UK Banking – Page 2 – Digital Finance Analytics (DFA) Blog

You’ve got to fight! For your right! … to fair banking

British governments have been trying to improve financial inclusion for the best part of 20 years. The goal is to make it easier for people on lower incomes to get banking services, but this simple-sounding target brings with it a host of problems.

A House of Lords committee will shortly publish the latest report on this issue, but the genesis of financial inclusion policy can be traced back to the late 1990s as part of the Labour government’s social exclusion agenda. The scope and reach of this strategy has since expanded beyond a focus on access to products and now seeks to improve people’s financial literacy to help them make their own responsible decisions around financial services.

The goal of increasing the availability of basic banking has become a tool for tackling poverty and deprivation worldwide, among governments in the global north and global south and among key institutions. In 2014, the World Bank produced what it described as the world’s most comprehensive financial exclusion database based on interviews with 150,000 people in more than 140 countries.

Retaliation? mobiledisco/Flickr, CC BY-NC-ND

Muddy waters

However, broad and enthusiastic acceptance of such policy efforts has prompted doubts about the simplistic narrative of inclusion and exclusion. This way of thinking does not capture the complexities of the links between the use of financial services and poverty, life chances and socio-economic mobility. It also ignores the sliding scale of financial inclusion, from the marginally included – who rely on basic bank accounts – through to the super-included with access to a full array of affordable financial services.

You can see the complexity and contradictions clearly in innovations such as subprime products and high-cost payday lenders. They have made it increasingly difficult to draw a clear distinction between the included and the excluded. Mis-selling scandals and concerns over high charges have also shown us that financial inclusion is no guarantee of protection from exploitative practices.

Even the pursuit of better financial education offers a mixed picture. Critics have raised concerns that this shifts the focus away from structural discrimination and towards the individual failings of “irresponsible and irrational” consumers. There is a grave risk that we will fail to tackle the root causes of financial exclusion, around insecure income and work, if policy follows this route.

In the midst of this focus on customers, the government’s role has been reduced to supporting those education programmes and cajoling mainstream banks, building societies and insurers into being more inclusive.

Vested interests. The Square Mile in London. Michael Garnett/Flickr, CC BY-NC

Given the central role that financial services play in shaping everyday lives, a hands-off approach from the state is inadequate. It fails to address the injustices produced by a grossly inequitable financial system. Our recent research examined how the idea of financial citizenship might offer a route to improvements. In particular, we looked at the idea of basic financial citizenship rights and the role that might be played by UK credit unions, the organisations which, supported by government, seek to bring financial services to those on low incomes.

The idea of establishing rights was put forward by geographers Andrew Leyshon and Nigel Thrift in response to the growing lack of access to mainstream financial services. The goal would be to recognise the significance of the financial system to everyday life and set in stone the right and ability of people to participate fully in the economy.

That sounds like a laudable aspiration, but what could a politics of financial citizenship entail in practice?

Drawing on the work of political economist Craig Berry and researcher Chris Arthur, we argue that the policy debate should move on to establish a set of universal financial rights, to which the citizens of a highly financialised society such as the UK are entitled regardless of their personal or economic situation.

The right to participate fully in political decision-making regarding the role and regulation of the financial system. This would entail, for example, the democratisation of money supply and of the work of regulators. Ordinary people would have to be able to meaningfully engage in debates about the social usefulness of the financial system.

The right to a critical financial citizenship education. Financial education needs to go beyond the simple provision of knowledge and skills to understand how the financial system is currently configured. It should provide citizens with the tools to be able to think critically about money and debt, as well as the capability to effect meaningful change of the financial system.

The right to essential financial services that are appropriate and affordable such as a transactional bank account, savings and insurance.

The right to a comprehensive state safety net of financial welfare provision. This could include a real living wage to prevent a reliance on debt to meet basic needs and could go all the way through to the provision of guarantees on the returns that can be expected from private pension schemes.

Establishing this set of rights would be a major step towards enhancing the financial security and life chances of households and communities. The weight of responsibility would shift from individuals and back on to financial institutions, regulators, government and employers to provide basic financial needs. As one example, just as people in the UK are given a national insurance number when they turn 16, so the government and the banks could automatically provide a basic bank account to everyone at the age of 18.

The UK credit union movement does make efforts towards these goals, but it cannot fully mobilise financial citizenship rights largely due to its limited scale and regulatory and operational limitations. For the rights to work, they will need the support of the state, of financial institutions, regulators and employers. That would enable the country to build something less flimsy than the loose structure we have right now, which piles blame onto the consumer and relies on voluntary industry measures to pick up the slack.

Banks like RBS still look risky, but getting too tough could cause greater problems

From The Conversation.

Even in less politically volatile times, the news that the UK’s biggest bank, RBS, failed the Bank of England’s toughest ever “stress tests” would have dampened financial spirits. The bank must now raise an extra £2 billion to protect itself from future downturns. This may be made easier because RBS is 73% publicly owned, but that’s an unwelcome legacy of its exceptionally poor condition after the crash of 2007-08.

Meanwhile, the Bank of England (BoE) singled out two other banks – Barclays and Standard Chartered – for having “some capital inadequacies”. So why haven’t eight years of economic recovery cured the banks’ woes?

Banks remain solvent as long as their assets, the money they’ve lent to borrowers or invested, exceed their liabilities, the money they’ve borrowed from depositors or other lenders. If the economy worsens, a bank’s assets can fall because their investments lose value and “non-performing” loans have to be written off.

For this reason, the core “equity” capital that banks have raised from shareholders is regarded as a safety margin between assets and liabilities; unlike loans, it never has to be repaid. For building societies, accumulated reserves take the place of shareholders’ equity in providing this buffer.

Stressful times

Stress tests calculate the fall in a bank’s asset values under various adverse economic scenarios. If a shock looks big enough to wipe out the “Tier 1 capital” safety margin, the bank is asked to raise more capital and/or boost the value of assets or make them better hedged against losing value. The BoE and European Central Bank are among the institutions that have regularly conducted these tests since banks were caught with their capital ratios down in 2008.

Downturn became crisis in 2007-08 because, in the unusually long and placid upturn beforehand, banks ran their core capital to dangerously low levels. Regulators found Tier 1 capital in some cases to be worth just 1-2% of assets, once they removed permitted adjustments that exaggerated the capital and understated the risks to asset value.

The Bank of International Settlements (BIS), the central bank for central banks, duly imposed stricter requirements. These included core capital equal to at least 8% of what are known as risk-weighted assets – a system that sets lower capital requirements for assets considered less risky. Acknowledging that this system had itself contributed to risk being underestimated, the BIS also recommended a minimum “leverage ratio” of capital to total assets. (The BoE has continued to argue over the terms of this, fearing it could erode the cushion of reserves it’s supposed to promote.)

Alarm bells?

RBS failed the latest test, having passed in previous years, because the terms have been toughened. That’s a recognition that simultaneous setbacks could hit the world’s major economies before the BIS reforms are fully in place in 2019. If loans to businesses, individuals and governments in multiple countries all started going bad, banks’ assets fall much further than if it’s just one sector in one country. Countries’ problems became contagious in 2008 when household and corporate assets, especially property, plunged on both sides of the Atlantic.

Policy measures taken to calm the last crisis might have raised the risks of another. Low interest rates and “quantitative easing” have encouraged more household and commercial debt, driving up property and financial asset prices. China, whose property bubble looks particularly pronounced, is among the greatest worries. Governments have also exacerbated their debts by spending to try to stop national output and price levels falling, leaving them ill-equipped to rescue collapsing banks again.
American economist, Irving Fisher.
These worries are deepened by the possibility that banks’ capital and reserves are still too low to withstand shocks. Some experts believe they need to rise by a factor of ten or more in relation to assets for the system to be totally safe. That view, pioneered by the American economist Irving Fisher, who identified the dangers of “debt deflation” in the 1930s, now has a range of powerful advocates including distinguished commentator Martin Wolf.

Wolf was a member of the UK’s Independent Commission on Banking, which in 2011 accepted the BIS’s recommendation of raising core capital to 8% of risk-weighted assets. More recently he argued it should be 100%. Where the current system reflects the fact that banks create money when they lend it, this “full reserve banking” would mean they could only lend what they had raised from the markets.

Regulatory dilemmas

Critics counter that such a radical move could bring the stability of the graveyard. It would give governments (via their central banks) complete control over their economies’ supply of money. Whereas banks currently generate most of the money supply by lending, they would be reduced to intermediaries channelling savings into investment.

For economic liberals, this would give the state an unacceptable monopoly over money – unless it returned to a gold standard that tied its currency to precious metals, which would effectively put a ceiling on how much money it could create. Others fear any substantial move away from the present “fractional reserve” system would cause a huge downturn while banks run down their lending and boost their capital.

Even then, central banks might be no better than now at phasing credit growth with economic growth to keep prices and production stable. And a gold standard might be inherently deflationary, unless breakthroughs in mining (or alchemy) kept precious metal stocks expanding in step with national output.
From out of the shadows … Inhabitant
But above all, private enterprise would always innovate to break this public monopoly. This is already visible in the rise of “shadow banking” – loans by institutions like hedge funds and private equity funds that escape bank regulation because they technically aren’t banks. Official statistics, which may understate the true situation, show shadow banking assets rising steadily to 12% of the total since regulation began tightening, mostly in rich economies where banking rules are tightest.

If once aberrant lenders like RBS are forced to mend their ways too radically, the next boom might just be powered from the shadows, causing new bubbles to burst in an even darker place. So central banks will stick to their present plan for gradual increases in capital, hoping any coming slowdown in growth won’t topple the banks that proved unstressed by their latest test.

Author: Alan Shipman, Lecturer in Economics, The Open University

More On Tesco Bank’s Cyber Attack

The Financial Times says Tesco Bank ignored warnings about their cyber weakness, which led to around 9,000 customers loosing £2.5m from their accounts.

risk-pic-2 The bank said on Monday:

Customer Apology and Update

Normal service resumed at Tesco Bank on Wednesday 9 November 2016 following the temporary suspension of online debit transactions from current accounts on Monday 7 November 2016.

We have refunded all customer accounts which were affected by the fraud on 5/6 November and are taking every step to compensate anyone who has been out of pocket as a result of the incident.

We are limited by what we can say publicly about how the attack took place, as this is still a criminal investigation, but we want you to know that the security and protection of your money and information remains our number one priority.

Thank you for your ongoing patience, and again, let me apologise for the inconvenience caused. We will do everything it takes to ensure you can have confidence in Tesco Bank.

In addition, the FT says the banks was also the subject of an earlier attack orchestrated by a criminal gang who purchased low-priced goods using contactless mobile phone payments at retailers in Brazil and USA.

Cybersecurity company Cyberint said it had discovered posts on a variety of dark web forums whose members had described the lender as being a “cash milking cow” and “easy to cash out”.

It is not clear, however, whether there is any link between these claims and the money stolen just over a week ago.

Fiserv, who were mentioned in the earlier post on the latest attack told me:

We can confirm that Tesco Bank is a client. We have been made aware of the incident mentioned in your blog. Neither Fiserv software nor our services were involved in the incident that Tesco Bank experienced over the weekend of 5 November. Nonetheless, we are offering our support in whatever manner will be helpful to Tesco Bank.

RBS Reports Loss of £469 million in Q3 2016

UK Bank, Royal Bank of Scotland has reported an operating profit before tax of £255 million, but an attributable loss of £469 million in Q3 2016.

This included restructuring costs of £469 million, litigation and conduct costs of £425 million (relating to US residential mortgage backed securities) and a £300 million deferred tax asset impairment.

This compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens.

They reported a Common Equity Tier 1 ratio of 15.0% which increased by 50 basis points in the quarter and remains ahead of their 13% target.

The leverage ratio increased by 40 basis points to 5.6% principally reflecting the £2 billion Additional Tier 1 (AT1) issuance.

RBS reported an attributable loss of £469 million in Q3 2016 compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens. Q3 2016 included a £469 million restructuring cost, £425 million of litigation and conduct costs and a £300 million deferred tax asset impairment. The attributable loss for the first nine months of the year was £2,514 million and operating loss before tax was £19 million.
Q3 2016 operating profit of £255 million compared with an operating loss of £14 million in Q3 2015. Adjusted operating profit of £1,333 million was £507 million, or 61%, higher than Q3 2015 reflecting increased income and reduced expenses.
Income across PBB and CPB was 2% higher than Q3 2015, adjusting for transfers, and was stable for the year to date, as increased lending volumes more than offset reduced margins. CIB adjusted income increased by 71% to £526 million, adjusting for transfers, the highest quarterly income for the year, driven by Rates, which benefited from sustained customer activity and favourable market conditions following the EU referendum and central bank actions.
NIM of 2.17% for Q3 2016 was 8 basis points higher than Q3 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises. NIM fell 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure.
PBB and CPB net loans and advances have increased by 13% on an annualised basis since the start of 2016, with strong growth across both residential mortgages and commercial lending.
Excluding expenses associated with Williams & Glyn, write down of intangible assets and the Q2 VAT recovery, adjusted operating expenses have been reduced by £695 million for the year to date. Adjusted cost:income ratio for the year to date was 66% compared with 67% in the prior year. Across PBB, CPB and CIB cost:income ratio of 60% year to date was stable compared with 2015.
Restructuring costs were £469 million in the quarter, a reduction of £378 million compared with Q3 2015. Williams & Glyn restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.
RBS has reviewed the recoverability of its deferred tax asset and, in light of the weaker economic outlook and recently enacted restrictions on carrying forward losses, an impairment of £300 million has been recognised in Q3 2016. This action has reduced TNAV per share by 3p.
TNAV per share reduced by 7p in the quarter to 338p principally reflecting the attributable loss, 4p, and a loss on redemption of preference shares, 4p, partially offset by gains recognised in foreign exchange reserves.

The Impact of “Quantitative Easing”

A Bank of England staff working paper “QE: the story so far” looks at the impact of QE and reviews the impact of central bank balance sheet expansions on financial markets and the economy. QE has led to a massive expansion in central bank balance sheets. Their analysis identifies three significant impacts. First, it is only when central bank balance sheet expansions are used as a monetary policy tool that they have a significant macro-economic impact. Second, there is evidence for the US that the effectiveness of QE may vary over time, depending on the state of the economy and liquidity of the financial system. And third, QE can have strong spill-over effects cross-border, acting mainly via financial channels. For example, the impact of US QE on UK economic activity may be as large as the impact on US economic activity.

The modern history of Quantitative Easing (QE) starts in February 1999. With policy rates having approached the lower bound for nominal interest rates, one member of the Bank of Japan’s (BoJ’s) Policy Board expressed an opinion that the Bank of Japan should “implement a quantitative easing by targeting the monetary base”. In 2001, Japan began down that road, purchasing government bonds financed by the creation of central bank reserves.

Outside Japan, QE was first adopted by the US Federal Reserve and the Bank of England in 2008 and 2009, as they neared the lower bound for nominal interest rates and sought to provide additional monetary stimulus. In 2015, these countries were joined by the euro-area, as the European Central Bank (ECB) began expanding its balance sheet as it neared the lower bound for interest rates. Three of these four central banks were continuing to expand their balance sheets in the second half of
2016.

Thus, it is only during this century, and in particular since the global financial crisis, that we have seen central bank balance sheet expansions taking on an explicit monetary policy objective. Since 2007-8, as a number of countries approached the effective lower bound for official interest rates, central banks made outright purchases of securities funded by the creation of central bank reserves – Quantitative Easing or QE. This has led to a substantial increase in central banks’ balance sheets, both relative to nominal GDP and to the stock of government debt outstanding.

But what are the impacts of this approach?

The first half of the paper reviews the international evidence on the impact on financial markets and economic activity of this policy. It finds that these central bank balance sheet expansions had a discernible and significant impact on financial markets and the economy.

The second half of the paper provides new empirical analysis on the macroeconomic impact of central bank balance sheet expansions, across time and countries.

They conclude “In the past decade or so, central bank balance sheet expansions have been used as a tool for loosening monetary policy. This paper has gathered together empirical evidence on the effectiveness of these policies on financial markets and the wider economy. It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions. There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.

The effectiveness of QE policies does vary, however, both across countries and time. For example, there is some evidence of QE interventions being more effective when financial markets are disturbed. There is also evidence of strong positive international spill-over effects of QE from one country to another. This paper has focussed on the aggregate impact of central bank balance sheet expansions. This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.

Note: The views expressed in this paper are those of the authors, and not necessarily those of the Bank of England or its committees.

CMA Remedies Could Mean Slow Profit Erosion at UK Banks

Remedies listed in the Competition & Markets Authority’s (CMA) final report on the UK’s retail banking market could lead to a slow but steady erosion of profitability at the major UK banks, says Fitch Ratings. But the initiative depends on customers being comfortable sharing sensitive financial information with other banks and third parties, which could represent a major barrier.

The remedies hinge on using technology to ensure that customers get the best deal, implying a loss of revenue for the banks. For example, several of the CMA’s remedies are directed at making sure customers can either reduce or avoid overdraft charges, which the CMA says bring in one-third of total revenue generated by retail banking activities in the UK.

UK current account holders are already able to ‘switch’ their account between banks in seven days by using the Current Account Switch Service (CASS), in place since September 2013. CASS was set up by the UK government to improve competition, but switching rates remain relatively low. In 2015, only around one million customers, equivalent to 3% of current account holders, used CASS.

Banking ‘shake-up’ relies too much on customers shopping around

From The Conversation.

A report that was billed to transform the UK’s retail banking industry has been criticised for not doing enough to protect customers. The Competition and Markets Authority report was two years in the making and is geared towards improving competition and the products on offer for individuals and small businesses.

But the government watchdog puts the onus on bank customers to improve market conditions. It said their lack of engagement with the market “weakens banks’ incentives to compete” and contributes to the costs involved for challenger banks to gain a foothold in the market. Therefore its package of remedies focuses heavily on measures aimed at stimulating consumers to shop around and making it easier for them to switch. Even with the new technology it proposes, this will be easier said than done.

Central to the reforms is a requirement that banks make their computer systems accessible to trusted third parties so that, with customers’ consent, their banking data can be transferred and used to drive new online services and mobile apps that compare the best banking deals and recommend switching when cost savings are identified. The aim is to have this part of the remedy up and running by 2018.

There are some obvious concerns: the security of data passed to third parties, the possible cost of these new services, and the fact that older generations and rural communities in particular often have no or poor internet and mobile access, so are not necessarily in a position to benefit. A further barrier may be that consumers are simply overloaded with calls to shop around.

Unrealistic expectations

A common cry from regulators of everything from gas and electricity to broadband and insurance is that consumers must engage more actively to make markets work. From all sides, you are urged to shop around and switch regularly to persuade providers to improve quality and cut prices.

But research I’ve conducted suggests how unrealistic it is to expect households to shop around for every service they use. I looked at the shopping and switching habits of more than 1,000 consumers for 12 common household and financial services, including energy, communications, banking, savings and credit cards. Most used ten or 11 of these services, but at best had shopped around for fewer than half (the blue line in the chart below).

Only a tiny proportion of households shopped around for every service they use (the green line in the chart). Households that shopped around prioritised their car, buildings and house insurance, followed by their gas and electricity provider. They were least likely to shop around for their bank account.

Average number of services for which households had shopped around in the last three years as a percentage of services used by the household and percentage shopping for all the services used. Jonquil Lowe, CC BY-ND

Across all services, the research found that households who had not shopped around tended to overestimate the time and difficulty of the task. But even among households who did shop around for a bank account, one in five found the process took more than a day and nearly one in ten found the process difficult. So part of the challenge facing regulators is to improve, and instil greater confidence in, the industry’s current account switching service (CASS) – something the CMA and the industry is trying to do.

Making life easier

My research showed that, for all types of household and financial services, most of those that did not shop around tended to think that all providers offer similar deals and that shopping around would save too little to make the chore worthwhile. The new third-party services that are being proposed may help to make banking differences more visible. In addition, the CMA will require banks to gather, publish and share data on the quality of their services, including whether existing customers would recommend their bank to friends, family and colleagues.

Another finding of my research was that households were most likely to shop around for insurance products. An important feature of these products is that they are annual contracts so there is an automatic, regular prompt to shop around. The CMA measures will try to mimic this for bank accounts by requiring banks to send existing customers prompts, suggesting that they shop around for a new account. These may be on a regular basis and also triggered by events, such as your local bank branch closing down.

While the CMA measures aim to tackle the particular shortcomings of bank customers that it has identified, they nonetheless overlook the wider context of households potentially being overburdened by multiple calls to become active and engaged consumers. My research suggests that, as the number of services you use increases, there may be resistance to taking on yet more shopping around.

Attempts by the government to get people to add bank accounts to this list may be an especially tough challenge and there may be a danger that shopping for bank accounts reduces the time and effort you are able to devote to shopping for other services. Regulators need to wake up to the fact that consumers simply may not be willing to take up the workload of driving the demand side of competition across multiple markets for household and financial services.

Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University

UK Bank Margin Pressure Mitigated by BoE Funding Scheme – Fitch

The Bank of England’s GBP100bn Term Funding Scheme (TFS) should partially offset the lower margins at UK banks stemming from the central bank’s recent rate cut, says Fitch Ratings. The scheme will provide a new source of cheap funding, but the extent to which lenders can avoid a margin squeeze will be linked to the amount of new lending extended by each bank and the deposit rates they offer.

We expect the majority of lenders to make use of the scheme because its 25bp charge is substantially lower than funding costs in wholesale markets or savings deposit rates. If lenders expand net lending between June 2016 and end-2017, they will be able to access more TFS funds; if lending shrinks, they will not be able to borrow more and TFS funding costs will rise. Banks and building societies can initially use the TFS to fund up to 5% of their existing loan stock. Lenders will be able to pledge assets and borrow four-year money from the BoE.

The TFS will also indirectly reduce funding costs because it will enable banks to force down deposit rates. With the generous-sized scheme, we think competition for deposits will fall and lenders will readily pass on the BoE’s 25bp base-rate cut to savers.

Under the BoE’s existing Funding for Lending Scheme, the benefit of cheaper funding was dependent on banks increasing their lending to certain sectors. Funding costs fell dramatically and we expect a similar result from the TFS.

A GBP100bn inflow of funding should prove to be ample for anticipated new lending requirements over the short- to medium-term. We also think the TFS will provide the sector with enough cheap funding to offset some pressures arising in the unexpected case that markets become dislocated as Brexit negotiations begin.

The extent of the benefit on net interest margins will be linked to credit demand from borrowers. The direct economic benefit will be reduced if the funds cannot be on-lent. But we still expect some benefit to filter through because savings deposit rates should fall overall and banks should see funding costs reduce as some wholesale funding is replaced with TFS funds.

Our UK GDP forecasts are for growth to slow to 1.7% in 2016 and 0.9% in 2017 – still high enough to support credit demand. But the Brexit negotiation phase is likely to mean that companies might delay decisions on non-urgent investments reflecting greater caution, and consumer spending and housing transactions could slow. We expect any reduction in loan growth in the foreseeable future to be driven by lower demand rather than funding supply given the number of measures introduced by the BoE. The TFS is one of a set of measures to support the economy and preserve financial stability.

The BoE took steps to ensure the banking system has ample liquidity immediately after the Brexit referendum. Regulatory capital requirements have also been reduced slightly through a reduction of the countercyclical buffer and an easing in the leverage ratio calculation.

Compared to many European peers operating in a negative interest rate environment, UK lenders are generally better placed to protect net interest margins. There is still room to lower deposit rates in the UK, whereas many peers already pay nothing for their deposits and would only be able to cut funding costs by charging retail depositors. To date, most lenders have been reluctant to do this.

We do not expect the BoE’s measures to impact the ratings of UK banks and building societies.

CMA paves the way for Open Banking revolution

The final report of the UK Competition and Markets Authority’s (CMA) retail banking market investigation, published today, concludes that older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services.

To tackle these problems, the CMA is implementing a wide-reaching package of reforms. Central to the CMA’s remedies are measures to ensure that customers benefit from technological advances and that new entrants and smaller providers are able to compete more fairly. The key measures, which will benefit personal and small business customers, include:

Requiring banks to implement Open Banking by early 2018, to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.

Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure but we will also be requiring banks to publish and make available through Open Banking a range of other quality measures.

Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. Unlike many other financial products such as home insurance, current accounts do not have annual renewal dates to act as natural reminders and other possible triggers like business growth are not prompting customers to review what they are getting from their bank.

Underpinning these remedies, the CMA is introducing further measures to make it easier for customers to search and switch. At the moment only 3% of personal and 4% of business customers switch to a different bank in any year. This is despite, for example, personal customers in Great Britain being able to save £92 on average per year by switching provider, with savings of around £80 a year on average available for small businesses. Larger savings are available for overdraft users – for example, personal customers who are overdrawn for one or two weeks every month could save £180 per year on average.

The CMA has also introduced specific measures to benefit unarranged overdraft users, who make up around 25% of all personal current account customers, and small businesses.

Banks make £1.2 billion a year from unarranged overdraft charges. Banks will be required to send alerts to customers going into unarranged overdraft, and inform them of a grace period, to avoid charges – research by the FCA has shown that this type of alert, when combined with mobile banking, can heavily reduce overdraft charges. Banks will also have to set a monthly cap on unarranged charges, and tell their customers about it.

The CMA found that small businesses lack tools providing comprehensive information about bank charges, service quality and credit availability. The CMA is throwing its weight behind the independent charity Nesta in a new initiative to put this right, requiring banks to provide Nesta with financial backing and technical support, alongside introducing a range of other measures targeted at small businesses such as a loan eligibility tool.

Alasdair Smith, Chair of the retail banking investigation, said:

The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.

We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.

Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.

This is backed up by a wide package of measures to improve the current account switching service, to make it easier for small businesses to shop around and open new accounts or get a loan, and to see how the quality of service provided by your bank compares with other providers.

We are also taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them. Alongside this, banks will have to cap their monthly charges for unarranged overdrafts.

The CMA will now focus on putting in place the remedies announced today, working with others whose role it is to make individual remedies happen, such as HM Treasury, FCA, Bacs and Nesta

BoE Stimulus Cushions But Will Not Offset Brexit Shock

The Bank of England’s (BoE) decision to cut rates, expand its bond buying and set up a new funding scheme for lenders is a proactive policy response to the EU referendum. But it is only likely to cushion, rather than fully offset, the shock to UK growth that June’s Brexit vote will cause, Fitch Ratings says.

The balance sheet expansion goes beyond our expectations and includes innovative measures to mitigate potential unintended consequences of policy easing.

The BoE cut the base rate to 0.25% from 0.5% – the first change in over seven years. It will expand UK government bond purchases by GBP60bn, and will purchase up to GBP10bn of UK corporate bonds. The BoE also announced a new Term Funding Scheme (TFS) aimed at ensuring the base-rate cut is passed through to borrowers.

We incorporated lower rates into our post-EU referendum update of our UK macro-economic forecasts, cutting our end-2016 policy rate forecast to 0.25% from 0.75%.

The BoE had already reduced the counter cyclical capital buffer for UK banks. Combined with a rate cut and increased quantitative easing, such measures forestall the risk of a significant tightening in credit conditions that would compound the impact of the Brexit vote.

But they will not outweigh the impact on investment as firms reduce capital spending due to sharply heightened uncertainty surrounding the UK’s future international trading arrangements outside the EU and related political and regulatory uncertainty. We expect investment to be 15% lower by 2018 relative to our May forecast.

The referendum will take a significant toll on the economy despite sterling’s fall potentially supporting exports. This is reflected in our latest growth forecasts of 1.7% in 2016 (down from 1.9% in May) and 0.9% in 2017 and 2018 (from 2.0%). The BoE’s assessment suggests sizeable concerns about the near-term outlook as a number of survey-based indicators have deteriorated dramatically. They are now forecasting 0.8% GDP growth in 2017, down from 2.3% in the May Inflation Report.

The BoE’s purchases of corporate bonds may boost investor appetite for higher-yielding instruments, but UK corporates have little need to raise significant new debt. Slightly lower funding costs will be less of a factor for corporate credit profiles than weak growth and sterling depreciation.

The BoE is cognisant of the potential consequences of very low interest rates on the financial sector. The TFS will enable eligible institutions to borrow central bank reserves at close to the Bank Rate. Funding costs will be lowest for banks that maintain or expand net lending.

This reduces the risk that the rate cut further squeezes margins at UK banks as they face additional pressure on revenues from a contraction in investment and slowdown in consumer spending. Nevertheless, while restating his opposition to negative interest rates, BoE Governor Carney emphasised that there was scope to increase all of today’s measures.

Building societies and banks whose business models rely heavily on net interest income and where liquidity buffers are held largely as cash at the BoE are most exposed to lower-for-longer rates. Their net interest margins are generally highly correlated to base rates, and given their low-risk, low-yield model, lower spreads could affect profitability.

The effect on insurers will depend on whether longer-dated bond yields continue falling. UK non-life insurers may feel the most direct impact because they tend to invest in shorter-duration bonds, and their asset portfolios are reinvested relatively quickly into prevailing yields. This would lower investment income, putting pressure on earnings and potentially driving higher premiums, but insurers would balance this against potential loss of market share.

UK life insurers’ balance sheets are less exposed to interest rates or bond yields, because the duration of their assets and liabilities are closely matched. Lower rates and yields could further reduce demand for annuities, but could modestly help demand for unit-linked or with-profits products given the low rates on bank savings.