Banks to limit overdraft charges as CMA demands only small changes

Banks will be forced to limit overdraft charges and introduce a new standard technology to enable consumers to more easily switch between providers, among several measures proposed by the competition watchdog to improve competition in retail banking.

Concluding its investigation in the sector, the Competition and Markets Authority said its proposed changes could lead to £1bn of benefits to customers over five years, with personal customers on overdrafts saving an average of £153 a year.

Rejecting the idea that the big banks should be broken up, the CMA said it would "not address the fundamental competition problems" as an increased numbers of banks would still mean customers could not easily choose between them due to a lack of transparency on fees and charges.

As a result, proposed measures from the CMA include forcing banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts, as around £1.2bn of banks’ revenues came from unarranged overdraft charges in 2014 for example and many customers are not aware of when they go into unarranged overdraft or realise the costs they are incurring.

To make switching easier, the CMA proposed requiring banks to swiftly introduce an open API (application programming interface) banking standard that will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties.

"This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal," the CMA said.

The CMA also proposed that banks should be made to regularly prompt their own customers to check they are getting good value from their banking provider and direct customers to price comparison websites that give tailored advice.

At present the CMA calculated that personal customers switching to a cheaper product could reap an average annual saving of £116; ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.

"For too long, banks have been able to sit back and not work hard enough for their personal and small business customers," said Alasdair Smith, chair of the investigation.

"We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees."

He said the CMA was well aware of the current barriers to challenger banks in UK retail banking and said what was really holding back the challenger banks is their ability to highlight to customers how new offerings compare with their current deal.

"Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy."

Sighs of relief for big banks

The British Banking Association seemed to take the proposals well and highlighted that the CMA's proposals were provisional.

"Capping monthly overdraft fees will help customers better manage their finances and raising awareness of the Current Account Switching Service will help more people realise they can switch accounts easily and quickly," said BBA chief executive Anthony Browne.

“We also want to see a regulatory regime that continues to support new entrants to the markets as well as growing banks, and ensures a level playing field. We will consider these latest proposals in detail over the coming weeks and look forward to working with the CMA as they prepare their final report.”

Providing a view of the market's reaction, analyst Mike van Dulken at Accendo Markets noted that shares in FTSE banks reacted strongly on Tuesday morning as "investors breathe a collective sigh of relief that results from a long-awaited 19-month investigation weren’t more drastic".

He said the proposed measures were considered "pretty much a let off" by traders who had been on alert for some more radical and sweeping reforms, with criticism that the provisional recommendations "don’t go anywhere near far enough to overhaul the personal and business banking market".

"If the aim was to promote competition, today’s update doesn’t really give the new challenger banks much more chance to spice things up and put an end to what has been a rather comfortable high street oligopoly for far too long."