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Banking Services (Small Businesses)
12.31 pm
The Chancellor of the Exchequer (Mr. Gordon Brown): With permission, Mr. Speaker, in presenting the Competition Commission's report on the supply of banking services to small and medium-sized enterprises, and my response and that of my right hon. Friend the Secretary of State for Trade and Industry, our starting point and guiding objective is our belief in competition as the spur to efficiency, innovation and competitiveness.
This is underpinned by our statement last July that, just as in the last Parliament it was right to make monetary decisions independent of political influence under an independent authority—first de facto and then de jure—so too it is right to make competition decisions—de facto and then de jure—independent of political interference, with Government accepting the decisions of independent competition authorities. Having already moved de facto to such a regime in the way in which we handle merger cases, in the forthcoming enterprise Bill we will legislate to make decisions on mergers and complex monopolies independent.
There are more than 3.5 million small businesses in the United Kingdom, representing 55 per cent. of jobs, 50 per cent. of all business turnover and £1 trillion of economic activity each year. The access to finance and quality of service that they receive from banks are critically important to their productivity and prosperity and that of the British economy. So when the Cruickshank report on banking services found little prospect of effective competition emerging in the small business market, the then Secretary of State for Trade and Industry and I referred small business banking to the Competition Commission for a full investigation. Its report is published and laid before the House today.
Under the Fair Trading Act 1973, there are three necessary tests, all of which must be met before it can be concluded that a complex monopoly is operating that is harmful to the public interest. The first test is that at least a quarter of the services under consideration must be supplied by a group of persons. The Competition Commission found that the eight largest clearing banks supplied at least a quarter of banking services in the UK, with the four largest providing 86 per cent. of services, and that that degree of concentration had changed little over the past 10 years. The second test is that the group of persons must be found to conduct its affairs
- "as in any way to prevent, restrict or distort competition".
Let me set out the Competition Commission's findings. First, it finds that the banks concerned had failed to compete on price by refusing to pay interest on current accounts and only paying low rates of interest on smaller, short-term deposit accounts; and that they had been maintaining a structure of charges not related to costs.
Secondly, the Competition Commission finds that those banks had reduced choice, and the ability of small businesses to make savings on bank charges, by restricting small businesses to business rather than personal bank accounts; failing to inform small businesses about possible benefits from set-off and sweep facilities which
allow for credit balances in one account to be set off against debit balances in another; and requiring small businesses wanting a deposit account or a loan also to hold a current account.Thirdly, the Competition Commission finds that those banks had made it hard for small businesses to compare the deals available from different banks by failing to provide small businesses with a breakdown of interest charges on their current account and offering discounts only to selected customers.
Fourthly, the Competition Commission finds that those banks had made it more difficult and expensive for new entrants and alternative suppliers to attract small businesses by confining free banking to business start-ups and to small businesses that had moved from another bank, and negotiating reduced charges for small businesses that were likely to switch banks.
The Competition Commission concludes that all eight of the largest clearing banks in the UK were found to be carrying out one or more of those practices, which operated against the public interest. Moreover, it finds that
- "the average return on equity between 1998 and 2000 is 36 per cent. compared with an estimated cost of equity of about 15 per cent. We however, recognise that a number of adjustments should be made to these figures."
- "despite the cautious approach we have adopted to a number of those factors, we have concluded that the four largest clearing groups . . . are together charging excessive prices . . . and therefore making excessive profits in England and Wales of about £725 million a year over the last three years with adverse effects on SMEs."
Where high profits are derived from an absence of competition or through a complex monopoly situation, and are earned by overcharging customers, the effectiveness of the market is reduced. Indeed, as the Competition Commission observed, where the consumers concerned—in this case small and medium-sized companies—are themselves operating in a highly competitive market, the adverse effects on the public interest are exacerbated.
Because practices carried out by the eight main clearing banks—and the overcharging by the four largest in England and Wales—were found by the Competition Commission to operate against the public interest, it recommends that all eight clearing banks identified make a number of changes to their practices to help promote competition in this market, including being required to facilitate the switching of accounts; providing—if requested—a portable credit history; making the charges for their services more transparent; investigating the feasibility, costs and benefits of a national scheme for sharing branches; and extending the business banking code.
Taken together, the Competition Commission states that those remedies, along with others that it proposes, would help to promote greater competition in banking services.
The Competition Commission also wants
- "a decisive and significant shift towards what"
- "consider to be competitive levels",
- "competition and entry has to date not been effective in reducing excess profits and prices, nor is the immediate prospect of new entry in"
- "view sufficient to reduce excess profits and prices in a reasonable time period."
The Competition Commission concludes that since certain current banking practices have operated against the public interest, and led to small businesses paying more than they should for services, it would be wrong to let the situation continue for several more years until the behavioural remedies to promote competition took effect.
From our starting point—our belief in competition as the spur to efficiency—the Secretary of State for Trade and Industry and I considered the Competition Commission's report carefully. We examined the recommendations and remedies proposed to promote competition, to encourage new banking suppliers to enter the market and directly to address the lack of choice and information. Until the competition authorities are fully independent, the Government have legal responsibility for decisions on complex monopoly cases. In preparing the Government's response, we sought and received additional advice on the report's technical analysis and recommendations from independent experts.
The advice of the Director General of Fair Trading, which is published today, agrees with the Competition Commission that the limited extent and difficulty of switching bank accounts is a key factor in inhibiting competition in the small business banking market. In his advice, which I am also publishing today, Sir Bryan Carsberg, the former chairman of the International Accounting Standards Board and former Director General of Fair Trading, concluded that
- "the framework adopted by the Commission is sound and would be accepted as appropriate by most independent experts".
The Competition Commission explicitly concludes that practices by banks operate against the public interest. Having carefully considered its report, the Secretary of State for Trade and Industry and I agree that action must be taken to promote greater competition.
First, the Competition Commission recommends that banks be required to facilitate the switching of accounts to enable small businesses to move accounts from one
bank to another easily and quickly by completing a substantial percentage of all account switching within five working days, by publishing their performance objectives and efficiency in achieving them, and by imposing no charges for closing accounts. We agree with the commission's recommendation.Secondly, the commission recommends that banks be required, if requested by a small business, to provide a portable credit history—a statement of the business's credit performance that can be passed to other banks and which will improve the prospects for smaller competitors and new entrants into the banking sector. We agree with the commission's recommendation.
Thirdly, the commission recommends that banks be required to stop bundling services and imposing requirements on small businesses to hold a current account in order to obtain a loan or deposit account. We agree with the commission's recommendation.
Fourthly, the commission recommends that banks be required to make their service charges more transparent by routinely publishing their standard tariff prices for money transmission services and for interest paid on current and short-term deposit accounts, allowing small businesses easily to compare charges. We agree with the commission's recommendation.
Fifthly, because lack of access to a bank branch represents a key barrier to many substantial new competitors entering the market, the commission recommends that banks be required to investigate the feasibility, costs and benefits of a national scheme for sharing branches, and to publish their findings within a year. We agree with the commission's recommendation.
The Julius report concluded that the principles underlying the voluntary code for banking and mortgages for households should be extended to small businesses. Consequently, the Competition Commission made several other informal suggestions, some of which are incorporated in the new code announced by the British Bankers Association last week, which we welcome. The Competition Commission recommends that other suggestions, such as banks improving their procedures for dealing with errors and paying compensation, should be added to the code.
Those and other remedies proposed by the Competition Commission are in pursuit of competition and we ask the banks to work with the Director General of Fair Trading to implement the recommendations speedily.
In seeking an earlier and decisive switch towards a better service for small businesses, the Competition Commission considered more radical proposals—for example, divestment of bank branches and small and medium-sized enterprise banking businesses, whereby banks would be forced to give over some of their branches or customers to other banks. It also considered a licence fee, an obligatory fund and a windfall tax. The Competition Commission rejected those proposals, and we agree with that rejection.
The Competition Commission recommends a transitional remedy that would not prevent companies from earning high profits but would simply ensure that they could do so only as a result of a genuine competitive advantage—a remedy that
- "imposes no restriction on new entrants . . . and should not interfere with the natural emergence of desirable competition".
The commission suggests that all remedies be put in place within six months. We hope that the Director General of Fair Trading will be able to reach an earlier agreement on the transitional remedy. The commission also recommends that the Director General of Fair Trading review all the remedies three years after their implementation. Under the Fair Trading Act 1973, there is flexibility for a review to take place sooner. We state our view that if at any time within the three years the Office of Fair Trading observes more effective competition emerging, or banks have proposals that they believe would make for a more competitive environment, an early review could and should take place.
Our goal is to create an environment where new entrants can compete with existing banks on a fair basis and both can secure more competitive services for small businesses. I urge the banks to work with the Director General of Fair Trading to achieve what is in everybody's interest: a better service and a fairer deal for Britain's 3.5 million small businesses.
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