Corporate report

SME Banking Undertakings: Annual Report background and context

Published 20 July 2023

The 2002 Undertakings

In 2002, following a Competition Commission (CC) investigation into banking services for SMEs, nine banks^{[footnote 1]} (two of which have since merged) agreed that, except in specific circumstances, they would no longer require an SME customer to open or maintain a BCA to get a business loan or deposit account. This practice is commonly known as bundling, and is prohibited by the Small and medium-sized enterprise (SME) banking undertakings (the Undertakings).

The Bundling Restrictions are set out in Clauses 17 to 19 of the Undertakings. These prohibit the banks from compelling an SME customer to open or maintain a BCA as a condition of granting, maintaining or servicing a loan or deposit account. Banks may however offer incentives e.g., lower charges or interest rates to SMEs to open a BCA alongside their loan or deposit account, and they may offer integrated products.^{[footnote 2]}

The Undertakings help to preserve choice for small businesses about the banking services they use, enabling small businesses to select their preferred BCA provider independently of any lending relationships, and prevent the large banks from restricting competition.

The 2014 Agreement

On 11 March 2014, the Office of Fair Trading (OFT) agreed a package of measures (known as the 2014 Agreement) with the banks to:

• improve awareness of the Undertakings among Relevant Staff

• assist the CMA^{[footnote 3]} in assessing overall levels of compliance with the Undertakings on an ongoing basis

As part of the 2014 Agreement, the banks agreed to undertake a detailed annual audit of their systems and procedures for ensuring compliance with the Undertakings. The annual audit includes: their policies, practices and procedures (including those related to training); staff awareness; and other evidence suggesting the presence or absence of actual or suspected non-compliance including internal audit reviews. These are reported to the CMA by 31 July each year.^{[footnote 4]}

Internal audit: best practice principles

Following the 2014 Agreement, the OFT and subsequently the CMA worked with the banks to produce a set of high-level principles to guide the focus and manner of their internal auditors’ inspections.

The CMA expects to see high standards put in place and maintained across the banks to ensure full compliance with the Undertakings, the 2014 Agreement and Directions where appropriate.

While the areas of best practice outlined in previous reports^{[footnote 5]} continue to be relevant, this section outlines the current areas of best practice that are relevant for the banks and which could improve the consistency of compliance.

For each of the banks, the CMA has assessed performance by reference to the following categories:

Policies, practices and procedures (including those related to training) which the bank has in place to secure compliance with the Undertakings

In particular:

• procedures to promote compliance are in place
• procedures to monitor compliance are in place
• procedures are reviewed
• first line assurance models are used
• second line assurance models are used

Policies, practices and procedures relating to internal communications on compliance

In particular:

• staff have are reminded about bundling
• Annual Reminders on bundling are reviewed
• ‘best practices’ and ‘professional standards’ are taken into account in reviews
• all Relevant Staff receive the Annual Reminder at the correct time

Policies, practices and procedures relating to external communications e.g. customer guidance

In particular:

• external communication is reviewed
• best practice or professional standards are taken into account when conducting this review

Awareness of the bank’s staff who are responsible for the marketing and sale of business loans and business deposit accounts (the Relevant Staff) with the requirements of the Undertakings

In particular:

• all Relevant Staff receive training
• training includes an assessment element
• staff training is reviewed
• staff interviews are carried out to assess staff awareness

Other relevant evidence suggesting the presence or absence of actual or suspected non-compliance with the Undertakings.

In particular:

• new-to-bank SME loans and business deposits and facility letters are reviewed
• customer complaints are reviewed
• bank lending appeals process is reviewed
• an individual complaint code for bundling is in place
• an internal complaint escalation process is in place internal complaints are reviewed
• new products are reviewed

1. The original legal entities that signed up to the undertakings were AIB Group (UK) plc, Bank of Ireland, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank plc, Lloyds TSB Bank plc, Northern Bank Ltd and the Royal Bank of Scotland Group plc. ↩

2. The Undertakings prohibit the tying of a BCA and a loan or deposit account, but do not prohibit the provision of integrated products (i.e. the sale of several products as one combined product). ↩

3. On 1 April 2014, the relevant functions of the OFT and the CC were transferred to the Competition and Markets Authority (CMA) under Schedule 5 to the Enterprise and Regulatory Reform Act 2013 and the Schedule to the Enterprise and Regulatory Reform Act 2013 (Commencement No. 6, Transitional Provisions and Savings) Order 2014. ↩

4. The banks currently bound by the 2014 Agreement are listed in each year’s annual compliance report. ↩

5. SME banking 2002 behavioural undertakings: reports on compliance - GOV.UK (www.gov.uk) ↩