OFT inquiry into clearing banks' profits from small business

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The Office of Fair Trading reopened a review of small-business banking yesterday to assess whether Britain's four main clearing banks - after agreeing to concessions for small firms - have found other ways of making excessive profits out of them.

The OFT said the review would focus on the action taken to reduce excessive profits and prices and whether this had been compromised by the banks, by increasing money transmission charges, for example. The regulator expects to pass on its findings to the Competition Commission by the end of the year.

A 2002 report by the Competition Commission concluded that the four main clearing banks - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland - were making excessive profits from small-business banking of more than £700m a year from 1998 to 2000. Between them, the four accounted for more than 70 per cent of the value of small-business customers' balances, which totalled £228bn in 2002.

The regulator then ordered the banks to "remedy excessive profits and prices" by offering free banking services to small businesses or paying interest on business current accounts.

The four banks said yesterday they fully complied with the ruling and moved quickly to offer their small-business customers interest on their accounts at the required minimum rate of 2.5 per cent below the Bank of England's base rate. Lloyds admitted that as a result of the review, its profits from small-business banking fell in 2003 but recovered as it grabbed a bigger share of the market.

The 2002 report also called for increased price competition by making it easier for new players to enter the market. It called on the banks to improve information to business customers and to make it easier for them to switch their account. These recommendations also apply to other clearing banks - Allied Irish Bank, Bank of Ireland, Clydesdale Bank, HBOS and Northern Bank.

The Federation of Small Businesses welcomed the latest review, saying small firms depend on efficient, timely and convenient banking services more than any other part of the economy.

Angela Silberberg, the FSB's deputy policy manager, said: "The service provided to small businesses by the large banks for many years was disappointing and the progress made in recent years has been good news for small firms." She said banks could do more to protect business customers by ending branch closures and promoting inter-bank agreements which allow customers to use branches where they do not have an account.

HSBC claims to be the only net gainer of account switchers, saying it was the first bank to offer and abide by a "switching promise" - giving a timetable for completing all switches.