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Newsroom & speeches
14 March 2002
With permission Mr Speaker, in presenting the Competition Commission's Report on the supply of banking services to small and medium sized enterprises - and my and my Right Honourable Friend the Secretary of State for Trade and Industry's response to it - our starting point and guiding objective is our belief in competition as the spur to efficiency, innovation and competitiveness.
It is underpinned by our statement in July that just as in the last Parliament it was right to make monetary decisions independent of political influence under an independent authority - first de facto and then by law - so too it is right to make competition decisions -de facto and then de jure - independent of political interference, with government accepting the decisions of independent competition authorities.
Having already moved de facto to such a regime in the way we handle merger cases, in the forthcoming Enterprise Bill we will legislate to make decisions on mergers and complex monopolies independent.
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 one trillion pounds of economic activity a year. The access to finance and the quality of service they receive from banks are critically important to theirs - and the British economy's - productivity and prosperity.
So when the Cruickshank Review of Banking Services found little prospect of effective competition emerging in the small business market, the Secretary of State for Trade and Industry and I referred small business banking to the Competition Commission for a full investigation.
Their Report is published, and laid before the House, today.
Under the Fair Trading Act of 1973 there are three necessary tests, all of which must be met before it can be concluded that there is a complex monopoly operating that is harmful to the public interest.
The first test is that at least a quarter of the services under consideration must be supplied by a group of persons. The Commission found that the eight largest clearing banks supplied at least a quarter of the banking services in the UK; with the four largest in fact providing 86 per cent of services; and that this degree of concentration had changed little over the past 10 years.
The second test is that this group of persons must be found to conduct its affairs ?as in any way to prevent restrict or distort competition?.
And, finally the third test is that the restriction or distortion of competition caused by the complex monopoly must be shown to operate against the public interest.
Let me set out the Competition Commission's findings.
First, they find that these banks had failed to compete on price by:
Second, they find that these banks had reduced choice, and the ability of small businesses to make savings on bank charges, by:
Third, they find that these banks had made it hard for small businesses to compare the deals available from different banks by:
Fourth, they find that these banks had made it more difficult and expensive for new entrants and alternative suppliers to attract small businesses by:
The Competition Commission concludes that all eight of the largest clearing banks in the UK were found to be carrying out one or more of these practices which operated against the public interest.
Moreover, the Competition Commission find that ?the average return on equity between 1998 and 2000 is 36 per cent compared with an estimated cost of equity of about 15 per cent. We however, recognised that a number of adjustments should be made to these figures...despite the cautious approach we have adopted to a number of those factors, we have concluded that the four largest clearing groups are together charging excessive prices and therefore making excessive profits in England and Wales of about £725 million a year over the last three years with adverse effects on SMEs?
Mr Speaker, profits are absolutely central to the effective and efficient working of a market economy. They are the engine in the dynamic process of competition, innovation and meeting needs of consumers.
Where high profits are due to relative efficiency rather than monopoly - as the Competition Commission found in the case of Northern Bank - the question of whether high profits are against the public interest does not arise.
Where high profits are derived from an absence of competition or through a complex monopoly situation, and are earned by overcharging customers, the effectiveness of the market is reduced. Indeed as the Competition Commission observed: where the consumers concerned - in this case small and medium sized companies - are themselves operating in highly competitive markets the adverse effects on the public interest are exacerbated.
Because practices carried out by the eight main clearing banks - and the overcharging by the four largest in England and Wales - were found to operate against the public interest the Competition Commission recommend that all eight clearing banks identified make a number of changes to their practices to help promote competition in this market, including:
Taken together, the Competition Commission states that these remedies along with others they propose would help promote greater competition in banking services.
The Competition Commission want ?a decisive and significant shift towards what [they] consider to be competitive levels?, and because as they state ?competition and entry has to date not been effective in reducing excess profits and prices, nor is the immediate prospect of new entry in [their] view sufficient to reduce excess profits and prices in a reasonable time period?, they recommend a further transitional remedy requiring the four largest banks operating current accounts in England and Wales - where evidence of excessive charges were found - to offer all small businesses one of three possible options:
The Competition Commission concludes that since certain current banking practices have operated against the public interest - and lead to small businesses paying more than they should for services - it would be wrong to let the situation continue for several more years until the behavioural remedies to promote competition took effect.
From our starting point - our belief in competition as the spur to efficiency - the Secretary of State for Trade and Industry and I have considered the Competition Commission's Report carefully.
We have examined the recommendations and the remedies proposed to promote competition, encourage new banking suppliers to enter the market and directly address the lack of choice and information.
Until the competition authorities are fully independent, the Government has legal responsibility for decisions on complex monopoly cases. And in preparing the Government's response we have sought and received additional advice on the report's technical analysis and recommendations from independent experts.
The advice of the Director General of Fair Trading - published today - agrees with the Competition Commission that the limited degree, and difficulty, of switching bank accounts is a key factor in inhibiting competition in the SME banking market.
In his advice - that I am also publishing today - Sir Bryan Carsberg, former Chairman of the International Accounting Standards Board and ex-DGFT concluded that ?the framework adopted by the Commission is sound and would be accepted as appropriate by most independent experts".
Like the Competition Commission we recognise that to be robust and play their key role in the economy it is necessary and desirable for banks, at points in the economic cycle, to make higher than average profits.
But while we are pro profit, we are also pro competition and cannot be on the side of any monopoly, or any other behaviour that unfairly restricts competition in markets.
The Competition Commission explicitly conclude in this case that practices by banks do operate against the public interest. Having carefully considered their report, the Secretary of State for Trade and Industry and I agree that action must now be taken to promote greater competition.
First, the Competition Commission recommends that banks be required to facilitate the switching of accounts to enable small businesses to move accounts from one bank to another easily and quickly by completing a substantial percentage of all account switching within five working days; by publishing their performance objectives and efficiency in achieving them; and by imposing no charges for closing accounts. We agree with the Commission's recommendation.
Second, the Commission recommends that banks be required, if requested by a small business, to provide a portable credit history - a statement of the SME's credit performance that can be passed to other banks and will improve the prospects for smaller competitors and new entrants into the banking sector. We agree with the Commission's recommendation.
Third, the Commission recommends that banks be required to stop ?bundling? services and not impose any requirement on small businesses to hold a current account in order to obtain a loan or deposit account. We agree with the Commission's recommendation.
Fourth, the Competition Commission recommends that banks be required to make the charges for their services more transparent, by routinely publishing their standard tariff prices for money transmission services and interest paid on current and short-term deposit accounts allowing small businesses to easily compare charges. We agree with the Commission's recommendation.
Fifth, because the lack of access to a bank branch represented a key barrier to many substantial new competitors entering the market, the Competition Commission recommends banks are required to investigate the feasibility, costs and benefits of a national scheme for sharing branches and publish their findings within a year. We agree with the Commission's recommendation.
The Julius Report concluded that the principles underlying the voluntary code for banking and mortgages for households should be extended to small businesses. And so the Competition Commission also made a number of other informal suggestions - some of which are incorporated in the new code announced by the British Banking Association last week. Others - including banks improving their procedures for dealing with errors and paying compensation - the Competition Commission recommend should now be added to the code.
These and other remedies proposed by the Competition Commission are in pursuit of competition and we ask the banks to work with the director general of fair trading to move the recommendations forward with speed.
In seeking an earlier and decisive switch towards a better service for small businesses, the Commission considered more radical measures including proposals for divestment of both bank branches and SME banking businesses - where banks would either be forced to give over some of their branches or some of their customers to other banks. And they considered a licence fee, an obligatory fund and a windfall tax.
The Competition Commission rejected these proposals, and we agree with this rejection.
The Competition Commission recommends a transitional remedy that is not about preventing companies earning high profits, but simply ensuring that they can only do so as a result of a genuine competitive advantage, a remedy that imposes no restriction on new entrants and should not interfere with the natural emergence of desirable competition?.
So the Commission recommend, and we agree, as a transitional measure, that the four largest banks operating current accounts in England and Wales be required to offer any SME either a current account paying 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. And the Director General of Fair Trading recommends, and we agree, that we ask him to obtain undertakings from the banks to implement this remedy.
The Commission suggests that all remedies are put in place within six months - we hope that the Director General of Fair Trading will be able to reach an earlier agreement on the transitional remedy.
The Commission also recommends that the Director General of Fair Trading should review all the remedies three years after its implementation. Under the Fair Trading Act there is flexibility for a review to take place sooner.
We state our view that if at any time within the three years the Office of Fair Trading observe more effective competition emerging - or banks have proposals they believe would make for a more competitive environment - then an early review could and should take place.
Mr Speaker, our goal is to create an environment where new entrants can compete with existing banks on a fair basis and both can secure more competitive services for small businesses.
I urge the banks to work with the Director General of Fair Trading to achieve what is in everyone's interest: a better service, a fairer deal for Britain's three and a half million small businesses.
