The Office of Fair Trading (OFT) released an update for its market study into banking services for small and medium sized enterprises (SMEs) on Tuesday, noting that some actions have been taken, or are currently planned, in response to competition concerns in retail banking.
Providers of banking services in the UK will see changes to the authorisation regime for new banks and the new Current Account Switching Service, along with plans to help newer or smaller providers of finance to compete by increasing the availability of credit information.
The OFT also announced that the study will be completed by the Competition and Markets Authority (CMA), as part of a wider examination of competition in the retail banking sector. The Financial Conduct Authority (FCA), which has been working closely with the OFT on the SME Banking market study, will continue to work with the CMA, which will become the UK’s lead competition and consumer body next month.
On-going analysis indicates that, despite improvements, there may be competition concerns that the provision of business current accounts (BCAs) and business loans is concentrated among a small number of major banks. SMEs are said to have low awareness of alternative sources of finance and find it hard to differentiate between providers, so they tend not to shop around or switch finance providers. This may result in newer or smaller providers finding it difficult to enter and expand their business across the core business banking products.
According to OFT, a combination of these factors lessens the motivation for providers to compete on price, invest in service delivery and quality, or innovate, which may mean that SMEs are not receiving the best deals from banking providers.
Action will be taken by OFT concerning two specific issues that the study brought to light. Various alternative finance providers raised significant concerns that banks may be hindering SMEs from accessing finance from alternative providers such as peer-to-peer lenders and providers of sales finance, including new financial technology lending platforms. There are reportedly significant delays in banks waiving security regarding existing loan arrangements, or agreeing the documentation needed for alternative lenders to take a second charge, which may be necessary for an SME to borrow from an alternative finance provider. These concerns have been raised by the OFT with the largest banks and the British Bankers Association, which responded constructively.
Nine UK banks gave undertakings following an investigation by the Competition Commission in 2002, which the OFT is currently reviewing. These banks included AIB Group (UK), Bank of Ireland, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank plc, Lloyds TSB Bank plc, Northern Bank Limited and The Royal Bank of Scotland Group plc. The OFT has received complaints about failure to comply with certain elements of the undertakings, which prevent banks from requiring an SME to take out a BCA in order to obtain a business.
While the OFT has seen examples of good compliance with the undertakings, there also appears to be a need for some improvement and for compliance to be monitored by the banks. A package of measures has been designed to improve information provided to staff in the banks dealing with SME customers, as well as to help the CMA to assess compliance with the undertakings through annual compliance reviews. Investigations in the issues will be continued over several months by the CMA.
The results of the first compliance review are due in July, when the CMA will examine information on details of compliance by each of the banks and then decide on any measures that should be taken on any failure to comply in relation to any particular bank.