Watchdog unveils plans to shake up banking market

Plans to 'shake up retail banking for years to come' have been unveiled by the competition watchdog after it found older and larger banks do not have to compete hard enough for customers' business.

The CMA said very few customers ever switch to another bank. Picture: Ian Rutherford
The CMA said very few customers ever switch to another bank. Picture: Ian Rutherford

The Competition & Markets Authority (CMA) has unveiled a package of measures that should help customers to shop around to get a better deal and smaller and newer banks to grow.

The plans include requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up.

Alasdair Smith, chairman of the CMA’s retail banking investigation, said: “The reforms we have announced today will shake up retail banking for years to come and ensure that both personal customers and small businesses get a better deal from their banks.

“We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.”

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The package of measures, set out in the final report from the CMA’s retail banking market investigation, will enable people and small businesses to manage accounts held with different providers in a single digital app.

The CMA said this will help customers to take more control of their funds; for example, by managing their cashflow and avoiding overdraft charges by being able to move money around more easily. It could also help them compare products more easily.

Banks will be required to put this “open banking” measure into place by early 2018, the CMA said, to speed up developments in technology in the retail banking sector.

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However, Atom Bank chief executive Mark Mullen said: “To me, it’s nonsensical for these banks to be responsible for setting the future standards of the banking industry – it’s like trusting a pyromaniac with the security for a fireworks party.

“The cultures and behaviours of many of our biggest banks and financial services providers contributed directly to the financial crisis and to the destruction of trust in our banking system and so to allow them to be in control of future standards is beyond absurd. The trade-off is that they are responsible for paying for the development of the open banking standard, but that’s not the point and equally means that the new banks like Atom will have little direct say in shaping the future. It’s a very generous dividend for those banks.”

The CMA will require banks to:

• Publish trustworthy and objective information on quality of service on their websites and in branches for customers to see. A core measure of how banks shape up will be whether customers would be willing to recommend their bank to friends, family and colleagues.

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• Send out suitable “prompts” such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. Unlike many other financial products such as home insurance, current accounts do not have annual renewal dates to act as natural reminders for customers to compare deals.

• Send alerts to customers going into unarranged overdraft, and inform them of a grace period, to avoid charges. Banks will also have to set a monthly cap on unarranged charges, and tell their customers about it. Banks make £1.2 billion a year from unarranged overdraft charges, which have been described as a “cash cow” for banks by commentators.

• Provide financial backing and technical support to independent charity Nesta to make it easier for small businesses to get a better deal. The CMA found small businesses lack tools providing detailed information about bank charges, service quality and credit availability. A range of measures targeted at small businesses will include a loan eligibility tool.

At present, just 3 per cent of personal and 4 per cent of business customers each year ditch their old bank and switch to a new one.

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The CMA said, despite this, someone could save £92 a year on average by switching to a deal that better suits their needs. Savings of about £80 a year on average are available for small businesses by ditching and switching.

People who are often overdrawn could make even bigger savings. Someone who goes overdrawn for one or two weeks every month could save £180 a year on average, the CMA said.

Unarranged overdraft users make up about 25 per cent of all personal current account customers and small businesses.

Craig Donaldson, chief executive of “challenger” lender Metro Bank said: “After more than two years in the writing and costing several millions of pounds, we are astonished that the CMA’s findings do not attempt to level the playing field for new entrants and challenger banks, by recommending that the Prudential Regulation Authority looks into disproportionate capital requirements. Disproportionate capital requirements are anti-competitive and unduly support the large incumbent banks by allowing them to hold up to ten times less capital for the same loans than challenger banks.

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“The CMA was given a rare opportunity to support and develop competition in banking – it is disappointing that they decided not to get at the root of the problem, but rather they missed the point and tinkered around the edges.”