Consumer groups have called on the competition watchdog to take tougher action to inject competition into high street banking after it stopped short of radical measures to break up the biggest players.
In the 10th investigation into the banking sector in 15 years, the Competition and Markets Authority (CMA) said high street banks would be forced to encourage their customers to switch to rivals.
The CMA said customers should be sent text messages to warn them if they were going into overdraft and prompt them to look for better offers. Banks which make mistakes – such as through IT outage – could also be forced to nudge customers to seek better deals elsewhere.
The CMA issued a list of remedies to inject competition into a market dominated by the big four banks – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays. The four hold a 70% share of the current account market and the CMA said switching could potentially save each customer £70 a year. Those with an overdraft would save £140 and those with larger overdrafts would save £260.
Alasdair Smith, chairman of the retail banking investigation for the CMA, said: “Banking is a sector of huge importance that affects every household and business in the country. We think customers need to be put in charge of their banking.”
But Richard Lloyd, executive director of the consumer body Which?, expressed disappointment at the provisional findings. “The CMA inquiry has to bring about better banking, but these proposals don’t go far enough. The CMA’s own evidence is that consumers are disengaged from the banking market, so better information and nudges to switch will not be enough,” he said.
The CMA’s research found that Lloyds, the market leader, was gaining customers despite charging above-average prices and delivering below-average quality. Its Bank of Scotland arm is also rated as offering below-average quality and above-average prices, along with RBS, its NatWest arm, and also Co-operative Bank.
The CMA has rejected ideas from challengers to the big four – notably Virgin Money – to stop free banking, in which customers are not charged for their current account if they stay in credit. Introducing monthly fees or demanding that interest was paid on savings would not solve competition concerns, the CMA said.
Nor does it intend to break up banks. Smith was dismissive of the move to spin TSB out of Lloyds and Williams & Glyn out of RBS, mandated by the EU at the time of the banking bailouts. Such breakups were “very costly”.
Instead the CMA is relying on a series of ideas intended to make it easier for customers to switch their accounts, including through the use of a more sophisticated way of accessing their personal details though Midata, which gives a breakdown of an individual’s data which can be plugged into price comparison websites. Building the IT capability is likely to cost up to £200m, according to an industry source, while the government needs to provide a protocol for the system.
Smith described it as “a game-changing tool”. “We don’t think customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control,” he said.
The CMA also said changes needed to be made to the seven-day current account switching service (Cass). It was introduced in 2013 in an effort to calm customer anxiety about the difficulty of moving direct debits and regular payments when switching accounts. Account portability – often described as akin to changing phone numbers – is being considered but not a priority.
The investigation was launched amid heated political debate about the future of banking, with calls from the then Labour leadership for new challenger banks to be created and a market share test introduced. It will be completed in May, once further research has been conducted with customers on the current remedies.
Harriett Baldwin, economic secretary to the Treasury, said: “The CMA’s work complements the work the government has already undertaken, and continues to take, to increase competition in banking and create a fiercely competitive market which delivers for consumers and the wider economy.”
In a warning shot to the government, the CMA said it was still considering the implications of a new corporation surcharge being imposed on banks, which has been criticised by competitors to the big four. The extra eight percentage points on corporation tax was announced in the July budget.
Simon Hunt, PwC’s UK banking and capital markets expert, said: “The lack of focus by the CMA on free, if in credit, current accounts could be a missed opportunity to really shake up a model which is arguably unsustainable and stifles competition through its lack of transparency.”