Competition Commission lifts price controls on ‘big four’ SME banks

24 August 2007
The Competition Commission (CC) has decided to scrap the price controls it imposed on the ‘big four’ SME banks in 2003.

Five years ago, the CC found that SME banking services were not working ‘in the public interest’ and to address the problem, imposed some regulations on the four largest banks servicing SMEs - Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland Group.

Known as ‘Behavioural undertakings’ the first was designed to make switching easier and faster and prices more transparent. It also ruled that banks were not allowed to make the supply of SME banking services conditional on taking other services such as loans or personal current accounts, from the same bank.

The CC’s ‘transitional undertakings’ compelled the banks to offer SME customers an interest rate of at least 2.5 percentage points below base, free money transmissions services, or both.

The CC’s new report, published this week, recommends lifting the price controls, but leaving the behavioural undertakings in place.

“Having reviewed the evidence and advice from the OFT, we believe that these price controls are no longer appropriate,” said Christopher Clarke, CC deputy chairman.

“They were intended to be temporary and have now been in place for over four years. During this period, other significant banks, such as HBOS, Abbey, and Alliance & Leicester, have competed more strongly for SME customers and improved their market position.

“SMEs have raised their expectations of what banks should provide and are more likely to consider switching if they do not get what they want. They are therefore better placed to constrain the actions of the four banks which were subject to the price controls, Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland Group.”

Ian Wilson, Managing Director of Business Banking at Abbey welcomes the news. He said:” Abbey believes that price controls create a distorted market, and narrow the options for competition. The removal of these controls will create a more transparent and competitive market.”

And John Fingleton, Chief Executive of the OFT, said: “This is an important step in the development of further competition in the business banking sector. It will allow banks greater freedom to innovate and compete for customers, and will be most beneficial for those prepared to consider switching their banking service provider.”

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