BRITAIN'S four biggest banks have promised a radical shake-up in the way they conduct business with small firms by offering businesses free banking, Chancellor Gordon Brown announced in the Commons yesterday.

The major high street banks came under fire earlier this year after Mr Brown backed a report which accused them of raking in excess profits at the expense of small and medium-sized businesses.

The Competition Commission found the banks - Lloyds TSB, Barclays, HSBC and Royal Bank of Scotland/ Natwest - charged excessive prices and made profits of £725m a year at the expense of small and medium sized businesses.

Mr Brown said at question time yesterday that the Government had "accepted undertakings" from the four banks that from January 1, next year small firms would be offered free business banking or paid interest on their accounts no less than 2.5 per cent below base rate.

He told MPs: "The Government has today accepted undertakings from the four main clearing banks that no later than January 1 next year they will pay interest of no less than 2.5 per cent less than the base rate on current accounts or offer free banking services to the small business customers in England and Wales.

"This will be a great help to many of the 3.5 million small businesses throughout the country."

Labour MP George Mudie, who represents Leeds East, praised the Chancellor for persuading the "arrogant four major banks to stop their monopoly position on small businesses".

He called on the Government to keep pressure on the banks to "make sure the Competition Commission's other recommendations on the monopoly position of the four institutions is sustained so the monopoly which has harmed small businesses and consumers is broken".