LONDON, Oct 18: A British inquiry into small-business banking is likely to call for some form of price control, putting further pressure on banking profits, a source close to the investigation said on Wednesday.

The Competition Commission conducted a year-long review and is due to send its findings to the government on Friday. It had been expected to avoid a heavy-handed approach because banks were already facing difficult economic times.

But the watchdog is now likely to propose price regulation, along with milder measures to make banks’ charges more transparent to customers and open up the market to more competition, said the source, who declined to be identified.

The report is likely to call for price regulation in some form, he said.

He said the commission had adopted one or more of a range of possible measures first outlined in a report in March.

These possible measures included paying interest on small business deposits, a ban on charging different rates on business and personal accounts and controls on charges.

The final verdict rests with Trade Minister Patricia Hewitt, who is expected to announce the decision next month. She may not accept the commission’s recommendations or may modify them.

Bankers were surprised price regulation was still on the agenda after the September 11 attacks in the United States, which have further hurt confidence in the world’s biggest economies and threaten to tip the world into recession.

The bankers hoped the watchdog would have diluted any plans for a big shake-up in business banking in order keep credit flowing to small businesses.

Banks argue that small business banking is highly competitive, with new entrants and new ways of accessing accounts, including the Internet. They say over-regulation would jeopardise new investments and stifle innovation.

The government needs to be very careful indeed in putting any big changes in this climate, said one banking source.

But the source said it had taken into account the possible economic fallout from the US attacks, and analysed profits over a full economic cycle, including a slowdown in the early 1990s.

One banking source one possible measure would be to force banks to offset any accrued interest on credit balances against money transmission charges — a process known as abatement.

This would certainly hit banks’ profitability, but it would not be a doomsday scenario. Doomsday scenario would be interest on current accounts, that’s very expensive, he said.

If banks had to pay interest on business current accounts, it could cost them more than 100 million pounds a year, banking sources say. The impact of this could spill over into personal banking, breaking the network of cross subsidies in the banking sector.

The hardest hitting measure the commission could recommend would be a tax on bank profits, but this has been ruled out. The commission is almost certain to call for a code of conduct under which the banks would be obliged to publish their charges and make it easier for customers to switch accounts.—Reuters