Don Cruickshank highlighted excessive profits

That is where a group of two or more organisations control at least a quarter of a market and prevent, restrict or distort competition.

The report identified 10 practices carried out by the eight main clearing banks that "restrict or distort competition and operate against the public interest".

The government estimates that the "softer" recommendations aimed at tackling these issues will take at least two or three years to take effect.

In the meantime, the four largest clearing banks, where "evidence of excessive charging has been found" in England and Wales should pay interest of at least the UK base rate minus 2.5% on current accounts or offer accounts without transmission fees.

Lloyds TSB, Royal Bank of Scotland, Barclays and HSBC between them control 86% of small business banking, and had a combined profit last year of �10bn.

A report by government adviser chairman Don Cruickshank concluded that the big four were making excessive profits from small business customers.

Banks 'not been fair'

Small business owners have complained about some of the banks' practices.

Dave and Jan Ward, who run a pressure washing company, said they used to trust their bank implicitly.

Only when they got an expert to look at their accounts did they find they had been wrongly overcharged, to the tune of more than �4,000.

"The anger comes in when you think how much you could be out of pocket without realising it. It could have been far worse than �4,000," Mr Ward told the BBC.

The banks have argued that there is no need for government action against them, as competition from new players in the small business banking field, such as Halifax and Abbey National, is changing the situation.

Cautious welcome

David Lennan, director general of the British Chambers of Commerce, which represents 135,000 small to medium sized businesses, gave Mr Brown's announcement a cautious welcome.

"Small businesses have for a long time complained about a lack of competition in this market and we are therefore pleased to see their complaints vindicated by this report," he said.

"Small businesses will welcome being paid interest on their current accounts, as contrary to perceptions they hold more on deposit than they borrow.

"However, we would have preferred tighter controls on the charges banks levy for transactions, rather than giving them the choice to pay interest as an alternative."

At the Institute of Directors, Richard Wilson, business policy executive, said: "We welcome the fact that some of the more draconian proposals suggested by the Competition Commission, for example the imposition of a windfall tax on the banks' profits, have been dismissed by the government.

"This is a victory for common sense."

Government recommendations:

• Where evidence of excessive charging has been found, any small business customers must be offered an account that pays interest of at least the Bank of England base rate minus two and half percentage points, or a current account free of money transmission charges, or a choice between the two.

• Banks must facilitate switching accounts within five working days and impose no charges for closing accounts.

• Provide a portable credit history - a statement that can be passed to other banks.

• Stop bundling services and not impose any requirement to hold a current account in order to gain a loan.

• Investigate the feasibility costs and associated benefits of a national branch sharing scheme.

• Inform small businesses when a charge has been made for an unauthorized overdraft.

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