While the issue of cross-subsidies has been central to many of the recent regulatory investigations into financial services, there has been remarkably little agreement about the existence and nature of these cross-subsidies. Regulators have reached apparently contradictory views on the matter. For example, the CMA investigation into personal current accounts (PCAs) concluded in August 2016 that “it is not the case that some customers subsidise others”, but the Treasury Select Committee then asked whether “in order to provide the free-if-in-credit PCA model, cross-subsidies are extended across all the product ranges”. The Financial Conduct Authority (FCA) then suggested in September 2016 that “PCAs provide an example of cross-subsidy between consumers”.

Against this backdrop the FCA has now announced new strategic review of retail banking business models, which will again look at the linkages between different product markets, including possible cross-subsidies.

To help bring clarity to the debate, Frontier has today published a paper examining this issue. The paper argues that a cross-subsidy needs to be defined carefully to cover only those situations where some customers are served or products sold intentionally below cost. Most products in financial services where cross-subsidy has been suggested would not meet this definition – including the cases of current accounts cross-subsidising other products and overdraft customers cross-subsidising other current account customers.

Paul Cullum from Frontier said “the FCA will need to resolve early in its review whether and where it believes cross-subsidies exist in financial services. We think the framework we have set out helps provide some much needed clarity on what defines a cross-subsidy and in our view strongly suggests cross-subsidies are rare in financial service products. This does not mean there are no issues to address in these markets. But characterising these issues as relating to cross-subsidy may be unhelpful.”

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