Competition Commission reports on supply of banking services to SMEs

Earlier this month, the Competition Commission (CC) reported on its 18-month investigation into the existence or possible existence of a monopoly situation in relation to the supply of banking services by clearing banks to small and medium-sized enterprises (SMEs). The Chancellor of the Exchequer and Secretary of State for Trade and Industry have fully accepted the CC’s recommendations. The Office of Fair Trading is now working on measures to implement the recommendations.

The report’s main conclusions are:

• there are a number of practices, each carried out by some or all of the clearing banks which constitute a complex monopoly situation in that they restrict and/or distort price competition in the supply of the banking services to SMEs
• these practices include: (i) confining the provision of free banking services to start-ups and switchers; (ii) generally not paying interest on current accounts; (iii) giving discriminatory discounts through negotiations; and (iv) refraining from price competition in setting prices such that they more than adequately finance an efficient SME banking business
• these practices are against the public interest in that they adversely affect choice and the level of information available to SMEs, and in that they result in the clearing groups charging excessive prices to SMEs in England and Wales to an extent that would not be expected in a fully competitive situation.

The CC’s preference was to remedy the adverse effects identified by encouraging competition. Hence, it recommended a number of measures to apply to all the eight main clearing groups to increase competition, including:

• a number of measures to ensure fast error-free switching of accounts which the CC regards as crucial to a more competitive market
• measures limiting bundling of services and improving information and transparency, and an examination of the scope for sharing of branches.

However, the CC was not convinced that these remedies would have sufficient impact on competition within the next two or three years to ensure that the excessive prices charged by the four largest clearing groups in England and Wales would disappear in a reasonable period of time. Therefore, it also recommended:

• that the four largest clearing groups in England and Wales should be required to offer SMEs operating current accounts in England and Wales an account that pays interest at the Bank of England Base Rate minus 2.5 per cent; alternatively, they should be allowed to offer SMEs current accounts that are free of money transmission charges, or a choice between the two, and
• that they should have to notify the DGFT and publish information on any new money transmission charges and increases in existing charges.

The CC also made other recommendations for further action that could be taken. These include encouraging SME representative bodies to identify and report to the DGFT any indication of action taken by banks in relation to money transmission charges or services or their lending policies that would negate the purpose of the remedies proposed.

Once the remedies have been implemented for three years, they will be reviewed by the DGFT.

The Office of Fair Trading is now drawing up detailed proposals for implementing the recommendations. It expects interest payments to start within three months.

This is an outline of the recommendations in the report, which runs to 1, 386 pages.

If you have any questions on this, please do not hesitate to contact Nick Paul on tel. 020 7367 2806 or email. [email protected]