Banks cleared of not passing on rate cuts

THE Chancellor yesterday cleared banks of failing to pass on base rate cuts to small businesses, a charge that has been levelled against the main lenders almost since the recession started.

Norman Lamont also announced the inclusion of firms with turnover of less than pounds 1m in the Banking Ombudsman scheme because of widespread dissatisfaction with banks. Despite the decision to improve the complaints process, small businesses attacked him for going on a 'wild goose chase' about interest rate margins and for letting the banks off the hook on other more important issues.

Stan Mendham, founder of the Forum of Private Business, welcomed the extension of the Banking Ombudsman scheme but said: 'The Chancellor has been misled by anecdotal information which has made him check whether banks are passing on interest rate cuts, when our research showed two months ago that was a false claim.

'If he had been looking at the issues that really matter - the availability of loans and the security banks are demanding for them - we would be much better off.'

Small businesses also welcomed yesterday's latest cut in interest rates, although there was scepticism about whether they would see all the benefits.

Julian Beauchamp, owner of Microrescue, a London computer business, said: 'The cut will have a crucial effect, provided the banks pass it on. I currently pay 4.6 per cent over base rate. If the bank comes down the whole 1 per cent I shall be very pleased.'

Several banks with base rate- linked lending announced that they were passing on the full interest rate cut to most of their small business customers.

But Gordon Brown, the Shadow Chancellor, accused the big four banks of a pounds 1.5bn increase in charges in less than four years, with the top eight banks raising charges 51 per cent during the recession.

A study by the Bank of England, commissioned by the Chancellor and published yesterday, found that base rate-linked borrowers accounting for 80 per cent of borrowing automatically received the full benefit within a day or two.

Overall, 60 per cent of customers received the full benefits of base rate cuts, 10 per cent found their margins narrowed and 15 per cent had their margins raised by 0.5 percentage points or less. The other 15 per cent had their margins raised by more. The comparisons were between June 1991 and the end of last year.

Businesses remained concerned that base rates have hit a floor level operated by Barclays and NatWest, so in theory they will not pass on any further reduction. But both banks made it clear that they would review the floor if there was another base rate cut.

The clearers welcomed the extension of the Ombudsman's powers to incorporate small businesses. But their backing for the plan came after the Chancellor agreed with them that only the smallest firms should be covered, that investigations should be restricted to maladministration, and that interest rates and commercial decisions by bank managers should be excluded.

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