Overview of competition at the FCA

Speech by Mary Starks, Director of Competition and Economics at the FCA, delivered at Credit Suisse.

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Speaker: Mary Starks, Director of Competition and Economics
Location: Credit Suisse, London
Delivered on: 24 July 2017


  • We have the objective to promote competition because of the benefits effective competition provides for consumers, firms and the wider economy.
  • We use market studies to assess how a market works and whether it could work better.
  • We have enforcement powers to investigate cases where we believe firms might be in breach of the Competition Act 1998.
  • We ensure our regulation supports rather than hinders competition through initiatives such as Innovate, the Sandbox and the New Bank Start-up Unit.

Note: This is the speech as drafted and may differ from the delivered version.

Good afternoon and thank you for giving me the opportunity to come and speak to you today. I’m going to talk about the FCA’s competition mandate – why we have it and how we pursue it.

When I first arrived at the FCA in 2013, the memory of the crisis was raw. Competition was not universally or even widely regarded as a good thing in financial regulation circles. The idea of putting more trust in the free market was deeply counter-intuitive and counter-cultural.

So why did the FCA hire a bunch of people like me and my co-director Deb Jones to promote competition in financial services?

So if this was the general attitude at the time, why did the FCA hire a bunch of people like me and my co-director Deb Jones to promote competition in financial services? I will use this time to answer this question; primarily focusing on why we have these powers and what tools we have at our disposal. I’ll talk about the three main things we do: market studies, competition law enforcement, and pro-competition regulation. 

The overall goal is you leave with a greater understanding and appreciation of what the FCA’s competition objective means for you as someone who works in financial services or, indeed, as a consumer of financial products.

Before I get to ‘why’ or ‘how’, I want to make a couple of important points. First, I want to give you a feel for some of the work we have carried out to advance our competition objective. You might have heard about our credit card market study or our cash savings market study, and associate them with our consumer protection objective. But they have been led by the Competition division with a view to making competition work better in these markets. My point is that our objectives are not completely separable – we often pursue more than one at a time. Much of our work in retail markets is about equipping consumers to be effective buyers, which has both competition and consumer protection benefits.

The second point I want to make is about retail versus wholesale markets. Obviously consumers do not walk in off the street to buy investment banking services from Credit Suisse. Some aspects of financial regulation apply differently to people acting in a personal versus professional capacity, or retail versus corporate clients. By contrast, competition policy and law applies the same principles at all levels of the supply chain. What the FCA’s competition remit means for you is fundamentally the same as it means for retail bankers. We ask broadly the same set of questions in any market; we get very different answers of course.

Before I get into how we promote competition, it is worth setting out why we do this work and why it is important. There are several elements to this, and I think a potted history is the easiest way to explain how the FCA got its competition objective. I’ll be mercifully brief.

Why competition

Competition policy is an important bulwark against vested interests solidifying and defending a secure or dominant market position.

Governments have long held the view that competition policy is an important bulwark against vested interests solidifying and defending a secure or dominant market position. This is famously exemplified by Teddy Roosevelt’s battle with the ‘robber barons’ at the turn of the 20th century. This was as much political as it was economic- the battle to ‘bust the trusts’ was based in part on a widespread discomfort among the public that these corporations and their owners were gaining more power than the American people or government. Parallels have been drawn with the European Commission’s cases against Intel, Microsoft, Google and Facebook – the corporate titans of the digital age.

Moving from the broad stage of global political economy to the local arena of UK financial services, the UK government has had concerns about competition in financial services, particularly retail banking, for quite some time. The Cruickshank Report, which was commissioned in the late 1990s, identified a range of competition concerns and, in particular, a need for the regulator to take account of the competition impact of its work. The crisis exacerbated concerns about competition in retail banking, bringing increased concentration and wiping out many of the main challengers in the retail banking sector, such as HBOS, Northern Rock and Bradford and Bingley.

Following the crisis, the Independent Commission on Banking led by Sir John Vickers recommended that the then nascent FCA be given a top line objective to promote competition.

So now you can understand why the FCA hired us – to advance our statutory objective to promote competition in the interests of consumers. But what do we mean we talk about competition?

Competition is a process of rivalry between firms seeking to win customers’ business.

Competition is a process of rivalry between firms seeking to win customers’ business. When competition is effective, clients can choose between suppliers, putting pressure on firms to meet their needs as efficiently as possible. This drives lower prices, increased innovation, better quality and wider choice. It is good for consumers.

That said, not all competition is effective or “good competition”. Sometimes market dynamics can drive a race to the bottom. People have argued that this was the case for PPI, for example. Part of our role is to step in when we see this happening, to ensure that competition is operating in the interests of clients and consumers.
As for the benefits to firms, effective competition is crucial for great firms to be rewarded for their efforts. I am sure you can all imagine how frustrating it would be if clients were unable or unwilling to switch to your business.

But it’s not all upside for firms in an open, competitive market – competition produces losers as well as winners.

Firms that cannot match their competitors’ price, quality or keep up with the pace of innovation may ultimately exit the market. Firm failure is obviously a sensitive topic for regulators but we accept that this is part of the competitive process and consistent with our objectives, providing firms can exit the market in an orderly fashion. The more confident we can be that firms can fail safely, thanks to the CASS and resolution regimes, the more open we can be to new players and new business models in the first place. Entry and exit are two sides of the same coin.

A common misunderstanding about our competition objective is that we are seeking to improve firms’ competitiveness. The FCA does not have an international competitiveness remit. Our competition objective is focused on improving the process of rivalry rather than seeking to directly improve the competitiveness of any one firm or group of firms. That said, competition and competitiveness will tend to point in the same direction. If you are efficient and responsive in supplying customers at home, you’ll tend to be well placed to do so abroad.

Strengthening competition also benefits the UK economy as a whole. It is not just about what active consumers can save. The more significant impacts of effective competition are the dynamic benefits to the wider economy. Competition places pressure on management of firms to increase efficiency; it ensures that productive firms increase their market share at the expense of less productive firms; and it drives innovation. 

Smart order routing is an example of innovation in wholesale markets. It is easy to take these market changing innovations for granted, but they occur because of the cut and thrust of a competitive market place and firms seeking an edge over their rivals.

So that’s the why. Now I want to talk about the how.

Market studies

I want to discuss some of the specific tools we use to advance our competition objective, starting with market studies.  A market study is an in-depth, evidence based look at how a market works, and whether it could work better. We have powers to do this under both FSMA and the Enterprise Act 2002. To date, using our FSMA powers has been the preferred route.

We launch our market studies with the publication of a terms of reference setting out what particular issues concern us - what “theories of harm” we will be looking at. A theory of harm is a hypothesis of how the competitive process has begun to break down and a description of potential adverse effects. I want to emphasise it is a hypothesis to be tested, not a conclusion which we have already jumped.

To test our theories of harm, we use a range of investigative and analytical methods from using econometric techniques to analyse data sets, for example on sales or fees, to convening consumer focus groups to better understand decision-making. We look at sellers, buyers, transactions and incentives along the supply chain. We take a market-based view, not a view on individual firms, and we look to understand the perspectives of established firms, new entrants and buyers.

Once we have gathered our evidence, we will generally publish an interim report. This report outlines our preliminary findings and possible solutions for addressing any concerns we have.

Following consultation and engagement with stakeholders on the interim findings and proposed solutions (or “remedies”), we then produce a final report where we conclude our findings and set out the way forward. Remedies can include proposing new rules, amending or withdrawing our existing rules, working with industry to introduce voluntary measures, or we can undertake supervisory or enforcement action. Sometimes, we will suggest that government consider how policy settings are affecting a particular market. We can also make a market investigation reference to the CMA. Our recent work on asset management comprises all of these elements.

Success of our studies depends on us arriving at a thorough and accurate understanding of how the market works. We can’t do this without significant help from our stakeholders. I don’t know if any of you were involved in our market study on investment banking, but if so – thank you!

So that’s the process.

How do we choose which market or sector for a market study? This is in essence a prioritisation decision – there is no legal or evidential hurdle we need to cross (we do not need to have ‘reasonable grounds to suspect’ or something similar) - but as a public body we need to deploy our finite resources efficiently. We need to look in the places we think the problems might be.

So we look for indicators of weak competition and consumer harm. Indicators of weak competition can include high concentration, barriers to entry and growth, and low levels of consumer engagement.

Our Mission document outlines different kinds of harm, both to consumers and to market quality or integrity. The most common and obvious harm from weak competition is prices being too high or quality too low, but these aren’t the only things we worry about. We worry about a lack of confidence among market participants, consumers buying unsuitable products or important consumer or business needs not being met because of gaps in the market or a lack of innovation.

We also liaise with our colleagues at the CMA and the EC to understand what markets they are looking at to make sure there is no duplication in our efforts. 

The FCA continuously monitors all the FS sectors we oversee. And periodically we publish these “Sector Views” for all to see. This enables us to keep an eye out for indicators of weak competition or harm.
Clearly we must have some concerns about a market before we launch a study, but we do not presume to understand that market in enough detail to fully diagnose any problem at that stage. Gathering robust evidence is absolutely key to testing our theories of harm.

Our market study into investment and corporate banking provides a good example of this. We were concerned that cross-subsidisation and bundling of services was occurring, and that this might raise barriers to entry, reduce incentives to innovate and require clients to use more or less of a service than they would have otherwise. However, our review of the evidence allayed many of these concerns and we did not feel the need to intervene very significantly in this market.

Competition enforcement

So that’s market studies. The second thing we do is competition law enforcement.

In 2015 we were given ‘concurrent’ competition powers with the CMA. This means either authority can investigate alleged or suspected breaches of competition law, but only one of us will. We aim to discuss and agree with the CMA who is best placed to take a case forward, though ultimately the CMA has the power to decide. In certain circumstances, the European Commission may take the case, at which point the FCA and CMA would stand aside. Again, they would consult with us before this happens, but the decision is ultimately theirs.

There are two broad prohibitions in competition law. 

First, firms must not “enter into agreements or concerted practices that have the object or effect of preventing, restricting or distorting competition”.  At a high level, this means that any firm must maintain its strategic independence in a market, and not enter into agreements or other practices that involve cooperating with firms that should be its rivals. Cartels and related behaviour can lead to the higher prices, lower quality and generally poorer outcomes for consumers that I mentioned earlier. For example, in 2010 the EC estimated that the removal of overcharges by cartels resulted in approximately 7.2 billion euro in benefits for consumers.

Second, firms in a ‘dominant’ position should not abuse that dominance. Again at a high level, this means that a firm with market power should not behave in a way that exploits its customers, or excludes its rivals. In other words, it must compete on the merits, and not behave strategically to rent-seek. While most financial services markets have many firms in them, so dominance is not an issue, there are some, e.g. market infrastructure, supply of data, benchmarks or indices, where network effects mean one supplier can become dominant (which is not in itself a problem) and they may be tempted to exploit that position (which is!).

We receive information from a range of sources about potential breaches of competition law. Regulated firms have an obligation to bring possible infringements to our attention. Some good corporate citizens bring the conduct of other firms to our attention, and we welcome that. Sadly we don’t offer hard cash for this – although the CMA does in some circumstances. We may identify indicators of potential wrongdoing through our discussions with other divisions at the FCA or with the CMA or European Commission.

We also have leniency arrangements for firms that have participated in cartel activity. Under leniency, firms can provide evidence in return for significant reductions in, or immunity from, penalties for that infringement. It is a policy designed to undermine ‘honour among thieves’ – the first member of the cartel to shop the rest gets off lightly, and has proved very effective indeed.

We currently have two open cases under the Competition Act, investigating anti-competitive agreements and concerted practices.  Given the sensitivity, we do not comment on ongoing cases though there was some media coverage on our recent visits to firms involved in aviation insurance. These cases are often complex and can take several years to conclude.

In conjunction with FEMR we produced a handy guide to competition law in wholesale markets. You can find it as an annex to the FEMR report.

Pro-competition regulation

The last thing I want to talk about is probably the most important but perhaps the least recognised aspect of our work to promote effective competition: turning the spotlight on ourselves. As I mentioned earlier, the FCA has a competition duty which means we need to consider the impact on competition of all our activities, even activities that are mainly about consumer protection or market integrity.

One of the FCA’s functions is to act the gatekeeper to firms wishing to sell financial services and products in the UK. By definition, our Authorisations function is a barrier to entry – you can’t enter the market until you are authorised. But it’s there for a good reason – establishing and maintaining confidence and trust in financial services markets. At the most basic level, we all need a very high level of confidence and trust in order to hand our hard earned savings over to a complete stranger to invest on our behalf. Regulation that keeps crooks out of the market is essential if we are able to take our money out from under our mattresses and put it to work. Furthermore, if consumers are anxious about who they might be dealing with, they’ll be reluctant to deal with anyone new – and I’ve already talked about the importance of new players for driving competition and innovation.

This does not mean we disregard any other impacts these barriers might have on competition, particularly by restricting new innovative firms to enter the market. But the trick is to operate a gateway function that keeps the unscrupulous out while letting the “good” businesses in as smoothly as possible.

Innovation is critical to boosting competition across the spectrum of financial services markets.

Innovation is critical to boosting competition across the spectrum of financial services markets. Open markets allow firms to come in and do things differently, which can transform the provisions of services. This can mean start-ups challenging existing businesses, or existing businesses challenging the status quo with new ideas and new products. It is vital that regulation enables rather than hinders this kind of progress.

And regulation that has been designed to fit existing products and business models can hinder progress if we’re not careful. Which is why we’ve established our Innovation Hub and Sandbox – to help innovators understand the regulatory implications of their innovations, and to help us understand where and how our regulations may be getting in the way. Our Direct Support function provides a contact point for innovative firms to ask questions and understand the regulatory framework that is relevant for their business.

Our sandbox gives innovative firms the opportunity to create and test new solutions in a safe space without some of the usual regulatory constraints. These activities are crucial to support innovative firms that otherwise might not be able to enter the market and compete with established firms.

Together with the PRA we reviewed our processes and requirements for authorising new banks. By better aligning the process for getting authorised, with the various stages involved in raising capital and acquiring customers, we made it easier to establish a new bank without lowering the standards we expect of new banks one iota. We’ve seen a range of new bank applications since this overhaul, from technology-driven mobile-only banks to a new clearing bank. Over the past year alone, eight new banks have been authorised.

Today I’ve provided you with a brief overview of competition at the FCA. I’ve discussed why it’s important that we promote competition. I’ve talked about the three main ways we do this: our market studies, our competition law enforcement and our pro-competition regulation.