Competition Commission lifts price controls on SME banks

The Competition Commission (CC) has today published its provisional decision to lift the temporary price controls imposed in 2003 on the UK’s four largest banks servicing small and medium-sized enterprises (SMEs).

The requirement on the banks to publicize changes in charges will, however, be retained. The behavioural undertakings designed to make the market more competitive by making switching easier and prices more transparent and by prohibiting the bundling of different products and services will remain in place.

In addition, the CC will be recommending to the Office of Fair Trading (OFT) that it should reinforce the awareness and the impact of the behavioural undertakings. In particular it will recommend that the OFT should:

actively monitor all SME banks’ behaviour following the lifting of the price controls, and raise awareness of any worsening of their offers;

work with the banks to ensure that SMEs become more aware of the banks’ obligations to make it quick and easy for them to switch accounts; and

explore with the British Bankers’ Association the scope for imposing the obligations on the banks under the Banking Code at its next review.

The price controls were put in place following an investigation by the CC into the SME banking market. They require the four banks to make available to SMEs an account that offers an interest rate of at least 2.5 percentage points below base or free money transmission services, or both. They were intended as a temporary measure until the behavioural undertakings, which were designed to make the market more competitive, had time to take effect. The behavioural undertakings apply to nine banks including the four bound by the transitional undertakings.2

CC Deputy Chairman Christopher Clarke said: “Having reviewed the evidence and advice from the OFT, we believe that these price controls are no longer appropriate. They were intended to be temporary and have now been in place for over four years. During this period, other significant banks, such as HBOS, Abbey, and Alliance & Leicester, have competed more strongly for SME customers and improved their market position. SMEs have raised their expectations of what banks should provide and are more likely to consider switching if they do not get what they want. They are therefore better placed to constrain the actions of the four banks which were subject to the price controls, Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland Group. Even so, we recognize that these four banks still have 85 per cent of the SME market. They will therefore remain bound to publicize any changes in their charges. Similarly all banks providing SME banking services will have to continue to comply with the undertakings on the ease of switching, transparency of prices and the prohibition on bundling of different products and services. The OFT will continue to monitor their compliance. We are also making recommendations to the OFT for further improvements to the SME market.”

The deadline for responses to the CC’s consultation on its provisional decision is 28 September 2007.