The FCA and the law of unintended consequences

The FCA and the law of unintended consequences. Photo by Borislav Orlinov,
Written by Alex Letts

The law of unintended consequences are explored by Alex Letts, who suggests the FCA hasn’t thought things through very well.

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

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 will 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, but the industry really served a purpose. Now it’s a mess: poorer people with bad credit records are left to doorstep lenders with all the consequent nastiness and distress. 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. Is this what the FCA is really for?

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% 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 Already, Atom Bank, the classiest act of the neobanks, has indefinitely withdrawn launch of its current account, pointedly referring to regulatory uncertainty. Secure Trust has left the market saying it wasn’t profitable, Norwich and Peterborough and many other building societies have bailed out too. The other neobanks 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) 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 poor thinking within 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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Photo by Borislav Orlinov,

About the author

Alex Letts

Alex Letts is founder and Chief Unbanking Officer of U. His disruptive career has brought digital technology into the advertising industry, electronic trading into the Lloyd's of London insurance market and, now at U, a transformation of the retail banking current account model.

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