Competition fears over SME lending

Maldon and Burnham Standard: Financial regulators are investigating the market for lending to small and medium-sized businesses Financial regulators are investigating the market for lending to small and medium-sized businesses

The UK's major banks are facing another inquiry after regulators highlighted their fears about the market for lending to small and medium-sized (SME) firms.

The Office of Fair Trading (OFT) said its initial work identified possible competition concerns in the sector, including suggestions that there is not enough incentive for banks to compete on price, service or quality.

The watchdog will pass on its study to the Competition and Markets Authority (CMA) - the UK's lead competition and consumer body from next month - which will decide in the summer if the criteria for a full-blown inquiry have been met.

The OFT said significant concerns have been raised that banks may be hindering SMEs in accessing finance from alternative providers such as peer-to-peer lenders and new financial technology lending platforms.

Alternative finance providers have complained that there are often significant delays in banks waiving security in respect of existing loan arrangements or agreeing the documentation for them to take a second charge.

OFT chief executive Vivienne Dews 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."

Figures earlier this month revealed that SME lending remains subdued, falling by £300 million in February compared to the average monthly decrease of £500 million over the previous six months.

Business Secretary Vince Cable said: " There is still a serious problem with small business banking. SMEs feel they have too few lending options other than the big four banks which is not healthy for the economy.

"The picture of concentrated ownership and excessive profit margins from SME banking described in the 2000 Cruickshank Report remains largely unchanged. More diversity and competition in the banking sector is critical if we are going to have a lasting recovery built on business investment and exports."

He said the new British Business Bank, which is supporting the growth of alternative lenders and challenger banks, will help to level the playing field but that the market is still not working as it should.

Mr Cable added: "Today's update from the OFT shows it shares these concerns, as do most experts, and I am pleased that the CMA will be taking this work forward as a top priority."

The OFT said that banks have taken some steps to boost competition in retail banking, such as a new current account switching service and the wider availability of credit information to help new providers to compete.

However it is concerned that business current accounts and business loans are concentrated among a small number of major banks.

It said barriers to entry and expansion may be contributing to newer or smaller providers finding it difficult to enter and expand their business, while S MEs are still finding it hard to differentiate between providers.

The OFT said: "There are low levels of shopping around and switching, and low awareness of alternative sources of finance.

"The 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 is met."

The British Bankers' Association (BBA) said it is working "proactively" with the OFT and CMA to improve the treatment of customers.

Chief executive Anthony Browne said: " We want businesses to have as many options as possible when seeking to get finance which is why individual banks and the BBA have set up programmes to refer customers to other institutions who might be able to help if they have been declined for a loan.

"The industry continues to modernise and improve current accounts so that customers get the best possible service, including the introduction of mobile phone payments from the spring, a number of new comparison tools and the seven day account switching service.

"The banks have also worked with the Government to help customers keep in control of their finances with text alerts, annual statements and clearer monthly information. Consumers are now nearly £1 billion better off due to a reduction in charges driven by these initiatives."

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