CMA to implement wide-reaching reforms to retail banking market

9 Aug 2016

The Competition and Markets Authority (CMA) has concluded that traditional high street banks do not have to compete hard enough for consumer’s business and has introduced measures to make it easier for customers to search and switch.

To tackle the problems present in the market, the CMA is implementing a wide-reaching package of reforms. Central to these reforms are measures to ensure that consumers benefit from technological advances, and that new entrants and smaller providers are able to compete for fairly.

These remedies were published in the final report of the Retail Market Investigation. The key measures from the report include:

  • Requiring banks to implement Open Banking by 2018
  • Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches so customers can see how their own bank performs
  • Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, or prompts on a customer’s annual statement to remind them to review whether they are getting the best value and switch banks if not

The CMA has recommended that the FCA undertake a programme of customer testing to identify which prompts will be most effective in changing customer behaviour.

Open Banking, the CMA’s foundation remedy, will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.

The CMA also introduced specific measures to benefit unarranged overdraft users, who make up around 25% of all personal current account customers, and small businesses.

Banks will be required to send alerts to customers going into an unarranged overdraft, and inform them of a grace period, to avoid charges.

Banks will also have to set a monthly cap on unarranged overdraft charges, and tell their customers about it.  The monthly cap will not be set centrally by the CMA but will be left up to the banks to decide.

Sian Williams, Head of National Services at Toynbee Hall commented on this news saying:

“We worry that the CMA advocates more account switching without realising some of the barriers consumers have in doing it. To date, switching remains low and has thus not led to innovation around the needs of low income consumers, particularly those who regularly go overdrawn already.

Whatever the relative merits of easier switching is, these merits have yet to be properly communicated to those on low incomes and we worry that the ‘innovation’ which has occurred has concentrated solely on prime banking customers.

As the CMA points out today, having an overdraft is not a barrier to current account switching in principle, but in practice it does raise questions for the bank an individual wants to switch to. Identifying which banks offer overdrawn customers a better deal is still very unclear. This, on top of existing life pressures, all mount up. For customers who are just struggling to make ends meet, it’s crucial that their bank account actively helps their money go further rather than reducing it through fees and charges. And we want those customers who regularly pay overdraft fees to know they can look for a better deal.

We feel that better communication from banks on the switching rights of consumers who have overdrafts, including those who are regularly or persistently overdrawn, is needed. We are glad that the CMA has recognised that there are savings for account switchers who are also overdraft users and would like to see banks take pride in proactively serving the customer who’s trying to get their money back on track, whatever their circumstances”.

Additional rememdies

In additional to those above, the CMA’s report includes additional measures aimed at improving consumer switching and engagement, for both personal current account users and small and medium enterprises (SMEs).  These include:

  • measures to strengthen the governance of the Current Account Switching Service (CASS), and also raise customer awareness and confidence in CASS
  • improvements to account switching by providing a longer period of redirection of transactions from the old to the new account
  • measures to improve the account opening and switching process
  • a recommendation to the FCA to undertake further work to identify, research, test and, as appropriate, implement measures to increase overdraft customers’ engagement with their overdraft usage and charges.
  • a recommendation that the FCA looks at ways for banks to engage customers more in considering overdraft features and their potential relevance and impact, during the PCA opening process.
  • additional banking measures for small businesses to improve the information available to SMEs about loan and overdraft charges and eligibility, make it easier for SMEs to compare products from different banks, and make it easier to open a new business current account (BCA).

Further details including the CMA’s final report and infographics illustrating some of their proposals can be found here.