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Retail Finance round-up - 11 August 2016

Retail Finance round-up - 11 August 2016

  • United Kingdom
  • Financial institutions - Retail finance

11-08-2016

The key development this week is the publication of the CMA’s final report following its Retail Banking Market Investigation. The report sets out the CMA’s analysis of shortcomings in competition in the markets for current accounts for personal customers and banking services for small businesses. It also sets out the actions the CMA believes must be taken to remedy the problems found.

There are four elements which cover foundation measures, including the open banking standard, current account switching measures, current account overdraft measures, and additional measures for small businesses. All remedies will be in place by summer 2018 but some aspects will take effect in the next few months.

Also of interest this week is the FCA’s publication of the Occasional Paper on predicting financial distress which considers whether it is possible to predict which consumer credit users will suffer financial distress.

Regulatory updates

Government updates, legislation and case law

Industry news

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CMA publishes Retail Banking Market Investigation final report

The Competition and Markets Authority (CMA) has published its final report following its market investigation into the retail banking market.  The report sets out the CMA’s analysis of the shortcomings of competition in the markets for current accounts for personal customers and for banking services to small businesses.  It also sets out the actions to be taken to fix the problems identified. It is important to understand that despite its title the report also has key implications for an institution dealing with its business customers.

The key issues are:

  • Current accounts for both personal and business customers have complicated charging structures and the actual cost to the customer depends on how they use the account.  Customers generally know very little about the charges and service quality provided by other banks.  It is therefore hard for customers to know whether they could get better value and service from another bank or a different product with the same bank.
  • Personal and business current account relationships are open-ended and do not have regular trigger points when customers might be prompted to ask themselves whether they could be getting a better deal elsewhere on their current account.
  • The Current Account Switch Service (CASS) is not widely known and does not command as much confidence as it deserves which may prevent customers from switching.
  • Charging structures for overdrafts are particularly complicated, making it even harder to compare providers.  Customers worry that if they switch they might not get the same overdraft from their new bank.  Moreover, the CMA found that many customers underestimate their overdraft use.
  • Over half of start-up businesses open their current account at the bank where the business owner has their personal account.  There is also a strong link between business current account and lending.  It is hard for small businesses to find out who is the best lender for them.  As their existing bank already knows a great deal about them, it is usually easier and quicker to get a loan from their existing bank and harder for potential lenders to accurately assess and price lending.
  • Getting new customers is difficult and costly for banks.  This means that banks which have been around for a long time have advantages over new entrants and smaller banks wishing to expand.

In an attempt to tackle the problems it has found, the CMA plans to introduce an integrated package of remedies.  The CMA’s remedies package is split into the following elements:

  • Foundation measures – these will underpin increased competition in all the markets it has examined.  The remedies in this category include, the open banking standard, service quality information and customer prompts. As part of the open banking standard, the largest retail banks are to develop an application programming interface (API) banking standard, this will be used to share a range of information types such as location of local branches and product terms and conditions. Banks must adopt an API standard for the least sensitive information by March 2017, the remaining aspects of the API standard must be completed by the first quarter of 2018.
  • Current account switching measures – the remedies in this category include, better governance of the guaranteed switching service, extended redirection of payments following switching, customer access to transactions history and customer awareness and confidence.
  • Personal current account overdraft measures – the remedies in this category include, overdraft alerts with grace periods, a monthly maximum charge and improved account opening and switching process.
  • Additional banking measures for small businesses – the remedies in this category include (among other things), competition to develop comparison tools and sharing of SME information.

Now that the CMA has published its final report it explains that its focus is on putting in place the remedies.  The timetable for setting out each of the remedies is set out in the report.  It will take until summer 2018 for all elements of the remedy package to come into force, however some remedies will be put in place within months.

For further information on the retail banking market investigation, please refer to our previous briefing, CMA's Retail Banking Sector Investigation - Update, published in November 2015 following the CMA’s publication of its provisional findings and also our Reforming retail banking briefing, published in June 2016 following the CMA’s publication of its provisional decision on remedies.

FCA publishes Occasional Paper on predicting financial distress

On 3 August 2016, the FCA published its Occasional Paper 20 which considers whether it is possible to predict which consumer credit users will suffer financial distress.  The authors of the Paper have also written an article on the topic entitled, ‘Can financial distress be predicted or is it just life (events)?’.

Key points include:

  • Distribution: The majority of individuals in the UK hold at least one consumer credit product, with about a quarter of all individuals holding outstanding debt. Borrowing is unevenly distributed, with the median consumer credit debt being £1,900 and the top 10% of consumer credit holders holding at least £10,300.
  • Estimating financial distress: Financial distress can have a variety of drivers. Objective measures of financial distress include missing two payments.  Subjective measures of financial distress include the impact on well-being and regularly running out of money each month. Approximately 2% of individuals holding consumer credit debts are in financial distress if objective measures are used.  However, when also looking at subjective measures this rises to 17%.
  • Predicting financial distress: Unpredictable life events such as divorce or unemployment cannot be gauged at the point of assessing creditworthiness. Lenders must base their decision on known or predictable elements. There is a strong correlation between high debt to income (DTI) ratios and the likelihood of financial distress. The DTI ratio is a more reliable predictor than, for example, using the total number of credit products.  In addition, there is a higher incidence of financial distress in younger individuals with higher DTI ratios.

The report concludes that affordability policies should be tailored to the products that people apply for and to applicants’ circumstances, especially their DTI ratio.

FCA publishes Policy Development Update – Issue 36

The FCA has published its Policy Development Update – Issue 36 covering key publications issued since the last edition. The update also sets out forthcoming publications and where applicable, expected dates for publication.

Of key interest are the following:

  • Feedback Statement to Chapter 2 of CP16/8: Application of the Mortgage Credit Directive rules for passporting firms – this is aimed at mortgage firms intending to passport into or outside the UK. This was expected to be published in July 2016, and should therefore be expected imminently.
  • Policy Statement to CP15/32: Smarter Consumer Communications: Removing certain ineffective requirements in the Handbook – this is aimed at the wider industry and is expected to be published in the Autumn of 2016.
  • Consultation Paper: Implementation of the Benchmarks Regulation – this is aimed at benchmark administrators, benchmark contributors, banks and certain other firms. The Consultation Paper is expected to be published in February 2017.
  • Consultation Paper: Updating and clarifying consumer credit reporting provisions – this is aimed at all regulated consumer credit firms and is expected to be published in October 2016.

FCA and PRA response in relation to peer to peer lending

The House of Commons Treasury Committee has published letters of response from the FCA and PRA to a number of questions regarding crowdfunding regulation that were raised by the Committee in June 2016.

The response from the FCA is set out in a letter dated 16 June 2016 from Tracey McDermott, former FCA acting chief executive.  The FCA answered the specific questions raised by the Committee, stating that as part of its assessment of firms, the FCA assesses whether firms convey information which is clear, fair and not misleading in accordance with financial promotion rules, and whilst the rules allow the peer to peer firms flexibility as to the level of due diligence they are required to carry out on borrowers, firms must make it clear to investors what due diligence has been undertaken.  For investment based crowd-funding, the FCA requires firms to assess the level of knowledge, experience and understanding of the investor where they have not received financial advice.  The FCA are committed to undertaking a post-implementation review of the regime it applies and the FCA will publish a discussion paper and call for input shortly.

The response from the PRA is set out in a letter also dated 16 June 2016 from Andrew Bailey, former PRA chief executive.  The PRA point out that whilst it is not the prudential regulator for crowdfunding platforms, the PRA does monitor any rapid growth of exposure by banks to new asset classes.  In the Bank of England’s (BOE) view the crowdfunding sector is currently too small to be systemically important to the UK financial system, but this judgment may change if the sector continues its high rates of growth, which the BoE will monitor and assess any prudential risk the sector may pose to the firms supervised by the PRA and to the financial system as a whole.

European Commission answers to written questions from European Parliament

The European Parliament has published the European Commission’s (the Commission) answers to its two written questions on the impact of the Mortgage Credit Directive (MCD) on EU citizens residing outside the EU and on dormant bank accounts in Europe.

Addressing the first question, the Commission confirmed that the MCD does not preclude financial institutions which operate in the euro area from extending mortgage credit to EU citizens not residing in the EU at the time they apply for mortgage credit, and whose income is earned in a currency other than the euro. The Commission also confirmed that financial institutions retain a contractual freedom on whether to grant mortgage credit as long as they do so in a non-discriminatory manner.

Addressing the query on dormant accounts, the Commission confirmed that there is no EU-wide legislation on this and that it does not see the need for a legislative initiative at EU level.

TheCityUK publishes report on future vision of the UK-based financial and related professional services industry

TheCityUK has published its report, UK financial and related professional services: meeting the challenges and delivering opportunities, setting out a comprehensive framework for the industry to deliver innovation, be more resilient and better skilled and identifying five broad areas of focus.

The report acknowledges that as an international leader, the industry is in a strong starting position, however, as the industry becomes more global, competitive and technology fuelled, and with added headwinds from a pending Brexit, the report warns that complacency is not an option.

The five areas for partnership which the report identified are:

  • Connect globally – international trade and investment partnerships are key. The industry needs to maintain an effective UK-EU relationship and sustain mutual market access, while also strengthening ties with developed economies and emerging markets.
  • Drive national growth – build on the strong national footprint to create more connected regional centres with specialist skills and expertise in areas such as emerging technology and middle and back-office. Educational institutions and enterprise partnerships will also be key to long-term success.
  • Expand our services – new areas of growth in the industry are emerging, and with clear partnership the industry can ensure the UK retains and grows its position as the global leader in areas such as capital markets, cyber insurance, legal services and infrastructure financing.
  • Innovate, disrupt, scale – harness the momentum gained in FinTech to ensure funding availability and help young technology firms engage with established institutions.  There should also be a collective effort to encourage and invest in major industry disruptions, such as blockchain, cognitive analytics and telematics.
  • Build skills and attract talent – the industry needs to develop local talent and retain access to a diverse and global workforce with next generation skills. The industry needs real partnerships with educators, broader apprenticeship schemes and an approach to skilled immigration that ensures it can attract the brightest and the best from around the world.

FSB launches thematic peer review on corporate governance

On 8 August 2016 the Financial Stability Board (FSB) launched a peer review. The peer review focuses on the implementation of the G20’s Principles of Corporate Governance (Principles) and in particular, how members have applied the Principles to publicly listed and regulated financial institutions. In summary, the Principles cover areas like governance, frameworks, disclosure and transparency. The objectives of the peer review include the following:

  • identifying effective practices, areas of progress and weak spots
  • informing and updating the Organisation for Economic Co-operation and Development’s current review of Assessment Methodology
  • to flag areas where further work could be done to promote the effective governance of financial institutions.  

Feedback has been welcomed from financial institutions, consumer associations, stakeholders and industry. Areas where comments are anticipated include:

  • how the corporate governance framework can promote a fair market and the efficient allocation of resources
  • ways in which the corporate governance framework recognises the rights of stakeholders and encourages co-operation between financial institutions and other stakeholders
  • how corporate governance can ensure the strategic guidance of the financial institution in question and the monitoring and management of its board.

The peer review will be published in 2017.

Launch of Open Banking Development Group

The Open Data Institute (ODI) has published a press release announcing that it is launching an Open Banking Development Group (OBDG) to drive innovation around an open banking standard, on a UK and international basis.

The ODI co-chaired the Open Banking Working Group (OBWG), and published a report in February 2016 setting out a detailed framework for delivering an open banking standard in the UK.  The OBDG aims to build on the work carried out by the OBWG and extend it by creating a global community of open banking leaders that will play an important role in shaping any open banking initiatives.

For more information contact

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