"Price Control" threatens profits of big four UK banks

The UK government has announced plans to force the country's four largest banks, Lloyds TSB, HSBC, Royal Bank of Scotland and Barclays, to offer better services to Britain's 3.5 million small businesses. The banks will have to pay interest on business current accounts or offer free banking, according to Thursday's announcement.

This move comes as a result of the findings, by the Competition Commission, that the big four banks, who between them have 86 per cent of small business current accounts, have overcharged small businesses to make excess profits of £725m ($1bn) a year. The chancellor, Gordon Brown, backed the findings.

The four banks condemned the plans, which they called "price control". They suggested the drop in profits will lead to enforced cut backs on services and lending. Barclays had already told the commission that it could respond by raising lending rates or refusing to lend to marginal customers, and John Rendall, head of business banking at HSBC, said, "If we find it is impossible to make an adequate return and the price is limited then logically we would have to review our commitment to better service".

Although the government's move is harsher than expected, given the deliberations between the Department of Trade and Industry and the Treasury over how hard to hit the banks, analysts believe bank profits will not be damaged too badly. The most severe cost of the new measures, £725m, would only be three per cent of this year's profits. In the Financial Times, ABN Amro Banks analyst Richard Coleman said "banks will whinge but basically will be relatively relaxed about this".

Gordon Brown said the announcements paved the way towards "a fairer deal" for Britain's small businesses. The price controls will be in place for up to three years, by which time the commission hopes new competitors will have gained a market foothold.