The Financial Services Consumer Panel is an independent statutory body, set up to represent the interests of British consumers in the development of policy for the regulation of financial services.
Tuesday, 27 October 2015
Last Thursday, the Competition & Markets Authority (CMA) published the interim findings from its inquiry into the market for personal and business current accounts.
The proposed solutions are unlikely to lead to a market that works better for consumers, and it is not surprising that the report has been criticised from many quarters for not going far enough. The CMA places great emphasis on switching. As the theory goes, if people switch away from high prices and poor service this will exert competitive pressure on the industry as a whole.
However, people are reluctant to switch. They want a relationship with their bank, believing this will, for example, help them get a loan or mortgage when they need one. This is particularly true of small businesses. Switching is seen as a hassle, the risk of things going wrong too great. Providing more information and a few prompts will not overcome consumers’ perception that the potential benefits of switching to another bank are simply not worth it.
Perhaps more to the point, how are consumers supposed to switch away from high prices when they do not know what they are paying? The CMA has provisionally concluded that ‘free if in credit’ (FIIC) banking does not inhibit switching. This may well true, but the implication is that people who switch do so for reasons other than price. If the CMA believes FIIC is not relevant, then it needs to explain how consumers’ decisions based on non-price factors will drive better, cheaper, products and services.
This issue is not new. Back in 2011, the Treasury Select Committee concluded that the cost opacity inherent in the FIIC model did not provide consumers with “sufficient information about charges to make an informed choice”. Similarly, the PRA’s Andrew Bailey said in 2012 that we need a “much better sense of what we are paying for [banking] and how we are paying”.
We agree. Cross-subsidisation, coupled with murky pricing structures and contingent charges, obscures the true cost of having a bank account, and, by definition, there are winners and losers.
The CMA’s provisional findings have not shed any light on the distribution of costs and benefits arising from FIIC, probably because banks can’t (or won’t) estimate the profitability of their individual product lines. The Panel commissioned its own research last year, and concluded that the losers were most likely those with high balances not earning interest; people who used overdrafts; and those who did not shop around.
We think it is impossible to gauge whether the current account market is competitive without knowing the cost and profitability of bank accounts and related products. The possibility to cross-subsidise current accounts from other product lines, such as mortgages, may also have an impact on competition in the current account market by acting as a barrier to new entrants.
The Panel will be putting these arguments to the CMA, and we hope that the final findings will put the spotlight on the true cost of ‘free’ banking and the impact on competition.