CMA proposals to improve retail bank competition ‘do not go far enough to create a fair system’

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Proposals by the Competition and Markets Authority to make retail banking more competitive and fairer for consumers fall far short of what is necessary, critics have warned.

The banking regulator proposed a cap on unarranged overdraft fees and warnings for customers before they dip into their overdraft in a report published on Tuesday.

But it stopped short of breaking up the banks or banning free current accounts to encourage customers to shop around.

“We need to break up the largest banks,” said Christine Berry, senior researcher on economy and finance at the New Economics Foundation.

She advocated for new types of bank that put customers’ interests first, such as mutual and public savings banks that are common in other countries.

“With the market dominated by a small number of giant players who all behave in similar ways, and with trust at rock bottom following wave after wave of scandals, it’s hardly surprising that customers don’t feel motivated to switch,” Berry said.

Research has shown that banking customers could make average annual savings £116 if they switched to a cheaper account, ranging from £89 for customers who do not use an overdraft, to £153 for those who do.

Customers often stick to what they have, the CMA found, because they don’t understand how fees are structured or how to get a better deal.

The CMA has proposed that data on high street overdraft tariffs and loan rates be made available on an app that will give immediate and accurate comparisons of the best banking products for each person.

But critics argued that services like this are already available and have done little to improve competition in the sector.

Jody Baker, head of money at comparethemarket.com, said price comparison sites that allow consumers to compare the best current accounts, credit cards and mortgages are underused.

“The key competition issues in retail banking are awareness and fear. Switching levels are tiny for current accounts and many consumers do not understand the benefits of switching an apparently free service – and concerns about the risks of doing so are rife,” Baker said.

Measures to make switching accounts less daunting, such as by allowing consumers to take their account numbers with them. Baker said this has the potential to put £5 billion back in people’s pockets over 10 years due to the increase in interest paid on balances and the reduction in bank charges and fees.

Martin Lewis, founder of MoneySavingExpert.com, said that zero per cent overdrafts were already available at Nationwide and First Direct.

“These are appetising for those with smaller overdrafts, yet what’s needed to give confidence for people with overdrafts to move banks is a ‘switching guarantee’ that if accepted your current overdraft will be at least matched and at a cheaper cost,” Lewis said.

HSBC, Lloyds, RBS and Barclays – the so-called big four British banks – provide 70 per cent of personal current accounts in the UK and eight out of ten business loans.

Metro Bank is the UK’s biggest challenger bank. But Craig Donaldson, chief executive, said Metro Bank could not break their dominance of the big four because it was not on a level playing field.

“Forcing growth organisations to hold disproportionate capital reserves and subjecting them to excessive taxes, is anticompetitive and will stifle growth. The CMA is letting the incumbent banks off the hook by failing to provide a meaningful remedy to address the huge disadvantages suffered by challenger banks,” Donaldson said.

The New Economics Foundation has proposed that the Government start by turning the taxpayer owned RBS into a publically-owned bank, supervised by citizen stakeholders.

Surveys have shown that there is public support for more drastic measures such as breaking up the banks. Research by Triodos, a sustainable bank based in the Netherlands, has found that more than three-quarters of adults think greater competition from challenger banks should be encouraged.

Half of those asked said that giving consumers the option of choosing from challenger banks will lead to improved customer service.

“There is a genuine appetite for change,” said Huw Davies, head of retail banking at Triodos Bank.