The Competition and Market Authority (CMA) this morning published its long awaited provisional findings report on the “Retail banking market investigation”. The CMA identified the persistence of competition problems centred on low levels of customer switching in both personal and business current accounts.
The CMA proposes a range of potential remedies to address these issues:
Requiring banks to prompt customers and businesses to review the service at certain ‘trigger points’
Upgrading Midata, an industry online tool, to make it easier for customers and businesses to compare bank products
Requiring the creation of a new price comparison website for SMEs
Requiring banks to raise public awareness of switching bank accounts through promoting the Current Account Switching Service
Requiring better sharing of information with credit reference agencies, banks and financial advisers
The CMA fell short of proposing structural remedies, such as breaking up banks, citing that these were unlikely to be effective in addressing the competition issues identified.
What’s the verdict?
The CMA’s proposed remedies are a step in the right direction – complementing existing efforts by banks – to improve competition in banking by encouraging more switching and better access to information for customers. But are these remedies the silver bullet that will resolve issues in a sector that has persistently failed to work for UK businesses?
The short answer is no. The CMA in its evidence has noted that businesses are disengaged from the financial sector and these remedies do not go deep enough to address this underlying issue. Manufacturers have been persistently shunning bank lending in the post-crisis period and have identified the following as their key areas in need of improvement:
More product diversity: shopping around for loans and current accounts is limited by the lack of diversity in financial products.
More transparency: lack of awareness and sufficient promotional activity on the range of financial products available.
Better relationships: need for better accessibility to branch networks and more sectoral specialisation by banks.
The proposed remedies go some way towards addressing the first two concerns. However, while encouraging switching and more transparency is crucial, it only partly addresses the issue of lack of product diversity. It is unlikely that these reforms will push the four largest banks – that hold 80-85% of Business Current Account and 85% of business loans market share – to significantly differentiate their product offerings.
The report also does not address the high barriers to entry for challenger banks, especially around the costs of setting up local branch networks. The concentration of market share of the largest banks removes pressure from banks to offer more specialised products and build more robust relationships with customers. Manufacturers have constantly emphasised the lack of capacity of banks to understand their business model and offer tailored financial products to match their needs.
Today’s report is unlikely to provide much more than a small dose of encouragement to businesses facing long-standing issues with access to finance. Improvements in switching and information access are welcomed but will not be the shock that puts the banking sector back on track towards effectively supporting the growth of businesses in the UK.
The CMA will now open its provisional findings to consultation ahead of the release of the final report in April 2016. There is still scope for the proposed remedies to change or evolve following this process.