With the economic upturn becoming front-page news, small business owners may be relieved to hear that regulators are continuing in their crusade to create a more competitive lending environment to allow small businesses to aid the economic recovery.

The Office of Fair Trading (OFT) has announced an update to it’s market study of financing for small and medium enterprises (SMEs) and confirmed that the case will be taken over by the Competition and Market Authority (CMA). The CMA comes into force on 1 April 2014, replacing the OFT and the Competition Commission.

The news is welcome as it shows the continued pressure and focus the regulator is exerting on banks to keep the SME finance market competitive to create higher standards, lower prices and create more choice for businesses seeking funding. There is a widespread view that although the economy is recovering well and growing, SME financing appears to be lagging behind the boost in confidence and remains tight.

The market study was originally announced in July 2012. The OFT has been working in conjunction with the Financial Conduct Authority (FCA), using the FCA’s expertise on the issue. The CMA will also continue to work with the FCA from April in a cross-regulator approach.

The original concerns regarding SME finance were:

  • Insufficient competition and a concentrated market with only a few major banks controlling the vast majority of SME finance.
  • Barriers to entry and expansion for new lenders.
  • Market inertia with SME’s typically not shopping around for different sorts of finance or between existing providers.

Update and next steps
In it’s update, the OFT notes that there are current reforms underway to try and increase competition which may impact upon the findings of the market study including:

  • Changes to the way new banks are authorised.
  • Better information on differing credit options for SMEs.
  • The new Current Account Switching Service.

However, the OFT has to date unearthed two new concerns during the study. The first concern is that banks may be hindering alternative funding providers by not releasing security quickly enough and agreeing documentation to allow new alternative lenders to take a second charge. These alternative lenders include peer to peer lenders and providers of sale finance.

The second concern is that the banks themselves are not complying with the undertakings they agreed with the OFT following a Competition Commission investigation in 2002. The concern was that banks were bundling business current account services with other lending and so further saturating the market with their own financial products, making market entry and swapping between providers that much more difficult.

The OFT notes that the banks and the British Bankers Association are being constructive in taking steps to increase competition and meet the OFT’s concerns. However, the market study will be inherited by the CMA who could yet decide that the market warrants a market investigation reference for further and more detailed examination including measures to reform it.

The decision regarding a possible market investigation reference is likely in 2015. Time will tell whether current reforms in SME banking will be enough to satisfy the new CMA.