Policy paper

Government response to the Competition and Markets Authority retail banking market investigation

Published 3 November 2016

1. Introduction

On 9 August 2016 the Competition and Markets Authority (CMA) published the final report of its market investigation into retail banking.

The CMA found features of the banking sector that restrict effective competition. This includes low customer engagement, barriers to searching and switching, and incumbency advantages in the provision of personal and business current accounts in the UK.

The CMA also found specific market features which leads to adverse effects on competition in the supply of SME banking services. This includes barriers to searching, strong product linkages, the nature of demand for SME lending products, information asymmetries and incumbency advantages in the provision of SME lending in the UK.

The CMA sets out a package of remedies that comprises 4 elements:

1. three cross-cutting foundation measures designed to increase customer engagement, improve transparency by making it easier for customers to compare prices and service quality and deliver a common standard for technology that allows the sharing of bank data – the open API banking standard
2. additional measures to make current account switching work even better by building on and improving the Current Account Switch Service (CASS)
3. measures designed to help consumers take more control over their overdraft usage and improve the switching process for these customers
4. measures targeted at specific issues in SME banking, making it easier for SMEs to compare providers and reduce incumbency advantages for business current accounts and loans

As part of this remedies package, the CMA makes 4 specific recommendations to government:

1. HM Treasury to give an authority powers to have regulatory oversight of the CASS
2. HM Treasury to work with credit reference agencies and SME lenders to enable SMEs to undertake soft searches for loans
3. HM Treasury to review commercial, technical and regulatory developments in the area of sharing SME data
4. Department for Business, Energy and Industrial Strategy (BEIS) to work with the British Business Bank and professional associations to explore ways in which their members can channel advice on identifying and choosing providers and sources of finance to SMEs

2. The government response

Since 2010 the government has taken significant action to improve competition in banking, ensuring that banks work hard to deliver the best possible products and services to their customers. The government is ready to take further action to ensure our banking sector remains the most competitive and innovative in the world.

This paper sets out how the government will take forward each of the CMA’s 4 recommendations, and we will provide further updates on these programmes of work as appropriate in due course.

Recommendation 1: HM Treasury to give an authority powers to have regulatory oversight of CASS

The Current Account Switch Service (CASS) is a free-to-use service designed to make it quicker and easier for customers to switch their current account in seven days. The service is operated and managed by Bacs Payment Scheme.

The CMA decided to strengthen the governance of CASS to provide those managing the service with stronger incentives to operate and develop the service in the interest of customers. As well as requiring undertakings from Bacs to address this, the CMA also made a recommendation to HM Treasury to introduce regulatory oversight of CASS by an appropriate body.

The CMA proposes that either the Payment Systems Regulator (PSR) or Financial Conduct Authority (FCA) undertakes this regulatory oversight of CASS. This oversight should include ongoing review and reporting on the performance of CASS, recommending on appropriate action as necessary, and annual or periodic agreement on CASS governance arrangements and strategic plans.

The government welcomes the CMA’s analysis and agrees to take forward this remedy. HM Treasury will ask the PSR to publish a report on the annual performance of CASS against agreed key performance indicators as specified by the CMA, including customer awareness and confidence metrics. The first report should be published within the next 12 months. The PSR should carry out this function in consultation with the FCA. Either the PSR or FCA may decide to take further action following their assessment of CASS performance. The PSR and/or FCA should notify HM Treasury if additional powers are required by either regulator to ensure any required changes to CASS. HM Treasury will continue to engage with relevant stakeholders on this programme of work.

Recommendation 2: HM Treasury to work with credit reference agencies (CRAs) and SME lenders to enable SMEs to undertake soft searches for loans

The CMA found that SMEs shopping around for finance providers is likely to increase the number of SMEs undergoing credit checks from CRAs.

Credit checks can lead to a record on an SME’s credit file so shopping around may have a negative effect on an SME’s credit rating, meaning they might be offered worse terms or prevented from obtaining a loan. The ability to conduct a soft search, which does not affect their credit score, therefore removes a potential barrier to SMEs shopping around.

The CMA recommends that HM Treasury works with CRAs and SME lenders to implement a mechanism for soft searching for SME lending products, so SMEs are confident they can shop around for credit and obtain indicative price quotes without adversely affecting their credit rating.

The government accepts this recommendation and has begun engaging with CRAs and SME lenders on this issue. HM Treasury will continue its positive discussions with industry and provide an update on this programme of work in due course.

Recommendation 3: HM Treasury to review commercial, technical and regulatory developments in the area of sharing SME data

In its notice of provisional remedies, the CMA proposed a measure to establish networks through which commercial information could be shared between SMEs and financial services providers.

In its final report the CMA set out its intention to build on existing industry, government and regulatory initiatives where possible. In particular the CMA identified two key government initiatives under the Small Business, Enterprise and Employment Act 2015 designed to boost competition in SME lending and help SMEs access the finance they need to invest and grow.

In April the government introduced improvements to SME data sharing by requiring designated banks and CRAs to share SME credit information with alternative finance providers. This will increase competition in SME lending by making it easier for challenger banks and other lenders to make good credit decisions on SMEs, and help level the playing field by helping SMEs access finance from a lender other than their bank. The government expects this data to begin flowing shortly.

The government has also introduced requirements for designated banks to share with finance platforms the details of SMEs they have rejected for finance, with the SME’s consent. Finance platforms must try to match SMEs with alternative finance providers who may be willing to lend where the big banks are not. This allows viable businesses that do not fit the risk appetite of the biggest banks to access the finance they need from alternative lenders like challenger banks and peer-to-peer platforms. This initiative went live on 1 November and banks have already begun offering SMEs referrals to these platforms.

Acknowledging recent developments in this area, the CMA recommends that HM Treasury reviews the landscape for SME data sharing, including the SME credit information and finance platforms initiatives, by summer 2018. The government accepts this recommendation and commits to reviewing developments in sharing SME data to the CMA’s suggested timescale.

Recommendation 4: BEIS to work with the British Business Bank (BBB) and professional associations to explore ways in which their members can channel advice on identifying and choosing providers and sources of finance to SMEs

In its market investigation the CMA assessed initiatives to help provide advice to SMEs currently offered by the BBB, BEIS and the Institute of Chartered Accountants in England and Wales (ICAEW). The CMA found that professional advisors could help SMEs make informed choices when applying for finance by, for example, signposting SMEs to comparison tools. It therefore recommends that BEIS should work with the BBB and professional associations to explore ways in which their members can channel advice on choice of banks and sources of finance to SMEs.

The BBB has already developed the Business Finance Guide as a comprehensive resource for SMEs, offering guidance on selecting the right type of finance for specific needs at each stage of the business life-cycle. This was published in July 2016 and includes options for raising equity finance as well as debt.

The government agrees with the CMA that professional advisers have a key role in helping SMEs make informed business decisions. The guide was developed alongside the ICAEW with a wide range of other organisations including the British Chambers of Commerce, FSB, CBI and the London Stock Exchange. BEIS and the BBB will work with these partners to deliver the CMA’s recommendation, in particular through the Business Finance Guide.