Competion concerns

12 May 2011

Competition in financial services is seen by the Government as a vital element in the new regulatory framework. This will bring the introduction of new agencies, new policies and a new dynamic between regulatory and competition powers.

The recently closed HM Treasury consultation, A New Approach to Financial Regulation, made the recommendation that the Financial Conduct Authority, one of the successors to the FSA, should pursue its regulatory objectives by taking the desirability of increased competition into account.

The FCA will be given “the ability to make rules that will have beneficial competition outcomes” in areas within its remit. However, both the Treasury select committee and the Independent Commission on Banking are now advocating a stronger, more primary objective to promote competition. We are concerned about the lack of clarity on both the extent of and basis for intervention to change competition dynamics through the FCA rulebook.

The Government is supporting a merger between the Office of Fair Trading and the Competition Commission into one body, the Competition and Markets Authority. The objective is to have cheaper, quicker and more efficient competition regulation. It has also suggested that the new CMA will be given a statutory objective to promote competition, which goes beyond the mere enforcement of competition rules.

Competition issues are emphatically among those at the forefront of several reports into the future structure of the banking sector in the UK.

The Treasury select committee report on Competition and Choice in Retail Banking published on April 2 stressed the high level of concentration in particular segments of the retail banking market.

Recommendations include the suggestion that greater transparency on charges is required. This includes transparency on “free” current accounts, where the TSC wants information on “interest foregone” to be made available. The report comments also on divestments by UKFI of state-owned bank assets, giving the view that UKFI should not focus solely on short-term revenue maximisation but also take the desirability of increasing competition into account.

The report is particularly negative towards too big to fail banks, considering that these are, in effect, unfairly subsidised.

The ICB was given a loose brief to look at possible regulatory and competition reforms in UK banking. On the regulatory side, its interim report advocates a retail banking ringfence and supports the prevailing international debate on higher capital requirements for systemically important banking institutions.

On competition issues, the ICB has set its sights on what it regards as the real and perceived difficulties in switching accounts. It advocates an improved switching process, reinforcing the findings of the TSC’s inquiry.

Another area of concern is the dependence of small businesses on bank branches for cash handling and it suggests that some smaller banks struggle to provide the infrastructure to serve this need. The report also raises the possibility of smaller banks growing this ability through improvements to the Post Office service or sharing cash-handling services with branches of bigger banks.

The ICB is also considering the divestitures that the European Commission is extracting from those UK banking groups that received state aid, and consulting on whether to recommend a market investigation with a view to additional divestments.

Firms will have been aware of the need to comply both with the prevailing regulatory regime and with the prohibitions of competition law but these have been largely separate fields of activity. In future, competition and regulatory policy will be more closely co-ordinated and financial institutions will need to adjust to this more integrated approach.

Ash Saluja is a partner at CMS Cameron McKenna

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