Recommendations

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The Competition Commission found a number of practices by banks which restrict or distort competition:

(a) Restricting price competition in relation to money transmission charges by generally confining the provision of free banking services to certain categories of SME customers, namely start-ups and some switchers from other banks; and/or using the scope for negotiation to reduce charges for those likely to switch.

(b) Restricting price competition in relation to business current accounts by generally not paying interest on such accounts.

(c) Restricting price competition on smaller, short-term deposit accounts by offering low rates of interest in relation to the value of funds to the bank.

(d) In relation to both current and deposit accounts, distinguishing between personal and business accounts and encouraging or requiring most or all SME customers to have business accounts, thereby restricting the choice of charges they pay and interest rates they can earn.

(e) Giving discriminatory discounts through negotiation whether or not against established tariffs, with the effect of making price competition more difficult, and thereby reducing the benefits for customers of competition.

(f) In consequence, maintaining a structure of charges not related to the structure of costs and unduly discriminating between SME customers.

(g) Failing to promote the scope for savings from use of set off or sweep facilities to all of the SME customers who could benefit from them.

(h) Failing to provide a regular breakdown of interest charges arising on SME current accounts.

(i) Requiring SMEs wishing to borrow or use business deposit accounts to have a business current account.

(j) Setting prices, in terms of charges and in terms of interest rates on loans, current accounts and deposit accounts, such that they more than adequately finance an efficient SME banking business, such as would emerge under fully competitive conditions.

In order to remedy the adverse findings, the Commission recommended that the eight main clearing banks give undertakings that they will:

(a) 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 ten working days if borrowing is involved (in the absence of security), with compensation if those timescales are not met;

(b) publish their performance objectives regarding (a) and their efficiency in achieving them;

(c) use best endeavours to resolve the problems associated with originators of direct debits, and publish a report on progress in doing so within 12 months of publication of the report;

(d) examine ways to allow more rapid transfer of security and publish a report on this within 9 months of the publication of this report;

(e) impose no charges on closing or switching accounts other than cost-related charges related to early termination of loan arrangements or transfer of security;

(f) publish whether or not they are willing to pay towards legal/valuation charges for transfer of security, and if so in which circumstances and up to what limits;

(g) provide a portable credit history to a timescale and format to be approved by the Director General of Fair Trading (DGFT);

(h) 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;

(i) if there are such technical reasons, to overcome the technical constraints within 12 months of the publication of this 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 for the account will be made;

(j) compile price information relating to 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;

(k) bring to the attention of their SME customers the availability of such information in a manner approved by the DGFT;

(l) inform SMEs whether a charge for the use of an unauthorised overdraft has been levied; if an SME has not been so informed (or requests such information) the clearing banks should be required to specify on statements the higher rate that applies on unauthorised overdrafts and the amount of the overdraft to which the higher rate applies; and

(m) 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 1 year after publication of this report.

However, the Commission does not believe that these remedies together with technological and other developments in the supply of reference services will 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. The Commission therefore recommends that these four groups should also 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. They should also have to notify to the DGFT and publish information on any new money transmission charges and increases in existing money transmission charges. Three years after implementation of the remedies, the DGFT should review whether further measures are needed or whether any or all the measures being implemented can be modified or discontinued.

The Commission also made a number of suggestions for further action that could be taken:

(a) The Government should investigate the scope for extending to SMEs (to the extent they do not already exist) the type of safeguards currently available to consumers under the Unfair Contract Terms Regulations 1999 (amended in 2001), to be limited to those SMEs lacking the bargaining power of the larger ones.

(b) The British Bankers Association’s Business Banking Code for SMEs (which came into force in March 2002) should be extended to include:

an agreement to provide a statement of cleared balance on request at an approved and published charge;

a requirement that reasons for refusing a loan application be given on request including written reasons if requested;

in the event of any move to standard contracts meeting the criteria that all written terms will be fair and will set out the customer’s rights and responsibilities clearly and in plain language, using legal or technical language only where necessary, a requirement that they be approved by the Plain English Campaign;

as to errors and compensation, a requirement to settle or use best endeavours to settle a specified percentage of disputes within a specified period of weeks, and performance tables monitoring the incidence of disputes and performance against this objective;

a commitment to pay for errors according to a standard scale of compensation, possibly including agreement to pay SME costs and costs of any agency advising the SME if the bank is in error and/or if an award of an independent arbitrator is greater than compensation offered;

as to security, a commitment to take the minimum practical security unless in return for an explicit improvement in terms, including means to appeal against unnecessarily high security, and rules for taking of third party security and guarantees.

(c) The Government should consider the scope for increasing the remit of the Financial Ombudsman above the current £1 million turnover limit. A similar extension in the scope of the Code could also usefully be considered.

(d) SME representative bodies are encouraged to identify and report to the DGFT any indication that money transmission charges (whether tariff-based or not) are increasing, or money transmission services are deteriorating, or the banks introducing conditions to their accounts that would negate the purpose of the interest on current account remedy to the detriment of SMEs.

(e) SME representative bodies are encouraged to be alert to any indication of an adverse change in banks’ lending policies or in lending prices including both interest and fees, and to report any such indication to the DGFT, who should consider whether another reference is appropriate.