Five years ago, Liz Truss spoke at an SMF event about the benefits of competition in a market economy. Scott Corfe examines how much has changed since then and argues that “Trussonomics” must focus on making consumer markets more competitive – both to accelerate economic growth and to address the cost of living crisis.
Competition is an area where we have to be constantly vigilant…we have to be absolutely careful to say that the benefits of competition are huge and the benefits of the way we operate a market economy are huge.
~ Liz Truss, then Chief Secretary to the Treasury, at an SMF event at the 2017 Conservative Party Convention.
It was the launch event for a report co-authored by myself and Nicole Gicheva, which examined how UK markets conformed to the economic ideal of “perfect competition” – where companies compete intensely for customers and constantly push prices down and put pressure on consumers Quality.
This notion of competition is often used to extol the relatively ‘free market’ prevailing British economic model. But as our analysis has shown, many of the markets consumers interact with every day fall far short of the ideal of perfect competition. From banks to telecoms to energy, a small number of companies dominate the market.
This in itself wouldn’t be a problem if it meant that these titans compete intensely for customers, and their size translates into efficiencies and lower prices.
The reality, however, is that consumer inertia is often pervasive, driven by a complex array of factors from vulnerabilities (e.g., financial hardship and mental health issues) to customers being overwhelmed by the complexities associated with the Navigating in often complicated markets is confused. With only a small proportion of customers switching banks, broadband providers, or gas and electricity providers each year, there is little pressure on large companies in these sectors to up their game.
Has much changed since Liz Truss spoke to us in 2017? The picture is complicated.
The positive first: Banks are under increasing competitive pressure due to new market participants
Financial services could be around a corner. Britain’s largest banks are facing increasing competition as more consumers embrace smaller “challenger” banks, including digital-only banks. According to the Financial Conduct Authority (FCA) analysis, the market share of digital challenger banks in the personal checking account (PCA) market increased rapidly from 1% in 2018 to 8% in 2021. As mentioned earlier, the increasingly competitive banking environment seems the results of customers, including in the form of better mortgage deals. The FCA also noted that service quality has improved as larger banks have adopted digital innovations – such as app-based budgeting tools – led by the digital challengers.
Figure 1: Share of private checking accounts by account number
Source: FCA analysis
Less positive – consumer harm in the telecom market is being overlooked
As in 2017, the telecom market remains a major concern for us as the consumer disadvantage here continues to be overlooked in policy and policy debates. Our analysis suggests that the four largest broadband internet service providers will have an 87% market share as of 2021, only slightly down from the 90% in 2017. Ofcom’s Switching Tracker 2021 shows that a quarter (27%) of households have a Have market share with the same broadband provider for over 10 years, another 17% between 5 and 10 years. Only 15% of households reported being with their broadband provider for less than a year.
This is significant because, according to analysis published by Citizens Advice this year, seven million broadband customers face a £61-a-year loyalty penalty if they stay on their contracts past the end of the original contract term, at a total cost to households of over 400 million pounds. Other areas of downside include customers getting slower-than-advertised broadband speeds and simply relying on poor-value products. With the advent of telecom bundling – consumers choosing to purchase mobile, broadband and sometimes pay-TV from the same provider – it can be difficult to differentiate the value for money of different offers.
Figure 2: Length of stay with the broadband provider
source: Ofcom Switch Tracker 2021
And energy: an area where we were overly optimistic about the emerging competition
The SMF has previously highlighted the energy market as an area where increasing competition is leading to a significant improvement in consumer outcomes as companies outside the ‘Big 6’ offer cheaper electricity and gas deals to customers.
But this situation was on a rocky foundation, as too many smaller providers had financially unsound business models that did not adequately hedge against rising wholesale energy prices. 28 energy companies have collapsed in 2021, driving out over four million customers. In 2022, customer switching between providers has collapsed as fixed-price tariffs have risen sharply. After years of reduced concentration in the hands of the largest suppliers, the energy sector is consolidating, raising questions about how the market will function once we exit the current period of extraordinarily higher gas and electricity prices.
Figure 3: Market share of the four largest companies in the consumer market, measured by the number of customers
Source: SMF analysis
Hypermarkets and Trussonomics
Liz Truss and her Chancellor, Kwasi Kwarteng, appear keen to demonstrate a clear break with economic policy, with a strong emphasis on doing whatever is necessary to stimulate growth. They are also under tremendous pressure to cope with the rising cost of living, which currently far outstrips people’s income growth.
In both areas, the focus must be on making consumer markets work better. The elimination of £1.3 billion in annual “fidelity penalties” in the broadband, mobile and mortgage markets, for example, would be a welcome boost to household finances.
Putting more pressure on companies to compete with each other would also make companies more productive and encourage them to make investments that improve service quality and lower prices. Research by the IMF has previously found that excessive profits – resulting from a lack of competition – lower corporate investment and innovation rates over the long term. Conversely, tackling excess profits through pro-competitive policies would boost business investment and hence economic growth.
What does this mean in terms of the new government’s political platform? Many of the SMF’s previous recommendations in this area remain relevant. A “presumption in favor of competition” at the heart of mergers and acquisitions policy would be welcome, as would the creation of a Competition and Consumers Minister to ensure competition issues are prioritized throughout government.
Policies also need to address the “barriers to scale” that can make it difficult for challenger companies to expand beyond a certain point – such as B. Regulatory costs and difficulties in accessing the finance needed for growth. While it is encouraging to see the digital challenger banks gaining market share, they may be reaching the limits of their growth; The FCA’s Strategic Review of Retail Banking found that a smaller proportion of digital challengers’ personal current accounts are master accounts compared to the big banks. This results in lower balances, lower transaction volumes, and lower overdraft usage, resulting in reduced funding benefits and less scope to generate fee income. The SMF has previously argued that the Financial Service Compensation Scheme (FSCS) should offer improved deposit insurance rates for challenger banks to encourage more people to use these banks for their main checking account.
There is also huge potential for the Government to support the use of technology to make UK markets “hypercompetitive” – for example by creating next-generation automated switching services that ensure consumers have access to the best deals on the market have market. Open banking could unlock such opportunities in the financial services space.
Elsewhere in the competition space, there is unhelpful uncertainty about the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU). This was set up with a promise to give UK authorities the tools to boost competition in online markets, which are often dominated by a small number of giant operators. But more than a year later, the DMU still lacks legal powers. The Truss government’s willingness to give it the necessary powers could serve as a litmus test for the new government’s views on competition. Is the new government team really serious about seizing the opportunity to make the UK a global leader in competitive markets, with all the benefits that consumers and growth might bring?
Britain should strive to have some of the most competitive and dynamic consumer markets in the world. To get there, the Truss government must recognize that such markets often do not arise naturally. In sectors like finance, technology, energy and telecoms, they need to be tamed, with a regulatory and political regime that limits market power, supports new entrants and recognizes consumer inertia. Not recognizing this – and instead viewing “market-friendly” policies through the narrow lens of tax cuts – would be detrimental to a go-for-growth agenda. It will also briefly change households.
