Newsroom

OFT to review undertakings in SME banking services

14/06    25 January 2006

The OFT is today launching a review of the undertakings given by clearing banks (see notes[1]) relating to the supply of banking services to small and medium-sized enterprises (SME) in the UK ( see notes[2]).

The undertakings were given following a 2002 report by the Competition Commission (CC) (see notes[3]) and were designed to:

• remedy excessive profits and prices by requiring the main four clearing banks to offer free banking services or to pay interest on business current accounts (transitional undertaking)
• encourage price competition by reducing barriers to entry and expansion in the market; improve information provided to business customers; and encourage switching by SME customers (behavioural undertakings).

In 2002, small and medium-sized enterprises, as defined by the CC, accounted for around 55 per cent of employment and 45 per cent of turnover of business in the UK.  The CC also found that the value of balances for SME customers was approximately £228 billion; and that the largest clearing banks in England and Wales, accounting for over 70 per cent of the value of balances, were making excessive profits of well over £700 million a year over the period 1998 to 2000.

The review will focus largely on the short term impact of the transitional undertaking on excessive profits and prices and whether the effectiveness of the undertaking has been compromised by the banks, for example by increasing money transmission charges. It will also consider the overall impact of the behavioural undertakings on competition generally (see notes[4]).

The OFT will consult stakeholders as part of the first phase of its review, which is expected to take up to nine months.  Unless its interim findings indicate a need for substantial further work, the OFT aims to advise the CC around the end of 2006 (see notes[5]).

NOTES

1. The transitional undertaking was signed by the four main clearing banks: Barclays Bank Plc, HSBC Bank Plc, Lloyds TSB Bank Plc and the Royal Bank of Scotland Group Plc (including National Westminster Bank).  A number of behavioural undertakings were given by nine clearing banks: AIB Group (UK) Plc, Bank of Ireland, Barclays Bank Plc, Clydesdale Bank Plc, HBOS Plc, HSBC Bank Plc, Lloyds TSB Bank Plc, Northern Bank Ltd and the Royal Bank of Scotland Group Plc. Copies of the undertakings are available on the register of orders and undertakings section of the OFT's website.

2. The review is being conducted under section 88 of the Fair Trading Act 1973, which continues to apply by virtue of Schedule 24 of the Enterprise Act 2002, and under section 5 of the Enterprise Act 2002, which gives the OFT power to obtain and compile information about matters relating to the carrying out of its functions so that it can take informed decisions and carry out its other functions effectively.

3. In March 2002 the CC published its findings in a report entitled: A report on the supply of banking services by clearing banks to small and medium-sized enterprises within the UK.  The report can be found on the CC website under reference Cm 5319.

4. The OFT has a general duty to keep undertakings under review and advise the CC whether by reason of any change in circumstances, the parties can be released from the undertakings or whether the undertakings need to be varied or superseded by new undertakings. The OFT is reviewing these undertakings at the present time subsequent to the CC's recommendation that it should review the undertakings after three years to assess whether further measures are needed or whether any or all of the undertakings can be modified or discontinued.

5. As part of the Government's policy of transferring decision making powers on matters of competition to independent competition authorities, the CC is now responsible for these undertakings. Therefore, if the OFT considers varying, superseding or having the parties released from the undertakings is appropriate, it will be providing advice to the CC.

Back to:2006