By Scott Wright

THE owner of Bank of Scotland has had its knuckles rapped by the competition watchdog for forcing thousands of customers to take out business current accounts when accessing UK Government-guaranteed coronavirus loans.

The Competition & Markets Authority (CMA) found Lloyds Banking Group had not complied with legal undertakings to safeguard choice and protect customers from anti-competitive practices as the bank provided billions of pounds in bounce back loans. The bounce back scheme was one of several brought in by the UK Government to support firms that faced huge challenges because of lockdown measures imposed to halt the spread of the disease.

Regulators acted to stop Lloyds from a utilising a practice known as ‘bundling’, whereby the bank required small business customers to open a business current account with the bank when applying for a loan. The CMA said the bank had breached undertakings to protect customers by demanding around 30,000 customers that were running their finances through a personal current account to open a business current account (BCA) in order to access finance through the bounce back loan scheme.

Although new BCA customers would not initially be charged, the watchdog noted that small business customers may keep their account for longer than the fee-free period. That could result in charges for an account that may not be suitable for their business, it said.

The CMA stated that bundling restricts competition and limits choice because customers may wish to hold an account with one provider while using a different bank for their loan.

The bounce back loan scheme was introduced by the Treasury in April to provide emergency finance to firms affected by the pandemic. It allows small and medium-sized businesses to borrow, through participating banks, between £2,000 and up to 50 per cent of their turnover, up to a maximum loan of £50,000. The Treasury notes on its website that the Government guarantees 100% of the loan, with no fees or interest to pay in the first 12 months. Interest will be charged at a rate of 2.5% after the first year.

When Lloyds reported its half-year results in July, the bank said it had provided more than £9 billion of lending to businesses through a variety of government-backed schemes, including bounce back and coronavirus business interruption loans. It has now lent more than £7.5bn to businesses across over 250,000 bounce back loans.

Lloyds did not break down how many of the 30,000 customers referred to by the CMA intervention fell within its Bank of Scotland operation. But it is thought that the bulk would be Lloyds Bank customers, given the respective size of the two businesses. A spokesman for Lloyds said: “When we launched bounce back loans, we asked customers using personal current accounts for their business needs to open a business bank account. This ensured quick access to the funds they needed. Any other solution would have created unnecessary delays at a critical time for businesses.

“All business current accounts benefit from 12 months free banking, alongside other business specific benefits. We proactively informed the CMA of our approach and are now writing to our customers to reiterate that they can transfer their account to a free loan servicing account at any time, should they wish to do so.”

The CMA, which has not fined Lloyds over the issue, said that the bank has agreed to a number of actions to become compliant and to make sure all customers are aware of their options.

The bank will be writing to customers this month to inform them that, if they open a BCA with Lloyds, they are not required to maintain the account for the purposes of a bounce back loan, and can switch to another provider at any time while keeping the loan. It will also tell customers that they will be offered the option to switch to a fee-free loan servicing account.

From the middle of September, the CMA noted, customers applying for loans under the bounce back scheme will have the choice to open a BCA or a fee-free loan servicing account upfront.

Adam Land, senior director of remedies business and financial analysis at the CMA, said: “The bounce back loans scheme is a key part of the support provided by Government to small businesses during the coronavirus (Covid-19) pandemic. It is important that signatories to our undertakings participating in this scheme do not restrict the choices of small businesses by bundling loans and business current accounts.

“By forcing businesses to open current accounts as a pre-condition to access this Scheme, Lloyds breached the CMA undertakings it signed, reduced choice and put their customers at risk of being unnecessarily charged.

“Following our action, Lloyds is taking the steps necessary to become compliant and will shortly be contacting existing customers to inform them of their rights.”

NatWest Group, owner of Royal Bank of Scotland, and Virgin Money, owner of Clydesdale Bank, are also signatories to the CMA’s undertakings, meaning they too are prohibited from requiring customers to open business current accounts to access bounce back loans. The CMA carries out yearly reviews of the undertakings.

Lloyds’s shares closed down 0.51p at 26.46p.