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Government set to bypass competition rules and push through HBOS/Lloyds merger

19 September 2008

The Government has announced that it intends to issue an “intervention notice” in the Lloyds TSB HBOS merger. This almost unprecedented step effectively bypasses the merger rules which allow regulators to scrutinise and even block anti-competitive deals.

Last weekend’s events in the US, particularly the collapse of Lehman Brothers, the difficulties faced by AIG and the takeover of Merrill Lynch by Bank of America, spilled over in to UK markets and resulted in huge falls in bank shares, with HBOS falling victim to a combination of targeted short-selling and disposals by worried investors and fund managers. The resulting collapse in HBOS shares caused the UK government to step in and encourage Lloyds TSB to make a bid for HBOS to avoid further problems for UK financial markets.

The proposed merger of Lloyds TSB and HBOS could normally expect to attract detailed scrutiny from the Office of Fair Trading and the Competition Commission. It has been reported that the banks have high combined market shares in a number of business areas, including mortgages, credit cards and unsecured lending. According to reports, the parties currently account for some 30% of the UK mortgage market – a figure that is likely to increase if other lenders exit the market and if, as expected, significant numbers of Northern Rock mortgage holders switch to Lloyds when their current fixed rate deals expire.

Competition regulators would ordinarily have the power to examine the deal and ultimately to block it if it would lead to a serious lessening of competition. Currently, the government may only intervene to wave through anti-competitive mergers on national security grounds or in certain media deals. But in an almost unprecedented step, the government has announced that it will extend its powers under the Enterprise Act to allow Lloyds TBS and HBOS to merge – even if the competition authorities decide that it could harm competition. The new powers would allow the government to decide that an anti-competitive merger which nonetheless ensured the stability of the UK financial system should be allowed to proceed in the public interest.

The UK merger control system is based on the competition regulators being free from political interference. So the fact that the government is prepared to intervene to allow this merger to go through shows how seriously it is taking the current financial crisis. The government faced severe criticism over its handling of the Northern Rock saga, which is still the subject of a lengthy State aid assessment by the European Commission, and is clearly keen to be seen to be taking decisive action to avoid any further bank collapses.

However, having gained special clearance for a merger which might not normally be allowed to happen, the question now is whether the new combined bank can be prevented from acting anti-competitively. So far, the handling of these events has gained good coverage for the government, but managing a level playing field in the banking sector in the long term could prove to be very difficult. There is also the possibility that further consolidation will be required, and that the regulators could be left dealing with a new breed of “superbank”.

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Sarah Livestro

Solicitor
T: 08700 86 5148
I: +44 (0)115 906 5148
E: sarah.livestro@shoosmiths.co.uk