Vulnerable consumers continue to be at the forefront of the FCA’s conduct agenda. While the FCA’s business plan for 2018/19 dropped consumer vulnerability as a cross-sector priority, our view is that this is not because vulnerability has become any less important to it. Rather, as explored in our recent stock take on the FCA’s approach to vulnerability, we see evidence that the FCA is embedding vulnerability into all aspects of its supervisory approach and programme of work.

One of the FCA’s key forthcoming reports with a strong focus on vulnerability will be its Strategic Review of Retail Banking Business Models. Launched in April 2017, a key area of focus for the review is whether free-if-in-credit (FIIC) banking leads to cross subsidies between poorer, potentially vulnerable consumers (who often use overdrafts with high associated fees and charges), and wealthier consumers who generally use these features less, and who benefit most from free personal current accounts (PCAs).

Ahead of the results of the review being published, this blog considers whether the FCA is likely to find evidence that the FICC model creates cross subsidies between poorer and wealthier consumers, and considers what actions the regulator might be minded to take in either case.  Overall, and in light of recent statements from the FCA, we think the most likely course of action is for the FCA to extend its payday loan cap to bank overdrafts.  We also highlight the importance of firms following the review closely because of the wider range of banking issues it covers and because of the likely implications for their business models.

The CMA and FIIC banking

The FCA is not the first UK regulator to look at the question of FIIC banking. The Competition & Markets Authority (CMA) recently undertook a multi-year competition review of the UK’s personal current account and SME banking market, with its final report and findings published in August 2016.

While the CMA’s report explored the distributional impact of FIIC banking, their narrower remit (only to consider competition, compared to the FCA’s broader responsibility for consumer protection), meant the focus of the report was different from the FCA’s ongoing review and looked purely at the competitive dynamics of the market.

The CMA ultimately decided not to ban FIIC banking, or to place a cap on overdraft fees and charges. Instead, their proposed remedies focused on encouraging consumer switching and acted as an important catalyst for much of the open banking agenda (which requires banks to share their data with third-party technology providers, thus opening up the market to other firms).

Some stakeholders argued that the CMA had failed to take a tough approach and was too timid in its recommendations. This included Treasury Committee members, who criticised the report when they interviewed the CMA’s lead investigator, Alasdair Smith. One Committee member, Rachel Reeves MP, accused the CMA of “a dereliction of duty” because of its failure to crack down on overdraft fees, while the Committee’s then Chairman, Andrew Tyrie MP1 , said that they had “dropped the catch.”

Having declined to cap overdraft fees, the CMA was then criticised for recommending that the FCA look at introducing a cap on unauthorised overdraft fees. However, as the CMA’s statutory powers extend only to promoting competition, its scope to pursue consumer protection issues was limited.

It is against this background that the FCA’s review was launched.

What were the CMA’s findings on FIIC banking?

Notably, the CMA’s evidence suggested that the premise that FIIC banking results in poorer, potentially vulnerable consumers cross subsidising wealthier ones, is too simplistic, and that it is actually wealthier consumers, with higher credit balances, who generate most of banks PCA revenues and so are likely to cross-subsidise other consumer groups.

The main piece of evidence in the CMA’s assessment of the FIIC model was a breakdown of the revenues banks generate from PCAs.2


The table, which amalgamates the current account revenues of every major UK bank, shows that overdraft charges (arranged and unarranged) make up 34% of bank’s current account revenues; arranged overdrafts make up 20% of revenues while unarranged overdrafts are 14%. Interchange fees and foreign exchange fees make up 10% and 5% of revenues respectively, while monthly account fees make up another 12%. What the CMA calls “net value of funds”, the value that deposits provide to the banks as a form of funding and the margin earned in lending them out (known as net interest margin) provides 50% of all revenue.

The wealthiest customers will likely have the largest deposits and those using overdrafts will have little or no money deposited – wealthier consumers would therefore be expected to generate the vast majority of “net value of funds” revenues. Wealthier consumers who spend more and are more likely to travel abroad3 will also generate the majority of the interchange and foreign ATM and exchange revenues identified above. Given that these sources of revenue are nearly double those from overdrafts, it seems unlikely that vulnerable or lower income consumers are cross-subsiding higher income consumers.4

The picture on cross subsidies is in fact more complex. The data suggest that these two groups may be cross-subsidising a third group of consumers who neither have large balances nor use overdrafts and so generate little revenue for banks. Consequently, while there may be cross subsidies present within the FIIC model, these are unlikely to affect vulnerable consumers alone.5

What conclusions is the FCA likely to reach about FIIC banking?

When the review was launched the FCA noted that “In the UK most consumers hold a free-if-in-credit PCA, and do not pay regular fees for using the account’s core transaction services. The prevalence of the FIIC model has caused public debate about whether it creates distributional issues, where some consumers pay more (or less) than others depending on their mix of products and/or how they use them… [We] are interested in whether vulnerable PCA consumers are particularly profitable for banks. This could indicate distributional issues, for example if vulnerable consumers pay (significantly) more than others.

In order to conclude that banning FIIC banking is necessary, the FCA would presumably need to find new evidence which contradicted the CMA’s previous data and findings. For the evidence to support a ban on FIIC banking, banks’ business models will need to have changed dramatically since 2014, such that they are now much more reliant on overdraft fees.

Instead, recent announcements from the FCA suggest that it is more likely to crack down on unarranged overdrafts, which would tackle-directly a source of high costs often faced by vulnerable consumers and address the FCA’s concern that some vulnerable consumers may “pay (significantly) more than others.”

At the end of January, the FCA published an update on its high cost credit work, part of which looked at unarranged overdrafts. The FCA said that it “remains concerned about the high fees and charges for unarranged overdrafts, especially when compared to the relatively small amounts lent”, and that its analysis would feed into the retail banking business models review. The FCA’s 2018/19 Business Plan confirmed that the FCA would look to take action, and consult on measures around overdrafts to address low customer engagement, promote competition and improve transparency for customers in May 2018. Subsequently, [it] will use the evidence and insight from the Strategic Review to inform the exact design of any wider package of remedies.”

Most recently, overdrafts were mentioned by FCA CEO, Andrew Bailey, in a speech on high cost credit he gave in May. Bailey said that he was “aware that some stakeholders have called for us to introduce price capping in other areas of the high-cost credit world, and overdrafts. We are examining a range of potential approaches to address the harm we see to consumers using these products.”

One option for the FCA would be simply to ban unarranged overdrafts. However this could lead to a variety of adverse consequences, as consumers would be unable to pay important bills or purchase essentials if they were prevented from withdrawing additional funds from their accounts.

More likely is that the FCA will look to bring overdrafts into the scope of its cap on high cost credit, which was originally introduced to tackle excessive charges in the payday lending sector. Capping overdraft charges was identified as an option in some of the Treasury Committee’s criticisms of the CMA’s original review.6 While the FCA and other regulators have seen important disadvantages to using price caps , the FCA’s original cap on high cost credit has shown its willingness to use this as a tool in certain circumstances. In other sectors, e.g. the energy market, regulators have been willing to cap prices, suggesting that the use of price caps is gaining prominence as a regulatory tool.

Conclusion: implications for firms

We think it unlikely that the FCA’s review will abolish the FIIC model, which would have major consequences for the retail banking market. More likely is the introduction of a cap on unarranged (and possibly arranged) overdraft fees.  Firms might therefore consider a scenario in which their business model needs to be adapted to meet the financing needs of consumers, and to respond to the potential loss of certain revenue streams.  They might also want to consider what other banking activities might in future be reviewed because of similar regulatory or political concerns about vulnerable consumers.

The review will touch upon a wider range of topics and is not limited to the distributional issues around FIIC banking and overdraft charges. Some of the other issues to be explored in the review include branch closures, the emergence of challenger banks and the increasing importance of new technology. Consequently, firms might also revisit the implications for their technology and digital offerings against the changing banking landscape and the new Fintech products facilitated by the open banking initiative.


1Andrew Tyrie has now been appointed to chair the CMA
2Table 5.7 from the CMA’s Retail banking market investigation final report, August 2016, p104.
3ABTA data shows that 25% of UK consumers take no holidays at all, while the wealthiest consumers take up to 8 a year.
4This conclusion is further evidenced by Annex 6.9 of the CMA’s review, which relates specifically to FIIC banking. Here the CMA notes that the average monthly cost paid by consumers for a PCA is higher for those accounts with higher balances, with forgone interest representing a large proportion of this cost, leading the CMA to conclude that “customers with high credit balances pay more (directly and indirectly through interest forgone) than customers with low credit balances.”
5The issue of cross subsidisation and FIIC banking is also discussed in the FCA’s Occasional Paper on price discrimination and cross subsidy. Here the FCA states that: “Banks must somehow cover the costs to provide these [free accounts], such as through (often high) overdraft charges and other ancillary charges, or by paying low interest on balances in credit. These charges and low interest rates are avoidable for certain segments of consumers, with the resulting concern that those consumers who incur the high overdraft charges or other ancillary charges, or who have a high balance, may be cross-subsiding those consumers who avoid such charges or loss of interest.”
Interestingly, the OP notes the potential for the FIIC model to create a cross subsidy between those with large deposit balances (typically wealthier consumers) and other consumers; a possibility which is not mentioned in the FCA review’s purpose and scope paper, but supported by the CMA’s data.
6At the end of April 2018 the Labour party moved to adopt an official policy of capping overdraft fees and charges
7The FCA’s Director of Competition and Chief Economist, Mary Starks, gave a speech in February 2018 on the use of price caps and how regulatory thinking had evolved.


Andrew Bulley

Andrew Bulley - Partner, Centre for Regulatory Strategy, Deloitte

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision.  Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”).  In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

Email | LinkedIn

Simon Brennan blog

Simon Brennan - Director, Centre for Regulatory Strategy, Deloitte

Simon specialises in prudential regulation for banks. Simon joined Deloitte after 11 years at the Bank of England, where he worked in a number of areas covering macro and micro prudential policy, and financial institution risk assessment.

Email | LinkedIn


Felix Bungay - Manager, Centre for Regulatory Strategy

Felix is a Manager within the EMEA Centre for Regulatory Strategy in Deloitte’s London office, where he focuses on conduct regulation across a range of financial services sectors. Prior to joining Deloitte, Felix worked at the FCA where he helped produce a wide range of the organisation's House and Sector Views, including those on Retail Banking and Lending, Retail Investments and Wholesale Capital Markets.

Email | LinkedIn


Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Comments are moderated, and will not appear until the author has approved them.