UK banks to be urged to implement retail competition improvements ‘promptly’

Out-Law News | 17 May 2016 | 5:04 pm | 2 min. read

UK banks will be expected to “promptly and efficiently” implement measures designed to make them work harder to compete for personal and small business banking customers once these are finalised, the Competition and Markets Authority (CMA) has said.

Its provisional remedies to improve competition are designed to provide retail banking customers with the right information and to encourage them to shop around, according to the CMA. They include monthly maximum charges for unarranged overdrafts backed with text alerts, to give personal banking customers time to avoid the charges; plus technology-based solutions including new online comparison tools and the "swift" introduction of an 'Open API' (application programming interface) banking standard.

"This standard will enable personal and SME [small and medium-sized enterprise] customers to safely and securely share their unique transaction history with other banks and trusted third parties," said the CMA, which is pushing for this to be finalised by early 2017. "This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal."

The CMA has decided not to pursue breaking up the biggest banks in order to boost competition, or banning so-called 'free if in credit' bank accounts, which critics told the regulator "distorted customer perceptions" of the true costs of banking. These measures would not "address the fundamental competition problems", as "having more and smaller banks, which customers still couldn't easily choose between ... would not significantly improve the market or give customers a better deal", the CMA said.

"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," said Alasdair Smith, chair of the CMA's retail banking investigation. "They will also protect those who fall into overdraft from being stung with unexpected fees."

The proposed remedies would also "help new competitors get a stronger foothold" in the market, by making it easier for customers to compare the costs and benefits of their existing accounts with competitors' products, Smith said.

The CMA said that few personal and SME banking customers tended to shop around, despite the introduction of the "reliable and efficient" Current Account Switching Service (CASS) in 2013. The "complicated and opaque" system of bank charges made it difficult for customers to work out if they were getting good value, with the result that nearly 60% of personal customers have been with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account, the CMA said.

The proposed remedies include the introduction of a monthly maximum charge for unarranged overdrafts on personal current accounts, which would be set and publicised by each bank. This would improve transparency, as well as protecting heavy overdraft users from unexpected charges, the CMA said in its report. Banks would also be required to automatically enrol their customers into text alert-style notifications of their overdraft usage; and to offer 'grace periods' to give customers a chance to take action and avoid charges for unauthorised overdraft use.

Banks would also be required to regularly prompt their account holders to review their existing banking arrangements, compare alternative products and providers and consider switching, if appropriate. These prompts could be issued "periodically, at key milestones in a customer's banking relationship and on the occurrence of specific events", and could direct customers to digital price comparison services tailored to their requirements, the CMA said in its report. It has recommended that the Financial Conduct Authority (FCA) further test any such measures before they are introduced.

The CMA said that its proposed changes could cut the cost of banking for consumers and small business customers by around £1 billion over five years. Personal current account customers that do not use an overdraft facility could save an average of £89 a year, while those with overdrafts could save around £153 a year, it said.

It is seeking feedback on its proposed remedies until 7 June, and intends to publish a final report by 12 August.