U.K. Regulator’s Bank ‘Shake Up’ With Cap Fails to Create a Stir

  • CMA attempts to crack down on fees after two-year probe
  • Banks can set their own limits on overdraft fees, CMA says

A U.K. regulator’s plan to create a banking “revolution” with a combination of self-imposed fee caps and a smart-phone app was heavily criticized by consumer groups and smaller lenders that said the measures would do little to increase competition in the industry.

The Competition and Markets Authority recommended banks set their own limits on overdraft charges and a grace period for customers to avoid them, rather than have the overdraft fees "centrally regulated," the watchdog said in a statement Tuesday. In 2014, banks received 1.2 billion pounds ($1.5 billion) in revenue from the fees.

Paul Pester
Paul Pester
Photographer: Matthew Lloyd/Bloomberg

"The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks," said Alasdair Smith, chairman of the investigation.

The report is the regulator’s second attempt at improving the banking services customers receive. In October, the CMA stopped short of adopting controversial proposals such breaking up the banks or ending free checking accounts, a decision criticized by lawmakers.

The latest proposals were dubbed too little, too late by consumer groups when the CMA published its provisional findings in May -- a refrain that was repeated Tuesday by smaller lenders.

Golden Opportunity

“The CMA has played right into the hands of the big five banks and missed a golden opportunity to enable people across the U.K. to get a better deal from their banks,” Paul Pester, chief executive officer of TSB Banking Group Plc, said in a statement. “The CMA’s report is only the first rung on the ladder and, while disappointing, it should not constrain the government in its ambition to achieve a truly competitive banking market.”

The next stop for the CMA’s final report is a review by another regulator, the Financial Conduct Authority. The British Bankers’ Association said that it recognized that “more work needs to be done to create a level playing field by supporting new banks wanting to set up business.”

The CMA said the limit on overdraft fees was a key measure in an area where banks get a third of their revenue. About 45 percent of customers use overdrafts and pay "substantially more" for their accounts that non-overdraft users, the regulator said.

Not a Cap

But consumer groups derided the measure as a cap that is “not actually a cap.”

“Banks will be allowed to continue to charge exorbitant fees for so-called unauthorized overdrafts, rather than protect those customers that have been identified as among the most vulnerable," said Alex Neill, director of policy and campaigns at Which?, a consumer group. "It is questionable whether these measures will be enough, not only to increase competition but also to ensure banks deliver a better service for their customers."

The CMA also said it wanted banks to implement "Open Banking" by early 2018 -- a package of measures that enables customers to manage accounts with multiple banks through one mobile phone app. The regulator also called for measures to make it easier for customers to switch accounts between financial institutions.

"I don’t think the report will make much difference," Manchester economics professor Diane Coyle said during an interview on the BBC’s Radio 4. "The report says the market isn’t working therefore consumers have to pull their socks up."

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