Memorandum submitted by the Federation
of Small Businesses
1.1 With 168,000 members, the Federation
of Small Businesses (FSB) is the largest UK lobby organsiation
representing the interests of small businesses and the self employed.
1.2 Representatives of the FSB have given evidence
at each stage of the inquiry into small business banking.
1.3 The importance of small businesses to the
UK is widely recognised. Small and Medium-sized Enterprises (SMEs)
contribute 40 per cent of UK GNP and employ 56 per cent of the
private sector workforce. In all 12 million people are employed
by the small business sector and a further two million jobs are
expected to be created over the next 10 years. The relationship
between small businesses and the banks is key to the success of
small businesses and will be vital to their ability to create
jobs over the next decade.
2. VIEWS OF
2.1 For small businesses the most important factors
in the choice of principal bank are:
Quality of Business Managers;
Location of bank branches;
Granting of overdraft facilities;
Terms and conditions of loans.
2.2 The most common reasons given by business
for changing their principal bank are:
Bank charges too high;
Unsatisfactory lending arrangements;
Personality problems with bank staff;
3. RECENT DEVELOPMENTS
3.1 The Cruickshank Report (March 2000)
The FSB gave evidence to the Cruickshank review
and agreed with the conclusion that there are ``real problems
with the way banks serve small businesses.'' Cruickshank's Competition
in UK Banking Report argued that a ``complex monopoly'' existed
in small business banking where the four main high street banks
held over 80 per cent of accounts. The report also concluded that
consumers were paying between three and five billion pounds a
year too much for banking services. The FSB supported the Government's
subsequent decision to refer the issue to the Competition Commission.
3.2 Competition Commission Interim Report
In November 2000, the FSB gave evidence to the Competition
Commission. The Commission's subsequent interim report suggested
three possible remedies to the ``complex monopoly.'' These were
a windfall tax to reduce profits, the regulation of the costs
of business banking, and the removal of the barriers to switching
banks. The FSB stated publicly that a windfall tax was the wrong
approach because any such levy would be passed on to small businesses
in higher banking charges.
3.3 British Bankers Association account finder
In the period between the Commission's interim report
and the full report, the Brisish Bankers Association (BBA) announced
a number of initiatives aimed at small businesses. The BBA launched
a business account finder website in association with the FSB
that allowed the user to view a full breakdown of any account
listed, including the latest account charges, interest rates payable,
and borrowing rates. The FSB welcomed the website as a move towards
3.4 Business Banking Code
In March 2002 the BBA and the Association for
Payment Clearing Services launched the Business Banking Code.
This is a voluntary code to set standards of good banking practice
for dealing with business customers. The code outlines 10 key
commitments. These commitments include giving information and
services in plain language and explaining the financial implications.
The code also gives a commitment to consider cases of financial
difficulty sympathetically and to handle complaints quickly. The
FSB endorsed the Business Banking Code because it sets benchmarks
by which SMEs can measure their bank's performance.
4. THE COMPETITION
4.1 The FSBs submission to the Competition Commission
Inquiry and subsequent public statements highlighted concerns
about over-charging and called for the following measures:
Portable credit references that are consistent
and universal, to remove the stigma of switching banks.
Consistency and transparency in bank
charges and tariffs.
Payment of interest on current accounts
held by small businesses.
The extension of ``offset'' accounts
to business customers.
Removal of charges on small businesses
for meetings with bank employees.
Proper discussions with customers instead
of unilateral action by banks on issues such as the removal of
Opening up the small business banking
market to foreign banks.
4.2 The Competition Commission declared:
Banks have failed to pay interest on
current accounts and the charges for overdrafts have far outweighed
the costs of administering them.
SMEs have been unfairly tied to business
accounts and have not been able to choose sweep facilities and
There has been a lack of transparency
in bank charges/rates of interest.
The big four have maintained over 80
per cent market share for over 10 years.
4.3 The Competition Commission Report made
11 main recommendations of which the following are key to small
The banks will be forced to pay interest
on current accounts of at least 2.5 per cent below base rate or
drop charges or offer a combination of the two.
Banks will have to allow clients to switch
banks within 10 working days and provide portable credit histories
on request to make this easier.
Banks will no longer be able to insist
businesses open a current account when they take out a loan.
The big four will have to carry out a
feasibility study on branch sharing to allow clients to use rival
Bank charges and interest rates should
be more transparent and league tables should be published.
Bank self-regulation using a voluntary
code should be extended.
5. FSB REACTION
5.1 Greater transparency
Significant moves towards greater transparency had
been made prior to the publication of the Report.
5.2 Current account interest
The FSB's view is that the case for current account
interest has become overwhelming over the last five years. In
the early 1990s small businesses were poorly capitalised but they
now hold more on deposit with the banks than they owe in loans.
As such there is a strong case for interest on these deposits.
According to the BBA, in September 2001, small firms had £43.4
billion on deposit. At that time small businesses had borrowed
£12.4 billion on overdraft and £29 billion on term loans.
Total bank lending was therefore £41.4 billion.
5.3 Bank charges
The Competition Commission Report concluded that
the big four clearing banks had overcharged small business customers
by £725 million. The requirement to offer free banking or
pay interest (or a combination of the two) will help secure a
fair deal for small businesses on bank charges which is of particular
importance for fledgling businesses.
5.4 Branch closures
Recent research by MORI for PostComm revealed that
a quarter of rural residents and those living in deprived urban
communities have difficulty in accessing a bank branch. The closure
of local bank branches imposes particular problems on small businesses.
The FSB welcomed the requirement in the Competition Commission
Report that the four main clearing banks are to carry out a feasibility
study on branch sharing. Since January 2002 a branch-sharing pilot
scheme has been run in 10 UK villages and small towns. The pilot
will be evaluated at Bristol University and has the support of
5.5 Portable credit histories
Of all the measures outlined in the Report, portable
credit histories could have the most far-reaching effect in the
long-term. At present it takes approximately 5-6 weeks for a small
business to switch bank accounts. Banks also use a variety of
credit reference procedures. A portable credit history will make
it easier and quicker for small business customers to move bank
accounts. The Report also includes a requirement that small business
customers should be able to move bank accounts within 10 working
days. Where the customer does not have an overdraft this requirement
is reduced to five working days. At present there is a stigma
attached to small business customers who swap their bank account
on a regular basis. The FSB is confident that the two measures
will help remove this stigma and develop a culture of ``shopping
around'' for the most competitive bank account.
5.6 The ``price control'' argument
There is an argument that the requirements on banks
to provide interest on current accounts and/or free banking is
in effect price control that will prohibit new players from entering
the business banking market. This is not an argument that the
FSB accepts. Our view is that greater transparency, portable credit
references and other measures will encourage small businesses
to "shop around" and hence make it easier for new players
(offering innovative products and services) to attract new customers.
By example, the Bank of Scotland has been the first bank to act
on the Report's recommendations by launching the first ever "offset"
mortgage for UK small businesses.
6.1 The FSB has given evidence at every stage
of the Inquiry into small business banking and supports the conclusions
of the Competition Commission's Report. There is compelling evidence
that bank charges on business accounts have been excessive and
that current account interest is justified by the amount held
on deposit by small firms. Portable credit histories will have
the greatest effect in the longer term. The FSB does not accept
the argument that the requirements on the banks will deter new
players from entering the business banking market.