Competition in the interests of consumers

We have to bring competition thinking, as it relates to our objectives and remit, into every decision, in every rule, in every action we take.

My Lord Mayor, ladies and gentlemen, thank you for that kind introduction – it is a great pleasure to be invited back to join you this evening.

A lot gets written about our industry, just this year two books – Michael Lewis’ Flashboys and Thomas Piketty Capital – have crossed from the business book shelves into the public imagination. Like many I suspect, I’ve read Flashboys but haven’t quite made it all the way through Capital.

And this week the economist who rewrote the rule book on regulation and competition was awarded the Nobel Prize. So it seems apt to discuss how the Financial Conduct Authority has been influenced by the extension of its remit into competition.

Jean Tirole has spent a career looking at industries dominated by a few major players. Before his work the consensus was that there were general principles that could be applied to all industries and that imperfect markets could be corrected with simple policies rules, price caps and the control of market share.

What Tirole has provided us regulators with is a practical toolkit – showing us that rules will only work in certain conditions, regulation can do more harm than good, particularly price capping, and that co-operation can sometimes be more helpful.  

His conclusion – the best regulator or competition policy should be carefully adapted to specific industry

Jean Tirole, after receiving the award, was asked how he would sum up his contribution to regulation. His answer was – ‘it’s complicated’.

I don’t think that revelation was what won him the Nobel.

Rather, Tirole has discussed the essential challenge of regulation, setting the framework but giving enough space to participants to innovate and flourish and serve the public as we would all want.

This is vital to our approach given our new competition objective.

In the aftermath of the financial crisis, we saw competition in many financial markets lessen as concentration increased.  

Today, the outlook is different. We see new entrants joining the market, or poised to join. We see new models shake up established markets – peer-to-peer lending being only the most fashionable.

Our reaction to these developments will be one of the defining characteristics of the FCA, helping to shape a market that offers consumers alternatives, products that meet their needs, delivered in a way that fits with how they live.  

Given that, it is right that we set out our view. What is the right level of disruption? How do you reconcile consumer protection with attempts to lower barriers to entry? What role does information asymmetry play and what can be done to ensure it doesn’t inhibit consumers from exercising the choices open to them?

In short, what does competition in the interests of consumers mean?  

Early successes

Before attempting to answer those questions it is worth looking at what we have been doing already.

Despite the competition team growing from nothing in just over a year, its workload has been considerable and its achievements impressive.

We haven’t simply tinkered around the edges – for example by taking on a market study in retirement income we have launched ourselves directly into markets that affect everyone in the UK, such as cash savings and general insurance add-ons.

In addition, we have been establishing the Payment Systems Regulator. The new body, which will oversee the £75trillion payments industry, will focus on competition issues, alongside innovation in the sector. Payment systems are in many respects the plumbing of the financial system. They are critical – we need to get this regulatory framework right – which is why we will be consulting on our approach later this year.

But competition will not simply sit as a discrete function within the FCA – the responsibility of a handful of teams. Instead, we have to bring competition thinking, as it relates to our objectives and remit, into every decision, in every rule, in every action we take.

To do that successfully, we are required to adopt a new approach.

Shifting culture – project innovate

One example of that change is our commitment to support innovation. We’ve committed to opening our doors to those – regulated and not – who come with new ideas about how to deliver financial services.

This is absolutely vital, as the regulatory system could result in an unconscious bias towards the status quo.

Large incumbent firms, with the relative risk and impact on consumers they have, rightly enjoy close supervision. I use the word ‘enjoy’ here carefully.

The closeness of that supervision means that if any of these companies has a question for us they know who to call, assured they’ll get an answer quickly.

To the app developer working alone who to call is not as obvious. And the answer won’t come so quick.

That is why we have promised to set up an innovation hub, so those who have fresh ideas can access our expertise to better understand the pitfalls and opportunities.

In addition, we will give the market more clarity on our expectations. In the advisory industry, we recently gave guidance on where the line dividing regulated advice and unregulated guidance fell. The aim was to provide certainty to those firms which, in response to the Retail Distribution Review, are looking at how financial advice and guidance can be delivered to those on smaller budgets or without deep pots to invest. How to automate part of the process. How to deliver a clean and efficient experience over the internet.

We have also seen some success by simplifying our authorisations processes. With the Prudential Regulation Authority (PRA), we have changed the way that banks seek approval, with more support offered for those applying.

There has been no lessening of the high standards we expect and consumers deserve, but we have looked closely at what we can do to make sure they do not become insurmountable barriers to entry. For example we have resolved the Catch 22 of banks needing to raise capital before authorisation but being unable to do so until they were authorised. Today, banks can gain approval in stages giving them time to raise the capital they need.  

Opening our doors and providing support will not be about picking winners. Quite the opposite; it is about levelling the playing field by giving all firms eager to innovate access to us so that the process of joining the financial markets or introducing new products does not seem so daunting.

Disruptive times – consumer reaction

There remains, however, a question mark about consumers' ability to embrace choice in financial services, even where it exists.

Superficially at least, the statistics appear to bear this out. For example, even after the introduction of seven day switching, current account turnover is improving but remains low. You are still more likely to change your spouse than your bank.

We’re told that faced with information asymmetries, and with a low level of financial literacy, consumers simply become apathetic. That it is dead legs guiding the market more so than the invisible hand.

This is not a new issue, nor is there one quick fix. We have been working hard with industry on applying the lessons of behavioural economics to financial services to boost engagement with consumers. This goes hand in hand with better, smarter disclosure by firms so that consumers are not put off by lengthy and complex terms and conditions. At one bank, the terms and conditions are longer than Macbeth, and read even less frequently.

True innovation also has a vital role to play. To assume continuing consumer lassitude is to assume that financial services will continue in the same vein; similar products delivered as they always have been.

A controversial example of how a simpler language can shake up a market is the payday industry. We know that many people turned to the online lenders in particular because they had nowhere else to turn. For others, however, the attraction may have been convenience.

There is a lot the payday industry does not do well:  but the relative ease of going online, simply choosing the amount you want to borrow on a website refreshingly free of jargon, and to get an immediate decision, for many people, has its merits.

Yet it would be wrong to assume that this is the preserve only of new challengers. The power of incumbents to take up the technological challenge should not be under-estimated. While Ocado pioneered online grocery shopping – and remains successful – the convenience of buying the weekly shop on the internet caught the public imagination when the major supermarkets began offering the service. With their huge reach, they were able to popularise the innovation – saving their customers time and effort.

The financial services in the UK have similar pedigree; from cash points to contactless, we have seen the big players support new technology. Our major banks need to be the innovators just as much as small start-ups.

The reaction of the market; the reaction of the regulator

Technological development has been named the fourth biggest challenge for their firms by senior executives. It was listed as 18th just two years ago. 

In other markets change as a result of technological advancement has been as rapid as it has been significant. 

The dismissal of music downloading as a fad by senior executives at HMV resulted in a high street stalwart and market leader disappearing in a matter of years as consumers adopted the new technology. 

That level of change at that speed can be daunting, particularly for regulators.   

Many will rightly ask, therefore, whether we would accept change, certainly at the speed and scale we have seen elsewhere. 

The answer is yes, if it can be properly managed and consumers still benefit from appropriate protection.  

This is the moment on which our success will turn. I am struck by parallels between the choices we now face and those for the Office of Fair Trading (OFT), which sought to liberalise the pharmacy market in the early 2000s.

On the one hand, there was the need for strong consumer protection. After all, consumers are generally no more versed in the finer points of pharmacology than they are on the intricacies of finance. As a result some protection was needed and the result was some barriers to entry.

But the OFT decided to reduce those for community pharmacies, allowing any business with appropriately qualified staff to dispense prescriptions. As a result, there was an almost 9% increase in the number of community pharmacies in the UK, particularly in the areas of most need. What’s more, even established pharmacies extended their opening hours. 

Seven years later, consumers were as much as £68m a year better off. Access was improved, important for those reliant on prescriptions, and 1.6m people were taking advantage of longer opening hours.

More importantly, the reduction in consumer cost and increase in convenience came free of negative consequence. Consumer protection was not lessened – pharmacy customers still enjoyed help from those expert in their field, but they were now able to do so at times and places that suited them.

This is the balance that we should be aiming for – change, some disruption, new models of distribution but all of it with the interests of the consumer at its heart.

Conclusion

We want to ensure that a competitive financial services market works for the interests of consumers, with adequate protections in place.

To return, finally, to Tirole’s complications, he believes effective regulation must allow for innovation and investment. This suggests that it is the players in the industry – the firms themselves – that are the most effective regulators, because they are the ones with the most perfect knowledge of imperfect markets. And, because a failure to regulate themselves can lead to lost customers, smaller market share, impaired profit. That means competition and choice in markets, better products and better disclosure.

Our role is ensuring that the right incentives are in place for both the regulator and the regulated; that the rules of the game are such that firms can thrive in the public interest.

To better set these rules we have created, in conjunction with Henley Business School, a master’s degree in financial regulation. This will set a global standard. It is a fresh approach that tries to move away from the game of hide and seek that Tirole sees – instead it will help provide certainty in a period of change and the tools so that both sides can see how financial services, even in imperfect markets, can deliver what consumers need.

This will help foster a stronger set of leaders in both the regulators and the regulated.  And it is important that we also consider the next generation of leaders. It is in this context that I commend the work of the City of London Corporation in helping City leaders to become governors on the boards of local schools – which I fully support. This important work will help ensure that financial services leaders have the interests of consumers and the markets they operate in at the forefront of their minds now, and in the future.

In short, initiatives like this will help us prepare for the rapid change that could be as revolutionary for the financial services as the Big Bang before it. Unlike the liberalisation of the 80s, and all the cynicism that went hand-in-hand with it, we want to ensure we have a competitive financial services market.

The means to achieve that are, as Tirole has said, complicated. It’s not just about the simple toolkit of deterrent fines, or bonus clawbacks, important though they are. It’s also the right competitive environment. The FCA is committed to deliver its part in creating that environment.