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New regulator to take over study into SME banking market

The UK's new Competition and Markets Authority (CMA) is to complete the study begun by the Office of Fair Trading (OFT) into competition in the market for the provision of banking services to small and medium-sized (SMEs) businesses.

The OFT had intended to complete its study early in 2014, but on Tuesday it published an update on the current status of its review, and announced that the CMA will continue the study as part of its wider scrutiny of competition in retail banking.

The CMA has already indicated its intention to refresh the OFT’s work on competition in the market for providing personal current account services (PCAs) and is expected to report its findings in the summer. A spokesman for the OFT told Out-Law.com that the CMA's findings from the study into competition in the SME banking market are expected to be reported separately by the new regulator soon afterwards.

Although it admitted that its study of the SME banking market is not yet complete, the OFT said that the "emerging analysis" has highlighted some concern over the market share that "a small number of major banks" have and with the barriers that exist for smaller providers to enter the market or expand their business. The OFT added that SMEs have found it difficult to differentiate between services offered by the different providers in the market, rarely switch providers or explore alternative sources of finance.

The sum result of these factors is that SME banking service providers are not incentivised to compete on price or improve and innovate in the way they provide services, the OFT said.

The regulator also said that some major banks have been urged to take action to address concerns that some alternative finance providers had raised around the way banks process requests from SMEs to waive security for existing loan arrangements or agree documents to allow alternative lenders to take out a second charge with those businesses and which impede their ability to offer a second source of finance.

In addition, the OFT said it was reviewing whether nine banks had kept to undertakings they signed following a previous investigation by the Competition Commission in 2002. In general, those undertakings ban the signatory banks from requiring SMEs to take out a business current account with them when also taking out a loan.

"SMEs are a vital driver of growth in the UK," Vivienne Dews, OFT chief executive, said in a statement. "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," she said.

Under the Enterprise Act, the OFT has the power to refer a particular market for further investigation by the UK's Competition Commission under certain circumstances. The discretionary powers, which will transfer to the CMA on 1 April, are triggered where the regulator "has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK".

Competition law expert Jenny Block of Pinsent Masons, the law firm behind Out-Law.com, said: "This was always going to be an inquiry that spanned the transition to the new regime and it is not surprising that charting a way forward has been left to the CMA to take a more holistic view including a review of progress in the PCA sector."

"It is helpful that the OFT is careful to indicate that it has not reached a view that the test for a market investigation reference is met and there is scope to influence the direction and focus of the CMA's ongoing review," she added. "The issues raised illustrate the need for a consistent and closely co-ordinated approach as between the CMA and the FCA, as well as the new payment systems regulator which from April next year will have concurrent jurisdiction to apply competition law in connection with participation in payment systems one of the issues raised in the OFT’s update."

Banking specialist Tony Anderson of Pinsent Masons added: "The publication of this update is timely given that the FCA plans to regulate companies offering loan-based crowdfunding platforms from April 2014. Such companies are being seen in several quarters as being a solution to filling the funding gap for SME’s."

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