UK Regulator Provides Update on its Retail Banking Business Model Review

The U.K. Financial Conduct Authority has published a Progress Report on its Strategic Review of Retail Banking Business Models. The FCA launched the Review in April 2017 and published a purpose and scope document in October 2017. The FCA is conducting the Review to gain a picture of how profits are generated by the sector, of the relative competitive advantages and disadvantages of different business models and of barriers to entry and expansion. The Review covers retail banking services to personal and small business customers. It focuses on the products and services that are used on a regular basis by large numbers of consumers and small businesses. This includes current accounts, savings products, mortgages, personal loans, credit cards, and business finance.

The FCA explains that its early analysis indicates that a key component of the competitive advantage enjoyed by retail banks to date has been the combination of personal current accounts and large branch networks. This combination has brought a number of benefits including a funding cost advantage (from personal current accounts paying zero interest or lower interest than other providers), significant additional income from fees and charges on personal current accounts (including overdrafts), the opportunity to cross-sell lending products to personal current account holders and the ability to cross-sell business accounts and associated business savings balances.

The FCA's work is ongoing. In the Progress Report, the FCA explains that it has not yet explored all relevant factors. It continues to develop a fuller picture of the drivers of return on equity and an understanding of the impact of branch closures on different consumer types. The FCA highlights a number of areas where it plans further engagement with banks and building societies to further its analysis. A particular focus of the next stage of the review will be the nature of the customer base and costs of retail banking.

Some commentators have expressed concerns that the tone and findings of the Progress Report imply that the regulators will take steps that result in an end for free-of-charge retail banking in the U.K.

The FCA invites responses to the Progress Report's findings by September 7, 2018. The FCA will also engage directly with banks to discuss the issues it has raised.

View the Progress Report.

View details of the purpose and scope of the review.

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