NatWest is refunding £600,000 to more than 700 small and medium-sized businesses after it broke competition rules by forcing them to open fee-paying accounts to take out loans with the taxpayer-backed bank.

The Competition and Markets Authority said it was unacceptable that NatWest had compelled small business customers that were applying for loans to open the expensive accounts instead of allowing them to have fee-free feeder accounts.

This practice is known as “bundling” and is against industry rules. The NatWest breach lasted for more than three years, from November 2016 to March 2020, and the lender informed the regulator of the violation in January last year. The bank will now reimburse the 702 customers for the fees they were charged during the period and has been ordered by the regulator to hire an independent auditor to review its compliance with the rules.

NatWest joins a number of banks to have been criticised by the authority for bundling. In March the regulator said that HSBC would refund about £800,000 to small business customers after it breached rules, while Lloyds Banking Group, Clydesdale, which is owned by Virgin Money, and Danske Bank have faced clampdowns for bundling.

Adam Land, senior director of remedies at the authority, said that NatWest “should have known better … Forcing businesses to open costly current accounts to secure essential loans is unacceptable and a direct breach of our rules, which have been in place for 20 years. These rules are there for a reason: to make sure small businesses are treated fairly and to make sure the market is competitive.”

The censure by the regulator is a blow for NatWest, one of Britain’s biggest high street lenders. The bank, which until two years ago was called Royal Bank of Scotland Group, remains about 48 per cent-owned by the taxpayer after its £45.5 billion government bailout at the peak of the 2008 financial crisis, which averted the lender’s collapse. The state owned 79 per cent of the group at its height, but has been reducing its stake.

The lender is led by Alison Rose, 52, who started as a graduate trainee at National Westminster Bank 30 years ago and became the group’s chief executive in November 2019.

A spokeswoman for NatWest said: “A technical issue meant that a small number of new business customers were incorrectly provided with a business current account when taking out a business loan. On discovery of this issue, we promptly informed the CMA of the error and resolved it. We have written to the small number of business customers that were affected and refunded them in full.”

The breach was caused by a problem with NatWest’s Electronic On-Boarding Account Opening system and affected customers who were new to the bank and were applying for a small business loan. While businesses were offered the choice of opening either a fee-free feeder account or a business current account, which had charges attached, a fault with NatWest’s system meant it would only automatically open the latter.

The regulator said: “The failure was caused by a lack of oversight by NatWest’s product and risk teams.”