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Thursday, 14 March, 2002, 23:13 GMT
Brown orders bank charge clampdown
Banks graphic
Hard-pressed small businesses could win some relief from bank charges, under new regulations proposed by UK Chancellor Gordon Brown.

The government has said it will impose controls on charges for current accounts, following the publication a report into small business banking from the Competition Commission.

Mr Brown attacked the "excessive profits" made by the big four clearing banks, which have earned an annual 725m over the past three years from small businesses.

Banks will be required to switch accounts within five days, and impose no charges for closing accounts.

They will also be forced to provide portable credit histories, and stop bundling services.

   Click here for a list of Mr Brown's key recommendations

The British Banking Association attacked the moves as amounting to price controls.

But the British Retail Consortium, representing UK shopkeepers, praised the move.

Director General Bill Moyes said: it was "delighted that the vast majority of its members' recommendations have been realised, through the requirements demanded of the eight major clearing banks today."

The Federation of Small Businesses immediately welcomed the move, which marks the end of an exhaustive three-year inquiry, as "a fair deal for small firms".

Excessive profits

The Competition Commission report found that there was a "complex monopoly" in the provision of banking services to small businesses.

Don Cruickshank
Don Cruickshank highlighted excessive profits
That is where a group of two or more organisations control at least a quarter of a market and prevent, restrict or distort competition.

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

The government estimates that the "softer" recommendations aimed at tackling these issues will take at least two or three years to take effect.

In the meantime, the four largest clearing banks, where "evidence of excessive charging has been found" in England and Wales should pay interest of at least the UK base rate minus 2.5% on current accounts or offer accounts without transmission fees.

Lloyds TSB, Royal Bank of Scotland, Barclays and HSBC between them control 86% of small business banking, and had a combined profit last year of 10bn.

A report by government adviser chairman Don Cruickshank concluded that the big four were making excessive profits from small business customers.

Banks 'not been fair'

Small business owners have complained about some of the banks' practices.

Dave and Jan Ward, who run a pressure washing company, said they used to trust their bank implicitly.

Only when they got an expert to look at their accounts did they find they had been wrongly overcharged, to the tune of more than 4,000.

"The anger comes in when you think how much you could be out of pocket without realising it. It could have been far worse than 4,000," Mr Ward told the BBC.

The banks have argued that there is no need for government action against them, as competition from new players in the small business banking field, such as Halifax and Abbey National, is changing the situation.

Cautious welcome

David Lennan, director general of the British Chambers of Commerce, which represents 135,000 small to medium sized businesses, gave Mr Brown's announcement a cautious welcome.

"Small businesses have for a long time complained about a lack of competition in this market and we are therefore pleased to see their complaints vindicated by this report," he said.

"Small businesses will welcome being paid interest on their current accounts, as contrary to perceptions they hold more on deposit than they borrow.

"However, we would have preferred tighter controls on the charges banks levy for transactions, rather than giving them the choice to pay interest as an alternative."

At the Institute of Directors, Richard Wilson, business policy executive, said: "We welcome the fact that some of the more draconian proposals suggested by the Competition Commission, for example the imposition of a windfall tax on the banks' profits, have been dismissed by the government.

"This is a victory for common sense."

Government recommendations:

  • Where evidence of excessive charging has been found, any small business customers must be offered an account that pays interest of at least the Bank of England base rate minus two and half percentage points, or a current account free of money transmission charges, or a choice between the two.

  • Banks must facilitate switching accounts within five working days and impose no charges for closing accounts.

  • Provide a portable credit history - a statement that can be passed to other banks.

  • Stop bundling services and not impose any requirement to hold a current account in order to gain a loan.

  • Investigate the feasibility costs and associated benefits of a national branch sharing scheme.

  • Inform small businesses when a charge has been made for an unauthorized overdraft.

  Click here to return

The BBC's Evan Davis
"Small firms deposit more money than they borrow from the banks"
The BBC's Stephen Sackur in Maryland
"Banking in America is a highly competitive market place"
Ian Mullen, British Bankers' Association
"Surveys show between 82 and 93% of small business customers are content with the service"
See also:

14 Mar 02 | Business
One firm's struggle with the banks
14 Mar 02 | Business
Q&A: Small business banking
06 Mar 01 | Business
Big banks 'operate monopoly'
05 Dec 01 | Business
HBOS takes on Big Four 'cartel'
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