Lamont wants rate floors axed

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THE CHANCELLOR has suggested to the banks that they abolish interest rate floors for small businesses and have another look at their codes of conduct for dealing with business customers.

He has also asked officials to look again at how more competition can be injected into the small business banking market.

These three suggestions come alongside a proposal that has already emerged to extend the powers of Lawrence Shurman, the banking ombudsman, to cover small businesses, or alternatively to set up a separate small business ombudsman.

However, all the ideas tabled by the Chancellor and his officials have met a frosty response from the banks.

He nevertheless appears determined to find some initiative to follow the release of a report by the Bank of England on small business lending margins, delivered earlier this month.

The report cleared the banks of failing to pass on base rate cuts to small businesses, but the Treasury was not satisfied and asked the Bank a series of further questions. The replies are believed to have reinforced the earlier conclusion that the vast majority of small businesses benefited fully from the fall in base rates over the past 18 months.

This has left the Chancellor with a political problem, because there have been so many complaints from small businesses and MPs about the banks' behaviour.

Any plan for injecting more competition into the small business market is fraught with difficulty because the market is dominated by a small number of huge banks, led by Barclays and National Westminster. Other potential players, such as the building societies, are not keen to enter the market for small business lending on a large scale.

The Department of Trade and Industry declined to intervene with a monopolies inquiry when small business lending emerged as a serious issue during the Lloyds and HSBC Holdings bids for Midland Bank.

Senior bankers believe the Treasury's idea of abolishing the floor on small business lending is irrelevant because the two main banks that operate a floor, Barclays and NatWest, have in practice moved it downwards, so it has no effect.

They are also irritated at the suggestion that the codes should be reworked; the latest versions have only recently been produced after extensive consultations.

The banks have publicly scorned the ombudsman idea, saying most of the complaints are about commercial questions of interest rates and lending decisions that fall outside an ombudsman's scope.

Unincorporated businesses can already complain to the banking ombudsman, but the Treasury is expected to continue pushing for access to an ombudsman for incorporated businesses which believe - for example - that they have been victims of maladministration.