UK Minimum requirements for eligible liabilities and own funds (MREL)

Given the current debate about “Unquestionably strong” banks, it is worth reading the Bank of England’s approach to minimum loss-absorbing capacity these institutions must hold, and how it can comprise both ‘going concern’ and ‘gone concern’ resources.

The Bank of England published a Statement of Policy on our approach to setting MREL (a minimum requirement for own funds and eligible liabilities) for UK banks, building societies and the large investment firms on 8 November 2016.

These rules represent one of the last pillars of post-crisis reforms designed to make banks safer and more resilient, and to avoid taxpayer bailouts in future. Banks are now required to hold several times more loss-absorbing resources than they did before the crisis, while annual stress tests check firms’ resilience to severe but plausible shocks. Banks are now also structured in a way that supports resolution. The Bank of England now has the legal powers necessary to manage the failure of a bank, and significant progress has been made to ensure there is coordination between national authorities should a large international bank fail.

The new rules will be introduced in two phases. Banks will be obliged to comply with interim requirements by 2020. From 1 January 2022, the largest UK banks will hold sufficient resources to allow the Bank of England to resolve them in an orderly way.

What is MREL?

MREL is a critical part of a resolution strategy. It determines the minimum loss-absorbing capacity these institutions must hold, and it can comprise both ‘going concern’ and ‘gone concern’ resources.

Going-concern resources, typically in the form of common equity, absorb losses in times of stress and ensure that a bank can keep operating and that it can maintain the supply of credit to the economy.

Gone-concern resources, typically in the form of debt, absorb losses when a bank undergoes resolution or is placed into insolvency.

Smaller institutions that provide banking activities of a scale that means that they can be allowed to go into insolvency if they fail, will satisfy MREL by simply meeting their minimum regulatory capital requirements as a going concern. There is no gone-concern requirement for these firms. More detail on the capital framework for bank capital is set out in the Supplement to the December 2015 Financial Stability Report.

But larger banks and building societies with a size or functions that mean they have a resolution plan involving the use of the Bank’s resolution tools will be required to hold additional MREL beyond their going-concern requirements.

In addition, firms are expected to hold going-concern capital buffers on top of these requirements. The buffers are calibrated to recognise systemic importance or idiosyncratic exposures, and are intended to be used so that banks can absorb losses without breaching minimum requirements. As these capital buffers are not permitted to count towards meeting MREL, they add to the total loss-absorbing capacity of each bank.

How much MREL must larger firms hold?

The MREL for large firms is needed in a resolution both to absorb losses and to recapitalise their continuing business. Our policy is that from 1 January 2022 they should be required to hold both their going-concern requirements together with additional MREL of an amount equal to those going concern requirements. In other words, their MREL will be two times their going-concern requirements.

These UK firms will become subject to interim requirements on 1 January 2020, prior to the final requirements coming into force in 2022. We will review our approach to calibration of the 2022 MREL for all firms before the end of 2020, before we set final MRELs. In doing so, we will have particular regard to any intervening changes in the UK regulatory framework, as well as institutions’ experience in issuing liabilities to meet their interim MRELs.

Table 1 below provides the estimates of the interim and final consolidated MREL requirements that we have sent to each of the UK’s global and domestic systemically important banks. As a firm’s MREL will depend upon its going concern requirements in a particular year, these 2020 and 2022 MRELs are simply indicative and are based on the calibration methodology set out in our Statement of Policy, with reference to the firms’ minimum capital requirements and balance sheets as at December 2016.

In addition to the global and domestic systemically important UK banks, there are eight other UK banks and building societies that currently have a resolution plan that involves the use of resolution tools by the Bank (rather than reliance on the insolvency regime). These are:

  • Clydesdale Bank
  • The Co-operative Bank
  • Coventry Building Society
  • Metro Bank
  • Skipton Building Society
  • Tesco Bank
  • Virgin Money
  • Yorkshire Building Society.

Table 2 provides the average of the indicative 2020 and 2022 MRELs and total requirements for these other firms.

We have provided an average for these firms as publishing MRELs for each of them would also reveal the firm-specific element of their capital assessments, many of which have not previously been disclosed. Accordingly, the Prudential Regulation Authority will consider its disclosure policy and undertake the appropriate consultations before a final decision on publishing individual MRELs for these firms is taken.

The Co-operative Bank has been excluded from the calculation of the average because the firm is currently seeking a sale, which has the potential to significantly affect The Co-operative Bank’s balance sheet. Therefore an indicative MREL based on The Co-op’s balance sheet today may not be a useful guide to the eventual requirement.

Lloyds Bank is shrinking hundreds of UK branches to be staffed by just 2 people

From Business Insider UK.

Lloyds Bank intends to shrink hundreds of its UK branches due to growing numbers of customers using online banking, according to a BBC report.

Its new “micro-branches” will have no counters and just two staff carrying mobile tablets, who will help customers use in-store machines, such as pay-in devices.


The new “micro” format will use much less space than existing branches, in some cases as little as 1,000 square feet.

The bank said the reason for the move was a “profound change in customer behaviour” which has seen growing numbers of transactions move online.

Some of the branches being converted will be Halifax and Bank of Scotland branches.

Jakob Pfaudler, Lloyds’ chief operating officer for retail, told the BBC: “We have a lot of branches that used to have a lot of footfall, and therefore feel quite empty and intimidating for customers. So when there’s too much space we may board up places in existing branches.”

In 2014, Lloyds announced a separate plan to close 400 branches over three years, with the loss of 9,000 jobs. It will have 1,950 left in the UK by the end of 2017.

UK Bank Capital On The Rise

The latest release from the Bank of England shows that the common equity Tier 1 (CET1) capital ratio for the UK banking sector increased by 0.3 percentage points (pp) on the quarter to 15.1%, 1.1 pp higher than in Q4 2015.

The quarterly increase was driven by small movements in both the level of CET1 capital (increase) and in the level of total risk-weighted assets (decrease).

The reduction in risk-weighted assets was driven by small decreases in most risk categories.

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

From The UK Conversation.

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.

  1. 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.
  2. 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.
  3. The right to essential financial services that are appropriate and affordable such as a transactional bank account, savings and insurance.
  4. 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 everstress 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-2The 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

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.

boe-20-octBut 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