18 September 2008

MLex Comment: LloydsTSB, HBOS deal may herald tougher enforcement for banks

The decision by UK financial regulators to allow the merger of LloydsTSB and HBOS, despite any potential competition concerns, is a clear defence of the ‘public interest’ as global markets are threatened with meltdown. But the move could augur for heavier-handed treatment of the banking sector in the future once the dust settles and regulators have the opportunity to take on an industry which has raised more than its fair share of antitrust concerns in the past. 

Yesterday evening, the British government helped engineer a deal which saw LloydsTSB rescue the country’s third largest mortgage lender Halifax Bank of Scotland for 12 billion pounds. 

Although the government may turn a blind eye to competition concerns the OFT could uncover and thereby allow the creation of the country’s largest retail bank with 28 percent of the mortgage market, it was nevertheless a decision born out of sense and prudence, and one not made lightly, given past competition concerns voiced when Lloyds pursued Abbey National in 2001.

That deal foundered since the UK's Competition Commission judged the merged entity to have more than 25 percent market share.

Under section 42 of the UK's Enterprise Act, the government can issue the Office of Fair Trading with a notice allowing it to intervene in 'public interest' cases. The Secretary of State for Business and Enterprise John Hutton announced his intention to issue such a notice today and will put this officially to the UK parliament after the summer recess, according to the OFT. 

“Currently public interest grounds cover only plurality of media ownership and national security,” stated the OFT today and some have suggested that additional legislation would be needed to create an additional public interest. 

Nevertheless, the OFT will still undertake its usual review of the acquisition and when that analysis reaches the Secretary of State, the decision may then be taken to overrule the antitrust regulator in the 'public interest'. 

There seems little doubt that the steps the UK financial services agencies have taken are correct and when it comes to saving financial systems, such measures are needed. 

But as the market settles down – whenever that may be – some questions will have to be answered. Firstly, the issue of other bidders.

The manner in which the deal was engineered by the government has riled some, since it is said to have by-passed the normal bidding process. HSBC is understood to have been sounded out for interest in acquiring HBOS but the terms were not judged suitable. Other banks – potentially from outside the UK – may have been interested in the cut-price asset as a way of entering the British market. 

While yesterday's solution appeared to contrast the Northern Rock bail-out, it was in fact not as ‘private sector-led’ as it appeared and the involvement of government and regulators was essential. This may lead rival banks – particular those missing out of the bidding process – to complain to competition authorities in London or Brussels over an unfair sales process. 

Once the dust has settled and the credit crisis has died down, the UK regulators will also be facing a different landscape than before and may need to act more firmly to crack down on potential market abuses. 

Excluded from applying its usual regulatory powers in advance of the merger, the OFT may need to address competition concerns after the deal has gone through. 

In recent years the UK’s competition regulator, the Office of Fair Trading, has kept a close eye on the banking sector, particularly through a high profile case in the High Court against the country’s banks over unauthorised overdraft charges, but also on issues such as card fees and irresponsible lending.

While some argue that the UK's banking market has changed significantly in recent years – particularly since Lloyds' 2001 pursuit of Abbey National – tying the hands of a regulator such as the OFT, which has been firm on antitrust concerns in the banking sector in the past, may bring heavier-handed intervention at a later date when abuses arise.

By Lewis Crofts and Robert McLeod

© MLex