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Press releases 2014 -

OFT update on SME banking market study

External view of a bank building

13/14    11 March 2014

The OFT has today published an update on the market study into banking services for small and medium sized enterprises (SMEs), including an announcement that the Competition and Markets Authority (CMA) will complete the study as part of a wider examination of competition in retail banking.

The Financial Conduct Authority (FCA) has been working closely with the OFT on the SME Banking market study, and will continue to do so with the CMA.

The OFT notes that some actions have been taken, or are currently planned, to respond to competition concerns in retail banking, including changes to the authorisation regime for new banks, the new Current Account Switching Service and proposals to increase the availability of credit information to help newer or smaller providers of finance to compete. The emerging analysis, which is on-going, suggests that, despite these and other positive developments, there may be competition concerns that:

  • The provision of business current accounts (BCAs) and business loans remains concentrated among a small number of major banks.
  • Barriers to entry and expansion may be contributing to newer or smaller providers finding it difficult to enter and expand their business across the core business banking products.
  • SMEs find it hard to differentiate between providers. There are low levels of shopping around and switching, and low awareness of alternative sources of finance.

A concern is that these factors, in combination, may reduce the incentive for providers to compete on price, invest in service delivery and quality or innovate, which may mean that SMEs do not get the best deal from their banking provider. They could also be consistent with a provisional finding that the statutory test for a market investigation reference (MIR) is met.

However, the analysis is not complete and the OFT has not reached any finding that the statutory test for making an MIR is in fact met. Moreover, the OFT has reached no view on whether it would exercise its discretion to make an MIR if the statutory test was met. Those decisions will be for the CMA once the study is complete.

The OFT has also announced action on two specific issues that have emerged during the study.

First, significant concerns have been raised by various alternative finance providers that banks may be hindering SMEs from accessing finance from alternative providers such as peer-to-peer lenders and providers of sales finance, including new financial technology lending platforms. The specific concerns expressed are that there are often significant delays in banks waiving security in respect of existing loan arrangements or agreeing the documentation needed for alternative lenders to take a second charge, either of which may be necessary for an alternative finance provider to lend to an SME. We have raised these concerns with the largest banks and the British Bankers Association, who have responded constructively. We now expect them to take swift and effective action on this issue.

Second, the OFT is currently reviewing undertakings given by various banks following the Competition Commission's investigation in 2002. As part of that review the OFT has received concerns about failure to comply with those elements of the undertakings, which prevent banks from requiring an SME to take out a BCA in order to obtain a business loan (that is 'bundling' of BCAs with business loans). The OFT considers that compliance with these undertakings is important as they are designed to help providers to compete effectively in SME banking.

The OFT's investigations into those concerns with the various banks are not yet complete and will be continued for some months by the CMA. Whilst the OFT has seen examples of good compliance with the undertakings, there is also evidence of some need for improvement and for the banks to monitor compliance.

The banks in question have worked with the OFT to agree a package of measures intended both to improve information provided to staff in the banks dealing with SME customers and to help the CMA to assess compliance with the undertakings through annual compliance reviews.

Following the first compliance review, the results of which are due in July, the CMA will determine next steps in light of information on details of the compliance by each of the banks. The CMA will then decide on any action that should be taken on any failure to comply in relation to any particular bank.

Vivienne Dews, OFT Chief Executive, said:

'SMEs are a vital driver of growth in the UK. They need access to banking services and loans which meet their needs.

'Our work suggests there may be competition concerns in this sector. We will continue our work over the coming weeks and hand this on to the CMA to conclude the analysis, and decide on the next steps.

'We have also taken action in two areas to safeguard and improve competition, including from innovative providers. We welcome the co-operation we have already seen from the industry and the steps that are now being taken. However, further action will follow if concerns in these areas are not addressed.'


  1. In April 2014, the CMA will become the UK's lead competition and consumer body. The CMA will bring together the existing competition and certain consumer protection functions of the OFT and the responsibilities of the Competition Commission, as amended by the Enterprise and Regulatory Reform Act 2013. The CMA, which is a non-Ministerial government department, was established on 1 October 2013 and will be taking on responsibility for cases, market studies and other work from 1 April. See the CMA's homepage for more information. 
  2. The OFT announced its planned programme of work into retail banking, including its proposal to look at SME banking, in July 2012. 
  3. The Independent Commission on Banking recommended that the CMA should actively consider making a MIR by 2015 if sufficient improvements in competition have not been made by that time. This view was reiterated by the Parliamentary Commission on Banking Standards in 2013. 
  4. Under section 131 of the Enterprise Act 2002, the OFT may make a market investigation reference to the Competition Commission, where it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom. From 1 April 2014, the power to make a market investigation reference will transfer to the CMA, with any market investigation reference being undertaken by a CMA Panel of independent members. The OFT (or CMA, as appropriate) will only then exercise that power to make a reference if it considers that, in all the circumstances, it would be appropriate to do so. The OFT has made no decision on either of those issues, which will be entirely for the CMA to make. 
  5. The OFT is reviewing the behavioural undertakings given by nine banks following the Competition Commission's 2002 investigation into the supply of banking services by clearing banks to SMEs. These undertakings were intended to facilitate competition by reducing switching costs, improving price transparency and placing certain limits on the 'bundling' of BCAs with other banking services provided to SME customers (including both business loans and business deposit accounts). The banks who provided these undertakings in 2002 were AIB Group (UK), Bank of Ireland, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank plc, Lloyds TSB Bank plc, Northern Bank Limited and The Royal Bank of Scotland Group plc.

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