Ongoing analysis by the Office of Fair Trading (OFT) into funding for small to medium-sized enterprises (SMEs) has found that there are a number of competition concerns.
These are:
- The provision of business current accounts (BCAs) and business loans remains concentrated among a small number of major banks.
- Barriers to entry and expansion may be contributing to newer or smaller providers finding it difficult to enter and expand their business across the core business banking products.
- SMEs find it hard to differentiate between providers. There are low levels of shopping around and switching, and low awareness of alternative sources of finance.
A concern is that these factors, in combination, may reduce the incentive for providers to compete on price, invest in service delivery and quality or innovate, which may mean that SMEs do not get the best deal from their banking provider. They could also be consistent with a provisional finding that the statutory test for a market investigation reference (MIR) is met.
However, the analysis is not complete and the OFT has not reached any finding that the statutory test for making an MIR is in fact met. Moreover, the OFT has reached no view on whether it would exercise its discretion to make an MIR if the statutory test was met. Those decisions will be for the CMA once the study is complete.
The OFT has also announced action on two specific issues that have emerged during the study.
First, significant concerns have been raised by various alternative finance providers that banks may be hindering SMEs from accessing finance from alternative providers such as peer-to-peer lenders and providers of sales finance, including new financial technology lending platforms. The specific concerns expressed are that there are often significant delays in banks waiving security in respect of existing loan arrangements or agreeing the documentation needed for alternative lenders to take a second charge, either of which may be necessary for an alternative finance provider to lend to an SME. We have raised these concerns with the largest banks and the British Bankers Association, who have responded constructively. We now expect them to take swift and effective action on this issue.
Second, the OFT is currently reviewing undertakings given by various banks following the Competition Commission’s investigation in 2002. As part of that review the OFT has received concerns about failure to comply with those elements of the undertakings, which prevent banks from requiring an SME to take out a BCA in order to obtain a business loan (that is ‘bundling’ of BCAs with business loans). The OFT considers that compliance with these undertakings is important as they are designed to help providers to compete effectively in SME banking.
The OFT’s investigations into those concerns with the various banks are not yet complete and will be continued for some months by the CMA. Whilst the OFT has seen examples of good compliance with the undertakings, there is also evidence of some need for improvement and for the banks to monitor compliance.
The banks in question have worked with the OFT to agree a package of measures intended both to improve information provided to staff in the banks dealing with SME customers and to help the CMA to assess compliance with the undertakings through annual compliance reviews.
Following the first compliance review, the results of which are due in July, the CMA will determine next steps in light of information on details of the compliance by each of the banks. The CMA will then decide on any action that should be taken on any failure to comply in relation to any particular bank.
Vivienne Dews, the OFT’s chief executive, said: “SMEs are a vital driver of growth in the UK. They need access to banking services and loans which meet their needs.
“Our work suggests there may be competition concerns in this sector. We will continue our work over the coming weeks and hand this on to the CMA to conclude the analysis, and decide on the next steps.
“We have also taken action in two areas to safeguard and improve competition, including from innovative providers. We welcome the co-operation we have already seen from the industry and the steps that are now being taken. However, further action will follow if concerns in these areas are not addressed.”