Big Four must clean up their act

THE Competition Commission has fired a useful shot across the bows of Britain's Big Four banks - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland - over their lending to smaller enterprises. It has branded them monopolists and is imposing price controls.

It could not happen to a nicer bunch of people. Whichever way you cut it, the small business customer has limited choice and is not rewarded properly when accounts are in the black. The Big Four complain that this is rubbish and that there are 28 providers out there.

But a combination of fear (better the bank you know) and complexity of accounts makes the smaller company reluctant to shift. It is because the banks have a captive customer base - particularly in England and Wales - that they can effectively charge what they like.

This, the Commission estimates, shifts £725m of wealth from small businesses to banks each year. In the context of the combined profits of £18.3bn made by the British banks in 2001, this may not seem very much.

But the measures proposed and accepted by Gordon Brown and Patricia Hewitt are no doubt seen as the thin of the wedge. It is proposed that the banks pay interest on small businesses' current accounts at 2.5% less than base rate, currently standing at 4%. Alternatively, they can offer free banking. Either way, this will go straight through to the bottom line, costing Lloyds TSB, for instance, around £100m a year.

What would really worry the banks, however, is if Labour were to apply similar principles to individuals current accounts, where Don Cruickshank found even greater profiteering. But the Treasury points out that this does not mean that the Chancellor is against bank profits. He is simply determined to win a better deal for small businesses.

Interestingly, although the Competition Commission is harsh on the banks' charging practices, it does say they are providing a good standard of service to this group of customers - which is more than can be said for personal customers.

If the banks behave themselves better over the next three years, then the Director-General of Fair Trading could lift the requirement to pay interest. What the Commission wants to see is the hidden barriers to competition removed. These include a mechanism to speed 'error free' switching of accounts and more transparency so that customers can see what they are paying for.

The competition watchdog also makes the intriguing suggestion that in locations where one bank dominates, customers of other banks should be able to obtain small business services. This raises the prospect of Lloyds TSB branches servicing Halifax and HSBC customers.

As far as bank shares are concerned, the report caused a minor scare for the Big Four, although the immediate profits hit will not be substantial. Newcomers to the small business market, like Halifax, Abbey National and Alliance & Leicester, do stand to benefit and could be re-rated.

The bank investigation, skilfully conducted by Derek Morris at the Competition Commission, allows the Government to make a political point. By punishing the big banks, it is able to show itself as sensitive to small firms' needs at a time when they have been grumbling loudly at the mountain of red tape. Moreover, the decision to adopt the report in its entirety shows that Brown and Hewitt are serious in their intention to give the Competition Commission independence so that decisions are not altered on a political whim. That is laudable.

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Allied's greenwash

ACROSS the Irish Sea there is a clear demonstration why it is important to have sound well capitalised banks. When £490m vanished into thin air in Maryland, at least AIB did not collapse. But the Ludwig report and the response of the AIB board can hardly be considered adequate by shareholders.

Controls at the Baltimore branch were appalling and the culture inside Allfirst was lax in the extreme. What is most worrying is the sheer complacency of chief executive Michael Buckley and his Dublin team when the first warnings were heard last May. Instead of thinking of Nick Leeson and other rogue traders and sending in auditors and senior executives to check matters out, they relied on local staff who have now been fired.

This was inadequate. The board should have accepted Buckley's resignation and dismissed Allfirst chief executive Susan Keating, the line manager in charge in the final few months. This is a whitewash - or greenwash - which investors should challenge with some urgency.