Mandelson's OFT brush-off raises huge questions

Published on 31/10/2008 20:35

THE report of the Office of Fair Trading (OFT) on the takeover of HBOS by Lloyds TSB is categorical that there are serious negative implications for competition should the deal go through. In normal circumstances the matter would now go to the Competition Commission, which would either veto the takeover or insist on safeguards to protect the public from market abuse.

Lord Mandelson instantly issued a statement saying he would ignore these findings and let the takeover proceed, because preserving "the stability of the financial system" outweighed any potential anti-competitive effects. Yet if the abuse of market power by financiers created the banking crisis, why does Lord Mandelson wish to rush through the Lloyds TSB takeover of HBOS with no preconditions whatsoever?

According to the OFT, "there is a realistic prospect that the anticipated merger will result in a substantial lessening of competition in relation to personal current accounts, banking services for small and medium-sized enterprises and mortgages". The new, enlarged bank will dominate the provision of mortgage lending across the UK, effectively setting the price and availability of home loans for years to come. In Scotland, the new, London-headquartered bank will dominate the provision of funds for small and medium-sized firms.

One flaw in Lord Mandelson's rush to judgment is the fact that he could impose conditions on the takeover designed to limit such inherent monopoly power. The OFT report is implicitly critical of the failure of Lloyds TSB and HBOS to offer any remedies for the loss of competition – something normal in a takeover. As a result, the OFT says "it would not be appropriate to deal with the competition concerns arising from the merger by way of undertakings in lieu of reference to the Competition Commission". That is a diplomatic way of saying that since the banks have refused to provide any voluntary remedies, they should not be trusted with any gentlemen's agreements regarding good behaviour; and the issue should be considered by the Competition Commission, not by politicians.

Bank shareholders, who have still to vote on the takeover, should consider the report in detail. They will not be aided in this by the extensive censorship of the published version. HBOS shareholders should note that the OFT rejects the view that the takeover must go ahead because otherwise HBOS would have failed. The report says: "The OFT considers that the application of the failing firm defence in this case is not appropriate given that it is not realistic to consider that HBOS would have been allowed to fail (or that its assets would have been allowed to exit the market)."

There is now a foreign bank interested in HBOS. Now we don't know if that's a better alternative for HBOS at this stage, but it is an alternative, and yet another reason why the Lloyds TSB deal should be re-examined. How can anyone know what's best until all options have been considered?