The competition inquiry aimed at curbing the dominance of the big banks has been scathingly attacked by leaders of the small banks trying to give consumers more choice.

The chief executives of Aldermore, Metro Bank, Secure Trust Bank, Paragon Bank, Shawbrook, One SavingsBank, Charter Savings Bank, and Edinburgh-based Hampden & Co have urged the Competition and Markets Authority to rethink its investigation, following an interim CMA report last week.

The report’s focus on promoting greater transparency of banking products through comparison websites is “naive”, the executives say in a submission to the CMA. They say it does nothing to address the big banks’ “stranglehold” on mortgage lending, and instead the inquiry should be addressing an underlying discrimination against small banks in capital and funding rules.

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The submission says: "In a nutshell, for every £1 of capital set aside to cover credit risk, a large bank can do 10 times more low loan to-value mortgage lending than a small bank or building society."

One of the eight executives, Paul Lynam the chief executive of Secure Trust Bank, said in an interview this week that the inquiry is “a waste of time”.

Mr Lynam said: “Some of the challenger banks didn't even bother engaging with the CMA.”

Craig Donaldson, chief executive at Metro Bank, said: “Contrary to the CMA’s belief, what is holding new entrants back is not the inability ‘to highlight to customers how new offerings compare with their current deal’, but not being able to compete on a level playing field.”

He went on: “The CMA is letting the incumbent banks off the hook by failing to provide a meaningful remedy to address the huge disadvantages suffered by challenger banks.”

Sue Lewis, chair of the Financial Services Consumer Panel, said relying on consumers to switch their banking products would have no effect on the market. “The CMA’s analysis shows that the quality of products and services has almost no bearing on market share.”

Rishi Khosla, chief executive of Oaknorth Bank, a niche lender to small enterprises, said: “The fact that finding a solution when it comes to larger loans will now be passed to the Treasury, who will only look to review whether the proposed remedies have worked in two years’ time, is very disappointing news for the millions of SMEs....who were hoping this investigation would finally deliver a solution to a problem that’s been going on for decades.”

Research by ethical bank Triodos this month found more than three quarters of UK adults think greater competition from challenger banks should be encouraged.

Over half want challenger banks to set themselves apart from the ‘Big Five’ by not paying bonuses. Just under half want the banking sector to be more honest and show more integrity.

Huw Davies, head of retail banking at Triodos Bank, said: “This research suggests that there is still a large degree of customer dissatisfaction with the mainstream banking industry, and a desire for alternative banks to challenge the status quo. The fact that 39per cent said they want to see more ethical or sustainable banks in the UK shows that there is genuine appetite for a change.”

The past lending practices of Scottish banks have helped create that appetite.

This week a new website was launched by former small borrowers with Royal Bank of Scotland, whose businesses were shunted into the bank’s Global Restructuring Group. The controversial GRG, accused of driving viable businesses to the wall under pressure to shrink the bank’s lending book after the crash, has been under investigation by the Financial Conduct Authority since January 2014.

The ExposeGRG site is said to be aimed at “GRG staff whistleblowers”.

Clydesdale Bank, which this week unveiled its first results since demerging from National Australia Bank and floating on the stock market three months ago, was given £1.7billion by NAB to cover outstanding customer redress for mis-selling. Earlier this month it added £450m to its provision for mis-selling payment protection insurance, following enforcement action by the regulator on practices first revealed by The Herald in 2013.

Simon Jaquiss, of claims adviser QA Legal, commented that there was still £1.3bn in the kitty to meet future claims for PPI mis-selling – and also for the bank’s fixed rate ‘tailored business loans’ sold between 2005 and 2012.

“Nothing wrong there in theory but these weren’t ordinary fixed rate loans," Mr Jaquiss said. "If the borrower sought to repay the loans early, they faced very large exit costs, somewhere in the magnitude of 20 to 30 per cent of the amount repaid.”

Other banks had also sold the ‘sting-in-the-tail’ product, but at Clydesdale the loans had been the standard small business product, he added.

“They have starved businesses of cash flow, they have prevented refinancing and re-banking unless the borrower had the cash to pay the exit costs.” In Scotland they had “resulted in the sale of farms, care homes, hotels, tea shops, and village stores”.

A Clydesdale spokesman said: "We deal fairly with complaints about any of our products or services and customers do not need to engage a claims management company to make a complaint to the bank."

One borrower, St Andrews hotelier Jim McGrory, has now been offered a £142,000 settlement by the bank after pursuing his case with the ombudsman for the past six years. In a final decision on the case first highlighted by The Herald in 2012, the ombudsman has ruled that the TBL was mis-sold in 2007, but Mr McGrory failed to make the case for £502,000 of consequential losses resulting from forced sale of properties.

The bank has offered redress of £11,126 and a replacement of the original TBL with a variable rate loan - resulting in a debt reduction of £131,240 along with other write-offs.