Posted by

Suren Thiru, UK Economist

23 Jul 2014

There you have it, another major investigation into the UK's broken banking sector. 

The decision by the Competition and Markets Authority (CMA), the UK's new competition watchdog, to recommend - albeit provisionally - a full competition inquiry into the SME banking sector will resonate with the business community. For years, firms across the country have yearned for more competition, greater choice and improved transparency in the banking sector, and with 85% of SME accounts sitting within the ‘big four’ high street banks it's not hard to see why.

This is reinforced by the results from the ground breaking Business Banking Insight (BBI) survey which showed that SME banking providers, especially the largest players, need to do a lot more to improve the level of service they provide. Many SMEs distrust the banking system and report that they are discouraged from applying for finance. Businesses that I speak to across the UK continue to view banks as being “all the same” with little difference in product offering or level of service.

So the provisional decision by the CMA to conduct a full-scale investigation into business banking is the right one. Improving competition in banking would mean better terms and conditions for business, and would in time drive down business costs.

However before anyone gets too carried away, there are three reasons to be cautious:

Firstly, we have been here before. In 2002, there was a Competition Commission inquiry into the supply of banking services to small businesses by clearing banks. In 2008, the Office of Fair Trading investigated the provision of personal current accounts and in 2011 the Independent Commission on Banking made recommendations aimed at promoting financial stability and competition. However, none of these investigations have yielded meaningful change in banking for SMEs.

Secondly, the decision to launch a market investigation into SME banking is provisional with the final decision due to be made this Autumn. It is vital that the planned CMA investigation remains comprehensive if it is to make a real difference to the growth prospects of SMEs. This investigation must be used as an opportunity to tackle the many concerns raised by business around banking, including significant misgivings over customer service, switching, lending and other business banking services.

Thirdly, increasing competition in business banking is only part of the story of fixing Britain’s broken business finance system. More must be done to provide growth capital to young, fast-growing firms who are often perceived to be too high risk. That means broadening the role of equity and bond issues in business finance and delivering a British Business Bank that is sufficiently funded and has the capability to lend directly to promising high-growth businesses.

So will the CMA's decision to conduct a full-scale investigation into SME banking herald a brave new dawn in banking? Not quite, but it's certainly a good place to start.