The Competition Commission said yesterday it wanted to lift price controls on business banking that it imposed in 2002, arguing the controls had succeeded in breaking up the dominance of the big four banks in accounts for small and medium-sized businesses.
But the watchdog ran into severe criticism from banks and small business leaders who said the controls had proved ineffective.
Price controls were introduced after an investigation by the OFT found four lenders – Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland – had 92% of the market for accounts held by small and medium-sized companies and that customers were unwilling to switch banks because of the high cost of transfers and red tape.
To encourage competition, the four high street banks were required, among other things, to offer an account paying interest of at least 2.5 percentage points below the base rate or free money transmission services, such as direct debit payments or both.
A recent report by the Office of Fair Trading said the controls should be lifted to encourage further competition.
Halifax Bank of Scotland (HBOS) said it supported scrapping price controls because far from encouraging competition they had been a barrier. The bank, which offered charge-free banking and interest on current accounts for small businesses before the commission’s 2002 review, said there was little evidence the controls had helped to increase competition.
It said red tape had proved greater as a disincentive to moving bank accounts than the incentive of a small cut in prices to bank customers. Only one in 10 small businesses switched accounts in the past three years.
A spokesman for the bank said price controls allowed the big four to retain 85% of the market when a period of open competition would have allowed rivals to make bigger inroads.
“Price controls have clearly done little to encourage small businesses to switch banks, and the hassle factor of switching has still to be addressed,” he said.
The commission was also criticised by the Federation of Small Businesses, which said the big four had spent the past five years paying lip service to price controls.
“We are utterly bewildered by the Competition Commission’s provisional decision,” said Mike Cherry, financial affairs chairman at the FSB.
“We have provided concrete evidence that the big four banks are not complying with the undertakings … and the Competition Commission appears to have completely ignored it.”
The Competition Commission denied price controls had proved a failure. It said the drop from 92% to 85% market share for the big four showed accounts from HBOS, Abbey and Alliance & Leicester had begun to attract small business customers. “[Small to medium-sized businesses] have raised their expectations of what banks should provide and are more likely to consider switching if they do not get what they want,” the commission’s deputy chairman, Christopher Clarke, said in a statement.
Analysts at Keefe, Bruyette & Woods said they had allowed for a reduction of around 2% in 2008 profits for the four large banks to take account of potentially tighter controls and that now they planned to unwind this discount.
The Competition Commission’s decision to lift the price controls imposed in 2003 is provisional. The deadline for responses to the move is September 28.
The four banks will remain bound to publicising changes in pricing as well as to “behavioural undertakings” including an agreement to ensure customers can switch accounts easily.