Understanding Market Competition

• Competition involves the number and size of sellers in a market.
• A competitive market has many sellers, with none dominating.
• Limited competition means fewer sellers, with some influencing prices and quality.
• The financial services sector in the UK requires more competition.
• Individuals choose financial providers and products for specific reasons.

The Importance of Competition

• Customers in the retail banking sector, which includes individuals and SMEs, have limited influence over financial institutions if dissatisfied.
• Depositors have limited power to negotiate higher interest rates on savings accounts.
• Interest rates are generally similar across banks.
• Depositors may need to form a pressure group to influence banks for better rates.
• Large commercial banks hold significant market influence and may not be seriously concerned by individual customer complaints.
• The market power balance favors suppliers over customers.
• Effective competition promotes more choices for individual consumers.
• Effective competition is defined as banks competing to serve customers well, rather than exploiting their lack of awareness or poor regulation.
• Banks should offer good, reasonably priced products that meet customer needs.
• Banks aim to attract and keep customers by offering the best deals, not by exploiting their ignorance or lack of assessment skills.
• In effective competition, customers can switch providers for better prices or quality.
• The threat of losing business motivates firms to provide value for money, high-quality products, and good customer service.
• Consumers must be informed, willing, and able to switch providers, which has been historically lacking in the UK.
• Measures are being implemented to encourage and facilitate easier switching.

Good and Bad Competition

• Good competition features various providers allowing consumer choice.
• Firms supply well-designed products that meet customer needs and long-term interests.
• Products are priced fairly with reasonable interest rates and fees that reflect the firm's cost, without excessive profit margins.
• Providers ensure product suitability before selling and avoid undue pressure on customers.
• Transparency is key, with full product information, clear terms, and customer understanding of financial implications.
• Firms avoid selling products unsuitable or too expensive for customers.
• Bad competition involves few, large, powerful providers aiming to maximize sales.
• Each firm supplies a wide range of similar financial products with little differentiation.
• Some products prioritize profit over meeting consumer needs, with sales staff pushing products even if unaffordable or unnecessary for customers.
• Providers offer superficial product information, highlighting attractive features while hiding disadvantages in fine print that customers are unlikely to read or understand.

Bad Competition in Practice

• Payment protection insurance (PPI) policies were widely sold in the 1990s and 2000s
• The Financial Ombudsman Service (FOS) estimates £50bn worth of policies were sold by hundreds of firms
• Millions complained of mis-selling, resulting in billions of pounds in compensation.
• PPI is sold to loan customers, covering repayments if they become unable to meet them due to unemployment or illness.
• Allegations of mis-selling included expensive policies sold to low-income individuals who could not afford the premium.
• Customers were sometimes led to believe that buying PPI policies were obligatory for loan approval.
• New rules now prevent providers from selling PPI policies simultaneously with credit.
• Some PPI policies did not allow customers to claim due to their circumstances, such as self-employment.
• The profitability of PPI led firms to promote policies aggressively, contributing to numerous complaints to the FOS.

Wasteful Competition

• 'Wasteful competition' occurs when providers spend heavily on designing, branding, and marketing products that differ only slightly from competitors.
• This money could be better used to reduce product prices.
• Some added features on bank products are unnecessary for customers.
• Banks offer various current accounts, from basic free accounts to enhanced charged accounts with added features.
• Enhanced accounts are chosen thinking that they are good value for money, but the benefits might be unnecessary.
• Customers might have existing coverage, or not need the added feature.
• Royal Bank of Scotland (RBS) offers four main types of personal current account (early 2019): 'Select Account', 'Reward Account', 'Reward Silver Account', and 'Reward Platinum Account'.
• Another example of wasteful competition includes high levels of advertising for financial products.

Product Complexity

• Financial services products' complexity makes them difficult for ordinary customers to understand.

• Financial services require consumer knowledge and understanding, and have complicated terms.

• Investment accounts and mortgage loans are inherently complex.

• Personal pension plans involves investing for retirement, which is complex and uncertain.

• To increase pension product returns, providers make difficult decisions and manage funds, leading to high charges.

• Competition drives providers to differentiate products, deepening the financial product's complexity.

• Providers add features and conditions to make their savings, loans, or pensions more attractive, resulting in products that are increasingly complex.

• Customers may choose without fully understanding, and might not appreciate the differences between brands of the same type of product.

• Providers occasionally seek a competitive edge by not clearly stating what the product involves in its advertising.

• Savings accounts from banks, societies, unions and peer-to-peer lenders have low returns, offer higher interest rates on specific accounts under certain conditions.

• Many accounts have features that make comparisons difficult like a minimum deposit, time rate, regular deposits and other products

• There is often tax implications

• Consumers want products that are simple with clear terms, conditions, and fees

The Competition Situation in the UK

• Competition in UK financial markets can be viewed from the 'demand' side (customers) and the 'supply' side (providers).

The Demand Side

• Retail financial product consumers (individuals and small businesses) are faced with the marketing efforts of financial services providers.
• Consumers are generally not organized nor act together to voice their needs or opinions, but now there are pressure groups.
• Pressure groups are needed because financial capability isn't high.
• Well-informed and financially capable consumers would make the demand side more powerful.
• Effective competition requires consumers to compare products, understand how financial products work, and consider the suitability of features.
• Many consumers lack financial awareness and sign up for unsuitable or misunderstood products, struggling with terms and conditions.
• Consumers can gain knowledge by reading product leaflets or browsing websites.
• Clear understanding of own circumstances helps consumers choose suitable products.
• Consumers need to be able and willing to switch providers without incurring charges or penalties
• Inertia exists where some customers stick with the same bank their whole lives.
• Younger people are more willing to switch, due to the the economy decline of 2007-08 financial crisis.
• Savers should look for alternative accounts, perhaps ones that also pay a bonus

Pressure Groups

• Retail financial product consumers are generally unorganized, there are some pressure groups to give consumers a voice and increase the power of the demand side
• Saves our Savers was a pressure group that belied savers must be supported and rewarded
• The group campaigned against devaluation of savings through inflation, artificially low rates, unfair taxation and exploitative practices
• Save Our Savers wanted providers to pay higher interest rates to savers, disclose interest rates being paid, and make fees manageable
• Save Our Savers is no longer an active campaign group, but savers still suffer from historically low interest rates
• The Financial Services Consumer Panel is an independent voice for consumers
• Our main areas of interest are supervision of the consumer credit sector, consumers ability to obtain redress and compensation, the provision of products that do what they say on the think, price transparency and the FCA's attempt to deal with issues that prevent competition
• The Financial Services Consumer Panel wanted a ban on adverts that referred to a specific rate of return

The Supply Side

• The two main aspects is the degree of concentration and barriers to entry
• The financial services sector is highly concenrated meaning there are few providers
• Weaker banks were taken over
• Concenration ratio is defiend as the percentage of a particular market that is accounted fro by a certain number of firms
• In mid 2014, the concenration ratio for the personal current account was at around 85%
• There are more compeltion in the savings and credit card marketers
• Mortgage and personaal loan markets are also concentrated
• A market with a small amount of large firms is called an oligopoly

Barriers to Entry

• The existence of barrier to entry are features that make it difficult for new firm to enter and compeltee
• The entry of new entrants to the financial services market face challenges in attractin customers for new entrants to the personal sector
• New entrants are faced with strong loyalty t existing brans and customer preference for banks with extenisve branch network;
• The existence of financial regulations make it difficult to compete successfully

The Need to Promote More Competition

• Lack of competition is bad for consumers because it has been difficult to switch banks.
• There is not much difference between the designs and prices of retail financial products on offer.
• The government and the finanical regulator want to promote more competition within retail bankig since they want better customer service
• Increased competition is called 'genuine competition'
• The larger financial institutions are corporated based on the motive for profit
• Goals of consumer protection come into conflict with wealth fare and stability of the financial system
• New competitors who are not restricted would put the customers interested first and design producs

Methods of Increasing Government

• Ways in which the compeition might be approved within the financial services are:
  • Encouraging challenger banks and reducing barriers to entry
  • Consumer choice and current accounts
  • Regulation

Encouraging Challenger Banks

• The best way to make the market compete is by being securing the emergence of strong new challenger banks
• A challenger bank has a strong incentive to grow with enough size to be seen as a viable alternative
• New banks like Virgin Money, Atom Bank and Metro Bank have entered the scene in the UK but remain small
• The government might encourage the emergence of challenger banks by giving leniency in reguarding their captial and liquidity The government might prevent large banks from increasing or by putting a cap on market share which would be difficult Another way is to encourage foreign banks spanish bank Santander did so in 2004, Swedish bank Handelsbanken has also opened branches Barries to entry include prudential capital recuierements, access to cash handling facilities and access to the payments system

Consumer Choice

• The ICB statedthat if consumser were able to exert more competitive pressure on banks, quantity adn quality of competition might improve
• Consumers needed to identify the products of minimum trouble
• Customers are not in he habit os comapring and switching

The Financial Conduct Authorit

• Effective competition is one of the FCA's objectives
• It see its role as that of prtecting and promoting competition in general
• Barries to entry should be lowered which helps new competitors enter the market
• It will be less costly for a new bank if it can apply for authorisation before it has to pay for developing its infrastructure
• Intervene in those issues that it believes carrt the greatest potenital harm to consumers and redressing issues like market power and account switching

The Competition and Markets Authority

• The Competition and Markets Authority (CMA) is responsible for monitoring and regulating competition
• It amis to consistently be extending compeltion adn proteccing consumers
• Investiating mergers and is in charge of consumer proteciton legislation

Consumer Environment

• There are 2 levels for a consumer when decided what financil services to buy
• Consider the type of product and what they are looking for
• Once a consumer is ready they need to choose the product and provider