Topic 2 Flashcards
What is effective competition
Banks compete to serve customers well rather than exploiting lack of consumer awareness or poor regulation - acting with best motives to make products meet consumer needs and are reasonably priced
5 features of good competition
Lots of competition
All products are well designed and respond to customers needs and long term interests
Charged at reasonable interest rates and fees that are fair and reflect cost of provision
Do not sell unless suitable and no undue pressure
Transparency
4 features of bad competition
Few large and powerful providers that aim only to maximise profit
3 examples of wasteful competition
Spend lots of money designing, branding and marketing an only slightly different product - could’ve been better spent on reducing price of existing products
Added features are wasted if they are not necessary eg) packaged accounts
Excessive advertising is wasteful and annoying
Why do new financial products become more complex? Why s this bad?
In order to differentiate, providers add special features which impose additional conditions to the T&Cs
This is not good because to be sustainable, consumers must be well informed about products
Consumers are the demand side of the market, they rarely act together to tell providers what they want, if consumers are well informed and financially capable, the demand side would become more powerful, demonstrated by which 2 key ways?
Customers must be willing and able to compare products to find ones which are most suitable
Customers must be willing and able to switch providers without incurring a penalty charge, if they find a cheaper product - large degree of inertia (fear or change) so do not make changes regularly
What is a pressure group
Represents the views of consumers, aiming to give them a voice and increase the power of the demand side
Save Our Savers is a pressure group which believes savers must be supported and rewarded for saving, what do they campaign against
Devaluation of savings through inflation
Artificially low interest rates
Unfair legislation and taxation
Exploitive financial practices
The Financial Services Consumer Panel is an independent voice for consumers of financial services what are their 6 main interests
Supervision of consumer credit sector
Consumers ability to obtain redress and compensation
Making sure products do as they say
Price transparency, financial advice and product accessibility
FCAs remit to deal with issues that prevent effective competition
Effective consumer representation at EU levels
What 2 key aspects affect degree of competition for the supply side
Degree of competition
Barriers to entry
Explain the degree of competition in the financial services industry
A highly concentrated market, lots of big banks taking over weaker ones, concentration ratio defines what % of the market is owned by each provider
The big 5 make up 85% of the current account market
What is a key issue with trying to compete on oligopolistic market
Consumers have a lot of knowledge of their products and prices, so compete less on price and more on product differentiation and heavy marketing
What are the key barriers to entry that the CMA found new firms face
There is existing customer loyalty to other brands and customer preference for bigger brands
These barriers deter new firms as they do not believe that they can gain enough to cover their higher start up costs and achieve successful market share
Financial regulators want more competition to encourage better service and lower charges and more choice for consumers, this must be ‘genuine competition’ what does this mean?
Providers must be interdependent of each other, products must be useful, adaptable to different circumstances and fairly priced
The Independent Commission on Banking (ICB) says one way to improve competition is to encourage challenger banks, what does this mean?
ICB want to make a more competitive market by securing the emergence of strong challenger banks
Governments could encourage this if regulators treated them more leniently in terms of rules on capital and liquidity and encourage them to buy branches of RBS and Lloyds TSB
could also put a cap on market share and limit mergers
The ICB also want to reduce barriers to entry, what 3 barriers to they want the government to pay attention to?
Prudential capital requirements - new bank may not be able to raise enough capital
Access to cash handling facilities - not have as many branch locations for customers
Access to the payments system - not large enough to be included in payments clearing system, would have to clear receipts and payments via a larger bank
Explain the main objective of the FCA
To promote effective competition, benefits customers by offering better value, genuine choice, quality products and services
Explain the FCAs mobilisation phase for new entrants
To reduce barriers to entry, allows potential competitor to gain authorisation at earlier stage of development - less costly to apply before investing in infrastructure
The CMA is responsible for monitoring and regulating competition, min goals include extending competition and protecting consumers, what 5 things are they responsible for ?
Investigating mergers which could restrict competition
Investigating areas where there may be potential competition and consumer problems
Investigating breaches of regulation
Bringing criminal proceedings to those who commit competition offences
Enforcing consumer protection legislation
93% of adults have a savings account, £354billion in easy access accounts
For what 3 reasons is the cash savings market not working well for consumers ?
Many accounts are old and do not pay as well
Providers do not make customers aware of better savings
Consumers are put off switching due to hassle
Retail banking customers have little influence over the banks, what is their only option
To switch accounts, but due to similarly low interest this has limited impact
Must band together as a pressure group to be successful
