After a two year long investigation into competition failures in the personal current account and SME retail banking sectors, the CMA announced today its final conclusions and a comprehensive remedy package. The CMA has concluded that competition for both personal customers and SME lending is not working well for customers and as a result banks lack the incentives to compete on price and quality. The CMA has issued a list of key recommendations to address these failures, revolving around the introduction and reinforcement of a range of measures to boost customer engagement.
Commenting on the announcement by the Competition and Markets Authority (CMA) today, George Nikolaidis, Senior Economist at EEF, the manufacturers’ organisation, said:
“The CMAs analysis makes it clear that SMEs are not well served in the current banking landscape. This lines up with our evidence that a majority of manufacturers are still reluctant to access bank finance, relying instead on cash balances to fund investments internally. However, manufacturers have identified an easier switching process and the ability of banks to offer manufacturing-specific expertise at a lower cost as potential levers to draw them back into bank lending. The CMA’s recommendations should go some way towards facilitating these conditions.
The remedy package also looks timelier than ever in taking a decisive step towards improving supply-side dynamics in access to finance for UK SMEs; the slump in bank shares following the Brexit vote and concerns about the liquidity of the banking sector leading to tighter credit conditions are likely to bring pre-existing competition shortfalls in SME lending back to the fore. Topped with the possibility of businesses reacting to post-EU referendum uncertainty by reigning in investment, the combined effect could have a devastating impact on the real economy.
Perhaps one gap in the CMA’s armoury are measures to lower barriers to entry for challenger banks. This could present another channel through which competition could be boosted in financial markets without relying on customer engagement to drive incentives for bank competition. Still, the remedy package looks comprehensive enough to sufficiently reshape competition dynamics in the financial sector, while it also opens up space for other government institutions to review the regulatory framework for challenger banks.
Looking forward, swift implementation by the CMA will be key in offsetting some of the negative impact of the Brexit vote on credit conditions, as well as making sure the financial sector is fit for the future.