The CMA Interim Report on Remedies: A more competitive UK retail banking sector or missed opportunity?

Last week’s Competition and Markets Authority (CMA) set of interim recommendations on the UK retail banking sector represents the culmination of nearly two years work from the new competition regulator analysing plans for structural, market, and anti-trust reform of the industry. It is important to remember the political context which gave rise to the enquiry.

Firstly, campaigns against high rates of interest charged by payday lenders had given rise to a far stricter regulatory approach from the new Financial Conduct Authority, driving most of those companies from the payday loan marketplace. Secondly, the Labour Party had proposed a series of reforms in the summer of 2014 designed to restructure and reset the market for retail banking, including, if required, break-up of the existing big five banks and the introduction of a market-share test, thereby creating two new challenger banks in the process. Political and social pressure had grown for a more fundamental review of how the retail banking market operated both from the consumer and competition perspectives. Thirdly, given that the old tripartite model of regulation was abolished by the Financial Services Act 2012, the Bank of England itself was given a much stronger role in regulatory oversight through the Prudential Regulatory Authority and the Financial Policy Committee (now on a statutory footing equivalent to the Bank’s Monetary Policy Committee following the recent Financial Services and Bank of England Act 2016). In the period since the enquiry was launched, the regulatory system for financial and payment services evolved further with the inception of the new Payment System Regulator in 2015.

The CMA’s report was not greeted by a fanfare of praise, instead sparking a fiery debate among consumer groups, politicians, and the banking industry over the strength of its recommendations for reform. The four main proposals were, first, to go full in on aiding banks with the move towards open APIs, sharing information with other account and payment services providers as required under the EU Payment Services Directive II by January 2018 at the latest. Some institutions, such as Deutsche Bank, have moved quickly to announce the development of a smartphone app to facilitate access to details on all accounts someone may have across different banks.

Second, to ease the process of account switching by building upon rather than replacing the Current Account Switching Service (CASS). The Government have moved to supplement these findings by proposing that borrowers should be able to move their mortgage between providers within seven working days, as easily as with a current account, and to bolster consumer rights to switching within its forthcoming Better Markets Bill in the new Parliamentary session.

Third, to deal with competition failures in the current account overdraft market by introducing caps on monthly charges set by each institution, but with each institution setting its own policy on the level of capped charges, and no obligation on a common approach across the sector. This approach was heavily criticised by Which? and the Labour MP Rachel Reeves, a member of the House of Commons Treasury Select Committee, has written to the Financial Conduct Authority inviting them to investigate imposing a standardised cap on unauthorised overdraft charges across the banking industry.

Fourth, to assist with the small and medium sized business lending market by increasing availability of comparative information on the best rates for different products, but not advocating structural reform of a sector in the UK in which RBS is the leading player with a 25% market share.

The heads of eight challenger banks in their combined response, put forward the case that regulators, including the Bank of England and the Bank for International Settlements’ Basel Committee on Banking Supervision, principally through the Basel II rules, had not developed a level playing field in terms of the lending market given that risk weighted capital requirements are the same for mortgage lending irrespective of the size of the bank. They claim that in the prime and buy-to-let mortgage markets for example, smaller lenders have to set aside ten times as much capital as larger banks do for taking on the same lending risk. They argued that challenger banks ought to have lower risk weighted capital obligations compared with the traditional banking institutions. Lloyds Banking Group are the market leaders with around a 25% share of the mortgage lending sector in the UK.

On SME lending, the Report focused its recommendations on providing further information on fees, prices and product availability to businesses. The Government recently issued a study of the SME loans market in the UK compared with that in the rest of the EU finding barriers to entry and expansion. It reflected that the German KfW and Swedish ALMI Foretagspartner were models worth further investigation in terms of potentially enhanced Government involvement with the SME lending market.

It did not recommend structural reforms of the current banking institutions, including the creation of new challenger banks out of the assets of current institutions within the financial system. Neither did it find a convincing case for moving towards current and business account number portability, championed by many as the best means of facilitating competition between current account providers, which it estimated would involve costs of between £2bn to £10bn. Rather than ruling it out completely, it advised it may be an issue which the FCA and Payment System Regulator could review again in due course.

All of these developments have to be considered in the light of further activity at Bank of England and Financial Stability Board levels domestically and internationally on the ring-fencing of retail from investment banking operations in the major systemically important institutions. The Bank of England, working towards the 2019 date for ring-fencing being introduced, is currently consulting on the level of the additional systemic risk buffers which banks with assets above £175bn will have to carry because of their importance to overall financial stability, likely to add 0.5% of risk-weighted assets to their equity requirements.

The final version of the Report is due out in August. It is receiving a great deal of advice on a stronger vision for the future of the UK banking sector, the markets it supports, and the consumers it serves. For many, the true test of the consultation process underway may be how much of that advice is accepted and implemented by the Competition and Markets Authority later this summer.