Out-Law / Your Daily Need-To-Know

The UK banking sector is set to be scrutinised by regulators after concern was raised about competition in the personal current accounts market and the market for SME banking services.

The Competition and Markets Authority (CMA) has launched a consultation on its provisional decision to open an investigation into competition in the markets (56-page / 615KB PDF). It said there is evidence, gathered during a study of both markets (185-page / 1.47MB PDF) it conducted with the Financial Conduct Authority, that the sectors "do not appear to be functioning in the way we would expect of effective competitive markets".

It said that low levels of 'switching' of current account providers by bank customers, despite low customer satisfaction levels, coupled with a few large providers holding high market shares, was indicative of problems with competition in that market.

It also said that other "demand-side" factors, including consumer inertia, problems with understanding pricing and a perception that bank current account services are the same, also contribute to "a complex pattern which gives rise to markets characterised by features which prevent, restrict or distort competition".

Last autumn a number of the UK's biggest current account providers signed up to a new Current Account Switch Service (CASS) which makes it easier and faster for consumers to switch between providers. The service enables switching within seven days and offers a guarantee to users that they will not face any charges or interest on their old or new accounts due to failings in the switching process if they inform their new account provider of these failings.

However, the CMA said that there are "reasonable grounds to suspect" that CASS and other initiatives have not resolved competition issues in the personal current account market.

The regulator also said that the market for SME banking services suffers from similar barriers to competition because many small businesses choose the same provider for their business current account (BCA) as for their own personal current account (PCA).

"The CMA’s provisional conclusion [is] that many of the features which the CMA considers there are reasonable grounds to suspect prevent, restrict or distort competition are common to both sectors and that the products are closely related – for example, the majority of SME owners obtain their BCA from their PCA provider and the same banks are prominent in both sectors," the regulator said.

The CMA announced that the four biggest UK banks in the SME banking service market, Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland Group, had submitted some proposed undertakings in lieu (UILs) of a market investigation reference "offering potential behavioural remedies" to address its competition concerns in that market.

The proposals include setting up a price and service comparison website for SMEs to assess the business current account products available from providers. The website would also act as a "portal" to allow SMEs to reach bank websites when seeking a loan.

In addition, the CMA said the banks had proposed standardising and simplifying "account opening procedures" and developing annual summaries of business current accounts "to stimulate SME engagement". The banks said that it would be an "effective, less costly outcome" for the CMA to accept undertakings instead of pursuing a market investigation.

However, the regulator said it had provisionally determined that it " cannot be confident that these UILs could provide as comprehensive a solution as is ‘reasonable and practicable’ to the features that the CMA has identified may prevent, restrict or distort competition in the SME banking sector". It also said it would be inappropriate to accept the UILs until it can be confident "structural remedies" in the market are not necessary.

"We are not saying that structural remedies are probable following a market investigation but, rather, that in these markets at this time one cannot reasonably rule out the possibility of structural remedies at ‘Phase 1’ without the further in-depth analysis that a ‘Phase 2’ market investigation can provide," the CMA said, "Our provisional view is that it would not be responsible or appropriate to accept UILs that preclude the possibility of a structural remedy without having explored these issues fully in a market investigation."

The CMA's consultation is open until 17 September, after which it will decide whether to proceed with a market investigation as proposed.

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