A guide to our coverage of the Competition Commission's report on banking services for SMEs is here.

The OFT (Office of Fair Trading) will be responsible for overseeing the implementation of the recommendations. Clues to how this may happen can be found in their comments to the government on the report. Below is a summary of the Director General's views. They are set out fully on the OFT site.

The CC (Competition Commission) report has found that the market for SME banking services is highly concentrated and inadequately competitive. The investigation has involved an extremely detailed assessment of the operations especially of the four largest clearing groups who have on the CC’s analysis been making substantial excess profits. The CC present evidence that there is little likelihood that competitive pressures will spontaneously emerge to redress the lack of competition in the market.

The CC found that there are a number of practices adopted by the four main clearing banks and certain other clearers, which restrict competition in the supply of banking services to SMEs. These relate to price setting and in particular to restricting the availability of free banking to SME customers that are start-ups or intend to switch. In addition, these banks have adopted a common policy of not paying interest on most or all business current accounts. Customer choice is further restricted by the differentiation made between personal and business accounts. These factors together led the CC to conclude that the structure of charges does not directly reflect the structure of clearing banks’ income and costs.

Having found a complex monopoly situation operating against the public interest, the CC proposed a combination of behavioural and regulatory remedies.

The proposed behavioural remedies seek to enhance competition by promoting ease of switching and introducing greater transparency and improved information about the availability of accounts. These remedies will require careful drafting and some preliminary work to ensure practicability. Where possible these recommendations could be implemented through an SME Bank Code which is common to the eight main clearing groups. I recommend that, to ensure that the CC’s remedies are quickly and effectively enforced, the OFT should retain control of the negotiating process. However, for the informal remedies shown in Annexe B, I recommend that you ask me to seek to ensure that they are included within the BBA Code at the next review.

As regards the proposal to regulate charges and interest rates, I recommend that the four largest clearing groups be required to ‘offer to any SME customer operating a current account in England and Wales an account that pays interest of at least Bank of England (BoE) Base Rate minus 2.5 per cent or a current account free of money transmission charges or a choice between the two’. The italics highlight that the banks do not necessarily have to treat their whole SME customer base uniformly and that the interest rate remedy is a floor, not a requirement.

The majority of the CC’s requirements are for immediate implementation. However, there are some areas which could be problematic so that not all the remedies can be put in place immediately, notably that concerning error-free switching of accounts. Whether the remedies are incorporated in an SME Bank Code common to the eight main clearing groups or require individual undertakings, it will take time to arrive at suitable drafting. The process will need to be informed by the results of the studies into resolving problems associated with originators of direct debits and speeding up the transfer of security. A sequenced approach to negotiating the undertakings will be required to ensure that the remedies, and hence the benefits to competition and to SMEs, are implemented effectively. I recommend that recommendations (c) to (m) be targeted for negotiation within six months and recommendations (a) to (b) be finalised as soon as the results of the studies proposed under recommendations (c) and (d) are available.

The regulatory and behavioural remedies will require considerable resources to monitor and ensure compliance. I recommend that a monitoring officer with a support team be appointed to ensure compliance. This officer could assist the review of the undertakings that the CC recommends should take place three years after implementation. These resources could perhaps be paid for by the banks that are subject to the undertakings.