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Investigations
Completed
inquiries
Inquiries
completed for 2002
 The
Commission’s provisional conclusions on complex monopoly
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Supply of banking services by clearing banks SMEs
The Commission’s provisional conclusions on complex monopoly
1. The Commission have now provisionally concluded that
a number of complex monopoly situations as defined in section 11 of the
Fair Trading Act 1973 exist by reason that the conditions specified in
section 7(1)(c) are fulfilled in relation to the supply of banking services
by clearing banks to small and medium sized enterprises (SMEs) –
the ‘reference services’. (The terms ‘SMEs’, ‘bank’,
‘clearing bank’ and ‘banking services’ are as defined
in the issues letter of 7 November). Under section 7(1)(c) a complex monopoly
situation arises if at least one quarter of the specified services are
supplied by members of a group of two or more persons (not being a group
of interconnected companies) who whether voluntarily or not, and whether
by agreement or not, so conduct their respective affairs as in any way
to prevent, restrict or distort competition in connection with the supply
of those services. However, the Commission has not reached any conclusions
on whether any matter operates or may be expected to operate against the
public interest.
2. Before specifying the provisional conclusions on complex
monopoly, it may be useful to put these provisional conclusions in the
context of the Commission’s current view as to market definition
and main characteristics of the markets.
3. The Commission’s current view is that:
- There are a number of relevant markets:
- a liquidity management services market that
includes business current accounts together with short-term bank
business deposit accounts and overdraft facilities when provided
in conjunction with business current accounts;
- a market for general purpose business loans
supplied by banks or other lenders to SMEs;
- a market for other types of business loans
to SMEs which can be segmented into, inter alia, invoice discounting
and factoring, hire purchase, leasing and other asset finance including
commercial mortgages; and
- other business deposit accounts held by SMEs.
- There are separate geographical markets (in England
and Wales; Northern Ireland; Scotland) for the markets of liquidity
management services and general purpose business loans, but the markets
for other types of business loans and other business deposit accounts
are UK-wide.
4. Of importance, in the Commission’s current view,
among the characteristics of the markets referred to in (a)
above are:
- in the liquidity management services market and
the market for general purpose business loans, a reluctance on the part
of SMEs to switch between banks;
- the preference of a substantial majority of SMEs
to obtain some (but not all) of their liquidity management services
and general purpose business loans from the same source;
- the significance of relationship managers both
to SMEs and banks, though in part for different reasons; and
- the lack of transparency to SME customers concerning
the process for determining availability, price and terms of overdrafts
and general purpose business loans.
5. A further current view of the Commission is that there
are significant barriers to entry to the markets for liquidity management
services for SMEs and for general purpose business loans based on:
- reputation;
- branch network;
- access to relevant skills, such as credit assessment and relationship
management;
- free banking provided to start-ups, creating pressure for new entrants
to offer free banking to the majority of their SME customers whereas
existing banks offer it to less than 20 per cent of their customers;
- scope for negotiation to dissuade SMEs from switching to new suppliers;
- the existing personal customer base of the clearing banks, from which
new SME customers emerge;
- the difficulty in attracting switchers given the reluctance of SMEs
to switch banks;
- economies of scale in money transmission;
- economies of scope in the provision of a range of services;
- regulatory requirements (particularly for those without existing financial
operations).
6. The Commission’s current view is that the competitive
pressures that smaller banks can bring to bear may also be affected by
a number of aspects of agency arrangements for access to payment clearing
services:
- Users of clearing services supplied under agency
arrangements (other than parent or other associate companies of clearing
banks) face widely different levels and structure of charging;
- There is difficulty in changing providers of
clearing services under agency arrangements;
- Users of clearing services supplied under agency
agreements are placed in the disadvantageous position of having to
rely on the co-operation of a competitor to enter or remain in the
market.
7. We have however been told of a number of current and
prospective changes in the supply of banking services to SMEs, including
actual and potential new entrants in certain sectors of the markets and
the use of new access methods including telephone, electronic and internet
banking. We are still considering the possible extent of such changes,
their likely impact and the timescales within which they are likely to
occur.
8. The Commission have provisionally concluded that the
following complex monopoly situations exist: the provisional finding of
these complex monopoly situations does not imply the existence of any
facts which operate or may be expected to operate against the public interest.
It appears that:
- The Royal Bank of Scotland PLC (RBS), National
Westminster Bank plc (NatWest), Ulster Bank Ltd (Ulster Bank) (all
part of the Royal Bank of Scotland Group plc – RBS Group), Lloyds
TSB Bank PLC (Lloyds TSB), Barclays Bank PLC (Barclays), HSBC Bank
PLC (HSBC), Bank of Scotland plc (Bank of Scotland), Clydesdale Bank
plc (Clydesdale), Northern Bank Ltd (Northern), Bank of Ireland Group
(Bank of Ireland), AIB Group (UK) plc (AIB) (trading as First Trust
Bank in Northern Ireland), The Co-operative Bank plc (the Co-operative
Bank), Abbey National plc (Abbey National), and Girobank plc (Girobank)
comprise a group of persons
- who together supply at least one quarter of
the reference services in the UK, and
- so conduct their respective affairs as to
prevent, restrict or distort competition in connection with the
supply of the reference services in that they carry out one or more
of the following:
- restrict price competition in relation to
money transmission charges by largely confining it to certain
categories of SME customers, providing free banking to start-ups
and some switchers, and using the scope to reduce charges for
those most likely to switch;
- restrict price competition in relation to
business current accounts by generally not paying interest on
such accounts;
- restrict price competition on smaller, short-term
deposit accounts by offering low rates of interest in relation
to the value of funds to the bank;
- in relation to both current and deposit
accounts, distinguish between personal and business accounts and
encourage or require most or all SME customers to have business
accounts, thereby restricting the choice of charges they pay and
interest rates they can earn;
- bundle the charges for access to relationship
managers with other charges for banking services;
- establish tariffs enabling discriminatory
discounts to be given by negotiation, with the effect of making
price comparison more difficult and reducing the benefits of competition
for customers;
- as a result of the matters listed above,
have a structure of charges not related to the structure of costs
and unduly discriminate between SME customers;
- require SMEs wishing to borrow or use business
deposit accounts to have a business current account;
- fail adequately to inform SME customers
of the scope for savings from use of set off/sweep facilities
or to provide a regular breakdown of interest charges arising
on their current account; or
- price, in terms of both charges and interest
rates on loans and deposits, such that they more than adequately
finance an efficient SME banking business, such as would emerge
under fully competitive conditions.
The above monopoly situation exists in favour of RBS
Group, Lloyds TSB Group PLC (Lloyds TSB Group), Barclays PLC, HSBC Holdings
plc (HSBC Group), Bank of Scotland, National Australia Bank Limited
(National Australia Bank, the parent company of Clydesdale, Northern
and also Yorkshire Bank plc), Bank of Ireland, AIB, the Co-operative
Bank, Abbey National, Alliance & Leicester plc (the parent company
of Girobank) and their respective subsidiaries.
- RBS, NatWest, Ulster Bank, Lloyds TSB, Barclays,
HSBC, Bank of Scotland, Clydesdale, Northern, Bank of Ireland, AIB (trading
as First Trust Bank in Northern Ireland), the Co-operative Bank, Abbey
National, Girobank and Nationwide Building Society (Nationwide) comprise
a group of persons:
- who together supply at least one quarter of
the reference services in the UK, and
- so conduct their respective affairs as to prevent, restrict
or distort competition in connection with the supply of
the reference services in that they carry out one or more
of the following:
- charge for clearing services provided under
agency agreements at differential rates not sufficiently related
to cost, thus discriminating between themselves (and their associate
companies) on the one hand and those to whom they provide clearing
services on the other, and between customers to whom they provide
such clearing services; or
- as members of the clearing companies, adopt
or cause to be adopted practices in relation to sort codes that
make it difficult to switch agency arrangements.
The above monopoly situation exists in favour of RBS
Group, Lloyds TSB Group, Barclays PLC, HSBC Group, Bank of Scotland, National
Australia Bank, Bank of Ireland, AIB, the Co-operative Bank, Abbey National,
Alliance & Leicester and Nationwide and their respective subsidiaries.
9. We referred above to a number of important aspects
of the supply of banking services to SMEs which the Commission is still
considering. The Commission has not reached any conclusion on whether
any matter operates or may be expected to operate against the public interest
and its provisional findings of any complex monopoly situation can not
be taken to imply otherwise. In considering the effects on the public
interest, the Commission is unlikely to conclude that any clearing bank
whose market share is very small in relation to the relevant market is
operating or may be expected to operate against the public interest.
6 March 2001
Current Inquiries / Accompanying Press Release
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