A big dust-up looms over small-business banking

The Competition Commission reports this week on the "complex monopoly" in banking for smaller compan

Any time now, a hefty dossier will land on the desk of Patricia Hewitt, the Trade and Industry Secretary. Unusually, the Chancellor Gordon Brown will also get a copy. The document, which could easily be mistaken for a telephone directory, is four months late, and Britain's senior bankers are all anxious to get sight of it.

Prepared by Derek Morris, the chairman of the Competition Commission, this is the conclusion of the long- running investigation into the way the banking industry provides financial services to small and medium-sized businesses. It was born out of the controversial review by Don Cruickshank into the banking sector.

The banks fear it could make ugly reading. Well, the big four certainly do - Lloyds TSB, HSBC, Barclays and Royal Bank of Scotland/NatWest. Between them, they lend money and take deposits from 90 per cent of the small and medium-sized enterprises in this country. Little wonder, perhaps, that Cruickshank recommended that they should be investigated. The commission has already told the banks that it regards them as operating a "complex monopoly" - defined as a situation where a quarter of the service is supplied by a group of two or more companies.

That finding in itself was no surprise, but the big banks are still furious. They have already complained loud enough to force Morris and his highly trained staff to ask for an extension to their investigation. In early October, the commission was still frantically negotiating with the banks about the factual information in its report, which is now due for delivery to Hewitt's desk on 19 October. The banks insist that they know nothing about the actual conclusions, even though they have received some information about the contents.

A large number of industry observers, however, believe the banks are scared of what the government could do, particularly Gordon Brown. Many are convinced that the Chancellor has surrounded himself with advisers who actually hate banks. The banks have found Patricia Hewitt, in her short tenure at the DTI, easier to deal with. But as Secretary of State, she will have the official sanction to act on the recommendations of the commission, and so is also a potential cause of concern for the banks. After all, what is to stop Brown using his political clout to come down hard on the banking sector?

No one believes - at least, not right now - that Brown intends to hit the highly profitable banking industry with a windfall tax, like the one levied on the utilities. However, the banks do harbour fears about some sort of price control - perhaps with the RPI plus X formula imposed on the utilities. Or controls could take the form of some sort of cap on charging - no more than a couple of pence to cash every cheque paid in by every small-business customer, for example.

The banks argue that such measures just would not work, insisting that these charges cross-subsidise other transaction costs and that cutting them would make a nonsense of their business models. In any case, the big four claim that competition between them already forces charges down. Mike Davies, group public policy director for Barclays, produces statistics showing that industry-wide charges to small-business customers have fallen 30 per cent since 1994 - faster in real terms than electricity, gas and food, though on a par with telecoms.

"We are in favour of competition," says Davies. "It is good for us. It is good for our customers. It keeps us lean and mean. We have no problem with the government's desire to increase competition. Anything that makes it easier to move accounts, we support."

John Rendall, the head of business banking at HSBC, agrees with his rival in that he would support any measures that make charges clearer to consumers. He acknowledges, though, that some of the "hypothetical" ideas suggested by the Competition Commission had given cause for concern.

The banks argue that they are already addressing some of the issues facing small businesses through an initiative of the industry body, the British Bankers' Association, which is drawing up a new code of practice whereby banks will make it easier for their customers to move accounts.

While Gordon Brown - who unleashed Cruickshank on the banks in his November 1998 pre- Budget speech - will be keen to score political goals with the report, the irony of the current situation cannot be lost on him or on other influential members of government.

When the investigation was being carried out, the banks were making record profits - excessive, by some measures. But two years on, and the Bank of England has cut interest rates six times to try to stave off recession. Small businesses everywhere face a difficult future. Is this the time to be waging war against banks? Probably not. The last time the banks had to cope with a recession, a number of them posted unthinkable losses. Royal Bank of Scotland reported barely any profit in 1992, the year after the last recession kicked in. All the main lenders to the small-business sector were equally bruised by the experience.

This is one of the reasons why the banks are secretly hoping that the recommendations of the commission might be tempered by government, even one that is trying to distance politics from policy on such crucial matters as fair competition. Imagine the political own goal that could be scored by setting price controls on small-business accounts at a time when many of the banks will be thinking long and hard about whether even to continue their relationship with certain struggling businesses.

This is why the banks have been arguing that the scope of the Competition Commission's report needs careful consideration. The details sound arcane to those outside the industry, but among the main areas of contention is pre-cisely how long an economic cycle really is. The commission wanted to factor in a cycle as short as three years; the banks instead have argued strongly that only a minimum of ten years would be fair to them. That would take in the awful early 1990s and be a reminder that, although banks may sometimes make large profits, they have shouldered heavy losses in the recent past.

"The economic cycle does need to be taken into account," says Rendall. He joins fellow members of the big four in insisting that competition is rife and points to the new potential threat from HBOS - the recently merged Bank of Scotland and Halifax - which has promised to boost Halifax's non-existent position in the small-business banking market.

The banks would not wish recession on anyone - they have too much to lose, in terms of both profitability and stock-market rating. But the threat may do them a good turn this time around, by softening whatever blows the government has in store.

Jill Treanor is deputy city editor of the Guardian