November 2014

CMA market review announcementFollowing the market studies published on 18 July 2014 and subsequent consultation period to September 2014, the Competition and Markets Authority (CMA) has confirmed its decision to progress a market investigation reference (MIR). The MIR will be in relation to both personal current accounts (PCAs) and retail banking for small and medium-sized enterprises (SMEs).

In addition, the CMA has announced its intention to review the competition undertakings that were to be put in place following the Competition Commission’s report in 2002 into SME banking.

The CMA will appoint a market reference group drawn from its panel of independent members. This group will shortly publish a timetable for various stages of the investigation.

In this document, we set out:

1. Key considerations arising from the consultation period

2. The increased focus on competition in the UK

3. Planning your response

Key considerations arising from the consultation periodThe scope of the inquiry has been refined to exclude offset current accounts and foreign denominated current accounts from the PCA inquiry. Foreign exchange, interest rate products, merchant loans and insurance products are excluded from the SME inquiry.

The CMA rejected representations from some of the larger banks to exclude private banking customers and packaged accounts, on the grounds that the users of these products do not materially differ from less affluent customers or those with standard current accounts. It also rejected requests from some new entrants to extend the PCA scope to include savings products.

The CMA reiterated the need for the SME banking scope to include both core lending products and business current accounts. It did accept that the definition of SME customers should only include businesses with a turnover below £25mn (excluding those that meet turnover criteria but are part of larger corporate groups).

Key contacts

Omar Ali Partner, UK Banking & Capital Markets Leader

+ 44 20 7951 1789

Rute Aparicio Partner, EMEIA Financial Services

+ 44 20 7951 0957

John Liver Partner, EMEIA Financial Services

+ 44 20 7951 0843

Mark Gregory Partner, Chief Economist

+ 44 20 7951 5890

The market studies have identified a number of concerns which the CMA considers as reasonable grounds to show that these markets prevent, restrict or distort competition. These concerns include:

► Barriers to entry and expansion for newer and smaller banks remain significant and markets remain concentrated.

► There is little movement in the market share of the largest banks.

► Levels of shopping around and switching between banks remain low.

► There is limited transparency and difficulties for customers in perceiving differences between banks.

The CMA has considered the impact of recent changes to the market, including the divestment of TSB, the proposed divestment of Williams & Glyn and the impact of new entrants, including Metro Bank, Tesco Bank, Virgin Money, the Post Office and Atom Bank, and the introduction of the Current Account Switching Service. Whilst the CMA sees these developments as positive, it considers that they do not yet solve the dominance and relatively stable market share of the Big Four. The CMA further emphasises that access to branch services, payments systems, capital requirements and lack of information on new customer creditworthiness in the SME market continue to be significant barriers to entry.

The CMA stated its decision not to proceed with proposals put forward by some of the larger banks, partly due to lack of sufficient evidence for their potential effectiveness. The proposals included a price comparison website for SME current accounts, standardised and simplified opening procedures, business current account annual summaries, and other measures to stimulate activity in the SME market.

The increased focus on competition in the UKOf 16 market investigations undertaken to date, 15 have led to competition issues being found and remedies being applied. The remedies available to the CMA are wide ranging and could include additional information on accounts and related fees, recent entrants being granted access to larger banks’ branch networks, disposal of assets to encourage competition, or even forced divestments of businesses in part or in whole. At this

stage, the CMA has announced that it is not ruling out structural remedies, whilst acknowledging that these are costly and onerous to implement.

The nature of recent remedies has varied in strength and disruption:

► For the car insurance market investigation, the remedies included the provision of better information on the cost and benefits of no claims bonus protection.

► There has been considerable focus on behavioural economics and how to encourage switching in the energy market investigation.

► However, for the private healthcare and UK airport market investigations, remedies included requirements for the main parties to dispose of significant assets to rectify concerns over lack of competition and high barriers to entry.

Planning your responseA market investigation places a substantial burden on the parties involved over a period of 18 to 24 months. A significant investment of management time will be required, alongside the need to support an extensive data gathering exercise and submission preparation process. Typically, investigations seek to understand the underlying economic and financial nature of the industry. In this context, issues such as absolute and relative product profitability, bundling, cost structure and the drivers of switching behaviour are likely to be areas of focus.

As a result, the data landscape for supporting a market investigation will be varied and voluminous, and will cover both structured data (databases) and unstructured data (email and communications). The ability to discover, collate, process, analyse and understand this data quickly is critical to the success path of any response. It is worth considering that a significant amount of information will be made available on the CMA’s website, such as core inquiry documents, evidence and CMA announcements. This is part of the CMA’s remit to ensure transparency of the market investigation.

To inform your response, we recommend that banks should have a strategy to engage with the CMA whilst analysing the business and operational impacts of the proposed remedies. As the process develops and outcomes crystallise, participants should look to refine both strategic and operational plans.

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EY | Assurance | Tax | Transactions | AdvisoryConclusionsFollowing the announcement of the consultation in the summer, some in the industry were hoping that the positive steps already taken to encourage new entrants and broader competition may have resulted in a narrower review. The CMA remit will be broad and will look at anything that prevents or distorts competition in the PCA and SME market.

The burden on the industry is not reducing. In addition to the CMA review, next year will see the beginning of the Senior Managers Regime, plans submitted for ring fencing, a response to the recent leverage recommendations and, of course, the need to address the consequences of the stress tests.

Barriers to entry are difficult to evaluate accurately when the market is already in the throes of quite significant change. Regulators have already removed some of the most considerable barriers to entry, such as capital requirements, and it seems to have worked. The PRA has reported that more than 20 new entrants are now in the process of applying for a banking licence.

It is clear the CMA will look at pricing and test the view that it could be more transparent for retail customers. Retail banking for consumers who are in credit is currently perceived as free, making it hard for banks to compete effectively on price, and for consumers to make comparisons.

For SMEs, the landscape is more complex. Pricing is arguably more transparent than for retail banking, suggesting that the key focus will probably be access and the impact of growth in non-bank providers such as peer-to-peer lenders.

We hope that you find the information in this document useful. Please contact us if you would like further information.

Kind regards

Omar Ali Partner, UK Banking & Capital Markets Leader

+ 44 20 7951 1789

Rute Aparicio Partner, EMEIA Financial Services

+ 44 20 7951 0957

John Liver Partner, EMEIA Financial Services

+ 44 20 7951 0843

Mark Gregory Partner, Chief Economist

+ 44 20 7951 5890

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