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Opinion > U Account

The FCA and the law of unintended consequences

Alex Letts, founder and chief unbanking officer at U | 16:57 Wednesday 9th August 2017

“If any branch of trade… be advantageous to the public, the freer and more general the competition, it will always be the more so” The Wealth of Nations by Adam Smith .

The FCA handbook could have been written by Adam Smith. It says it “seek(s) to ensure and promote clean and competitive markets”. Yet, some of its actions seem blind to the law of unintended consequences. As a result, the outcome could be reduced competition and disadvantaged consumers. Not quite what Adam Smith had in mind.

Take the knee-jerk assault on the payday lending market, whipped up by a media frenzy and political pant-wetting. There were certainly issues that needed to be addressed, and the bad guys needed to be run out of town, however the industry really served a purpose. But, of course, bien-pensant Guardian readers and 'Outraged of Daily Mail' can now feel that they've done their bit, sipping their conscience-cleansing lattes, safe in middle-class comfort. Meanwhile, broke people get their hands smashed by hammers.

Next up is the retail banking sector, where “more competition” and “more switching” is the mantra of the FCA's political masters. “More nonsense” might be more apposite. A plethora of banking licences, easier application process and requirements have been introduced. No real harm in the objective when six companies own a whopping 95% of personal current account (PCA) market share. But is relentless regulatory pressure on pricing, the open banking rules, a new FCA review (because the CMA blinked) and so on, really the right answer?

The law of unintended consequences suggests not. Already, Atom Bank has postponed the launch of its current account, pointedly referring to regulatory uncertainty. Secure Trust Bank offloaded its consumer lending business and Norwich and Peterborough Building Society is due to be closing a number of branches. The other neo-banks must be wondering how they can make any money, ever, except perhaps from the biggest and wealthiest accounts. How does this help the mass market? It doesn't.

Increasingly, PCA provision is a volume game and that favours the mega-bank incumbents. They use PCAs as deposit and lending engines, not as profitable products. It is this that's anti-competitive, achieved via (what should be illegal, in my opinion) cross-subsidisation of costs. It is this that reduces competition.

So now there's a real threat of less and less choice, and greater monopoly. Much of that is down to political pressure on the FCA. And don't start me on the facile strategy for the ludicrous Current Account Switching Service. Adam Smith must be rotating in his tomb.

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