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Thursday, 14 March, 2002, 14:38 GMT
Q&A: Small business banking
Q&A

Gordon Brown, the Chancellor of the Exchequer, has responded to the long-awaited Competition Commission's probe into small business banking. BBC News Online takes a look at what is wrong with the market, and how the government's recommendations will work.

I have got a small business: how will the changes affect me?

Small business customers should see an improvement in the service they receive from their bank, although the changes will not be immediate.

The report identified 10 practices carried out by the eight main clearing banks that restrict or distort competition and operate against the public interest.

Banks restricting or distorting competition and operating against public interest
Barclays Bank
Bank of Ireland
Bank of Scotland
AIB Group (trading in Northern Ireland as First Trust)
HSBC
Lloyds TSB
National Australia Bank (through its subsidiaries Clydesdale Bank and Northern Bank)
Royal Bank of Scotland group

These banks must make a number of changes to their practices, such as increase transparency, improve choice and ease switching of accounts.

These remedies could take between two and three years to come into effect, but the report recommends that the four largest clearing banks in England and Wales - the main offenders - must take action sooner.

They will be required to offer interest on their current accounts of at least the Bank of England Base Rate minus two and a half percentage points or a current account free of money transmission charges, or a choice between the two.

This measure is expected to take about three months to introduce.

The Director General of Fair Trading will now seek undertakings from the banks on the remedies proposed.

What have the banks done wrong?

It is a question of market dominance, something that critics claim banks are exploiting unduly.

The big four clearing banks, HSBC, the Royal Bank of Scotland, Barclays and Lloyds TSB, control about 86% of the small business banking market.

In March 2001, the Competition Commission ruled in its interim report into the small business market that these banks operated a "complex monopoly" in the supply of services to small firms.

Another probe by Don Cruickshank, published on 20 March 2000, concluded that banks were making up to 1.5bn a year in profits from small business banking.

The publication of the final Competition Commission report on Thursday backed up these findings, saying that some banks were making "excessive" profits and charging excessive prices.

What do small businesses pay?

Small businesses have not fared well.

They typically pay an annual charge for holding a current account and are charged for individual transactions.

In 1998, there was 13bn-20bn held in current accounts at the big four banks.

But they have offered only small rates of interest on credit balances.

The Competition Commission report concluded: "A number of specific practices of the four largest clearing groups - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland Group - restrict and/or distort price competition and result in those clearing groups charging excessive prices to small and medium-sized enterprises in England and Wales."

Why was the report delayed?

The report had become one of the most eagerly anticipated events in Whitehall - and a political hot potato.

The report was concluded in October 2001, but the government has been wrangling over just how to tackle the issues.

In short, it had become a regulatory minefield.

What were the issues?

The government had to tread the uneasy line between regulation and competition.

With the budget due next month, the timing of the report was particularly sensitive.

Banks would be furious with the government if price controls were ordered or a windfall tax were levied on their profits.

However, "soft" options which were aimed at encouraging more competition and increasing transparency, such as making it easier for businesses to switch accounts, might not have gone far enough to silence critics within the small business community.

The government's recommendations tread a middle line between these "softer" options and harsher measures.

In the meantime, how can I save money?

The British Bankers' Association website has a business account finder.

It lets you compare tariffs, charges and rates that are offered by banks for different types of business, for example, if you are a sole trader or in a partnership.

Information from the tables is supplied by Business Moneyfacts.

See also:

14 Mar 02 | Business
Brown orders bank charge clampdown
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