FCA competition initiatives - An update

Key issues

In exercising its competition competencies to date, the FCA’s focus has been on markets which potentially affect large numbers of consumers. So far it has made extensive use of its power to undertake market studies, which it sees as a prime enforcement tool.

Market studies

General insurance add-on products

On 24 July 2014, the FCA issued its final findings and proposed remedies in its first market study into general insurance add-on products, finding that competition is not effective in the market, leading to poor consumer outcomes. The FCA found that the sale of add-on insurance frequently resulted in poor value policies that were not what consumers needed.  The value of general insurance products was not always clear. The findings are here. Following a series of consultations on its proposed remedies the FCA issued a policy statement on 10 June 2015, amending the Insurance: Conduct of Business source book to provide customers with specified information to help customers shop around for Guaranteed Asset Protection (GAP) insurance and introducing a deferral period so that GAP insurance cannot be concluded until at least a day after customers receive this information. The amendments are in force from 01 September 2015. On 28 September 2015, it published a further policy statement on the rules banning opt-out selling across the financial services sector and guidance supporting informed decision making for add-on buyers. Annexed to the policy statement are final rules on banning opt-out selling across financial markets and Handbook and non-Handbook guidance on the provision of appropriate and timely information during the sales process. The rules and Handbook guidance come into effect on 01 April 2016 and firms are expected to be compliant by then. Non-Handbook guidance (for operators of price comparison websites and other participants in the distribution chain) on the provision of appropriate information on all optional extras earlier in the sales process, whether or not they are add-ons, took immediate effect. Compliance is expected by 30 September 2016.

Consultation on a discussion paper on three options for publishing data on the value of general insurance products closed on 24 September 2015 and the FCA's response is awaited. The three options proposed are: claims ratio as a stand-alone value measure; a package of claims frequencies, claims acceptance rates and average claims pay-outs; and claims ratios and claims acceptance rates. In addition, the FCA asked for alternative ideas on how to increase transparency and product quality in the general insurance market.

On 03 December 2015, the FCA issued a consultation paper on increasing transparency and engagement at renewal in general insurance markets. The proposals would introduce new rules and guidance for firms on steps to be taken when renewing general insurance policies, including disclosure of last year’s premium on renewal notices and additional disclosure when customers have renewed the same product four times or more. The consultation closes on 04 March 2016 and finalised rules and guidance are expected by mid-2016.

Cash savings

On 20 January 2015, the FCA published the final report and proposed remedies in its market study into cash savings. Its findings confirmed that the market is not working well for many consumers. While some consumers shop around regularly and switch accounts to make use of more competitive rates, many are reluctant to do so. Some of the factors that the FCA highlighted as responsible for customers’ unwillingness to switch accounts include: the perceived limited financial benefit, an inconvenient process, and a lack of awareness of alternative, more competitive products elsewhere on the market. The FCA concluded that providers need to improve the transparency of their practices and availability of information to customers, as well as ensuring that switching accounts is an efficient and convenient process for customers wishing to obtain a more competitive rate. The FCA consulted on proposed remedies in four main areas: disclosure, switching, convenience, and sunlight remedies. On 23 July 2015, the FCA published a paper indicating the measures it intends to take forward and consulting on some of its disclosure and sunlight remedies.

On 08 December 2015, the FCA issued a feedback and policy statement making the rules and guidance provisions set out in the July 2015 paper final, with some minor amendments, discussed further below. The rules and guidance will come into effect on 01 December 2016.

The measures include:

• Disclosure:
  • clear key information about interest rates and functioning of product pre-sale 
  • an improved summary box at the point of sale 
  • appropriate account names that are not misleading 
  • post-sale warnings about low-paying accounts 
  • prominent display of current interest rates 
  • cash illustrations pre-sale and to be tested for effectiveness post-sale 
  • information about the benefits of shopping around, including a switching box in communications with customers 
  • improved presentation of information in communications 
  • further consultation on auto-renewal of fixed term accounts.
• Switching:
  • facilitating switching between accounts offered by a particular firm 
  • using Randomised Controlled Trials to test ‘return switching forms’ for branch and telephone based accounts 
  • seven working day target time for cash-ISA transfers 
  • improved use of electronic identity verification. 
• Convenience: 
  • account aggregation to make monitoring accounts easier for consumers 
  • PSDII to offer regulatory framework for secure aggregation. 
• Sunlight remedies:
  • to raise awareness of strategies to reduce interest rates to long-standing customers, and so encourage either better value products or shopping around
  • 18 month trial for gathering and publishing information on providers’ lowest interest rates.

From a customer perspective, there is considerable overlap between sunlight and disclosure-based remedies. However, an independent role for this kind of remedy remains, namely in driving banks’ awareness of their own reputational standards.

The 23 July 2015 FCA paper sought specific feedback in particular on the switching box and the continuing role of the Annual Equivalent Rate (AER) Code, which is still being considered by the FCA. Separately, Part 8 of the paper consulted on the changes to Banking Conduct of Business Sourcebook (BCOBS) rules that would be necessary if the reforms discussed above were to be enacted. In response to the consultation, the 08 December 2015 policy statement incorporated a number of revisions to the BCOBS changes (for details see Appendix 1 to the policy statement):

• Standardised definitions of "savings account" and "fixed-term savings account" - following consultation, the definition of ‘savings account’ includes accounts returning value through dividends instead of interest and the definition of ‘fixed-term savings account’ includes accounts permitting limited withdrawals within the fixed term with no loss of interest.
• Summary boxes - the rules detail where these should be present, how they should be presented and what information they must include. Following consultation, flexibility and innovation with the format of summary boxes is permitted so that they work for mobile and digital channels constrained by space.
• More prominent display of interest rate data - the rules relate to visibility, presence on particular forms of communication, and availability on customer request. Following consultation, the FCA provided further detail on where interest rate data must be displayed, for example interest rate information must be no more than "one-click" away from the customer’s on-line banking home page.
• Changes to notification processes - rules on clarity, frequency, triggering events requiring firms to notify customers, and issuing reminders.
• Making it easier to switch between the same firm’s products - this relates to the consistency of ease of switching between media, parity of service in switching internally and externally, defining “prompt and efficient service”, and adding a switching service to existing online and mobile banking services.

In relation to the sunlight remedy, the FCA published the first set of data on 08 December 2015, showing the lowest interest rates available on open and closed easy access cash savings accounts and easy access cash ISAs (as at 01 October 2015). The publication of this data is aimed at raising awareness of firms’ strategies towards their longstanding customers and to encourage firms to offer better value products to existing customers. This data will be published on a trial basis at six-monthly intervals for 18 months, with the next report due in May 2016. If the remedy proves effective in changing firms’ behaviour, the FCA will then consult on whether publication of this data should be made permanent.

Further reports, inquiries and consultations are expected in relation to the outstanding proposed remedies. A report on the findings of the trials relating to the switching box, effectiveness of reminders by channel and a return switching form, together with the FCA’s proposed approach, will be issued in early 2016. A consultation on the proposed auto-renewal remedy is expected in early 2016 as well as further inquiries into impediments to faster ISA transfers. An announcement of a target for ISA transfers is expected in Q2 2016 and will apply from 01 January 2017. The FCA will also be engaging with industry in Q1 2016 to take the convenience remedy forward as part of the implementation of PSDII and will be continuing discussions with industry and stakeholders in relation to the AER Code.

Pensions reform

In March 2015, the FCA issued the final report in its market study into retirement income, setting out its confirmed findings and remedies, recommendations and actions on improving the ways in which firms communicate with customers about their retirement options. The FCA found that:

• many consumers failed to shop around for an annuity and some did not buy the best annuity for their circumstances
• the length and complexity of wake-up packs and the perception that the sums involved do not justify shopping around deterred consumers from engaging with the available options
• the consumer tendency not to shop around weakened competitive pressure on incumbent firms and made it harder for challenger firms to gain a critical mass of customers
• consumers are highly sensitive to the presentation of financial options and future complexity of decisions will require greater support for consumers.

Remedies included requiring firms to provide an annuity quotation ranking in order to aid comparisons, redesigning and behaviourally trialling information provided pre-retirement (eg wake-up packs), and in the longer term, work with the government to create a pensions dashboard to enable consumers to see all their pension pots at once. The results of a wider review of the rules relating to pensions and retirement scheduled for summer 2015 incorporating further work on annuity comparisons and the replacement of wake-up packs are expected in 2016.

On 01 October 2015, a consultation paper was published on proposed changes to the pensions rules and guidance. The consultation ended on 04 January 2016 and a policy statement comprising feedback and the revised rules will be published at the beginning of Q2 2016. Annex 2 of the consultation sought views on the key issues the FCA intends to consider in its retirement outcomes review (a follow up to the market study). The three key issues in the review are: product options, features, charges and access; consumer decision making; and the impact of advised and non-advised distribution channels. The review is due to launch in early 2016.

Credit card market study

In November 2014, the terms of reference for the FCA’s market study into credit cards were published. Key areas in which competition may not be working in the best interests of consumers includes how easy it is to shop around for the best card, looking at product complexity, transparency and fairness of the terms and behavioural drivers, and the extent of shopping around and switching; how firms recoup costs across different card holder groups, and the issue of unaffordable credit card debt.

The FCA published its interim report on 03 November 2015, with comments due by 08 January 2016. The FCA found that:

• firms compete strongly for custom on some features, offer a range of products to meet consumers’ needs and there have been new entrants in the market in recent years
• consumers shop around, switch and value the flexibility offered by credit cards
• firms were not targeting particular groups of consumers to cross-subsidise other groups
• firms are active in contacting consumers who miss payments to trigger forbearance, as consumers in default are unprofitable, but firms do not routinely intervene where consumers have persistent levels of debt or make minimum payments, as such consumers are profitable.

The FCA identified a range of potential remedies. Remedies that will help consumers find the best deal include enabling better access by consumers to their transaction data, boosting the role of comparison websites, ensuring consumers can search the market without damaging their credit score and prompting consumers when they are nearing the end of a promotional period. Remedies to help reduce problematic credit card debt include giving consumers more control over credit limits and utilisation, encouraging consumers to pay off debt quicker when they can afford to and incentivising firms to do more to identify struggling consumers earlier and help them manage repayments.

The FCA's final report is due in Spring 2016.

Wholesale sector: Investment and corporate banking services

In February 2015, the FCA issued a report on the Wholesale sector competition review 2014-15, and at the announced the proposed launch of its first market study into the wholesale sector, focussing on investment banking and corporate banking services. The market study launched on May 2015 and focuses on issues such as choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services, in primary market and related activities (corporate broking and lending, ancillary services) in the UK.

• Clients’ choice of banks and advisers: the FCA will consider whether large clients are better serviced by banks than smaller ones, and the reasons for this.  It will look at the purchasing behaviour of clients and the impact of syndication, as well as entry and expansion, and whether existing regulation disproportionately hampers new entrants into the market.
• Limited transparency: the FCA will consider the adequacy of information from supplier to client, the transparency of the allocation process and the impact of established practices and regulation on transparency in the IPO process.
• Bundling and cross-subsidisation: the FCA will investigate whether bundling (the provision of two or more services in a package instead of services being sold separately) and cross-subsidisation (where margins from one service are used to enable another service to be provided at a lower price) occurs and, if so, if its effects are adverse upon competition and clients.

Interim findings and proposed remedies are due in early 2016, with the final report due out in Spring 2016.

Asset management

On 18 November 2015, the FCA published the terms of reference launching a market study into asset management and related services. The market study will explore three main areas: how asset managers compete to deliver value; whether asset managers are willing and able to control costs and quality along the value chain; and how investment consultants affect competition for institutional asset management. It will also be considering whether there are barriers to innovation and technological advances that prevent investors from getting better outcomes.

An interim report including proposed remedies is expected to be published in Summer 2016 and a final report is due in early 2017.

Competition in the mortgage sector

On 07 October 2015, the FCA announced that it had launched a call for inputs on competition in the mortgage sector to identify potential areas in which competition may not be working well, in particular the operation of the regulatory regime and any barriers to entry, expansion or innovation, customers’ ability to access, assess and act on information on mortgage products and services, and firms’ conduct and relationships, and any impact on these factors that changes in the economy and/or to the regulatory framework may have. The deadline for providing input was 18 December 2015. The FCA will decide in the first quarter of 2016 whether a full market study is appropriate.

Joint activities

The FCA is continuing to liaise closely with the Competition and Markets Authority (CMA) following its referral on 6 November 2014 of both the SME banking and the personal account market for an in-depth review. The CMA set out its provisional findings and possible remedies and published a full provisional findings report on 22 October 2015. A number of competition problems were identified in both markets: banks do not have to work hard enough to compete for customers; levels of customer switching are low; and new products and new banks do not quickly attract customers. However, the CMA identified positive developments including new entrants into both markets, new innovative products, digital innovations associated with online and mobile banking and new tools that may increase searching and switching. Potential remedies include: requiring banks to prompt customers to review the service they receive via individual messages at certain trigger points; making it easier for consumers and businesses to compare bank products by upgrading the Midata tool; creating a new price comparison website for SMEs; requiring banks to raise public awareness of and confidence in switching; and requiring better sharing of information with credit reference agencies, banks and financial advisers. On 18 December 2015, stakeholders were invited to comment on an additional remedy relating personal current account holders and overdraft charges, including the possibility of alerting customers when they are about to incur or have incurred overdraft charges, and in relation to arranged overdrafts, remedies to increase transparency of charges and make it easier to identify whether an alternative provider would give the overdraft facilities sought (and so facilitate switching).  A provisional decision on remedies is expected in February 2016 with the final report due in April 2016.

In November 2015, the FCA published a discussion paper on its approach to SMEs as users of financial services and whether SMEs should be provided with greater protections including access to the ombudsman service. Responses are due by 18 March 2016.

The "Fair and Effective Markets Review" published on 10 June 2015 jointly by the Treasury, the Bank of England, and the FCA on the fixed income, currency and commodities market has competition law issues as a prime focus (see our article: Fair and effective markets review - the competition law issues). The review emphasises the importance of raising awareness of the issues and of firms and staff complying with competition law. The review also highlights the FCA’s role in ensuring that firms comply. This is an area in which the FCA is likely to wield the new concurrent competition law enforcement powers that it gained in April 2015 (see our article: UK Financial Regulators become fully fledged National Competition Authorities).

Potential impact

The FCA is targeting both retail and wholesale markets in exercising its competition function and developing innovative analytical approaches using behavioural economics to examine consumer behaviour.  In addition to its new Competition Act 1998 enforcement powers, the FCA also gained powers to carry out market studies and make a direct reference of a market for in-depth investigation to the CMA under the Enterprise Act 2002, while retaining its powers to launch market studies under FSMA.  Under its 2015-16 Business Plan, the FCA set out a programme of new market studies and thematic work and confirmed that it is aiming to deliver fewer, more in-depth pieces of work. Planned work includes a thematic review of conflicts of interest in dark pools, staff remuneration and incentives and debt collection practices, a review of sales practices and how firms support consumers to make the right choices. The grant of Competition Act 1998 powers is likely to result in investigations of anti-competitive agreements and abuses of dominance by market participants being launched alongside this programme.  No let up in the FCA’s zeal to put its competition competences to work is in sight, and the new Competition Act 1998 powers bring with them the potential for fines to be imposed and follow-on actions for damages to be brought in the courts by those claiming to have suffered harm.. 

Look out for

• Finalisation and implementation of remedies arising out of the market study into general insurance add-ons and the market study into the cash savings.
• Interim findings and proposed remedies in the market studies into investment and corporate banking services (early 2016) and asset management (Summer 2016)
• Final reports on the market studies into credit cards and investment and corporate banking services in Spring 2016
• The CMA’s provisional decision on remedies in the retail banking market investigation (February 2016) and its final report (April 2016)
• The launch of the first FCA investigations under Chapter I or Chapter II Competition Act 1998, or Article 101 or 102 of Regulation (EC) No 1/2003 (the prohibitions against anti-competitive agreements and abuses of dominance) under its concurrent powers gained on 01 April 2015. On the evidence of the FCA’s avid exercise of its competition mandate under FSMA 2012, the FCA can be expected to use its new powers to pursue potential breaches of competition law zealously.
• The first direct reference by the FCA of a market to the CMA for in-depth investigation under its Enterprise Act 2002 powers, also gained on 01 April 2015.