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The Competition and Markets Authority (CMA) has published proposals to reform retail banking, but will customers get a better deal? Julia Woodward-Carlton, partner, and Gregory Hayes, associate, in the competition, EU and regulatory department at Eversheds, consider the proposed remedies to tackle current problems.
CMA market investigation: SME banking undertakings review—Provisional decision on remedies published, LNB News 17/05/2016 138.
The CMA has published its provisional decision that, with the exception of bundling undertakings, which prohibit the banks from compelling a customer to open or maintain a business current account (BCA) alongside their loan or deposit account, market and regulatory developments since the undertakings were given, and the retail banking market investigation’s proposed remedies package, represent changes of circumstances such that the undertakings can be released. The CMA announced on 12 November 2014 the appointment of the group for the review of undertakings given by nine banks in relation to small and medium-sized enterprise (SME) banking in 2002 and 2003. The review considered transparency, switching, portable credit history and bundling. The CMA invites responses to its provisional decision on remedies by 7 June 2016. The CMA's final report on the retail banking market investigation will be published by 12 August 2016.
What are the main problems identified by the CMA? Why have they gone for behavioural/informational as opposed to structural remedies?
The CMA’s provisional decision on remedies sets out its proposals for tackling the competition issues it has identified in the personal current account (PCA) and SME banking markets. It has identified that a combination of low customer engagement, a lack of product information, and poor transparency, are barriers that affect customers’ ability and willingness to search and switch. Such low searching and switching rates suggest that customers are not responding to changes in price and quality, which is a common warning sign in any market that competition is not working effectively. Low customer engagement in turn means that banks are not incentivised to compete on price or quality, or to innovate, and that it can be difficult and costly for banks to attract new customers.
Despite public pressure to do so, the CMA has not exercised its powers of divestment to bring about structural changes to the PCA and SME banking markets, it states: ‘it is not the size of the banks or the number of the banks that is the problem’. Furthermore it notes that its experience from the divestment of Lloyds TSB is that divestments can be an expensive and complicated way of tackling concerns, and in this case it has decided that this is not appropriate.
The CMA’s view is that changes to the structure of the PCA and SME banking markets are required to address its concerns, but that the necessary changes can be facilitated indirectly through effective behavioural and informational remedies, as well as technological change, for example the use of application programming interfaces (APIs) could facilitate market disruption by enabling new entrants and encouraging innovative business models. It points out that such innovations are likely to make a more effective change to the structure of the PCA and SME markets than would be possible by exercising its divestment powers.
Is this approach likely to be repeated in future enquiries, given that the CMA has also backed away from structural remedies in the energy investigation?
The CMA clearly considers that behavioural and informational remedies are likely to be the most effective and proportionate means of addressing the concerns it has identified, and that this is consistent with its approach in the energy market investigation.
As with other competition regulators, the CMA is tasked with testing and implementing remedies that are effective and suitable to the particular market being investigated. In this case, it appears quite rational for the CMA to address its concerns about the availability and transparency of product information, and barriers to switching, by focusing on behavioural and informational solutions.
The use of divestment powers by a regulator would generally be regarded as an extreme solution to market problems, but it is not implausible to think that these could be used in the future. Recently, the Payment Systems Regulator (PSR) announced that it is proposing to use its divestment powers to address concerns it has about ownership and competitiveness of payment infrastructure. Whether we will see this approach from the CMA in the future will likely depend on the issue at hand as all market investigations turn on their facts. What is clear in this case is that the CMA has not bowed to public pressure to use its divestment powers for the sake of it.
The CMA sees APIs as central to the remedies package, what is the API banking standard and how will it work?
APIs are sets of instructions that allow one piece of software to connect to another. An open API can be used as an effective medium for accessing information that is presented to an agreed ‘open standard’. APIs have been successful in other industries, most notably for restaurant, taxi and hotel bookings where they are regarded as positive mechanisms by which to create market stewardship.
The CMA considers that the establishment and use of API technology has ‘the greatest potential to transform competition’ in both the PCA and SME banking markets; in particular to facilitate structural changes that will lower barriers to entry and enable the emergence on a large scale of new entrants and new business models.
Its vision for the use of API technology is the sharing of a range of information types, from the location of local branches, to product terms and conditions or the availability of competing products. APIs could also be used to share customers’ transaction history with intermediaries to enable them to establish more effectively products that are suitable for individual PCA and SME banking customers. It could also be a remedy to incumbency advantages that the CMA has identified as a barrier for potential new entrants caused by the fact that existing players have access to their customers’ transaction history but, because this information is not shared, it can be difficult for new entrants to design or provide new products. The CMA hopes that by making customer information available to intermediaries and competing banks, greater competition will follow.
The CMA has tasked the largest banks to work together to develop a single API standard, and to ensure it operates well, but oversight of the process will be by an entity separate from the CMA and Financial Conduct Authority (FCA), with an independent chair. The API is likely to be launched in stages, with the least sensitive information (such as product terms and conditions) available by March 2017 and fully operational by early 2018 at the latest.
How will different elements of the remedies package be implemented and enforced? What’s the timetable for roll out?
The CMA is expected to implement the remedies quickly after its final report is published in the summer, and to set out in an order its final remedies within the six months that follow. Firms are then likely to have approximately six months to implement most of the remedies. That said, the exact timeframes will depend in part on what the remedy requires and may change if the consultation responses received suggest that more time is needed in some cases for remedial measures to be implemented effectively.
The CMA will monitor firms’ compliance with the remedies by requiring them to submit a compliance report. Moreover, it is proposing to ‘outsource’ the monitoring and enforcement of certain remedies to the FCA, Department for Business, Innovation & Skills (BIS) and HM Treasury.
It is currently seeking views on whether it should apply a low de minimis threshold, which would mean that very small firms (for example with less than 150,000 PCA customers and less than 20,000 SME customers) will not be required to implement certain remedies.
What measures are proposed for PCA overdrafts and also SME banking? How will the monthly maximum charge (MMC) work?
The CMA is proposing to introduce focused measures aimed at tackling the specific concerns it has identified for PCA overdrafts and SME banking.
In respect of overdrafts, the proposed recommendations include:
• requiring PCA providers to provide online tools to enable potential customers to know whether they may be eligible for an overdraft should they take out a PCA product with a particular bank, and to automatically enrol customers into an unarranged overdraft alert
• that the FCA undertakes further work to identify, research, test and implement measures to increase overdraft customers’ engagement with their overdraft usage and charges, and
• that the FCA considers new ways to help customers better engage with the PCA opening process by, for example, being more willing and able to consider overdraft features and their potential relevance and impact
A key feature of the proposed remedy package is the provisional requirement for all PCA providers to set a specific MMC that a customer could incur for use of an unarranged overdraft facility. They are expected to have six months from the date that the CMA makes its final remedial order to implement this process. This is not a price cap; rather PCA providers will be responsible for setting their own MMC and will compete with all other PCA providers in this respect. They will be required to ensure that the MMC information is transparent and at least as prominent as information about other overdraft charges.
In respect of SME banking, the CMA is proposing measures that will make it easier for customers to access and assess information on charges, service quality and lending criteria and, where necessary, switch to a new provider. These measures include a requirement for the largest banks in the UK to build in loan price and eligibility indicator tools on their websites and to make these available to at least two price comparison websites. Price comparison websites were also a key feature of the CMA’s provisional remedies decision in the energy market investigation. It has identified price comparison websites as a viable facilitator of switching and greater transparency, and we can expect these to continue to play a prominent role in future market investigations.
What are the different elements of the remedy package being proposed in the banking investigation, in what way will they be ‘mutually reinforcing’?
The CMA’s proposed package of remedies is focused on addressing the underlying causes of adverse effects on competition in both PCA and SME markets, and there are four separate elements to the proposed remedies package:
‘foundation measures’ are aimed at increasing customer engagement by using customer prompts (eg for use of unauthorised overdrafts); improving transparency; and making better information available to customers through APIs
proposed measures to tackle barriers to current account switching, for example by making reforms to the current account switch service (CASS) to strengthen its governance and increase customer awareness and confidence in the process
proposals to make a number of interventions in PCA overdrafts by, for example, requiring banks to implement a MMC for overdraft usage (as discussed above), and
proposed targeted remedies to address what is describes as ‘specific and deep-seated’ problems in the SME banking market
Given the nature of the issues that the CMA has identified, the proposed measures are integrated and mutually reinforcing. Each measure taken on its own would not be sufficient to address the depth of problems identified. The measures proposed to create a more seamless switching process, by for example, passing oversight of the CASS to the PSR, are only likely to be effective if customer engagement increases and there is more available product information for customers to compare in order to encourage switching.
Interviewed by Evelyn Reid.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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