SUPPLY OF BANKING SERVICES BY CLEARING BANKS TO SMALL AND MEDIUM SIZED ENTERPRISES (SMEs)

STATEMENT OF PROVISIONAL CONCLUSIONS ON COMPLEX MONOPOLY

The Competition Commission has sent letters to the clearing banks included within its terms of reference giving its provisional conclusions on the existence of a complex monopoly situation. A complex monopoly situation arises if at least one quarter of services are supplied by members of a group of two or more persons (not being a group of interconnected companies) who whether voluntarily or not, and whether by agreement or not, so conduct their respective affairs as in any way to prevent, restrict or distort competition in connection with the supply of those services.

A provisional finding that a complex monopoly situation exists does not, however, imply the existence of any facts which operate or may be expected to operate against the public interest.

The Commission has set out its provisional conclusions in the context of its current view as to market definition and main characteristics of the markets. In particular it refers to a liquidity management services market, that includes business current accounts together with short-term bank business deposit accounts and overdraft facilities when provided in conjunction with business current accounts. It also distinguishes a market for general purpose business loans supplied by banks or other lenders. Among the characteristics of the market are a reluctance of SMEs to switch banks in the liquidity management services market and the market for general purpose loans; and the existence of a number of potentially important barriers to new entry. The Commission has however been told of a number of changes in the supply of banking services to SMEs, including actual and potential new entrants in certain sectors of the markets and the use of new access methods including telephone, electronic and internet banking. It is still considering the possible extent of such changes, their likely impact and the timescales within which they are likely to occur.

The Commission has provisionally concluded that a complex monopoly situation exists firstly in that clearing banks:

(a) restrict price competition in relation to money transmission charges by largely confining it to certain categories of SME customers;

(b) restrict price competition in relation to business current accounts, by generally not paying interest on such accounts;

(d) in relation to both current and deposit accounts distinguish between personal and business accounts and encourage or require most or all SME customers to have business accounts, thereby restricting the choice of charges they pay and interest rates they earn;

(e) bundle the charges for access to relationship managers with other charges;

(f) establish tariffs enabling discriminatory discounts to be given by negotiation;

(g) as a result of the matters listed above, have a structure of charges not related to the structure of costs and unduly discriminate between SME customers;

(h) require SMEs wishing to borrow or use business deposit accounts to have a business current account;

(i) fail adequately to inform SME customers of the scope for savings from use of set off or sweep facilities or to provide a regular breakdown of interest charges; or

(j) price such that they more than adequately finance an efficient SME banking business, such as would emerge under fully competitive conditions.

A further complex monopoly situation exists in that the clearing banks charge for clearing services provided under agency agreements at differential rates not sufficiently related to cost, or, as members of the clearing companies, adopt or cause to be adopted practices in relation to sort codes that make it difficult to switch agency arrangements.

As noted above, however, there are a number of important aspects of the supply of banking services to SMEs the Commission is still considering. The Commission has not reached any conclusion on whether any matter operates or may be expected to operate against the public interest and its provisional findings of any complex monopoly situation can not be taken to imply otherwise. In considering the effects on the public interest, the Commission is unlikely to conclude that any clearing bank whose market share is very small in relation to the relevant market is operating or may be expected to operate against the public interest.

The complete statement may be obtained from the Competition Commission web site: www.competition-commission.org.uk/09-01pc.htm or, in writing, from the Reference Secretary (Banks), Competition Commission, Room 504, New Court, 48 Carey Street, London, WC2A 2JT.

Notes to Editors

The inquiry was referred to the Competition Commission by Stephen Byers, Secretary of State for Trade and Industry, and Gordon Brown, Chancellor of the Exchequer, under sections 47(1), 49(1) and 51(1) of the Fair Trading Act 1973 (see DTI press notice P/2000/194).
On 8 November 2000, the Commission published a statement of issues, highlighting those matters which had been identified by the investigating group for further consideration. That statement referred to provisional conclusions that a scale monopoly situation existed in relation to the supply of the reference services in the UK, in favour of the Royal Bank of Scotland Group, but did not indicate any such provisional conclusions as to the existence of a complex monopoly situation (see Competition Commission Press Notice 57/00).
Dr Derek Morris, Chairman of the Commission, is heading the inquiry. The other members of the group are Cosmo Graham, David Hammond, Elizabeth Monck and Roger Munson.
Further information can be obtained from the Commission website at www.competition-commission.org.uk/ref.htm
Enquiries should be directed to: Francis Royle, Press OfficerTel: 020 7271 0242