the provisional measures it consulted on earlier this year. This is despite calls from challenger banks urging the CMA to take more radical action on capital requirements. While challenger banks are likely to be disappointed with today's report as the CMA confirmed it will not carry out further analysis on this issue, they could yet see a more significant shake up from the PRA, Bank of England and the Treasury.

"The CMA’s proposal for an open Application Programme Interface (API) standard, which would give consumers access to more information from banks, is at the heart of its package of remedies. FinTech firms are potentially one of the winners here, but the ambitious timescale for the project means implementing it, and the CMA’s other measures, could be challenging and costly for banks.

"This package of measures will go some way towards addressing customer apathy towards bank account switching. But there needs to be a more even playing field between established banks, challengers and FinTech firms for the full benefits to be passed on to consumers."

Ewen Fleming, partner and financial services group practice leader at Grant Thornton, added, "While consumers will largely welcome the CMA's proposed measures, their overall impact will, to a large degree, be dependent on the technology deployed being game-changing. There’s a balance that will need to be struck between innovation and consistency across the industry, which could prove challenging. The terms of access to the proposed new digital app will become critical.

"Interestingly, the CMA seems to group all retail customers together and all business customers the same, when we know the market is a lot more segmented. There's a risk that the more sophisticated, digitally-savvy customers in each group will benefit and others might not see the same results.

"Related to this is the reliance on disclosure as a tool to encourage competition. It's unclear whether this will work as well as the CMA seems to believe, or that the products are sufficiently differentiated for anything beyond simple 'best buy' tables to make a significant difference. What's also unclear is what the measures to support smaller banks are, beyond being able to target very specific groups of customers.

"For the measures to have a significant, material impact on the market, a lot will be required of the big banks in terms of investment. This comes at a time when they are also looking to update their legacy systems and an uncertain post-EU referendum and low interest rate environment is potentially reducing their profitability.

"Positively, the overdraft proposals look useful, but may not go far enough to help those in real need.

"While any measures to increase consumers' control over their finances and increase competition in the sector should be encouraged, the costs and resource implications on institutions to deploy the technology and controls to ensure they are market-appropriate need to be taken into consideration – particularly at a time of limited growth potential in the sector."

VishaL Bhatnagar, senior vice president and country manager at banking software company CAST UK, highlighted that while challenger banks with newer, more digital systems would embrace the measures, "legacy banks are extremely concerned about the wide-ranging implications of the CMA ruling”.

Sinead Moore

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