Creating a fair and competitive environment for retail banking in the interests of consumers

Speech by Karina McTeague, Director of Retail Banking, the FCA. This is the text of the speech as drafted, which may differ from the delivered version.

The FCA’s objectives are designed to support creation of ‘a fair and competitive environment for retail banking’ in the interests of consumers.  

We have three operational objectives:

  • appropriate consumer protection
  • market integrity
  • competition in the interests of consumers

At last year’s Marketforce conference, Clive Adamson noted that part of the

FCA’s vision for retail banking is:

‘A competitive market where firms are able to make a sustainable return, where innovation takes place for the benefit of the consumer.’

I want to focus on these two elements today – competition and innovation. I am going to talk about the challenges to competition and innovation, how we’re addressing them at the FCA, and the role of industry in addressing these challenges.

But let me start, first, by talking about the FCA’s approach of being forward looking and responsive to change. And how we expect that, by so doing, this supports firms, in turn, also to be forward looking and responsive to the needs of their customers. Which, in  turn, creates a fair and competitive environment for retail banking in the interests of consumers.

Forward looking: our supervisory work

So how are we forward looking, and where do we want firms to look forward with us?

The thematic work we’ve published this year acknowledges the changes in consumer behaviour, the changes in UK demographics, the changes in technology and the changes in market participants.

For example, we conducted a review of mobile banking, as we  noted the exponential increase in consumers opting for mobile banking (with more than 18 million mobile transactions per week in 2013 – twice as many as in the previous year) and the increasing emphasis of firms on this medium. Pleasingly, we found no evidence of consumer detriment, although we are asking firms to keep alert to their IT and risk management capacity and capabilities to ensure these keep pace with the speed and scope of change, and the risks associated with third party service providers.

We are noting firms using digitisation as a cost-cutting tool, and folding that under the heading ‘responsiveness to customer demand’


In our day-to-day supervision, we are noting firms using digitisation as a cost-cutting tool, and folding that under the heading ‘responsiveness to customer demand’. An example is withdrawal of paper statements. Some in this room today will welcome that, not only as executives looking to improve operational efficiencies, but also as customers yourselves, welcoming 24/7 access and de-cluttering your own home offices.

The FCA welcomes initiatives to make life easier for consumers. But we are also asking firms to be mindful of the impact on customers who are not well positioned to embrace the digital world, and address their needs too.

Risk Outlook

As part of being forward looking, the FCA gives industry early sight of areas where we anticipate future conduct risk issues crystallising. Our Risk Outlook this year covered areas such as:

  • Growth in consumer credit and mortgages: warning firms to consider the customer impact of relaxed credit risk appetites, and the adequacy of their forbearance strategies for customers in financial difficulties.
  • IT: noting not only the importance of systems that are stable, and resilient against cybercrime, but also have the capacity and capability to move safely with the pace of change.

I encourage you to read this and assess which of the risks we’ve highlighted might affect your business model and strategy, and what actions might be appropriate to avoid potential risks crystallising into actual detriment to customers or the market.


Our forward looking approach is vital when dealing with new market participants and new distribution channels. By way of example, with crowdfunding, our objective has been to ensure transparency so consumers know the risks they’re taking, whilst not over-burdening this new approach to funding.

Let’s turn to some of the challenges, as I see them, to achieving a fair and competitive environment. We have existing challenges, and future challenges. And by ‘we’ I mean both the regulators and the regulated.

 It is clear to me that most boards of big firms understand that they need to put customers at the heart of their businesses.

Existing challenges to achieving a fair and competitive environment

We are emerging from the years of financial crisis where, understandably, the key focus was on the financial viability and sustainability of retail banks. Many retail banks are successfully re-establishing a more stable platform for growth.  Society is now observing that, in the immediate aftermath of the financial crisis, with the focus of turning from ‘survival’ to ‘business as usual’, the standards  it expect of its retail banks  have been lacking. 

So our existing challenge – the challenge that the regulators and the regulated have - is to restore the trust and confidence of consumers in retail banking. From the FCA’s perspective, that means we must be able to demonstrate that, as well as being forward looking:

  • we respond with pace and judgement
  • we’re predictable
  • we are proportionate – and proportionate also in the interests of a balanced pursuit of our three objectives: consumer protection, market integrity and competition in the interests of consumers

I know, from the firms’ perspective, the consistent wish is to be able to put behind them their numerous legacy issues. And if firms are serious about that they must continue to put the customer at the heart of their remediation strategies. A key part of that is robust root cause analysis, followed by delivery of effective plans to fix the underlying cause as well as the symptoms.

I encourage firms to build on their stabilised platforms for growth - through their growth strategies and cost cutting strategies – that they continue to put  the customer at the heart of these transformation programmes. Firms must maintain the steady course for cultural change that they’ve set themselves, even in the face of headwinds – whether those headwinds are ring-fencing, prudential regulation, or further conduct issues that may come to light.

We are generally pleased with the progress banks are making with regard to cultural change. We are seeing the right conversations on conduct in the board room. It is clear to me that most boards of big firms understand that they need to put customers at the heart of their businesses.

The task for firms is now to embed. We know this is a challenge; it will take time to get it right. We also know banks are big, complex entities with a need to industrialise conduct processes. That said, conduct frameworks alone won’t prevent poor conduct. The best safeguard firms have is staff who have the skills and support to make the right judgements – who have the right instincts.

Which firms do I believe will win back consumers’ (and society’s) trust and confidence first? Those firms that grasp the cultural nettle; where words and actions are aligned, where risk and reward are aligned, and where individuals take ownership for their actions.

We will be focusing on how easy it is for consumers to shop around for the best deal, how firms recover their costs from different cardholder groups, and issues around unaffordable lending.

Future challenges: Competition

Which takes me on to our future challenges, and how, through the FCA’s competition objective, we support the creation of a fair and competitive environment for retail banking in the interests of consumers.

Financial services play a vital part in the success of the UK. To continue to be successful on the global stage, we need to be competitive. That’s why the FCA’s competition objective is so important.

We need vigorous competition. But not just competition for competition’s sake. An important part of our objective is to create consumer choice. In turn, consumers shopping around give firms the incentives to up their game, seeking to retain customers and win new business by offering those customers more of what they want, be it on price, quality, service or innovation.

I want to take you through a number of initiatives which support delivery of our competition objective, under the following headings:

  • understanding how key markets are working through market studies
  • identifying and addressing practical obstacles for consumers
  • reducing barriers to entry

Understanding how key markets are working through market studies

For example, the FCA took responsibility for consumer credit on 1 April this year. The credit card market is large (£150bn) and touches the lives of some 30 million consumers. We decided it was an appropriate time to take stock and explore whether competition in this market is working effectively in the interests of consumers. So we have launched our market study into the credit card sector, publishing our terms of reference. 

The purpose is to build our understanding of how the credit card market works, as well as dealing with any competition issues we encounter so we can deliver our competition mandate.  We will be focusing on how easy it is for consumers to shop around for the best deal, how firms recover their costs from different cardholder groups, and issues around unaffordable lending and whether particular groups of consumers are over-borrowing or under-repaying their credit card balances.

We are also undertaking a market study of cash savings to assess whether competition in the market for cash savings products is working well for customers. We published our interim findings in July, which included:

  • The market works well for those (typically more rate sensitive) customers who shop around between providers, helping drive competition between those providers that are seeking to attract new customers and grow deposits.
  • However, large numbers of customers do not shop around. In response, some providers pay relatively low rates on older accounts.
  • Many customers also hold their savings products with their current account provider despite PCA providers often offering relatively low rates (compared to the market).
  • Low switching levels mean that challenger banks face difficulties in growing deposits without paying far greater interest rates, making retail funding relatively more expensive for them.

We are currently finalising our findings and expect to report back later in the year.

Identifying and addressing practical obstacles for consumers

The ability of customers to switch between providers with confidence is an essential element of a competitive current account market. We are undertaking a review of the effectiveness of the year-old Current Account Switch Service in which we are considering:

  • how switching levels have changed over the past 12 months
  • whether current account customer satisfaction levels have increased
  • whether current account providers’ behaviour has changed

Reducing barriers to entry

We know that access to payment systems is a particular barrier to entry. In April next year, the Payment Systems Regulator will become fully operational, focused on ensuring effective competition and innovation in the systems and infrastructure that underpin retail banking, in the interests of end users.

Earlier this month, the PSR released its consultation paper outlining its regulatory approach aimed at ensuring the UK has world class payment systems, (taking account of FCA work on Account Number Portability and the Switch Service). Its aims will include opening up access to payment systems, and establishing a process to drive industry strategy development.

This is a key component of opening up the competitive landscape for new and existing entrants.

We also know, from feedback that potential new entrants can struggle with the time it takes to receive authorisation, and an element of ‘chicken and egg’ when it comes to conditions to be met prior to launch. In response to that feedback, we have simplified the authorisations process - whilst preserving the integrity of financial services entrants.

For example, we are now offering the option of a mobilisation phase where firms are authorised at an earlier stage (but with a restriction on the business they can undertake).  This allows them to complete their setup with the certainty of being authorised. The restriction is then lifted when the firm is fully operational and ready.

The PRA has also implemented changes to the capital and liquidity regimes for new banks.

Just over a year on from introducing these improvements, we are seeing a number of positive developments, including a substantial increase in the number of firms discussing the possibility of becoming a bank. Firms are telling us the authorisation process is clearer and easier to follow. And the new mobilisation option has been advantageous for applicant firms that would previously have faced challenges in raising capital or investing in IT systems. All this without lowering standards.

Another potential competition concern is the structure of the Personal Current Account and SME markets. The final decision by the CMA, due in 2016, could potentially result in significant changes to the PCA/SME landscape. Naturally, this is still some time away so it’s not appropriate to speculate on what those changes might be.

In the meantime, we are continuing to co-operate and co-ordinate with the CMA to make these markets work well for consumers – and, where possible, reduce regulatory burdens on businesses that may be coming under the scrutiny of both authorities at the same time.


Finally, I want to turn to the importance of innovation in creating a fair and competitive environment for retail banking. I hope you’ll have seen the launch of the FCA’s new initiative – Project Innovate.

Project Innovate demonstrates our approach as a forward looking, listening regulator that looks to the needs of tomorrow’s consumers, as well as today’s consumers. Innovation can be a powerful driver of effective competition. Our extensive engagement to date has been responded to with enthusiasm.

Since October 28th, we have been running a full time Innovation Hub with a team dedicated to supporting innovation in financial services; innovation that can genuinely improve the lives of consumers.

We have already identified some policy challenges we want to tackle to support innovation, for example:

  • We are aware that innovator businesses are experiencing difficulties in obtaining access to bank accounts.  We won’t interfere with legitimate commercial decisions by banks. But we want to understand what more we can do to try to unpick this difficult issue.
  • Regulatory uncertainty. The Innovation Hub will give innovators informal steers, which they will rely on at their own risk. This means we can give our view more quickly and unblock the barrier to innovation that is thrown up by uncertainty.

We believe that, through better competition, consumers will benefit from better choice. Not just choice of provider, but choice of products, of services, of channels. And that these choices will create a virtuous cycle where innovators encourage fast followers amongst market incumbents, which in turn encourages more innovation and competition in the interests of consumers.