Watchdog investigation: banks are not under enough competitive pressure on current accounts

Bank customers fear that switching their current account to a new bank will be complicated, time-consuming and risky, the CMA said.

The CMA found that customers with an overdraft are less likely to switch their personal current account than other users.

Heavy overdraft users in particular could save themselves up to £260 a year if they switched, the investigation found, while on average current account users could save £70 a year by switching.

It said that overdraft charges are "complex" and information on product service and quality is limited, making it hard for customers to compare products.

The CMA also said there is a particular problem with SME (small and medium enterprise) customers opening their business current accounts (BCA) at the same bank where they have their personal current account, then sticking with the same bank for their business loans.

It said the lack of competitive pressure in SME banking is highlighted by the fact that more than 50% of start-ups looking for an SME account choose the bank with which they have a personal current account, over 90% stay with their BCA when the initial free banking period comes to an end, and around 90% then go to their BCA provider when they are looking for business loans.

Potential remedies being suggested by the CMA to help include:

- Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain "trigger points". These could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs, a key trigger point could come at the end of free banking periods.

- Making it easier for consumers and businesses to compare bank products by upgrading Midata, a Government-backed online tool that allows consumers to access their banking data from their bank and compare their existing deal with other accounts which may suit their personal needs better. An improved Midata could have a "radical impact" on consumer choice in retail banking markets, the CMA said.

- The creation of a new price comparison website for SMEs - currently nothing effective exists to fulfil this role, the investigation found.

- Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing their funding for a widespread and sustained advertising campaign.

- Requiring better sharing of information with credit reference agencies, banks and financial advisers - making it easier for SMEs to shop around for loans and cutting out the need for multiple application form-filling.

The watchdog said previously that there has been "very little movement" in the market shares of the four largest banks, which are Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland (RBS).

It said that the big four banks collectively supply more than three quarters (77%) of the personal current account market in the UK, as well as more than 85% of business current accounts and 90% of business loans.

The CMA is expected to publish a final report into the market in around April 2016.

Alasdair Smith, chairman of the retail banking investigation, said: "We think customers need to be put in charge of their banking."

He continued: "Despite some encouraging developments, particularly in the shape of challengers that have entered the market in recent years, for too long banks have been able to sit back and take their existing customers for granted.

"We don't think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control."

A seven-day current account switching service was launched in 2013 to take the hassle out of moving banks.

But the CMA said that, while the service is functioning reasonably well, awareness of it is low. Only 3% of customers switched their personal current account in 2014 and just 16% looked at alternative accounts.

The investigation also found that accounts which are expensive are not losing customers to cheaper and better alternatives at a rate that would be expected in a well-functioning market.

Because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products and cheaper prices and smaller or better banks find it hard to get a foothold, the CMA found.

The CMA provisionally decided not to recommend remedies aimed at ending current accounts which are "free" if the customer is in credit. In reality, customers can end up paying for these deals through interest they have lost out on by not going elsewhere and account charges.

The watchdog said it saw "no convincing evidence" that these accounts distort competition - and they can give a "reasonable deal" to many customers.

Structural remedies, such as forcing the break-up of banks, were also provisionally rejected. The CMA said the problems in the market are unlikely to be resolved by creating more, smaller banks - as it is the underlying issue of the lack of switching which needs to be addressed.

Chancellor George Osborne said: "The CMA was created by this Government to promote competition, it is a powerful promoter of better services for customers in our country.

"I think today's report is an excellent report which points to what more we can do to give people real choices about who they bank with and the deal they get when they do their banking."

The Chancellor defended the corporation tax surcharge on banks, which will apply to lenders with profits of more than £25 million, insisting it will not act as a barrier to new entrants.

The 8% supplementary tax on profits will apply from January 2016 and the CMA said a number of building societies and smaller banks had raised concerns about it.

Appearing before the Treasury Select Committee, Mr Osborne said: "Before we introduced the tax we assessed the impact it would have on those we would be asking to pay the tax. That's why we introduced the £25 million threshold ... that takes the smaller players out of the tax altogether."

He added: "It sits alongside all sorts of other things we have done for challenger banks to enter the market, to try and break up that oligopoly we saw five or six years ago. That's why we have on our high street new names like Metro, Aldermore and Virgin Money - beneficiaries of Government divestment of banks like Northern Rock, beneficiaries of our independent regulators making it easier for challenger banks to enter the market, beneficiaries of a Government that's promoting competition in the financial services."