One of the main aims of these blogs is to set current regulation in its historical context, and to distinguish between those elements that are distinctly new, the long run trends and cycles, and the seemingly intractable. This week’s announcement by the FCA that it would consult on a basic savings rate, designed to safeguard the interests of depositors who lose out on rates by not shopping around, ticks at least two of these boxes.
The first thing to note is that the FCA’s announcement is the latest stage in a story that started with the launch of the cash savings' market study in October 2013. The second is that it is also part of a longer narrative that goes back to at least 2000 and the publication of the Cruikshank Report into competition in UK banking.
Parts of this issue have moved forward since then. For instance, only in 2010 did the FSA decide to switch on its conduct of business powers for banking, but no-one now would recommend reverting to the previous status quo. It has also become much easier to switch banks, and while this has made little difference to the numbers doing so (as the FCA here admits), it remains a step forward.
Equally however, the overall competitive landscape for banking has become much more consolidated. Back in 2000, the Building Society demutualisation movement had more or less run its course, but most of its children had either been consumed by the banks or were looking wobbly. Barclays was about to buy the Woolwich and was reportedly interested in Abbey, while the Halifax was about to merge with Bank of Scotland. (Northern Rock was doing well enough but that's for next week.) A few years later, the financial crisis would force further consolidation.
This longer narrative poses considerable problems for the UK regulatory system and its competition objective in particular. PSD2 and Open Banking have only just started, but so far it looks like it will be, at best, hard yards to shift the competition needle noticeably. On a different trajectory, ring fencing is likely to encourage depositors to believe that the British Government stands behind the ringfenced entities of the Big Five, and those that follow them. Meanwhile, Recovery & Resolution Plans, Operational Continuity requirements, and the growing crystallisation of cyber and other technology risks are all likely to raise the bar and, in competition terms, the barrier to entry.
Added to this, interest rates are still very low but perhaps starting to rise, and QE is still in force but presumably can’t last forever. Both these factors have relevance for banks paying higher basic savings rates.
All of which makes it more difficult to read the significance of this latest FCA consultation. The FCA’s current market study of the retail banking model may well add to this complexity, as well as, probably, repeating some of Cruikshank’s conclusions.
If we try and cut through and look further ahead, there is clearly a shift in the banking model taking place, fuelled partly by technological change and partly by long term regulatory pressure – e.g. the FSA switching on its conduct powers in 2010 and the FCA’s forthcoming consultation on whether firms should have a 'duty of care' towards their customers.
Banks will be thinking about this, and there are likely to be significant benefits for those who can shift their model quickly and in a sustainable way. Ironically, given the overall narrative arc, this shift in business models could well take place ahead of the introduction of any basic savings rate.
The FCA implemented a package of measures to address some of this harm, which came into force in 2016. This included trialling other disclosure remedies proposed in the Market Study, including a switching box, but they did not stimulate sufficient changes in customer behaviour to address the harm to longstanding customers.