By Daniel Hunter

The Federation of Small Businesses (FSB) has welcomed today's (Wednesday) report from the Parliamentary Commission on Banking Standards looking at the banking sector. The report has probed deep into the banking industry and gives clear recommendations to Government on how to clean-up the sector.

With 85 per cent of small and medium-sized enterprise (SME) banking controlled by the main five banks, the FSB believes that the recommendation for the Competition and Markets Authority to review retail banking to SMEs cannot happen soon enough.

It is however disappointed that another review needs to take place as Cruickshank identified the problems in the sector in an authoritative report over a decade ago. These included an overly concentrated market structure and low levels of competition. Little progress has been made in addressing those issues, putting both the banks and policymakers in a poor light.

The FSB has long said more competition is needed to help customer choice and make retail banking much safer. Recommending that the Prudential Regulation Authority (PRA) has a competition objective is important and the FSB would like to see the Government take it forward. Government should also look at how the PRA would interact with the other major regulators, government departments as well as the Business Bank to promote a more diversified banking market.

Recommendations to encourage the growth of alternative providers, such as peer-to-peer, crowdfunding and Community Development Finance Institutions, as well as challenger banks are needed to open up competition further than just retail high street banks. The FSB urges Government to do all it can to encourage more investment in these sources of finance to drive up their use. The Business Bank has a clear role to play in making sure that businesses know about these sources of finance.

On the measures detailed in the report, John Allan, National Chairman, Federation of Small Businesses, said: "Small firms have been rocked by scandal after scandal in the banking sector, not least Libor rigging and mis-selling of complex financial products, which has affected many of our members. We feel these recommendations should help clean-up the sector as well as encourage greater competition. However, a decade ago, the Cruickshank report identified many of these problems, so the fact another review is needed is a sad indictment of the lack of progress.

"With the concentration of banking in the last 20 years, real competition and choice has all but vanished. More competition is needed across the sector, not just in retail banks but from alternative providers, if access to finance is to improve for small firms and for innovation to flourish. For too long the main high street banks have had a monopoly on lending to these customers. While innovative alternative providers currently make up a small proportion of lending, it is an area we think can grow significantly with the support of the Business Bank."

Join us on
Follow @freshbusiness