Supply of banking services by clearing banks to small and medium-sized enterprises (SMES)

Statement of hypothetical remedies

1. The Competition Commission, as part of its monopoly inquiry into the supply of banking services by clearing banks to SMEs, is now seeking further comments on possible remedies should it conclude that there are any matters which operate against the public interest.

2. The Commission is still pursuing its investigation and has as yet reached no conclusion on any matter. In view of the timescale involved, and in order to help the Commission assess the wider implications of any recommendations it might wish to propose, in the event that it reached adverse public interest findings, it is now inviting comments on the practicality and effectiveness of the suggestions set out below, or any alternative proposals. The Commission is not, however, at this stage proposing one or more of the remedies set out below: they are for comment and discussion.

Possible effects on public interest

3. In its statement of 8 November, the Commission referred to provisional conclusions that a scale monopoly situation existed in relation to the supply of the reference services in the UK, in favour of the Royal Bank of Scotland Group, and set out a number of issues highlighting those matters identified by the investigation group for further consideration. In its statement of 6 March, the Commission provisionally identified two complex monopoly situations; it also drew attention to its current concerns about the marketplace and barriers to entry. The hypothetical remedies on which it is now inviting comments would relate to the possible adverse effects set out in paragraphs 4 and 5; the Commission is currently of the view that, in so far as any of the practices identified in its statement of 6 March are carried out by the RBS Group, any adverse effects on the public interest would arise in the context of the complex monopoly situations identified, rather than any action on the part of the scale monopolist in isolation.

4. As regards the first complex monopoly situation provisionally identified in our statement of 6 March, relating to prices and terms of supply, the possible effects adverse to the public interest of the practices identified would be that they:

(a) restrict the ability of other suppliers (including potential suppliers) to compete;

(b) permit and result in some suppliers of the reference services incurring costs at a level significantly higher than would be expected in a fully competitive situation;

(c) result in a level of profitability significantly more than necessary for the banks concerned to finance an efficient SME banking business (being the business of supplying banking services to SMEs);

(d) result in a level of prices, overall and for individual banking services, significantly in excess of cost, to an extent that would not be expected in a fully competitive situation;

(e) adversely affect the level of choice available to SMEs; and/or

(f) adversely affect the level of information available to SMEs.

We are also considering whether aspects of quality of service to customers could also be adversely affected, for example, whether excessive security is required for loans; whether contractual relationships between banks and SMEs are unfair or insufficiently clear, to the detriment of SMEs; whether aspects of banks’ procedures could indirectly be detrimental to ethnic minorities; and whether there is inadequate transparency in loan assessment or in respect of bank statements for SMEs primarily in relation to composition of interest and account charges.

5. As regards the second monopoly situation identified, with respect to money transmission arrangements, by restricting the ability of suppliers using agency agreements to compete effectively, the choice of suppliers available to SMEs would be reduced and the level of prices be higher than would be expected in a more competitive situation.

6. When considering whether any of the matters set out in paragraphs 4 and 5, operate or may be expected to operate against the public interest, we will consider whether there are any offsetting benefits.

7. As we said in our statement of 6 March 2001, we are unlikely to conclude that any clearing bank whose market share is very small is operating or may be expected to operate against the public interest. Of those clearing banks in whose favour we provisionally identified complex monopoly situations to exist, we are unlikely to find that conduct by Abbey National, Alliance & Leicester, the Co-operative Bank or (in the context of the second complex monopoly situation) Nationwide operates or may be expected to operate against the public interest.

Possible remedies

8. In the Issues statement of 8 November, we set out four categories of possible remedies; the following paragraphs give more information on possible remedies based on the Commission’s current thinking. Some of the remedies would directly remedy any adverse effects identified; others indirectly, for example by addressing barriers to entry.

Possible regulation of charges, terms, conditions or profits

(a) A requirement concerning rates of interest payable on deposit accounts and current accounts

(i) A requirement not to discriminate (ie an undue or unwarranted degree of differentiation) between holders of short-term as opposed to long-term deposits, and between customers with current account balances in credit and other customers. Secondly, a requirement that on instant access and short term deposits banks should pay a rate of interest more closely related to the benefit to the clearing bank of the funds (for example base rate less a specified per cent), with equivalent or related rates to be paid on current accounts; and/or

(ii) A requirement to notify customers periodically of the availability of set-off and sweep facilities and of the benefit to individual SMEs that would have been received over the previous 12 months had such facilities been used. There could also be a requirement not to charge for use of set-off and sweep facilities.

9. The provisions in a(i) and a(ii) would directly address the practices identified in (ab), (ac) and (ai) of the first complex monopoly situation provisionally identified: and could also provide a remedy to any conclusion that the overall level of prices and profitability were too high (also resulting from the practices identified in (aj) of the first complex monopoly situation). To see the practices that were identified in respect of the complex monopoly situation, refer to the Issues statement of 6 March 2001.

10. In addition, there may be a need for further constraints on charges for the supply of other banking services and loan interest, to prevent these latter being increased to compensate for the effects of the remedies referred to in a(i) and a(ii). This could, for example, be in the form of price control (see paragraph 18) or prohibition of price increases.

(b) Prohibition on discrimination of charges between personal and business accounts and/or between personal and SME customers

11. Although the use of banking services by many, in particular larger, SMEs is in many respects different from that by personal customers, there may be justification for either not differentiating between such customers by virtue of the type of account or offering choice of tariffs. The following would directly address any adverse effects of the conduct identified in (ad) of the first complex monopoly situation, but could also provide a remedy to any adverse effects in relation to the overall level of prices or choice.

(i) A requirement to adopt the same set of money transmission charges for any given levels of activity (eg for similar value or number of transactions) whatever the nature of the customer (hence, a distinction could be retained between business and personal accounts, as long as common money transmission charges were applied to both); or

(ii) If money transmission charges differ between personal and business current accounts, to require banks to offer SMEs a choice of business or personal account charges, on whichever account is operated (for example, including or excluding the services of a relationship manager).

(iii) Similarly in respect of deposit accounts, a requirement to offer the same rates of interest at equivalent levels of deposit on personal and business deposit accounts, or a requirement that SMEs should have a choice between personal and business deposit account rates.

12. The approach outlined in paragraph 11 would prevent discrimination between users of personal and business accounts or give holders of business accounts a choice of tariffs, whereby the charges would be appropriate for the facilities used by the customer. For example, as regards the services of a relationship manager (relevant also to any adverse effects of the conduct provisionally identified in (ae) of the first complex monopoly situation), SMEs should be offered a choice between tariffs excluding the services of a relationship manager, then paying explicitly for these services when the SME wanted it, and tariffs including such services. In assessing the appropriateness of a remedy in respect of the charging for the services of relationship managers, we would welcome views on whether the benefit of the relationship manager facility is primarily in the interests of the bank or the customer.

13. Comments are invited on whether there should be a threshold above which such requirements would not apply; to what such a threshold should refer (eg turnover of the account); and what the level of the threshold should be.

14. We currently do not think it appropriate to adopt a similar approach in relation to lending. The services of relationship managers in relation to lending could be covered by arrangement fees.

(c) Lower charges or (in some cases) no charges on current accounts for money transmission services

15. This would also be a possible remedy for any finding that the overall level of prices and profits is too high. Although such an approach may not apparently be cost reflective in relation to individual services or customers, it might be cost-reflective in relation to money transmission charges in conjunction with the benefits to the banks of funds in current accounts.

(d) Arrangement, renewal or security fees or any other additional charges

16. Some of the services subject to management, renewal and security fees involve significant cost to the clearing banks, and their abolition might appear inappropriate. However, reduced fees might be appropriate.

(e) Requirements concerning charges for clearing services and portable sort codes

17. A current concern as regards money transmission systems is not one of access to transmission systems, but the charges for such access. This is relevant to both complex monopoly situations, in the first of which it would seek to address a possible barrier to entry. A possible remedy would be:

(i) That charges for agency agreements should be explicitly related to cost and be non-discriminatory.

(ii) That all banks to whom clearing services are supplied should be provided, on request, with portable sort codes to assist switching agency agreements.

However, we have noted in the H M Treasury consultation document on Competition in Payment Systems, the proposal for rules designed, inter alia, to require firms to provide access to payment systems on fair, reasonable and non-discriminatory terms. The proposed powers of the Office of Fair Trading (OFT) and their use in relation to payment systems may be seen as one approach to remedying this problem. We would welcome views on the necessity for a remedy beyond the proposals in the consultation document.

(f) Other regulatory options

18. The Commission is also considering regulatory approaches additional to those set out in the Issues statement of 8 November in order to remedy any adverse effects of prices or profits being too high.

(i) A price control which might be based on average revenue earned (for example per SME) or a tariff basket approach by analogy with some utilities. This could include both a requirement for an initial reduction in the level of money transmission charges together with margin on funds for each bank (either the same reduction for all banks or differing among banks), and a cap on subsequent annual price changes (eg, of an RPI-X form). Some additional constraint on charges for bank lendings (including fees) may be necessary. Such an approach would directly assist in reducing prices, but we would need to consider the possible implications for new entry.

(ii) A requirement on banks to provide to the Director General of Fair Trading (DGFT) on a regular basis information on profitability of services to SMEs to assist him in the carrying out of his functions.

Possible behavioural remedies primarily to remove any barriers to entry

(a) Availability of data base on SMEs, possibly including financial information

19. We have received conflicting evidence on whether or not adequate information is available to new entrants on the financial performance of SMEs, sufficient to enable them to judge as effectively as existing suppliers the financial performance of individual SMEs or of SMEs as a whole: an issue we are still exploring. In the event that we conclude that this is a problem, a remedy on the provision of information could be appropriate.

(b) Assistance to switching

20. In our statement of 6 March, we identified a reluctance to switch as one of the important characteristics of the market and a barrier to entry. There is one way in which this problem may be exacerbated by the clearing banks, namely using the scope to reduce charges for those most likely to switch ((aa) of the first complex monopoly situation), but remedies to facilitate switching could by reducing barriers to entry be a remedy for any of the possible adverse effects identified resulting from the first complex monopoly situation. We have noted the improvements to the process of switching planned to be introduced by the Association of Payment Clearing Services, but among other options for remedies to reduce barriers to entry are to require the clearing banks:

(i) To improve their practices to facilitate switching, at least to a minimum industry standard to be approved by the OFT.

(ii) To take steps to facilitate the switching of loans and arrangements for security (this could include, for example, a requirement that there should be no penalty, not related to cost, on early redemption of loans).

(iii) To develop portable account numbers to assist transfer of accounts between banks.

(iv) To bear all the costs of switching accounts.

(v) To apply a specific timetable for completion of switching, and penalties if that is not met or errors are made, plus compensation for any costs incurred by SMEs as a result.

(vi) To provide their customers with a portable credit history, to assist their ability to switch.

(c) Limitation on bundling of banking services

21. We provisionally identified in (ah) of the first complex monopoly situation the requirement that SMEs wishing to borrow or use business deposit accounts have a business current account. A possible remedy for any of the possible adverse effects identified would be:

(i) Prohibition of any requirement on any SME to hold a current account as a condition for holding a deposit account of any sort or any type of loan other than an overdraft.

Were such an approach to be adopted, it would be reasonable for clearing banks to require SMEs with a loan but no current account with that bank to provide on request copies of current account statements with another bank.

(d) Banks to inform customers of alternative suppliers of banking services

22. It has been put to us that more readily available information on comparative charges of different banks would assist competition and thereby remedy, wholly or partly, any of the possible adverse effects of the first complex monopoly situation identified. A possible remedy would be that:

(i) The clearing banks be required on a regular basis to provide specified information on main money transmission charges and current and deposit account interest rates to a body such as the BBA or possibly, the FSA to compile the information into an overall list, which that body would supply to any bank which requested it but also require the banks subject to this remedy to distribute to their SME customers. Although not all banks would be required to provide the relevant information, such a body might include similar information for any other banks who wished to supply it.

With regard to loans, such information is unlikely to be appropriate on loan rates, but could be such as to identify the suppliers of loans.

(e) Improved transparency and comparability of charges and terms for the provision of banking services, including transparency of risk assessment and rates of interest for loans

23. We are still considering the issue of whether there is a lack of transparency of loan interest rates, charges and terms and would welcome any future discussion or agreement between user representatives and the banks on how this could be improved.

24. We are also considering:

(i) If a loan is refused or terms offered which are regarded by an SME as unacceptable, whether clearing banks should be required to give, in writing, their reasons.

(ii) Whether banks should be required to give customers an option to have a more detailed billing statement, ie a breakdown of interest and account charges.

(f) Requirement to publish information on the profitability of services to SMEs

25. We raised the possibility of such a requirement in the Issues statement but are currently of the view that such information should only be supplied, if at all, to any monitoring authority.

(g) The ability of customers at no extra cost to use branches of other clearing banks or joint use by clearing banks of branches (particularly in areas otherwise unserved); or

(h) Requirement to offer cash collection services more widely

26. We have noted access to branch networks as a possible barrier to entry. These possible remedies also, however, relate to the concerns raised with us about branch closures, which is of wider relevance to personal, as well as SME customers. In the context of SMEs, a branch network appears to be relevant mainly to SMEs with substantial cash transactions. There may be scope for further development of secure collection and delivery services or mobile banks, use of the Post Office, or (as happens to some extent already) of the counters of a different bank, or other outlets. Were a community bank type solution for personal customers to be developed, we would envisage that it could also be used for SME cash requirements.

27. A further possibility is that any bank covered by our remedies should undertake to make branch facilities available on fair, reasonable and non-discriminatory terms to customers of other banks; and should not charge its own customers for use of other banks’ branch facilities even if it is charged by that other bank. Alternatively, these could be issues for further consideration by OFT in its proposed new role in promoting competition in payment systems.

Possible behavioural remedies primarily to safeguard SMEs in their relationships with their banks

(a) Obligation to provide (in plain language) in a single document and explicitly the terms on which the services requested are to be and are provided to an individual customer

28. We are still considering concerns raised about the documentation currently used by clearing banks; we are aware of attempts to provide clearer contracts.

(b) Require adequate minimum compensation for overcharging, eg of treble the amount charged

29. We have received evidence of problems in charging occur, and are continuing to consider whether there are sufficient instances of their not being corrected or adequately resolved to require remedies in this respect, including for example whether the maximum compensation that can be awarded by the Financial Ombudsman is adequate.

(c) Withdrawal of overdraft facilities

30. We are aware of a concern about inadequate notice and circumstances of withdrawal of overdraft facilities. We appreciate there may be exceptional cases when withdrawal of overdraft facilities may be necessary: if it occurred on a significant scale it would give rise to concern. We have also noted that some banks now offer an overdraft facility guaranteed for a minimum period: a possible remedy would be for other clearing banks to be required to offer this.

(d) Provision of consumer-type safeguards in relation to contract terms for loans to SMEs;

(e) Regulation of relationship between clearing banks and their customers including terms on which banking services are supplied and the marketing of such services and the introduction or extension of customer dispute arrangements (eg widening the role of the Financial Ombudsman or a regulatory or competition authority) and remedies available; or

(f) Other direct remedies to above points, eg prevention of unfair provisions including excessive or unnecessary security, guarantees, collateral, or insurance.

31. There may be merit in a code of conduct specifically regarding the provision of banking services to SMEs together with changes to the current BBA Statement of Principles, a process in which involvement by representatives from outside the banking sector such as user groups, the Financial Ombudsman and the FSA is clearly important. We also welcome the proposals of various user groups to improve the relationships between banks and SMEs and the initiatives of a number of clearing banks, including limiting security taken on houses where a spouse has an interest, but it has been argued to us that the amount of security taken could be reduced if clearing banks were prepared to take a lien on property, rather than the full value of a house as security. We also acknowledge the importance of a properly funded banking mediation service. We are still considering whether there may be a need to widen the existing regulatory roles in this context as a formal remedy for any adverse effects identified, and are also still considering aspects of banks’ relationships with ethnic minorities.

A possible tax, licence fee or fund

32. In setting out the possible remedies above, we have noted a number of options which would seek to alleviate any adverse effects identified; but which may not sufficiently increase competition or reduce any high prices or profits we may identify. Among other possible approaches are:

(i) If profits are found to be too high, to recommend the government consider a tax on past or current excess profits and/or a tax or licence fee to reduce prospective high profits. Application of a tax or licence fee would not in itself, however, help SMEs, nor assist entry and may require other measures to ensure the tax is not passed on to SMEs in charges. Imposition of such a tax would be outside the powers of the Fair Trading Act; nor could we specify the purposes to which the proceeds should be put.

(ii) Competition would, however, benefit if such potential proceeds were to be spent in ways to assist competition and bring prices down: this might include the dissemination of information on comparative prices; or to develop community banks; or to establish a database on SMEs. Establishment of a fund (as opposed to levying a tax or licence fee) for this purpose initially of limited duration (for example 3 years) with subsequent review would therefore by assisting competition address any finding of excess prices; but there are also no powers to require the financing by the banks of such a fund under the Fair Trading Act.

Neither of the above approaches may be feasible. In that event the regulation of prices, as discussed in paragraph 18(i), might become more appropriate. As noted, however, while price control may assist SMEs, we would need to consider the possible implications for entry.

Possible structural remedies

(a) Divestment of branches;

(b) Divestment of businesses and accounts in certain areas; or

(c) Cap on local market shares.

33. If other remedies prove to be impractical or not fully effective, we may need to consider structural remedies such as divestment of branches (to other banks) and/or accounts, as a possible remedy should prices and profitability be thought excessive. Such structural remedies could, however, be more severe than the other measures mentioned above, and could be disruptive. We would need to consider, and welcome views, on whether this would be appropriate or proportionate to remedy the adverse effects identified. We see no merit, however, in capping local market shares.

34. In the light of the scale of activity of the largest banks in factoring and invoice discounting, and in particular the extent to which they supply such services to the customers to whom they supply the main banking requirements, there may be merit in a possible remedy for any detriments that may be identified in relation to those services. Possible remedies would be a requirement on the clearing banks to ensure it was made clear that particular suppliers were subsidiaries of the main clearing banks; to provide to users of these services lists of alternative suppliers; or to require divestment of those activities.

21 March 2001