Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Federation of Small Businesses


  1.1  With 168,000 members, the Federation of Small Businesses (FSB) is the largest UK lobby organsiation representing the interests of small businesses and the self employed.

1.2  Representatives of the FSB have given evidence at each stage of the inquiry into small business banking.

1.3  The importance of small businesses to the UK is widely recognised. Small and Medium-sized Enterprises (SMEs) contribute 40 per cent of UK GNP and employ 56 per cent of the private sector workforce. In all 12 million people are employed by the small business sector and a further two million jobs are expected to be created over the next 10 years. The relationship between small businesses and the banks is key to the success of small businesses and will be vital to their ability to create jobs over the next decade.


2.1  For small businesses the most important factors in the choice of principal bank are:

—  Bank charges;

—  Quality of Business Managers;

—  Location of bank branches;

—  Granting of overdraft facilities;

—  Terms and conditions of loans.

2.2  The most common reasons given by business for changing their principal bank are:

—  Bank charges too high;

—  Unsatisfactory lending arrangements;

—  Personality problems with bank staff;

—  Access/convenience.


3.1  The Cruickshank Report (March 2000)

  The FSB gave evidence to the Cruickshank review and agreed with the conclusion that there are ``real problems with the way banks serve small businesses.'' Cruickshank's Competition in UK Banking Report argued that a ``complex monopoly'' existed in small business banking where the four main high street banks held over 80 per cent of accounts. The report also concluded that consumers were paying between three and five billion pounds a year too much for banking services. The FSB supported the Government's subsequent decision to refer the issue to the Competition Commission.

3.2  Competition Commission Interim Report (March 2001)

In November 2000, the FSB gave evidence to the Competition Commission. The Commission's subsequent interim report suggested three possible remedies to the ``complex monopoly.'' These were a windfall tax to reduce profits, the regulation of the costs of business banking, and the removal of the barriers to switching banks. The FSB stated publicly that a windfall tax was the wrong approach because any such levy would be passed on to small businesses in higher banking charges.

3.3  British Bankers Association account finder

In the period between the Commission's interim report and the full report, the Brisish Bankers Association (BBA) announced a number of initiatives aimed at small businesses. The BBA launched a business account finder website in association with the FSB that allowed the user to view a full breakdown of any account listed, including the latest account charges, interest rates payable, and borrowing rates. The FSB welcomed the website as a move towards greater transparency.

3.4  Business Banking Code

  In March 2002 the BBA and the Association for Payment Clearing Services launched the Business Banking Code. This is a voluntary code to set standards of good banking practice for dealing with business customers. The code outlines 10 key commitments. These commitments include giving information and services in plain language and explaining the financial implications. The code also gives a commitment to consider cases of financial difficulty sympathetically and to handle complaints quickly. The FSB endorsed the Business Banking Code because it sets benchmarks by which SMEs can measure their bank's performance.


4.1  The FSBs submission to the Competition Commission Inquiry and subsequent public statements highlighted concerns about over-charging and called for the following measures:

—  Portable credit references that are consistent and universal, to remove the stigma of switching banks.

—  Consistency and transparency in bank charges and tariffs.

—  Payment of interest on current accounts held by small businesses.

—  The extension of ``offset'' accounts to business customers.

—  Removal of charges on small businesses for meetings with bank employees.

—  Proper discussions with customers instead of unilateral action by banks on issues such as the removal of overdraft facilities.

—  Opening up the small business banking market to foreign banks.

4.2  The Competition Commission declared:

—  Banks have failed to pay interest on current accounts and the charges for overdrafts have far outweighed the costs of administering them.

—  SMEs have been unfairly tied to business accounts and have not been able to choose sweep facilities and universal accounts.

—  There has been a lack of transparency in bank charges/rates of interest.

—  The big four have maintained over 80 per cent market share for over 10 years.

  4.3  The Competition Commission Report made 11 main recommendations of which the following are key to small businesses:

—  The banks will be forced to pay interest on current accounts of at least 2.5 per cent below base rate or drop charges or offer a combination of the two.

—  Banks will have to allow clients to switch banks within 10 working days and provide portable credit histories on request to make this easier.

—  Banks will no longer be able to insist businesses open a current account when they take out a loan.

—  The big four will have to carry out a feasibility study on branch sharing to allow clients to use rival outlets.

—  Bank charges and interest rates should be more transparent and league tables should be published.

—  Bank self-regulation using a voluntary code should be extended.


5.1  Greater transparency

Significant moves towards greater transparency had been made prior to the publication of the Report.

5.2  Current account interest

The FSB's view is that the case for current account interest has become overwhelming over the last five years. In the early 1990s small businesses were poorly capitalised but they now hold more on deposit with the banks than they owe in loans. As such there is a strong case for interest on these deposits. According to the BBA, in September 2001, small firms had £43.4 billion on deposit. At that time small businesses had borrowed £12.4 billion on overdraft and £29 billion on term loans. Total bank lending was therefore £41.4 billion.

5.3  Bank charges

The Competition Commission Report concluded that the big four clearing banks had overcharged small business customers by £725 million. The requirement to offer free banking or pay interest (or a combination of the two) will help secure a fair deal for small businesses on bank charges which is of particular importance for fledgling businesses.

5.4  Branch closures

Recent research by MORI for PostComm revealed that a quarter of rural residents and those living in deprived urban communities have difficulty in accessing a bank branch. The closure of local bank branches imposes particular problems on small businesses. The FSB welcomed the requirement in the Competition Commission Report that the four main clearing banks are to carry out a feasibility study on branch sharing. Since January 2002 a branch-sharing pilot scheme has been run in 10 UK villages and small towns. The pilot will be evaluated at Bristol University and has the support of the FSB.

5.5  Portable credit histories

Of all the measures outlined in the Report, portable credit histories could have the most far-reaching effect in the long-term. At present it takes approximately 5-6 weeks for a small business to switch bank accounts. Banks also use a variety of credit reference procedures. A portable credit history will make it easier and quicker for small business customers to move bank accounts. The Report also includes a requirement that small business customers should be able to move bank accounts within 10 working days. Where the customer does not have an overdraft this requirement is reduced to five working days. At present there is a stigma attached to small business customers who swap their bank account on a regular basis. The FSB is confident that the two measures will help remove this stigma and develop a culture of ``shopping around'' for the most competitive bank account.

5.6  The ``price control'' argument

There is an argument that the requirements on banks to provide interest on current accounts and/or free banking is in effect price control that will prohibit new players from entering the business banking market. This is not an argument that the FSB accepts. Our view is that greater transparency, portable credit references and other measures will encourage small businesses to "shop around" and hence make it easier for new players (offering innovative products and services) to attract new customers. By example, the Bank of Scotland has been the first bank to act on the Report's recommendations by launching the first ever "offset" mortgage for UK small businesses.


6.1  The FSB has given evidence at every stage of the Inquiry into small business banking and supports the conclusions of the Competition Commission's Report. There is compelling evidence that bank charges on business accounts have been excessive and that current account interest is justified by the amount held on deposit by small firms. Portable credit histories will have the greatest effect in the longer term. The FSB does not accept the argument that the requirements on the banks will deter new players from entering the business banking market.

April 2002

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