PRIVATE EYE calls the DTI the “Department of Timidity and Inaction” because of its persistent leniency towards big business. Following its announcement last week that it wants to lift price controls on business banking, thus letting Britain’s big four banks off the hook over the way they treat small business customers, I have a new soubriquet for the Competition Commission: the “Clearers’ Champion”.
The commission, known unil 1999 as the Monopolies and Mergers Commission, gave the impression it was a watchdog with teeth five years ago, when it first imposed controls on the small business banking sector. Following the Cruickshank Review, which revealed that the banks were making billions of pounds in excess profits out of their small business customers, the commission brought in measures forcing the banks to treat their small business customers more fairly.
After much behind-the-scenes wrangling, the four biggest UK banks — RBS/NatWest, Barclays, Lloyds TSB and HSBC — reluctantly agreed to offer their small business customers the choice of either interest-bearing current accounts or free banking.
One hope was that the measures would help make the market for small business banking more competitive. Here — even though smaller players such as Abbey, Alliance & Leicester and HBOS have had some success around the edges — the measures appear to have failed. Five years ago, the big four had 92% of the small business banking market. They now have 85%.
Furthermore, small businesses on both sides of the border remain concerned about the transparency of charging structures and the Federation of Small Business (FSB) has revealed that the banks are only paying lip service to the pledges they reluctantly made five years ago.
Mike Cherry, financial affairs chairman of the FSB, last week said: “We are utterly bewildered by the Competition Commission’s provisional decision in this case. It flies in the face of all the evidence we have given, and completely contradicts the experience of thousands of our members.”
Cherry cited research by the FSB in November 2006 which revealed that 70% of small businesses remained unaware of the undertakings made by the banks in 2002 (in other words, their pledge to either offer interest-bearing current accounts or free banking to small business customers). More than half of the 4200 respondents had not been offered either option, or did not know which of the two options their bank provided.
Ahead of what they called “price controls” in 2002, senior banking industry figures were up in arms. I recall a director of one Scottish bank telling me the banks would make life difficult for Tony Blair’s government if the commission dared to introduce such measures. In this banker’s view, nobody should come between a bank and its ability to maximise profits from its customers, claiming “the market should decide”.
That was a bit rich considering that “the market” contained just four players, the barriers to entry remained high and the banks seemed willing to try every trick in the book to disguise the true cost of their products.
The Competition Commission pressed ahead anyway, obliging banks either to provide interest-bearing current accounts with rates of at least 2.5% under base (a relatively cheap option while interest rates remained low and of little real value to their customers) or else free banking to their small business customers. Unsurprisingly, those that did publicise the options tended to favour the first option.
So, why is the commission proposing to scrap the 2002 measures before they have had any discernable impact on banks’ behaviour or the wider market situation?
Conspiracy theorists rgue the banks are feeling so bruised in the retail arena — where the OFT has brought a court case to challenge their right to impose penalty fees on individual borrowers — that they have pleaded with the authorities to be let off the hook in this area. It is possible but unlikely given the supposed independence of the UK’s competition authorities and courts.
It is more likely the commission has just failed to examine the evidence properly. For a start, it should read the FSB’s Small Business Banking report, published in February. If it does decide to press ahead with the scrapping of so called price controls in this market, it should at least make such a prospect conditional on the banks altering their attitudes towards small businesses in other areas.
One reason the market remains so uncompetitive is that, perhaps out of pique, the banks make it difficult for small business customers which try to change banks. The banks made separate “behavioural undertakings” in 2003, promising they would address this situation, for example by facilitating the transfer of standing orders and direct debits. Again they have dragged their heels, according to the FSB’s research.
One way for the Competition Commission to demonstrate it has not degenerated into a toothless lapdog, or a Clearers’ Champion, would be for it to strike a bargain with the banks. How about offering them the prospect of the axing of price controls as a carrot, conditional on them demonstrating they really have made it easier for business customers to switch supplier?
This article was the main business comment article in the Sunday Herald on 26 August 2007