The preliminary findings of the Competition Commission's inquiry into small business banking raise yet another question mark over the Treasury's determination to push stakeholder pension sales through the banks.
The commission has provisionally concluded that a “complex monopoly situation exists” where clearing banks restrict price competition in the small business banking market.
The findings of the comm-ission can be used to anticipate the expected shape of the stakeholder market, where domination by a handful of players including high-street banks is widely expected.
The Competition Commission, formerly known as the Monopolies and Mergers Commission, defines a complex monopoly as a situation where two or more companies skew or curb competition in any given market.
Its review claims banks offer low rates of interest, restrict the choice of charges payable and interest rates earned, fail to inform small business customers adequately of the scope for savings and fail to provide a regular breakdown of interest charges.
Although there is no suggestion the banks are acting together to do this, it appears the commission suspects the big four clearing banks – HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB – are working to control the vast majority of the small business market.
The result of the suspected monopoly is that interest is generally not paid on current accounts, while only low rates of interest are paid on short-term deposit accounts.
The commission also says the charges levied on small businesses bear no relation to the costs the banks incur for providing their services.
This track record should probably not make for snaking queues for stakeholder pensions through the high-street banks. However, with the recent axing of thousands of salespeople, who would have been perfectly placed to take stakeholder to the low-earning target audience, it is likely that those wanting stakeholder will be led by default to the high street.
The commission's findings confirm what the Government is believed to think already. Last month, Trade and Industry Secretary Stephen Byers said the fear of reduced competition in the small business market was one of his reasons for referring Lloyds TSB's bid for Abbey National to the competition authorities.
Yet, against this backdrop, the Treasury is willing to overhaul the polarisation regime to make it as easy as possible for banks to push stakeholder.
The Treasury is not prepared to comment at this stage and sidesteps the stakeholder issue by saying the report does not deal with private customers and that it will wait to read the full report when it is published in the summer.
It says it is dealing with the question of anti-competitiveness in banking by implementing measures contained in the Cruickshank report, such as Catmarks for credit cards.
But these measures appear superficial against the huge weight of the banks' influence on policy and the immense consolidating force the 1 per cent price cap is forecast to be.
Clerical Medical head of strategic marketing David Shelton says: “The 1 per cent cap has led to the loss of the home salesforces and drives insurance companies out of what should be a mainstream market. This is likely to decrease competition which is bound to be bad for consumers.”
Federation of Small Business national spokesman Terence O'Halloran goes further. He says: “How can they say there is competition in the marketplace when virtually every new entrant is swallowed up by established banks? It is the same situation in the stakeholder arena. It is a bank-invented product driven by banks' vested interest. There will be consolidation and the price cap eliminates competition from day one.”
A recent report by leading consultancy Cap Gemini Ernst & Young says if proposed changes to the polarisation rules are extended into phase two, the bulk of future life insurance distribution will be handed over to the high-street banks.
The consultancy says the banks will dominate in a multi-tied regulatory regime because of their large customer bases and branch networks.
It is not clear what reasons the Government has to believe the banks will deliver consumers the best deal on stakeholder.
Torquil Clark pensions development manager Tom McPhail says: “It is hard to predict how narrow the stakeholder market will be but many expect the number of serious players will be around six. It is also anticipated that many IFAs will further concentrate on high-net-worth individuals because there is no money in the individual market.
“The stakeholder target market will be disenfranchised and this will lead them to the clearing banks known for their low quality service.”
But all may not be lost. There could be some surprises as no one can truly predict who will go the distance in the stakeholder market.
While the small business banking market is entrenched, the stakeholder market is a fresh pasture, even if the playing field appears tilted in banks' favour.