Banks may be hindering small and medium enterprises (SMEs) from accessing finance from alternative providers such as peer-to-peer lenders and on-line lending platforms, the Office of Fair Trading (OFT) has warned.
The body urged “swift and effective action” to address the issue in an updated report on banking services for SMEs.
The OFT said some actions have been taken, or are planned, to respond to competition concerns in retail banking, including changes to the authorisation regime for new banks, the new Current Account Switching Service and proposals to increase the availability of credit information to help newer or smaller providers of finance to compete.
However, despite these “and other positive developments”, there may still be “competition concerns”, specifically:
- That the provision of business current accounts (BCAs) and business loans remains concentrated among a small number of major banks.
- That 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.
- That 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.
The OFT said: “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.”
The OFT has announced action on two specific issues that have emerged during the study.
First, it said “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.”
The OFT also expressed concerns about failure by some banks to comply with undertakings from 2002 that prevent them from requiring an SME to take out a BCA in order to obtain a business loan.
The competition body said its investigations into these concerns with the various banks are not yet complete and will be continued for some months by the Competition and Markets Authority (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.”
The results of a first compliance review are due in July, after which the CMA will decide on any action to be taken.
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.
“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.”