Key lessons from the FCA’s Retail Banking Strategic Review – growing competition, digitalization and innovation

The long-awaited decision of the Financial Conduct Authority 2022 Strategic Review of Retail Banking Business Models finds that digital innovation and changing consumer behavior are reducing the “legacy advantages” of large retail banks in the UK. The FCA report lays out key changes to competitive dynamics in the retail banking industry, identifies areas for improvement and calls for action to address them. We’ve highlighted some of the key takeaways below and how the FCA’s findings are likely to impact future investigations and regulations in the financial services industry.


The FCA report explores key trends in the retail banking industry in light of the continued advance in digitalisation, increasing attention to consumer protection and Covid. Whereas previous surveys have found the UK retail banking sector to be characterized by stable market shares, a low rate of change and low levels of innovation (see CMA 2016 retail banking market surveyas well as the FCA 2018 Progress report and Strategic review), the FCA’s 2022 report makes it clear that this is no longer the case.

Digitalization and changing consumer behavior increase competition

With persistently low interest rates putting pressure on financial returns, many expected the economic turmoil of recent years to negatively impact smaller banks and reduce their ability to compete with large, traditional banks. However, as the pace of digital innovation has accelerated in the wake of the pandemic, the FCA report confirms that digital challenger banks have in fact been buoyed by the continued influx of new “multi-homing” customers. “, whose money had previously remained in the accounts of their arch rivals. The report estimates that the average UK adult now has around 1.9 personal checking accounts (BCP), with digital challengers holding 8% of this newly expanded market. Interestingly, the pandemic has reversed a similar trend in micro-enterprise lending, with larger banks able to offer larger loans under Covid-related government loan schemes.

The FCA report finds that digital challenger banks have been leading the adoption of digital innovation in PCA banking, forcing major banks to modernize. He confirms that this trend has improved the quality of services and increased innovation, thereby improving outcomes for consumers and SMEs.

The report also finds that an increase in the use of mortgage brokers has benefited mortgage borrowers through lower interest rates. The number of consumers benefiting from standard variable tariffs has decreased, showing the value of intermediaries that enable consumers to compare different products more effectively. However, the FCA considers that there is still room for improvement in competitive conditions in mortgage and consumer lending. Large banks subject to the ring-fencing rules introduced in 2019 have benefited from additional liquidity that can be used for mortgages. Current accounts of digital challengers, on the other hand, are currently less likely to be used as primary accounts, which means lower balances, fewer transactions and less overdraft usage, and therefore funding advantages and revenue from lower commissions.

Look forward:

  • In light of these changing competitive conditions and industry developments in the retail banking sector, the AMC and FCA may need to assess whether remedies and undertakings arising from prior investigations remain necessary or whether some remedies and commitments can now be removed.
  • In all future market studies and surveys, the impact of digitalization and changing consumer behavior are likely to be the primary areas of focus.
  • The FCA report recognizes the positive impact of Open Banking in increasing competition and facilitating innovation by a wide range of players. The focus will now be on advancing open finance to enable easier sharing of consumer data to deliver benefits through personalized products, price comparison and easier switching.

More room for consumer protection improvements

While noting that digitalization and increased competition lead to benefits for consumers such as greater choice and lower prices, the FCA also warned that the changes should not come at the expense of better customer service. high quality : “we know that there is a significant proportion of consumers and businesses for whom competition may not bring the same benefits […] We have a role to play in ensuring that banks continue to have a strong focus on consumer outcomes, especially for users in vulnerable situations.”.

The FCA sets out some key points to consider as policy continues to develop in this area. These include:

  • Diversity of business models: the increased focus on digitization could mean that some consumers are worse off (e.g. due to branch closures). The FCA will continue to monitor business conduct to ensure special attention to the needs of vulnerable consumers. Diversity of business models has therefore been identified as essential to ensure competition in the sector.
  • Consumer protection in micro-enterprise banking: innovation and new entry into micro-enterprise banking must be linked to banks’ obligations to protect consumers and the economy from harm.
  • Regulation: the FCA reiterates in its report that well-designed regulatory intervention can yield concrete results. For example, the FCA points to the significant drop in returns on unarranged overdrafts following a reform of the overdraft market that came into effect in August 2020.
  • The new consumption obligation: the consumer obligation that is under consultation will compel businesses to deliver good results to retail customers and, the FCA hopes, will lead to a higher level of consumer protection. As explained in a previous blog postthe FCA intends to implement a significantly higher standard than the current rules provide, with the aim of finalizing the new rules by July 2022.

It is likely that consumer protection issues will form a key part of future investigations and regulations in the financial services sector. With this in mind, companies should take steps now to design and implement fair value assessments, demonstrate that prices provide fair value to consumers, and develop processes that consider specific categories of consumers (such as vulnerable customers).

What happens next?

Through this report, the FCA has issued a call for further action on outstanding areas for improvement, reaffirming its role in promoting competition in the interests of consumers. It aims to have discussions with banks on its findings and has invited views by March 31, 2022.

Please reach out to your usual Freshfields contact if you would like to contribute to this discussion and/or would like to have a conversation about what this means for your business. You can also learn more about the changing regulatory landscape globally in our Antitrust 10 key topics report.

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