Competition and choice in retail banking - Treasury Contents

Written evidence submitted by the Competition Commission

This note provides an overview of the role of the Competition Commission ("CC") and a summary of the CC's inquiries relating to aspects of the banking and financial services sectors during the last 10 years.


The CC is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. All of the CC's inquiries are undertaken following a reference made to it by another authority, most often the Office of Fair Trading (OFT) (which refers merger and market inquiries), or one of the sector regulators (which can refer markets within their sectoral jurisdictions or make regulatory references in relation to price controls or other licence modifications) or as a result of an appeal from a decision of one of those sector regulators.[67]

Under the Enterprise Act 2002 (the Act), the OFT can review mergers to investigate whether there is a realistic prospect that they will lead to a substantial lessening of competition (SLC). The OFT may seek undertakings from the merging parties to address any competition concerns. If that is not possible it may refer the merger to the CC for an in-depth investigation. The CC has wide ranging powers to remedy any competition concerns, including preventing a merger from going ahead or requiring a company to sell off part of its business. In exceptional circumstances where public interest issues are raised, the Secretary of State may intervene as provided for in the Act, and may prevent a merger from being referred to the CC or may make a merger reference himself.

The Act also enables the OFT (and the sector regulators) to investigate markets and, if they are concerned that there may be competition problems, to refer those markets to the CC for in-depth investigation. In market investigations the CC has to decide whether any feature or combination of features in the market prevents, restricts or distorts competition, thus constituting an adverse effect on competition (AEC). If the CC concludes that this is the case, then it must seek to remedy the problems that it identifies either by introducing remedies itself or by recommending action by others.

Undertakings or orders are the primary means by which remedies are given effect under the Act (and the Fair Trading Act 1973). The OFT has a statutory duty to keep these undertakings under review, and if it considers that due to a change of circumstances a set of undertakings or an order should be varied or terminated, then the OFT refers it for consideration by the CC. Responsibility for deciding on variation or termination of undertakings lies with the CC.

In relation to regulatory references, the CC's role is dictated by the relevant sector-specific legislation.


The CC operates under a Chairman (Peter Freeman) and Chief Executive (David Saunders). CC governance is provided by the CC's Council comprising in addition the three Deputy Chairmen and three non-executive members.

The CC employs about 140 staff, the great majority of whom are professionals (primarily lawyers, economists, business advisors and inquiry staff).

The CC also employs about 35 part-time Members, who are experienced industry figures, professors of economics, competition lawyers, etc. Members are paid only for the inquiries on which they serve and, whilst appointed by the Secretary of State,[68] are completely independent of political control.

Inquiries are conducted by a small Group of CC Members (selected and appointed to the inquiry by the Chairman), normally led by the Chairman or one of the Deputy Chairmen. Decisions in individual cases are taken by consensus[69] by the Group (who are by statute sovereign) working closely with the expert staff team.

The CC is widely recognised for being highly transparent: inquiry Groups hold hearings with parties and publish evidence, working papers and provisional decisions to ensure that parties are appraised of the issues under consideration. The CC publishes an administrative timetable for each inquiry and is bound by a statutory time limit for determining competition cases.[70]

Whilst the CC's focus is primarily on competition, it necessarily takes other public policy issues into account, particularly when considering remedies.

The CC's work on mergers and markets is subject to judicial review by the Competition Appeal Tribunal (CAT), and on regulatory matters also by the general courts.


The CC has completed six reports on topics within the banking and financial services sectors over the past 10 years. Four of them were under the 2002 Act:

—  Payment Protection Insurance, January 2009 (followed by remittal November 2009-October 2010).

—  Northern Irish Personal Banking, May 2007.

—  Home Credit; November 2006.

—  Store cards; March 2006.

Two earlier reports were made to the Secretary of State under the Monopoly and Merger provisions of the Fair Trading Act 1973:

—  SME Banking - a monopoly inquiry—March 2002 (reviewed August 2007).

—  Lloyds TSB/Abbey National—a merger inquiry—July 2001.

Details of these inquiries are set out in Annex A.

Annex A


PAYMENT PROTECTION INSURANCE (February 2007-January 2009 followed by remittal November 2009-October 2010)

Terms of reference and status of the remittal

—  The reference followed a super-complaint from Citizens Advice and covered the supply of all PPI services (except store card PPI services) to non-business customers in the UK. The CC reported on 29 January 2009, requiring a prohibition on selling PPI at the same time as credit - the point-of-sale prohibition (POSP), a ban on selling single-premium PPI policies (where a multi-year policy is paid for in one up-front fee, added to the cost of the loan; the FSA took action on this in parallel and there are now no single-premium personal loan PPI policies sold) and various remedies to increase and improve information flow and transparency.

—  On 30 March 2009 Barclays challenged aspects of the CC's final report including inclusion of the POSP in the package of remedies. Lloyds and Shop Direct Group Financial Services Ltd (which sells retail PPI through brands such as Littlewoods) intervened in support of Barclays; the FSA intervened in support of the CC. In October 2009, the Tribunal upheld the CC's conclusions as to the competition problems in the market but ruled that the CC must consider further the inclusion of the POSP, taking account of the possible loss of convenience for consumers in no longer being able to buy PPI at the same time as credit.

—  Following a remittal from the CAT in November 2009, the CC carried out a detailed analysis of the impact of the POSP on customers' convenience, including conducting a customer survey. In October 2010 the CC confirmed the POSP for all forms of PPI except retail PPI (a small part of the overall PPI market).

Product market

—  PPI services are insurance services supplied to protect a borrower's ability to maintain credit repayments in the event that the borrower suffers an accident and/or sickness and/or unemployment and, under some policies, death. Short-term income protection (short term IP) sold alongside credit was found also to be PPI - whilst the sales focus is on a customer's income rather than outgoings, the policy typically insures the same events in the same way, with the same benefits. PPI is predominantly sold through three distribution channels: face to face contact in branches (over half), over the telephone, and over the internet.

—  Most PPI policies are sold by credit arrangers (banks, building societies, mortgage intermediaries) at the point of sale of the credit being issued but there are a few providers of PPI policies that do not also supply the credit to be insured (ie stand-alone PPI).

—  The CC found that PPI sold by an individual credit arranger is not in competition with other credit arrangers' products (though is in competition with the very small stand-alone PPI/short-term IP market), hence each credit arranger selling PPI is a virtual monopolist.

—  Given the market definition, markets are essentially monopolies. In terms of share of supply, the newly-merged Lloyds Banking Group has 40-50% of gross written premiums.

Key issues

—  The CC found there to be little competition among distributors and intermediaries in relation to the supply of any type of PPI policy sold at the point of sale. The CC found the following features of the market causing an AEC: the extent of competition between providers was limited (on both price and non price factors); there were barriers in terms of customer search for PPI policies (time consuming, limited information available, complexity of policies, misunderstandings in relation to PPI improving the credit application process, low level if stand-alone provision); barriers to switching (eg access to consumers' credit information); barriers to entry and expansion; and the point of sale advantage in selling PPI combined with a credit product (ie stand alone providers were at a competitive disadvantage); barriers to new entry (eg building scale and access to customers at point of sale).

—  The consumer detriment included higher prices, less choice and less innovation. Total consumer detriment would be significantly more than £200 million per year (some elements of consumer detriment could not be quantified including the scale of the adverse selection problem).[71]

—  The CC found that if a POSP were introduced there would be an overall benefit to consumers of all types of PPI (save retail PPI). Some customers would value an opportunity to reflect on their options away from the credit point-of-sale. In addition the package of remedies - including the point-of-sale prohibition - would introduce competition which is likely to bring substantial benefits to consumers in terms of lower prices, better products and more choice.


—  Remedies included prohibiting selling PPI at the credit point of sale and transparency measures for consumers (eg price comparison tables, the provision of annual statements), all PPI providers must provide comparative data to the FSA, a prohibition on the sale of single-premium PPI policies, a requirement to unbundle retail PPI from merchandise cover. The remedies will be implemented by means of an order.

STORE CARDS (March 2004-March 2006)

Terms of reference

—  The OFT's reference specified the relevant market as the supply of (a) store card credit services and (b) consumer credit services through store cards. The CC requested a change to the terms of reference to include also insurance services (ie insurance purchased in association with provision and use of store cards). The geographic market was the UK.

Product market

—  By taking out a store card, a cardholder enters into a direct contractual relationship with the provider, not the retailer. Providers often offer store card insurance (PPI) covering card repayments.

—  The main sources of income for store card providers are interest income on balances not settled within the interest-free period; card related insurance income; income from fees levied for late payment of accounts; and other income including merchant fees from certain retailers.

—  The store card market remains an important source of credit and associated insurance. There were more than 11 million store cardholders with outstanding balances of well over £2 billion.

—  The distribution chain comprised department stores and clothing retailers, and store credit providers typically financed and administered the store cards on their behalf. At the time, six large lenders (five of which were quoted companies) accounted for around 90% of the market. A few retailers, notably Argos, financed and operated their store card programmes in house; however, most contracted their store card operation to a provider who managed it on their behalf. The two largest providers were General Electric Consumer Finance UK (GECF - largest provider having a share between 50-70%) and HSBC Group (HSBC - the second largest providing John Lewis and Marks and Spencer).

—  There were found to be two relevant economic markets: an "upstream" market, where providers compete for retailers' store card contracts; and a "downstream" market for the supply of credit and insurance through store cards to retailers' customers.

Key issues

—  There were no adverse findings in the upstream market and in particular no barriers to entry by financial institutions.

—  In the downstream market, the CC found that there was little or no competitive pressure on setting APRs; there was little or no competitive pressure on the levels of late payment fees or on the pricing of insurance sold with store cards; and providers did not include sufficient information on their statements. Many store card programmes had APRs clustered around 30% and there was little competitive pressure to reduce them.

—  Various features of the market had the effect of insulating from competitive pressures consumer credit and insurance services provided through or in association with store cards.

—  Detrimental effects on consumers included higher prices, less choice, and lack of transparency. Over the period since 1999, consumer detriment was found to have amounted to at least £55 million a year and possibly significantly more.


—  Remedies related primarily to increasing consumer transparency and included full information on statements (key items of information to be prominently displayed on the front page of the store card statements eg the current APR and an estimate of interest payable next month); an APR warning on store card statements; and the provision and prominent display of a facility to pay by direct debit. Where store card providers offer a package of payment and price protection or payment and purchase[72] protection, they must offer payment protection alone as a separate item. All remedies were implemented by an order. The remedies are now under review following the implementation of the EU consumer credit directive.

HOME CREDIT (December 2004-November 2006)

Terms of reference

—  The reference from the OFT followed a super-complaint from the National Consumer Council. The product market was defined as the provision of credit, typically in small sum cash loans, the repayments for which are collected in instalments (often weekly or fortnightly) by collectors who call for that purpose at the customer's home. The geographic market was the UK.

Product market

—  The mean value of a home credit loan was around £300. APRs generally exceeded 100% and for loans of around 6 months often exceeded 300%.

—  All parties investigated were legitimate licensed businesses (to be distinguished from illegal lenders ie loan sharks).

Key issues

—  At a national level, this was a highly concentrated market and one in which the leading lender (Provident) had a very substantial market share. The CC found that Provident accounted for around 60% of the supply of home credit in the UK on most measures, and that the six largest lenders together accounted for over 90% of UK supply.

—  Two features contributed to the weakness of competition creating an AEC: insensitivity of customers to prices and the failure of lenders to compete in any significant way on price. There were also incumbency advantages for established lenders (ie knowledge of customers' credit worthiness). Price insensitivity and incumbency advantages were preserved by the lack of data sharing, customers' requirement for an agent they can trust and the regulatory prohibition on door-to-door canvassing of loans.

—  The CC found that customers generally paid higher prices than could be expected in a competitive market and on average £20 higher.


—  Four remedies were selected with the objective of increasing price transparency and decreasing information asymmetries between incumbent lenders and other lenders. These remedies were: increased data sharing on payment records through credit reference agencies; requirement for lenders to publish their prices for home credit loans; better information provision to customers on loan accounts; and early settlement rebates.


Terms of reference

—  The reference from the OFT followed a super-complaint from Which? and the General Consumer Council for Northern Ireland (GCCNI). The terms of reference for the inquiry covered the supply of Personal Current Account (PCA) banking services in Northern Ireland.

Product market

—  The product market covered all personal current accounts (PCAs) but not other types of personal financial products such as credit union accounts and offset/current account mortgages.

—  The inquiry categorised the banks into "clearers" (eg Governor and Company of the Bank of Ireland, AIB Group - trading as First Trust Bank, Northern Bank and Ulster Bank) and "non clearers" including building societies (Abbey National, Alliance & Leicester, Halifax, Nationwide, Woolwich), banks based in Great Britain and banks providing a remote service.

Key issues

—  The inquiry analysed branch networks including entry and expansion; bank conduct including charging structures and complexity for the consumer; customer conduct including levels of switching; unilateral and co-ordinated effects and financial performance.

—  The features that restricted or distorted competition in the PCA market in Northern Ireland were (a) unduly complex charging structures and practices; (b) lack of transparency in banks' explanation of charging structures to consumers; (c) lack of consumer switching between PCAs and banks.


—  The CC's remedies aimed at increasing transparency of charges for consumers and covered clear language, explanations of the level of charges and interest rates, advance notice of charges and debit interest incurred and changes to the switching process. Remedies were implemented by means of an order.

SME BANKING (2000-02 monopoly investigation, Fair Trading Act 1973)

Terms of reference

—  On 20 March 2000, the CC was asked by Ministers to investigate the supply of banking services by clearing banks to small and medium-sized enterprises. The CC was required to determine whether a monopoly situation existed, whether firms exploited their monopoly position and what could remedy any exploitation.

Product market

—  The CC defined SMEs as businesses with a turnover of up to £25million.

—  The CC found the market for SME banking to be highly concentrated especially with regard to the four largest clearing groups (Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland Group) that accounted for over 90% of liquidity management services in each geographic region.

Key issues

—  For a number of reasons customers showed an unwillingness to switch.

—  There was a similarity of pricing between the major banks; the use of selective negotiation to reduce prices for those considering switching; and high barriers to entry (including branch infrastructure and high sunk costs).

—  The CC found that as a result of the consumer and competition issues identified, the four largest clearing banks were charging excessive prices and therefore earning excessive profits.


—  The Secretary of State asked the OFT to negotiate remedies to give effect to the CC's recommendations. As a result, a number of behavioural and transitional undertakings were given by the four largest banks. Behavioural undertakings were designed to: make switching easier and faster; limit bundling of services, and improve price information and transparency to SMEs. Transitional undertakings were also sought to strengthen competition in the short term. These required the banks to offer either current accounts paying interest (at BoE base rate minus 2.5%) or accounts free of core money transmission charges.

OFT and CC review of undertakings given by banks (August 2007)

—  OFT found that the transitional undertakings had been successful in achieving increased levels of competition and that the four banks had complied with their requirements. The market had however become more competitive due to the impact of the behavioural undertakings and general market trends. The OFT therefore recommended the four banks be released from their transitional undertakings but that the behavioural undertakings remain in place to address their concerns over customer switching levels and customer awareness of costs.

—  The CC largely agreed with the OFT's advice, and decided in December 2007 to lift the temporary price controls that had been imposed in 2003.

LLOYDS TSB/ABBEY NATIONAL (February-July 2001 merger inquiry, Fair Trading Act 1973)

Terms of reference

—  Proposed merger between Lloyds TSB and Abbey National.

Product market

—  Lloyds TSB was one of the four leading clearing banks (others were Barclays, HSBC and RBS/National Westminster Bank). Lloyds and Abbey National were found to overlap in the following product markets: financial products sold to personal customers (current accounts, mortgages and savings accounts); markets for financial products sold to small and medium enterprises (SMEs); markets for financial products sold to larger firms and wholesale banking.

Key issues

—  The proposed merger would reduce competition in the supply of banking services to SMEs as it would eliminate one of the very few players outside the big four. The merger would result in higher prices for personal current account (PCA) and SME banking services, and decrease innovation and consumer choice. Efficiency gains would result from the merger but the CC did not consider these would be passed on to consumers in the form of reduced prices.


—  The CC concluded that there were no possible remedies in relation to the PCA and SME markets short of prohibiting the merger that could adequately address the adverse effects. The Secretary of State accepted this recommendation and prohibited the merger.

4 November 2010

67   The sectors include airports, air traffic services, electricity, gas, financial services, postal services, railways, telecommunications and water. Back

68   For an eight year term following open competition. Back

69   The CC would not normally expect to reach a decision from which more than one member dissented. Back

70   Two years for a market investigation; 24 weeks plus 8 weeks extension for a merger review. Back

71   High PPI prices are likely to have resulted in adverse selection in the markets for PPI, resulting in increased claims costs on PPI policies and increased impairment costs on credit sold to PPI customers, compared with the levels that would arise given the lower PPI price levels that we would expect in a well-functioning market. A further detriment to consumers as a result of high PPI prices is therefore the increased costs of supplying PPI at high PPI prices due to adverse selection: paragraph 77 of the CC's report, January 2009. Back

72   ie protection covering damaged, lost or stolen purchases. Back

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