Julian Rose examines whether investigations into SME lending by the Competition and Market Authority will spice up the mix for leasing businesses
For a while, it looked like the Competition and Market Authority’s (CMA) two-year market investigation of the retail banking market, including SME lending, might actually get interesting for leasing.
The terms of reference for the investigation of the market included all bank lending products, not only current accounts. That may not sound earth-shattering, but several banks had argued strongly that only core lending products should be looked at.
The wider scope reflected the CMA’s concern that linkages between SME current accounts and other lending products – including asset finance – could restrict, prevent or distort competition.
Was that a signal that the CMA might force the large banks somehow to separate the provision of SME current accounts from other products, including leasing?
As usual for CMA investigations, many thousands of pages of evidence have been collected. The CMA has sweeping powers to demand information from the banks and other businesses – most of which is published, albeit with the most sensitive information removed.
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Based on evidence it collected from the banks, the CMA estimates that the four largest banks (Lloyds, HSBC, RBS and Barclays) had a 65% market share of the SME asset finance market.
The ‘Herfindahl-Hirschman Index’ (HHI) for the asset finance market is 1550, the CMA reports. The HHI is calculated by adding the squares of the market shares of participants. The 1550 index value might be obtained, for example, if the largest firm had a market share of 30%, the next 20%, and then all the rest under 10%.
These market share results do look a bit suspect and the CMA acknowledges that its data excludes "a significant number" of finance providers. The published accounts of the four banks show their total asset finance books represent around 55% of the UK market. Take out of that the (mostly legacy) big-ticket business and the four bank’s SME market share is likely to be well below 40%.
The CMA statistics show that approximately 70% of banks’ asset finance product sales are to business current account holders. However only a very small – and indeed declining – proportion of business current account holders take out asset finance with the same provider. A CMA graph suggests it’s something like one in 200 customers.
Around 7% of all SMEs use asset finance. Of these, 37% of them do so with their main bank, and the remaining 63% go elsewhere. This is quite different from other banking products, as 69% of businesses went to their main bank for invoice discounting and factoring and 76% for commercial mortgages. It has also changed markedly in recent years with the proportion of businesses using their main bank decreasing from around 62% to 37% since 2010.
So some strong evidence here that the largest banks are being increasingly selective in where they offer asset finance. It also shows the important role of brokers in helping SMEs to shop around for asset finance, although brokers get barely a mention in the CMA’s hundreds of pages of analysis.
Businesses with annual turnover less than £2m (2.6m) accounted for around 45% of banks’ SME asset finance customers, but only 15% of the value of outstanding balances.
The CMA concludes that the asset finance market appears to be less concentrated than the markets for business current accounts and general loans. As a result, the CMA is now expected to conclude that asset finance is, after all, a separate market to business current accounts. So that should remove any possibility that the authority could require banks to separate out their leasing arms from their other activities.
The CMA also looked at the banks’ asset finance revenue split between interest charges, arrangement fees and revenue from other fees and services. Arrangement fees accounted for around 4% of revenue in 2014, down from 5% in 2011. Revenue from other fees and services accounted for around 7% in 2014, down from 16% in 2011.
The CMA doesn’t provide much commentary on this. Perhaps the fall in other revenue reflects a shift away from operating leases. It doesn’t seem likely there’s been any dramatic change in policy on fee charging.
As reported in Leasing Life in November, in October the CMA published its provisional findings for the investigation. It identified a number of competition problems including low level of switching. It said there was a particular problem in SME banking where many SMEs open their business current accounts at the same bank where they have their personal current account, then stick with that bank for their business loans (but not, as we have seen, asset finance).
The CMA has strong legal powers it can use to remedy competition problems, but for this review all of its proposed remedies seem fairly innocuous – much to the dissatisfaction of the smaller ‘challenger’ banks who have argued the CMA has failed to address some core issues including the competition effects of prudential regulation.
Proposed remedies include requiring banks to send notes to customers, reminding them they can change bank; doing more to make it easier to switch banks, including setting up a price comparison website for SME bank products; and more sharing of data to allow SMEs to shop around for loans without having to make multiple applications.
The CMA’s efforts are no doubt well-intentioned, but for now its proposals don’t seem any stronger than those coming from several previous SME banking competition reviews – none of which have done much to change the market.
Unless there are any twists in the investigation yet to come it’s not a very exciting end to the story, but at least we now know what the CMA knows (or doesn’t know) about the SME asset finance market!
Julian Rose is director of consultancy Asset Finance Policy Ltd and runs the Asset Finance 500 broker directory