“Customers first, not banks”: What the CMA report didn’t say

10th August 2016 / United Kingdom

By New Economics Foundation – Today the Competition and Markets Authority published its final recommendations on reforming the retail banking market. This follows findings last year that customers are being systematically ripped off by banks and many could save significant sums of money by switching.

The recommendations don’t pack much of a punch – but this comes as no real surprise. The CMA had already ruled out the possibility of structural reform (breaking up big banks) and the possibility of capping overdraft charges.

So what does the report actually recommend? At the core of the proposals are the following:

  • Banks should provide customers with better information and encourage them to switch accounts to get a better deal.
  • Banks should allow customers to share their own bank data securely with third parties using ‘Open Banking’ – new technology that will enable customers to manage accounts held with multiple providers through a single app – making it easier to shop around for deals.

Despite the hype about ‘Open Banking’, these solutions are limited and likely to be ineffective. They continue the pattern set by the CMA’s recent report on the energy industry of placing the onus on consumers to fix broken markets. Here, the regulator found that energy customers were being systematically ripped off by the Big Six energy companies.

In both cases, the CMA found that the poorest customers fared the worst – both overdraft users and those on pre-payment energy meters tend to pay higher charges than other customers. And in both cases, the watchdog shied away from meaningful action to reform the industry.

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Instead, one of the main recommendations of the energy review was that energy companies should be able to access customer details from their competitors, so they can contact them encouraging them to switch.

Worryingly, the CMA’s solution to the systematic exploitation of consumers amounts to little more than price comparison websites and junk mail.

More information about exploitative products is not the answer

The CMA’s stated function is to promote competition within a market, identify practices that are damaging to consumers and put a stop to exploitative practices.

It’s debatable whether competition can ever be an adequate solution in markets that none of us has a meaningful choice to opt out of. But even on the CMA’s own terms, these recommendations don’t go nearly far enough.

They amount to bombarding customers with more information about other banks and energy companies that happen to be offering slightly better deals – but fundamentally these companies have equally little interest in treating consumers fairly. On top of this, the information available will remain time-consuming and complicated. Consumer group Which? have already questioned whether these measures go far enough towards ensuring banks deliver a better service for their customers.

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We need better companies, not better consumers

What we are witnessing here is the fundamental failure of the current economic model. Having promised to generate more competition and better outcomes for customers, deregulation – in the case of banks – and privatisation – in the case of energy companies – have actually concentrated power in the hands of a very small number of very large conglomerates.

These companies have little or no incentive to prioritise customers’ interests, let alone the public interest. The net result is that we are now being overcharged for the essential goods and services we need to survive and thrive.

Worryingly, the regulators tasked to promote competition now seem to be gripped by a kind of paralysis, unable to rein in these monopolistic players. It remains unclear whether this is because the companies concerned are simply too powerful, or because regulators believe that a market that is fundamentally flawed can be fixed by encouraging consumers to shop around for a better deal.

But it’s hardly surprising that customers don’t feel motivated to shop around when the options on offer all seem to look the same. The solution here is not to place more pressure on customers’ shoulders to avoid being ripped off. It’s to give them a genuine choice of providers which will actually put their interests first.

We could start by setting up people’s energy companies at city level, or by breaking up the state-owned RBS into a network of locally-owned banks with a mandate to serve their communities. Big problems with big companies demand big solutions. And at the moment, it doesn’t look like those solutions will come from the CMA.

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