OFT to review business banking services

Regulator to study whether Big Four breached agreement

Britain’s Big Four banks are to be scrutinised amid growing claims their small business services are not meeting the undertakings given to them by regulators.

The Office of Fair Trading (OFT) announced it will launch a review of the supply of banking services to small and medium-size firms, focusing largely on allegations of excessive profits, a lack of price competition and whether the banks have compromised the effectiveness of the 2002 undertakings.

The transitional undertaking was signed by the UK’s Big Four clearing banks, Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland Group, which includes NatWest.

The Competition Commission (CC) required the four banks to offer free banking services to small firms or pay interest on business current accounts, and its behavioural undertaking aimed to encourage price competition by reducing barriers to entry and expansion in the market.

The CC found in 2002 that the value of balances for small business customers was approximately £228bn and that the largest clearing banks in England and Wales, accounting for over 70% of the value of balances, made excessive profits of well over £700m a year between 1998 and 2000.

The review will focus largely on the short term impact of the transitional undertaking on excessive profits and prices and whether the its effectiveness has been compromised by the banks, for example by increasing money transmission charges. It will also consider the overall impact on competition generally.

Businesses welcomed the review, saying they support the banks’ autonomy but the time has come for them to offer better protection to their customers.

“The [Federation of Small Businesses (FSB)] supports self-regulation by the banks and has found that they have an open and constructive approach to the reviews of the Banking Code,” said Angela Silberberg, FSB Deputy Policy Manager.

“However, we feel that they can do more to protect business customers by ending branch closures and promoting inter-bank agreements, which allow customers to use branches where they do not have an account.”

The OFT will begin a nine-month consultation period and expects to report back to the CC at the end of the year.

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