Banks attack Brown's clampdown on charges as 'fundamentally flawed'

Big Four ordered to pay interest on current accounts and transfer money for free
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The Independent Online

UK banks attacked the Government's introduction of price controls in small business banking yesterday, and some dismissed the Competition Commission's 18-month investigation into the market as fundamentally flawed.

The commission stunned the City by recommending that the so-called Big Four banks ­ Royal Bank of Scotland, Lloyds TSB, HSBC and Barclays ­ should be forced to pay interest on business current accounts, or provide money transfers for free. The Government had been expected to stop short of introducing any form of price controls on the Big Four, which control some 85 per cent of the small business market.

In accepting the commission's report in full, Gordon Brown, the Chancellor, accused banks of profiteering from small enterprises to the tune of £725m for each of the past three years. But he found no evidence of excess profits in Scotland, where small business accounts will be exempt from price controls.

Barclays led the backlash, arguing that the commission had based its conclusions on its three most profitable years, 1998 to 2000. "We have not made excessive profits. The methodology used by the commission was, in our view, seriously flawed. The mandatory introduction of interest on current accounts or free banking for business customers will inhibit competition," it said.

Lloyds also angrily denied any suggestion of profiteering, noting that it supported small business through the entire economic cycle. Imposing price controls in effect "removed the main source of competitive advantage for new entrants" it said.

Royal Bank of Scotland declined to comment but could not rule out offering differently priced business accounts either side of the border.

HSBC said it was "very disappointed" and would consider a legal challenge. "This will stifle new entrants," a spokesman said.

Even HBOS, seen as a vital new entrant in the marketplace, said it would not have recommended price controls. It launched its first small business accounts in the Halifax this year, using a 2.0 per cent in-credit interest rate to tempt customers away from the others.

Banking chiefs are to appear before Treasury Select Committee hearings on the report.

But Derek Morris, the commission's chairman, hit back at the criticism. "The lack of interest on current accounts was clearly leading to overcharging of small businesses. The notion that it is more competitive to allow it to continue doesn't stand up," he said.

The Federation of Small Businesses applauded the report while the British Chambers of Commerce gave it a guarded welcome. Some City analysts said the impact of the mandatory current account interest was entirely manageable, costing the industry only about £210m, a charge likely to be recouped by paying lower interest on business savings accounts.

"We do not expect this to lead to increased competition in the short term and it does not create a level playing field for new entrants such as Alliance & Leicester, Abbey National or HBOS," said Jon Kirk, an analyst at Fox-Pitt Kelton. "The key factor is customer inertia."

Martin Cross, an analyst at Teather & Greenwood, put the total cost of price controls and other wider behavioural remedies as high as £1bn annually. "If bad debts return as an issue later in the summer, banks may feel emboldened to say that they are putting up their charges," he said.

Shares in almost all the banks closed flat or up.

The Competition Commission's report

Findings

* Lloyds TSB, Barclays, Royal Bank of Scotland and HSBC control 86 per cent of the small and medium-sized enterprise market (SME) ­ a position of market dominance which has not markedly changed in the past 10 years.

* The Big Four made excess profits of £725m a year from the UK's 3.5 million small businesses between 1998 and 2000. This is from a return on equity of 36 per cent, compared with a cost of equity of 15 per cent.

* The banks block competition by bundling services together, making small businesses take out a current account if they want a loan. They then charge for current account services.

* The banks refuse to break down charges and fail to explain to customers that they could benefit from services such as sweeping, which allow credit balances to offset debts.

* Discounts are only offered by the banks to new customers or those threatening to switch to another provider.

* The banks make it difficult for customers to move to rivals by taking a long time to hand over details about their account and by not providing a clear record of customers' credit history.

Recommendations

* Banks must offer interest on current accounts of not less than 2.5 per cent below the Bank of England's base rate to existing and new customers. The director-general of the Office of Fair Trading must report on progress in three months.

* If the banks do not, they must remove charges from money transmission services, such as cheque clearing.

* If they increase money transmission charges where allowed, they must inform the director-general of Fair Trading.

* Banks must make it easier for customers to switch by promising to carry out most of the work within five days if the customer does not have a loan and 10 days if it does.

* Give customers easy access to their own credit history so that they can approach other providers.

* Unbundle services, removing requirements to hold a current account if customers want a loan.

* Make costs more transparent by publishing previously hidden charges, such as for unauthorised overdrafts on statements. Make the charges easier to compare with those of rivals by publishing them in a form acceptable to the Office of Fair Trading, so comparative tables can be drawn up.

* Consider setting up a national scheme to share branches to give easy access to banks even in remote areas. A report must be made to the director-general of Fair Trading a year from now.

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