FCA’s embarks on yet another U.K. retail banking enquiry | Wolters Kluwer Financial Services
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  • FCA’s embarks on yet another U.K. retail banking enquiry

    By Michael Imeson

    Published October 09, 2017

    Regulatory investigations into UK retail banking are a never-ending story. Michael Imeson outlines one of the latest, the FCA’s review into retail banking models.

    The Financial Conduct Authority is about to issue an information request to banks as part of its “strategic review” of retail banking business models. It announced the review in May, when it said that as a result of significant changes in the banking market – such as the increasing use of digital channels, ring-fencing and the Competition and Markets Authority’s “remedies” – that it was time to examine the impact of these changes on competition and conduct.

    After several months of behind-the-scenes discussions with the industry and consumer groups, the FCA will at some point in October 2017 request information from banks on many aspects of their business. It will then publish a project update in the second quarter of next year, explaining its initial analysis and the next steps.

    While bankers groan, roll up their sleeves and get ready to answer yet more questions from nosey regulators, consumer champions like Which? cannot wait to see the results.

    The review is looking at the business models for personal and SME (small and medium-sized enterprises) banking. The FCA has several objectives, including:

    • To evaluate how changes in bank regulation, technology, the economy and society are affecting retail banking models, and identify any potential competition or conduct issues.
    • To understand how free-if-in-credit bank accounts are paid for by banks, and if the costs are unfairly subsidised by any particular group of customer.
    • To understand the impact of increased use of digital channels, and the corresponding reduced use of branches, on consumers and competition.
    • To discover which retail banking services are the most and least profitable, and why.
    • To discover which banks make the most and least profits, and why.
    • To consider how revenues and costs in one service area may be linked to other service areas, and where there may be cross-subsidies and cross-selling of other services.
    • To explore how new business models differ from old ones.

    The FCA says it will concentrate on the biggest banks, but will also look at smaller banks, building societies and credit unions. It also says its review is different from the Competition and Markets Authority (CMA) investigation into retail banking which reported its findings last year. The CMA focused on current accounts and competition, whereas the FCA review will include all service areas and consumer protection.

    The review is in addition to other investigations the FCA is carrying out into retail banking, such as service quality information, the high cost of short-term credit and account opening/switching.

    “A piece of discovery work” 

    Andrew Bailey, Chief Executive of the FCA, in a speech in London in the summer referred to the review as “a piece of discovery work to start with, focusing on links between different products and services and their relative profitability”. He added: “It includes the impact on different groups of customers. It should enable us to assess better the impact of changes – for instance in technology – on retail banking business models.

     “It is very much an empirically driven piece of work which picks up where the Competition and Markets Authority left off, but is not a full evaluation of the functioning of competition in retail banking markets. It is broader in scope than the CMA’s work, which focused on personal current accounts and SME banking. We are covering both sides of the balance sheet of banks – deposit taking and lending.

     “We are already in touch with stakeholders on this work. It is, I should say, an ambitious project. My hope is that we can lay out a body of evidence from which conclusions can start to be drawn. But, let me manage expectations. We expect to be working hard for the rest of this year and into the first two quarters of next year to get the evidence laid out.”

    U.K. Finance’s grin-and-bear-it response 

    So, what do bankers think of the review, coming so soon after the CMA’s recommendations which are now being implemented? One of those “remedies” was for the nine biggest UK banks to comply with the Open Banking standard which forces them to give competing payment service providers (PSPs) access to information on their customers’ accounts. Armed with that information, the PSPs can then provide those nine banks’ customers with information on alternative services, and even make payments from their accounts held with one of those banks.

    Open Banking will therefore inflict some pain on the big banks. The FCA review will inflict even more discomfort. UK Finance, the bankers’ trade body, is putting on a brave face and not complaining, at least not in public. “UK Finance is working closely with the FCA in its strategic review of retail banking models,” says a spokesman. “The FCA recognises the significant technological, economic, social and regulatory change that has occurred and which will continue. We will work with the industry to help the FCA understand how this change is helping banks serve their customers better and provide customer choice.”

    An advisory firm’s frank response 

    Banking experts at accounting and advisory firm PwC are more forthright about the negative implications for banks. “What the review reveals about these practices could have far-reaching consequences for the industry,” write PwC’s Laura Cox and Megan Charles in a recent article.

     “Initially, firms need to prepare for the FCA’s data request that will precede the review. Even this seemingly innocuous first stage is likely to be challenging for firms, unless they have data on profitability by business line and product readily available. The second phase may bring more direct engagement from the FCA as the regulator seeks to understand the details of firms’ business models. In the longer term, banks will need to consider fundamental questions about the review’s impact on their business models and product offerings.”

    The authors say that a post-review retail banking world could look vastly different from today. Although the FCA is not opposed to cross-subsidisation if the market remains competitive, “excess profit from one business area gained at the expense of banks’ more vulnerable customers will raise alarm bells at the regulator and could see the end of cross-subsidisation”, says PwC.

    Coupled with the CMA remedies and the ring-fencing rules – whereby the largest banks must separate their consumer banking activities from their investment and international banking activities by January 2019 – the review could put additional costs on banks and force them to “rethink their product portfolios and pricing strategies”, and even withdraw less profitable products, believe Ms Cox and Ms Charles. But then, if they did that, they might break the FCA’s rules on treating customers fairly.

     “Ultimately, the most significant change could be the end of the traditional model of ‘free-if-in-credit’ banking,” says PwC. “Banks applying a monthly charge for operating a bank account could become the norm.”

    Consumer champion speak out 

    For the consumer champion Which?, the review provides a chance to do something about high overdraft charges. “The FCA should be using this review as another opportunity to tackle exorbitant unarranged overdraft fees that banks often end up charging those who can afford it least, plunging them further into debt,” says Harry Rose, Money Editor of Which?

    “Banks have made over a billion pounds a year through these unfair fees, which must now be brought into line with arranged overdraft charges. The FCA must act now to end the financial strain these charges put on vulnerable consumers.”

    The FCA’s Andrew Bailey mentioned unarranged overdrafts in his speech. He said “it is quite regularly argued that their cost exceeds the price cap that the FCA imposed on payday lending”. It is an issue “because it illustrates well the challenge of how costs and returns are spread across products and thus customers” because some customers “are more likely to use overdrafts than others”.

    It seems inevitable therefore that retail bankers must yield more ground when this review, and other related FCA investigations, are completed.

    About the author: Michael Imeson Chartered MCSI is Contributing Editor of The Banker magazine; Senior Content Editor at Financial Times Live where his role is to organise and/or chair events on financial services; and the owner of editorial services agency Financial & Business Publication. Michael is also a regular contributor to Wolters Kluwer’s Compliance Resource Network.



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