Competition in banking services for small and medium-sized enterprises

Internal links

Report by the Competition Commission on the Supply of Banking Services plus summary, associated documents and related links

The Government has accepted in full the findings and recommendations of the independent Competition Commission following its investigation into the supply of banking services to SMEs. The Commission's report, which is being published today, finds that a complex monopoly exists in the market and that as a result SMEs in England and Wales are being overcharged for their banking services.

Chancellor Gordon Brown said:
"Our starting point and guiding objective is our belief in competition as the spur to efficiency, innovation and competitiveness.

"There are over 3.5 million small businesses in the UK representing 55 per cent of jobs, 50 per cent of all business turnover and economic activity of £1 trillion a year, and the access to finance and the quality of service they receive from banks are key to their, and the British economy's, productivity and prosperity.

"Our goal is to create a fully competitive environment where new entrants can compete with existing banks on a fair basis and can offer more competitive banking services for small businesses."

Secretary of State for Trade and Industry Patricia Hewitt said:
"The report from the Competition Commission is crystal clear - competition in the market for banking services to SMEs is not working properly.

"The Competition Commission finds that as a result SMEs in England and Wales are being overcharged. We cannot allow small businesses to continue paying a higher price for banking services than is right. SMEs are a vital part of our economy, employing over half the workforce. It is essential that they have a proper choice of banking services, supplied at competitive prices.

"The recommendations of the Competition Commission which the Government has accepted in full will bring competition into the market and fundamentally change the way it works.

"SMEs should find it easier to switch banks, charges should be lower and more transparent and SMEs should have greater choice both within and between banks."

The Competition Commission report is a detailed investigation of the supply of banking services by clearing banks to SMEs in the UK and follows a reference made jointly by the Chancellor and the then Secretary of State for Trade and Industry in March 2000.

The report finds that there is a complex monopoly in the provision of banking services to SMEs. The market is highly concentrated - the four largest banks provide nearly 90 per cent of these services.

back to top

The report also identifies 10 practices carried out by the eight main clearing banks that restrict or distort competition and operate against the public interest. In particular the complex monopoly allows the four largest clearing banks in England and Wales to overcharge their SME customers and earn excess profits.

The Competition Commission recommend that in order to promote competition in the market, all eight main clearing banks make a number of changes to their practices in order to reduce barriers to entry, increase transparency, improve choice and ease switching of accounts.

But, because these remedies will take some time to take effect, and the Competition Commission want ?a decisive and significant shift towards what [they] consider to be competitive levels?, they also recommend as a further remedy that the 4 largest clearing banks in England and Wales should offer any SME either interest on their current account of at least the Bank of England Base Rate minus 2.5% or a current account free of money transmission charges; or a choice between the two.

As is normally the case with monopoly reports, the process now is that Ministers will ask the Director General of Fair Trading (DGFT) to seek undertakings from the banks on the remedies proposed.

Notes to editors

The Competition Commission report identifies ten different practices carried out by banks that in the view of the Commission restrict and/or distort competition in the supply of banking services to SMEs and operate against the public interest.

The report finds that these banks have made it more difficult and expensive for alternative suppliers to attract SMEs by:

confining free banking to business start-ups and to SMEs who had moved from another bank;
negotiating reduced charges for SMEs who were likely to switch banks; and
requiring those SMEs wanting a deposit account or a loan to also hold a current account.

These banks have made it difficult for SMEs to compare different deals available by:

offering discounts only to selected customers; and
failing to provide SMEs with a breakdown of banks charges on their current accounts.

These banks have reduced choice and the ability of SMEs to make savings on charges by:

restricting SMEs to business rather than personal bank accounts; and
failing to inform SMEs about possible benefits from 'set-off-and-sweep? facilities which allow for credit balances in one account to be set off against debit balances in another and the automatic transfer of funds between accounts to prevent overdrafts.

And they have failed to compete on prices by:

refusing to pay interest on current accounts and only paying low rates of interest on smaller, short-term deposit accounts;
maintaining a structure of charges not related to costs; and
overcharging their SME customers.

The Competition Commission found that the eight main clearing banks in the UK (Barclays Bank, Bank of Ireland, Bank of Scotland, AIB Group (trading in Northern Ireland as First Trust), HSBC, Lloyds TSB, National Australia Bank (through its subsidiaries Clydesdale Bank and Northern Bank) and the Royal Bank of Scotland Group) were all carrying out one or more of these practices.

In line with the Competition Commission's recommendations, Ministers, in order to promote stronger competition in banking services to SMEs, have asked the Director General of Fair Trading (DGFT) to seek undertakings from the eight banks listed above that they will:

complete a substantial percentage of all account switching within five working days where no borrowing is involved and in all but the most exceptional cases within ten working days if borrowing is involved (in the absence of security), with compensation if these timescales are not met;
as part of i) to publish their performance objectives and their efficiency in achieving them;
use best endeavours to resolve the problems associated with originators of direct debits and publish a report on progress in doing so within twelve months of publication of the report;
examine ways to allow more rapid transfer of security and publish a report on this within nine months of publication of the report;
impose no charges on closing or switching accounts other than cost-related charges related to early termination of loan arrangements or transfer of security;
publish whether or not they are willing to pay legal/valuation charges for transfer of security, and if so in which circumstances and up to what limits;
provide a portable credit history on request (a statement of the SMEs credit performance that can be passed to another bank or alternative supplier) to a timescale and format to be approved by the DGFT;
not impose any requirement to hold a current account to obtain a loan or hold a deposit account unless required for legal or technical reasons;
overcome any technical constraints within twelve months of the publication of the report (subject to DGFT confirmation) until which time they should specify in their terms and conditions that the obligation to hold a current account is a temporary requirement, for systems reasons, and that no charge will be made for the account;
compile price information relating to the clearing banks? standard tariff prices for money transmission services, and interest paid on current and short-term deposit accounts in a form approved by the DGFT that would enable price comparisons readily to be produced, and to publish or procure the publication of such information free of charge in a manner approved by the DGFT;
bring to the attention of their SME customers the availability of such information in a manner approved by the DGFT;
inform SMEs of whether a charge use of an unauthorized overdraft has been levied; If an SME is not informed (or requests such information) the clearing banks should be required to specify on statements the higher rate that applies to unauthorized overdrafts and the amount of the overdraft to which the higher rate applies;
investigate the feasibility, costs and associated benefits of a national scheme in which the main clearing groups would be required to enter into arrangements (not necessarily reciprocal) with those without a local branch presence in a particular area for use of branches on fair, reasonable and non-discriminatory terms to be approved by the DGFT and publish the results one year after publication of the report.

The Competition Commission takes the view that these remedies may take at least two or three years to take effect.
Since it would be wrong to let SMEs continue to suffer the adverse effects caused by a lack of competition in the banking market, the Competition Commission recommend a further remedy. The DGFT has been asked to seek undertakings from the four largest clearing banks operating in England and Wales (Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland Group), where evidence of excessive charging has been found, to offer to any SME customer operating a current account in England and Wales either:

an account that pays interest of at least the Bank of England Base Rate minus 2.5 per cent; or
a current account free of money transmission charges; or
a choice between the two.

The Commission recommend that the DGFT should review this, and the other remedies, three years after implementation. And Ministers have made clear that, under the terms of the Fair Trading Act, there is no reason why a review cannot take place sooner if the DGFT were to consider that competition in the market had sufficiently improved.

The Government accepts the findings and recommendations of the Competition Commission report, which has been supported by the Director General of Fair Trading in his advice published today. Sir Bryan Carsberg, former Chairman of the International Accounting Standards Board and ex-DGFT was also asked for his assessment of the accounting methodology used by the Competition Commission. In his advice (also published today) he confirmed that ?the framework adopted by the Commission is sound and would be accepted by most independent experts?.

The Government has stated that it has accepted the DGFT's advice that he now be asked to seek undertakings from the banks to implement these remedies, including requiring the four largest banks operating in England and Wales to offer interest and/or free banking. He will be asked to report back within 3 months on this remedy and on progress generally.

The Chancellor and the Secretary of State for Trade and Industry made the reference for banking services to SMEs in March 2000 in response to concerns raised in a report on competition in UK Banking by Don Cruickshank.

Competition in banking services for small and medium-sized enterprises

Internal links

Notes to editors

Related documents: