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OFT raises competition concerns in SME banking 11 March 2014

The Office of Fair Trading (OFT) has warned of “competition concerns” in the small and medium-sized enterprise (SMEs) lending market in an update on its market study.

In a statement on its ongoing analysis into SME banking, the OFT highlighted that the provision of business current accounts and business loans remains concentrated among a small number of major banks, while barriers to entry are preventing newer or smaller providers entering the market.

It is concerned SMEs find it difficult to differentiate between providers, with low awareness of alternative sources of finance.

The OFT warned that these factors in combination may reduce the incentive for providers to compete on price, invest in service delivery and quality, which may mean SMEs do not get the best deal from their banking provider.

But it has not come to any finding that the statutory test for making a market investigation reference has been met while the study is ongoing and the decision will be for the Competition and Markets Authority (CMA) once the study is complete.

According to the OFT, two specific issues have been raised during the study so far after concerns from alternative providers that banks may be hindering SMEs in accessing finance from peer-to-peer lenders and providers of sales finance.

It has been expressed to the OFT 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.

It now expects the largest banks and the British Bankers’ Association to take “swift and effective” action on this issue.

The second issue has been brought to the OFT’s attention during its current review of undertakings given by various banks following the Competition Commission’s investigation in 2002.

The OFT said it has received concerns about failure to comply with those elements of the undertakings, which prevent banks from requiring an SME to take out a business current account in order to obtain a business loan, that is the “bundling” of business current accounts with business loans.

It acknowledged some examples of “good” compliance with the undertakings but also some evidence of the need for improvement.

The OFT announced it is handing the SME banking study to the CMA to complete as part of a wider examination of competition in retail banking and confirmed the Financial Conduct Authority (FCA) will continue to work with the CMA on the study.

Vivienne Dews, OFT 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.”

The CMA has confirmed it will publish the findings of its work on both personal current accounts and SME banking during Summer 2014.

SME lending will be part of a business lending debate taking place at this year’s Credit Summit on the 3 April at the QEII Conference Centre in London, for more information click here.

 

 

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