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Retail banking business models under strategic review by UK regulator

The UK's Financial Conduct Authority (FCA) has opened a review into business models in retail banking to assess the impact those models are having on competition and conduct in the market.12 May 2017

The FCA said it had opened its review following a period where there has been "significant economic, technological, social and regulatory changes" in the retail banking market.

Banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said: "The retail banking landscape in the UK has changed fundamentally in the last few years with the increasing presence of challenger and digital banks. What the strategic review reveals as bank ring-fencing, PSD2/open banking and Brexit start to impact on the UK, will be monitored closely."

In announcing its review, the FCA said that the way banks operate is likely to be further influenced "in the coming years" by "‘lower for longer’ interest rates, open banking, increased use of digital channels by consumers, regulatory interventions such as ring-fencing, and the remedies introduced by the Competition and Markets Authority (CMA) [following its investigation into the retail banking market]", it said.

The FCA said: "Against this background, we have been considering what we need to do in order to build a robust evidence base to enhance our understanding of the state of competition and conduct in retail banking markets at a pivotal time of change. We want to understand the impact of changes in retail banking business models and the implications for our objectives to protect consumers and promote effective competition, with the ultimate aim of ensuring our regulatory approach remains fit for purpose."

"To achieve this, we will be conducting a strategic review of retail banking business models – a programme of discovery work to examine the business models used in the retail banking sector and evaluate the impact of changes on competition and conduct," it said.

The FCA said that, during the initial part of its review, it will seek to better understand which areas within retail banking are profitable, which are less so, and why, and examine how profits are distributed across the firms active in the market. In addition, it said it hopes to build its understanding whether there are links between revenues and costs in different areas of business within retail banking and whether such links spur "inter-relationships, cross-subsidies and incentives to cross-sell different products".

The regulator said it would also "take an in-depth look at personal current account profitability" and " probe how emerging business models differ from traditional business models" during the initial phase of its review.

It plans to "evaluate the impacts of changes in economic, technological, social and regulatory factors on retail banking business models, with a view to identifying any risks to our competition and conduct objectives" during the second phase of the study. It said it will provide an update on its review between the beginning of April and end of June 2018.

"We envisage that the review will encompass financial service providers including retail banks, building societies and credit unions," the FCA said. "In view of the large share of the UK market served by the larger retail banking groups, we will inevitably place most focus on these firms, but we are also keen to draw from the experiences of other firms."

"We expect to look across the retail banking balance sheet and to consider the full range of personal banking products/services and small/medium enterprise banking. For example, we want to understand profitability by product or service type. This may include current accounts, cash savings, mortgages, secured and unsecured lending, credit cards and general insurance distribution. As we progress our analysis we may choose to focus on specific areas in more detail," it said.

The FCA said its review is "fundamentally different" from the CMA’s retail banking market investigation.

"The CMA’s market investigation focused on personal current accounts and small/medium enterprise banking. Our review will look across the retail banking balance sheet and consider other product areas such as savings and consumer lending," the regulator said. "The focus of our review is broader than that of the CMA’s because we have a consumer protection objective as well as a competition objective."

Firms active in the retail banking market can expect to receive an "information request" from the FCA as part of the review, it said.