Written evidence submitted by the Financial
Services Consumer Panel
I am delighted to accept the Committee's kind invitation
to spend some additional time with Committee members on 18 November
to answer questions on competition and choice in the banking sector,
after the discussion with my two colleagues on the Financial Services
Practitioner Panels on the future of regulation. I thought it
might be helpful to write to you ahead of this latter discussion
setting out the Panel's main thoughts in this area. The Panel
will shortly be submitting evidence to the Independent Commission
on Banking which the Committee might also find useful. Structural
change could of course be a stimulus for greater competition and
we will be able to assess this once the Commission's options for
change are published in the spring of 2011. I will arrange for
the Panel's Secretariat to send a copy of our evidence to the
Clerk to the Committee, once it has been submitted.
COMPETITION IN
THE BANKING
SECTOR
While we do not regard competition as a panacea,
we believe that there are barriers to entry into the retail banking
sector and to competition within it that must be removed if consumers
are to have a real choice of banking services. The current concentration
of business in the large banking groups, together with common
ownership of financial firms, severely limits the options for
consumers to effect real change. The position is particularly
acute in Scotland, where the retail banking sector is dominated
by just two banks. When consumers are in a position to exercise
effective choice the pressure will be on banks to improve customer
service and introduce fairly priced products that meet consumer
needs. This is a fundamental issue in banking. It is an example
of a market with ostensibly competing businesses where competition
is ineffectual in achieving good consumer outcomes and where regulation
has been ineffective in delivering good value for consumers.
"TOO BIG
TO FAIL"
If the market is to be opened to more new entrants
there needs to be resolution of the implicit Government subsidy
of banks that are "too big to fail". This distorts competition
by weakening the ability of small or new entrants to become real
challengers and destroys the functioning of an effective market.
The issue of regional monopolies in both Scotland
and Northern Ireland warrants specific attention.
COMPETITION AND
REAL CHOICE
Competition and choice are not the same thing, although
effective competition can lead to greater choice for consumers—but
it must be a real choice. In retail banking this means
a wider selection of products and services, rather than essentially
the same product sold a number of times under different brands.
The chances of customers having this real choice would be greatly
enhanced if there were more banks or banking service providers
in the market, creating an environment where new or innovative
products can be developed.
It is difficult for consumers to "vote with
their feet" when they are dissatisfied with the service provided
by their bank when the process is, or at least is perceived to
be, problematic and when there is no really different alternative.
We have heard lack of account switching described as a result
of consumer apathy. We do not think this is necessarily true.
Rather it is often a recognition that another bank has nothing
new to offer. Consumer Focus published research[98]
on 9 October which showed that only 7% of customers moved their
current account during the last two years, compared with 31% who
switched energy supplier, 26% who switched telecom provider and
22% who switched home insurance. The Panel wants to see consumers
in a position to shop around for banking services which meet their
needs and have something alternative to offer.
SO -CALLED
"FREE BANKING"
The pricing of banking services, including the erroneously
named "free banking" model, is another barrier to competition.
There is a perception that so-called free banking has become a
basic customer and market expectation and this has the potential
to restrict the development of different models by fledgling market
participants. In other retail sectors, where effective competition
prevails, consumers benefit from lower costs and genuinely innovative
products designed to meet their needs. So-called "free banking"
makes it hard for new entrants to offer fee-based current accounts
even though this might provide many customers with better value
for money overall. In this respect the lack of transparency about
interest forgone on current accounts, and the difficulty of establishing
the total cost of a current account work against customers making
a rational decision about which bank to use for their main current
account.
PAYMENT SERVICES
OR TRANSACTIONAL
ACCOUNTS
Consumers need access to and have confidence in,
a resilient transactional payment service in order to buy basic
utilities such as water and electricity supplies—as well
as other consumer goods—at the best price. For example,
direct debit is the cheapest way to pay utility bills. In the
future, the trend towards electronic payment systems away from
cash and cheques means that everyone will need a transactional
account. There has to be clarity about the cost of the provision
of such a service, which currently tends to be hidden in the overall
cost of other banking facilities, or masked by the label of "free
banking".
In many respects this aspect of banking service is
a utility but the access to customer information which it provides
gives the bank holding this information a competitive advantage
which works against effective competition in the market for financial
services and raises the barriers for new entrants.
REGULATION AND
COMPETITION IN
BANKING
It is not possible to consider competition in banking
without taking into account the impact of regulation. For example,
lack of transparency over product costs and charges in the market,
where the growth in packaged accounts can only serve to blur the
real cost of products still further, together with the legislative
constraints in the Financial Services and Markets Act on the regulator's
ability to publish information which it collects in carrying out
its duties—such as data on customer complaints—does
limit consumers' ability to exercise market freedom and so help
to drive down prices. A legislative presumption in favour of transparency
in the regulation of retail banking, including the contentious
question of complaints data, could do a lot to support effective
competition.
In our response to HM Treasury's paper on a new approach
to regulation we called for, among other things, a clearer remit
and stronger powers for the new Consumer Protection & Markets
Authority to protect and uphold the interests of consumers. In
certain circumstances this would include promoting effective competition
that delivers clear consumer benefits. Such powers will be needed
to deliver real regulatory change in the retail banking sector
that will encourage effective competition.
Adam Phillips
Chair
Financial Services Consumer Panel
5 November 2010
98 "Stick or twist: an analysis of consumer behaviour
in the personal account market" at consumerfocus.org.uk. Back
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