Introduction
Let me start by saying that it is very good to see some familiar faces in the room, including legal colleagues, both in-house and from private practice, economists and representatives of the financial services sector more generally.
It is also somewhat concerning as it means I need to speak on matters that you may all find interesting in equal measure. That is no easy task.
With this in mind, I thought it would be appropriate for me to address today three questions that are frequently asked of me, from different perspectives. The first of these, which is most commonly raised by those in the industry, is how the FCA promotes competition without encouraging a “race to the bottom”.
In other words, there is a concern whether firms can be encouraged to compete without exploiting their customers and without those firms compromising on range, quality, price and innovation.
Second, also of interest to industry and perhaps for the economists amongst you, I am often asked why we often focus on switching as a way to make a market work effectively.
The issue here is that the importance attached to consumer switching seems, to some, counter-intuitive where firms are focusing their efforts on brand loyalty as a way to build their businesses. Or to put it another way, can competition be promoted by encouraging firms to retain their customers, rather than seeking to facilitate switching?
Conversely, if it is accepted that we should focus on switching behaviour, another issue which often crops up is whether there is an optimal level of switching that we envisage. Let me turn to these points in a moment.
Finally, and typically a question from the lawyers, I want to address how the work of the FCA differs from the FSA: what changed with the statutory competition objective that we received at time of the FCA’s creation? I want to talk about our market studies work in that context and other changes to the way we regulate. I will also touch on our Competition Act 1998 enforcement powers which we acquired almost a year ago.
The answers to these three questions should sufficiently showcase our competition powers in a way to engage all of you. At least that is my aim.
Clean and honest competition
Let me turn to the first of the issues that I have outlined.
This relates to whether promotion of competition may actually lead to a ‘race to the bottom’ rather than better outcomes for consumers.
Here is the concern.
Financial services can be inherently complex. The decisions are for too many too hard, with people not always making optimal choices that work in their interests. This may sometimes be due to low financial capability, though even sophisticated individuals often demonstrate patterns of behaviour that do not work in their interests.
In these circumstances, firms may be driven to compete with one another but on terms that exploit behavioural biases. For example, one firm may try to compete by using business models that are predicated on luring consumers into poor deals, meaning those deals that do not match their needs.
Firms may also attempt to compete with each other but in a way that sacrifices good consumer outcomes overall. There may be rivalry by means of price competition, but to the extent that range, quality and/or innovation is compromised at the same time.
Such consequences are not what Parliament intended when they gave us our competition mandate. They are not our aim.
This is why.
The Financial Services and Markets Act provides us with an overall objective to make markets function well. We must act in a way that is compatible with that objective.
When we do this we must advance at least one of our operational objectives. We have three of these: one being our objective to promote competition. But what is often overlooked is that we must promote competition in the interests of consumers.
It is this last part that is critical: and which distinguishes a healthy competitive market from a race to expand or sell at all costs.
Our aim under our competition objective is to promote clean and honest competition that serves customers well, rather than promoting over-exuberant selling with poor consumer outcomes.
In other words, our aim under our competition objective is to promote clean and honest competition that serves customers well, rather than promoting over-exuberant selling with poor consumer outcomes.
Our other operational objectives are to secure an appropriate degree of protection for consumers and to enhance the integrity of the UK financial system.
These also have essential roles to play in driving competition forward.
Consumers need to know they can trust the firms they buy from and are adequately protected. Examples include prohibitions on unfair dealing and mis-selling. This gives them confidence to exercise choice. In turn, this drives firms to compete hard to win their custom without creating a race to the bottom.
Our Credit Card market study provides a good example of this. We found this is a market where firms compete strongly and customers do shop around. We also found promotional offers were common in this market, and were an important spur for switching. However, our findings suggest that some consumers would be helped by being reminded of the benefits of repaying their debt or shopping around at the end of their promotional period. Some of the remedies we are considering are aimed at helping competition to work for the longer term benefit of those customers.
We also found that there is scope for the market to work better for consumers struggling with credit card debt or paying more than they could in fees and interest. In this regard, we are looking at a range of measures that could, first, reduce over-borrowing and encourage earlier repayment, so reducing the amount of interest and charges that consumers pay because of the way they use their credit cards; and secondly, encourage earlier intervention by firms to identify and help consumers with potentially problematic debt. Again, this is competition and consumer protection working in tandem to achieve better results.
We call this a “virtuous circle of competition”: consumers who are active and engaged, with confidence to exercise choice, will shop around. This will drive firms to seek business by competing on range, quality, price and innovation.
Why focus on switching?
This leads nicely into my next point.
The virtuous circle of competition implies that firms that treat their customers well will not only win new business, but also retain customers.
The virtuous circle of competition implies that firms that treat their customers well will not only win new business, but also retain customers. If that is correct, then, the argument goes, why focus on getting consumers to switch?
The point to make is this.
Switching is not a goal in and of itself.
Nor is the “right” level of switching our end game.
Rather, we are outcomes driven. What we seek is a market that functions well in the interests of consumers. If we see features in a market that prevent this, then we may intervene.
Let me illustrate this.
We accept that those consumers who make an active decision to remain with their provider may believe that their existing choice still satisfies their needs, or that the costs involved in switching outweigh the potential benefits. This choice can provide benefits for the consumer and may still encourage firms to compete.
However, at the moment, many customers are staying without even considering the alternative options. For all sorts of reasons, they are not making an informed choice between the options. A more engaged consumer, who potentially switches his or her supplier, may be a better driver of competition with the benefits that brings. It is those positive outcomes that we are interested in.
Here is a recent example of this in practice.
We published findings in our cash savings market study just over a year ago. That found that for many consumers, competition in this sector was not working as well as it should. 80% of easy access accounts had not been switched in the last three years, yet savings providers, on average, paid lower interest rates on accounts held for a long time than on accounts opened more recently.
In December 2015, we finalised a first package of measures to help make switching cash savings accounts quicker and easier. This includes new rules from December this year to force firms to provide clear information on the interest rates on their cash savings products.
But getting consumers the information they need to shop around was not our only approach to getting providers to compete to offer the best possible deal.
We are also implementing a remedy to “shine a light” on interest rates that are not prominently displayed but that might be earned by some customers. For obvious reasons, this is known as a sunlight remedy.
In summary, we asked firms to disclose to us the lowest rates they pay on their easy access cash savings accounts and easy access cash ISAs.
We published this first set of data last December.
This was not meant as a tool used directly for shopping around. Rather it is intended for market commentators, consumer groups and the media to raise awareness of, and therefore influence, providers’ strategies towards their long standing customers.
Both measures will encourage firms to treat existing customers well. Only those not getting a good deal will have reason to switch away.
What makes us different from our predecessor?
Let me turn to my third point.
Our mandate to promote effective competition in the interests of consumers was not something that our predecessor, the FSA, had in its remit.
Why was this objective given to us? The Independent Commission on Banking’s Final Report in 2011 said that one of the reasons for problems in financial services was that competition had not been central to financial regulation.
The creation of the FCA changed that.
So, how has this change been implemented?
Market studies and other reviews
To date, our competition mandate has been most visible in our market studies work. That said, these are not only limited to a competition assessment. They may also look for issues of consumer protection and/or market integrity
In short, by investigating a sector and the behaviour of firms and consumers within it, we can determine whether the market is working well.
Since we were given our competition objective, we have carried out or are carrying out market studies to analyse how competition is working in cash savings, retirement income, general insurance, credit cards, investment banking and asset management.
But market studies are about more than just understanding competition dynamics.
We also look for solutions that provide conditions for the market to work better.
We have already begun to implement remedies in the cash savings, general insurance and retirement income sectors to help ensure competition works better. We are currently considering a number of interventions in the credit cards market.
So as you can see, market studies are therefore a very important part of our work.
I want to be clear though: we do not undertake market studies lightly and it is important to get the scoping right; to avoid the study itself becoming a disproportionately costly exercise.
We do not use them as a mechanism to lift every stone. Rather we aim to ensure they are limited to areas where we have concerns.
So, for this reason, we often begin by taking views on whether those are the right areas on which to focus. For example, our review of competition in the wholesale sector was undertaken to gather views on areas that might benefit from further investigation. As a result of that work, we have launched two market studies: the first into investment and corporate banking and a second into asset management.
In fact, sometimes we may want to consider market dynamics in a less formulaic way. Take our mortgage work in this context for example.
In October 2015, we announced our intention to consider an assessment of barriers to competition in the mortgages sector, such as factors affecting consumers’ ability to access credit and ability to switch providers. We issued a call for inputs and will issue a feedback statement later in the Spring. We will also be putting that evidence together with emerging findings from the review we have been conducting of the responsible lending rules.
Embedding competition
A perhaps less visible part of our work which differentiates us from the FSA before us is to ensure we have the right sort of regulation to allow competition in financial markets to thrive.
We describe this as “embedding” competition throughout a range of our regulatory activities.
For example, we want to ensure that regulation does not stifle competition. By this I mean that it must not discourage sound firms from entering markets or by entrenching practices which discourage innovation.
In this context, we have conducted an internal review of regulatory rules which we inherited from the FSA. We considered where changes could be made that would promote effective competition in the interests of consumers.
Work that has emanated from this includes our Smarter Consumer Communications project. A key element of this is a consultation to see if changes can be made to certain FCA Handbook disclosure requirements to improve their effectiveness.
Other work where we have examined regulatory barriers to competition is in the context of Project Innovate. This is an FCA initiative to help firms looking to introduce beneficial financial products and services to the market. In this context, it helps us identify where parts of the regulatory framework may be impeding new entry or market development, for example because our rules or processes reflect established business models without leaving space for innovative ways to meet customer’s needs.
Competition Act powers
The final area I want to discuss is the one that gets much of the attention, perhaps unfairly. That is our powers to enforce against breaches of the Competition Act in the financial services sector. Perhaps your question here is “should we all have the dawn raid teams on standby?”
The first thing to say is that we stand ready to enforce, but it is not all about enforcement.
These powers are just one aspect of our competition tool kit, no more and no less important than the others.
Of course, competition law is not new in financial services, as both the CMA and European Commission have had these powers for many years, and our powers sit concurrently with theirs. We were given these powers to strengthen the FCA’s ability to ensure competitive markets for financial services that deliver good consumer outcomes.
We were also clearly out of line with other sector regulators, who not only had objectives to promote competition like us but also had the specific enforcement tools to tackle those competition failures brought about by firms’ behaviour. It was an anomaly which needed to be addressed.
Add into this mix the deterrent effect of our Competition Act powers, indeed how that might even of itself promote competition, this put us on the best possible footing to promote effective competition in financial services markets, with the ultimate winners being consumers.
So where are we on the use of those powers?
For the last year, we have been talking about enforcement cases in the future tense. Very recently, that has changed and I can now confirm that we are taking active steps towards the opening of Competition Act investigation.
For the last year, we have been talking about enforcement cases in the future tense. Very recently, that has changed and I can now confirm that we are taking active steps towards the opening of Competition Act investigation.
It is not the FCA's normal practice to release details of enforcement cases in the early stages, so for today, and for some time to come, I can offer no further details.
Suffice it to say and without prejudging the outcome of any investigation I hope it sends a signal that we take competition law seriously alongside other regulatory enforcement.
We have no particular quota or plan for the number of competition enforcement cases we will make. We will continue seeking to detect breaches where they arise in the financial services sector, and step in quickly to take action if we need to. We are well placed to do so.
Let me take Principle 11 as an example of this. Last summer we made minor amendments to the FCA handbook to reinforce the obligation on authorised firms to report significant infringements of applicable competition law to the FCA. We have seen a greater number of notifications under Principle 11 from firms relating to competition issues this year than last, which may be attributable to this clarification.
We have also taken the following measures to date.
We have issued two “on notice letters” to firms.
These are similar to the CMA’s warning letters. They are issued where the evidence suggests that there may be a potential infringement of competition law but where our prioritisation does not lead to opening an investigation. They do not constitute formal decisions relating to infringements of competition law.
These letters set out the behaviour of potential concern, giving the firms involved an opportunity to exercise due diligence and to consider whether the activity of concern adheres to their obligations under competition law.
In this context, firms are asked to respond with action they propose to take in order to address the concerns raised.
The recent letters related to concerns we had identified during the course of the Retirement Income Market Study.
We subsequently met with the firms concerned to further understand the arrangements in question. As a result of our actions, the firms have undertaken a number of initiatives to strengthen competition compliance.
We have also issued three advisory letters. These letters are educational and are intended to increase awareness of competition law to achieve greater compliance by the firms in question.
Our commitment to our Competition Act programme of work also includes working with other regulators and competition authorities.
We have a strong relationship with the CMA and are cooperating closely with it in relation to our concurrent functions. In December last year, we agreed a new Memorandum of Understanding with the CMA with regard to competition and this is beginning to work well in practice.
We also continue to liaise with the CMA on their investigation into the supply of personal current accounts and retails banking services to SMEs. We are considering their concerns and proposals ahead of their final report later this year.
We are also liaising with the European Commission in relation to a number of cases of mutual interest.
To conclude
These are clearly exciting times for competition at the FCA.
Since 2013, we have grown a Competition Division with the strength and depth to undertake the wide range of activities I have illustrated today.
In empowering consumers to make good choices, in driving value in financial services and by encouraging new entry and fostering innovation, we can generate benefits, not only for consumers in our sector but also the economy at large.
These are integral to making markets function well. They are of course, not without challenge. We need to be smart about identifying competition issues when they come into the FCA. We need to work closely with other competition authorities. We need to integrate competition work with other FCA policies and activities. We are making significant progress on these matters.
And in empowering consumers to make good choices, in driving value in financial services and by encouraging new entry and fostering innovation, we can generate benefits, not only for consumers in our sector but also the economy at large.
Thank you.