Why a Lloyds TSB takeover of HBOS is bad news for the Scottish high street

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THE Scotsman is today calling on the Office of Fair Trading to investigate the potentially damaging effect the HBOS takeover will have on Scottish businesses and customers.

It is believed the Lloyds TSB buyout will shrink the number of deals available for mortgages, retail accounts and insurance – and have a disproportionate impact north of the Border. This newspaper is deeply concerned it could leave Scotland with Europe's least competitive banking market.

Based on figures from a Treasury report, the lack of competition in the country already costs Scottish customers between 300 million and 490 million and the takeover would only exacerbate this. It would leave the Scottish banking market dominated by two banks – RBS and the new superbank. This is far more significant than the likely effect on the UK market, which is dominated by the "big four" banks – HSBC, RBS or Natwest, Barclays and Lloyds TSB.

In a letter to the Office of Fair Trading (OFT), Mike Gilson, Editor of The Scotsman, states: "This would result in Scottish banking customers having the least choice and probably paying the highest charges in Britain.

"While this would be unacceptable in itself, it would also place an unacceptable handicap on the Scottish economy, reducing Scotland's capacity for growth and job creation."

Competition rules would normally prohibit such a merger but when the financial crisis hit HBOS, the UK government said it would waive them. Since then, the government has produced a new 500 billion plan to buy shareholdings in banks and give them massive loans.

The Scotsman, joined by many leading Scottish figures, including Alex Salmond, the First Minister, is arguing this has changed the situation and so the HBOS takeover by Lloyds TSB should be reconsidered.

Although the OFT is looking at the impact of the deal on the UK banking sector, The Scotsman believes a separate Scottish-specific investigation should be held. And the call is being backed by politicians and leading businessmen dismayed at the deal.

According to The Scotsman's research, the Scottish market is already almost twice as concentrated – ie has only half the competition – as England and Wales. The deal would make it almost three times as concentrated.

The newspaper's investigation into the effects of the merger has gathered the limited amount of publicly available data on the share each bank has of the Scottish market. It then uses a standard tool – the Herfindahl-Hirschman Index – to judge how competitive the Scottish market is.

When told of The Scotsman's letter to the OFT, a spokesman for Mr Salmond said: "We are entitled to ensure that any merger is in the public interest – that the public won't end up paying for the merger, paying for lost jobs and paying for the restriction of competition.

"Until these questions are satisfactorily answered, then there must be no merger."

Alex Neil, an SNP MSP, said he had also written to the OFT, urging it to look at the issue from a Scottish perspective. He said the way in which the OFT dealt with the complaint would be "a litmus test" of its effectiveness.

Jim Spowart, founder of the internet bank Intelligent Finance, said the takeover would lead to competition issues in retail and business banking, car and home insurance, and mortgages. Backing The Scotsman's call to the OFT, he said: "Scotland is going to be affected because of a lack of choice. We have 50 per cent less of the options anyway.

"There is less of a monopoly problem south of the Border. We have a small population and a huge percentage has a connection with Lloyds or HBOS. The only real alternative is RBS."

As well as reducing competition, he said the merger would be bad for business as it would sever the links which the Bank of Scotland had built up with Scotland-specific industries from its Edinburgh base. This would leave crofters, farmers and oil firms to deal with London-based bankers, perhaps lacking experience of their sectors.

It is open to the OFT to advise against the merger if it feels it would seriously harm competition. Should the government let it proceed, the OFT can also present a case for changes to improve competition, such as advising that part of the merged bank should be hived off into a new company.

The OFT's deadline for comment is Thursday, and a report will be sent three days later to Lord Mandelson, the Business and Enterprise Secretary.

Mr Gilson concludes the letter: "The Scotsman hopes you will agree that there is compelling evidence to warrant conducting a particular examination of the Scottish banking market as part of the report."

An OFT spokesman said of The Scotsman's letter: "We welcome any comment on the merger as part of our investigation."







Dear Mr Fingleton,

The Scotsman newspaper is deeply concerned about the bad effects on competition in the Scottish banking market that will be caused by the proposed merger between Halifax Bank of Scotland (HBOS) and Lloyds TSB. We believe that such a merger would leave Scotland with the most concentrated and least competitive banking market in Britain, perhaps also in Europe.

This would result in Scottish banking customers having the least choice and probably paying the highest charges in Britain. While this would be unacceptable in itself, it would also place an unacceptable handicap on the Scottish economy, reducing Scotland's capacity for growth and job creation.

Our purpose in writing to you is, therefore, to ask that the Office of Fair Trading (OFT) should make a specific study of the Scottish banking market as part of the report that you are preparing for the government on the implications of the takeover. While the government, as part of its response to the current financial crisis afflicting banks, has said it will waive the normal competition rules that would rule out an HBOS/Lloyds TSB merger, the OFT is still duty-bound to report on how this move would affect competition.

The Scotsman believes that the Scottish banking market is quite different from the UK market, which is dominated by the "big four" established banks – HSBC, RBS/NatWest, Lloyds TSB and Barclays – and within which market HBOS operates as a smaller "challenger" bank.

In Scotland, however, the market is dominated by HBOS and RBS, which we believe have about 70 per cent of the overall market between them. The Clydesdale Bank and Lloyds TSB share most of the remaining 30 per cent, while HSBC and Barclays have made little inroads, concentrating only on winning some of the larger business customers.

This quite different market structure, The Scotsman believes, makes a compelling argument for the OFT to produce a separate report on Scotland.

There is, unfortunately, very little information about competition within the Scottish market. The main banks, obviously, have that information, but they have declined to make it available. But what information is available supports the case that there is limited competition already and that the merger will reduce competition even further.

One indicator we can use is the number of branches that each bank has. While not a perfect match for the actual share of the retail banking market (it ignores internet banks such as Intelligent Finance, also owned by HBOS, and banks run by supermarket firms such as Sainsbury's), it does give a rough approximation.

It shows that the retail banking market is dominated by RBS and HBOS, with Clydesdale and Lloyds TSB having relatively small shares. If Lloyds TSB takes over HBOS, the market will become even more concentrated in the hands of two big banks.

This would be a virtual duopoly. We know just how unacceptable this is, because we can use a standard economic tool, used by the OFT and others, to judge the degree of market concentration. This tool, called the Herfindahl-Hirschman Index (HHI) gives a good idea of when a market has become too dominated by big firms.

When applied to the market share of the banks in Scotland, as estimated by the number of branches they have, the index turns out to be 2530. This is well in excess of the HHI figure for the UK personal-account banking market of 1410 reported in your July 2008 report on UK banking. In our view, this justifies a separate investigation into the Scottish banking market.

The change in the index which would be caused by an HBOS/Lloyds TSB takeover, an increase of 1043 points, is more than 20 times the increase cited in your guidelines (50) which would raise competition concerns.

And the index figure which would be created by the merger – 3573 – points to an unacceptably concentrated market.

These figures can be criticised as being based on a rough-and-ready estimate of market share. But The Scotsman believes they are in the right ballpark. The only other publicly available information on the Scottish banking market we have been able to find is in the Cruickshank report, commissioned by the Treasury and published in 2000.

It contains some information on the banking market for small and medium-sized companies. It shows the same pattern as portrayed by the bank's branch networks: a market dominated by RBS and HBOS, with Clydesdale and Lloyds TSB some way behind. A Lloyds TSB takeover of HBOS would distort the market still further, creating, in effect, an unacceptable duopoly.

The HHI for this banking market emphasises the point. Before any takeover, it is at 2780, which is a high degree of market concentration. Indeed, the Cruickshank report found that Scotland had the most concentrated business market of any part of the UK. A combined Lloyds TSB/HBOS bank would see the HHI shoot up to 3868 and leave Scottish businesses with the least competitive business banking service in the UK.

The Cruickshank report estimated that the cost to UK consumers, in terms of charges being higher than they should be in a properly competitive market, was between 3-5 billion. Allowing for inflation, and Scotland's share of the UK economy, it means that Scottish customers were being overcharged between 300-490 million by their banks. In an even less competitive market post-takeover, that cost is bound to rise further.

It is open to you, we understand, to advise Lord Mandelson, the Secretary of State for Business and Enterprise, that the merger should not proceed if it creates unacceptable competition concerns. We also understand that the government may well authorise the merger as the best way to ensure stability in the British banking system. If so, it is also open to you to advise that a de-merger of part of the HBOS/Lloyds TSB bank, perhaps the Bank of Scotland portion, should be considered in order to improve competition. The Scotsman believes, in view of the evidence we have compiled, that this should be considered.

In any event, The Scotsman hopes you will agree that there is compelling evidence to warrant the conducting of a particular examination of the Scottish banking market as part of the report on how this takeover will affect UK banking.

We look forward to hearing from you.

Yours sincerely,





How controversial deal could add up to net loss for thriving town

THE picturesque town of Bridge of Allan, in Stirlingshire, boasts a bustling main street replete with traditional staples and more modern businesses.

Two banks stand opposite each other. On one side of the road, HBOS. On the other, Lloyds TSB.

If the merger of the two giants is approved, Bridge of Allan will almost certainly lose the presence of one of them.

And while there will still be a branch in which to process transactions, the range of products on offer is likely to be greatly reduced. The superbank will only have the Royal Bank of Scotland branch up the road to compete with.

Douglas Ross, of Bridge of Allan Merchants Association, said:

"I think the concern is the lack of competition. If you are down to two banks, then it is a bit restrictive."

Bridge of Allan is also the closest point for those who are attending Stirling University, meaning that the choice of student accounts to which next year's intake can look forward may be drastically reduced.

Political consensus builds against tie-up – but Standard Life renews backing


COUNCILS and pension funds with shares in HBOS and Lloyds TSB are being called on to vote against the proposed takeover.

Alex Neil, an SNP MSP, has written to his party's local leaders across Scotland urging them to take a stand.

In the letter, he states that for reasons such as loss of jobs and competition, "it makes sense to veto this merger and stop all this damage being done to Scotland".

He wants them to apply pressure on council factions with shares in either of the banks to come out against it.

Meanwhile yesterday, Margo MacDonald, the independent MSP, called on Edinburgh's Labour MPs to question the deal.

In an open letter, published today in The Scotsman, she states: "The banks and other financial institutions together create the critical mass that has enabled Edinburgh to attract a wide spectrum of companies with their decision-making personnel based here.

"The proposed merger/takeover of HBOS by Lloyds TSB will endanger this, as Edinburgh's prestige and credibility as a major financial centre will not survive the loss of corporate functions from The Mound."

She adds: "I fully appreciate your duty to support your government and the constraints placed on you by loyalty to your leadership, particularly at a time of political tension, such as now.

"But if you share my concerns about the effect of this takeover on the lives of our constituents, will you approach Gordon and Alistair and ask them to review the likely outcome of the takeover in the light of changed circumstances since they first moved to prevent the collapse of one or both of the banks?"

However, the head of investments at Standard Life Investments, which has a major stake in both parties, further strengthened the Edinburgh-based institution's backing for the deal.

Euan Stirling said: "I think the deal certainly works for both sets of shareholders and most of the stakeholders involved.

"The terms were reached in order to avert further problems in the market for HBOS and, from an HBOS perspective, I think you would need to have a huge appetite for risk to want to see it trading independently again.

"But I also think that Lloyds has made a very good case for the value that accrues to it from the deal."

Mandelson puts family-friendly reforms on ice because of downturn


THE government sparked controversy yesterday when it announced it was looking "afresh" at the cost of new employment rights, including family-friendly reforms.

Lord Mandelson, the Business Secretary, was warned that delaying rights – such as the extension of flexible working – because of the economic downturn would send out the "completely wrong message" and risk hitting the UK's competitiveness.

Ministers were told flexible working could deliver a competitive advantage by improving workers' productivity and attracting the best staff.

The Chartered Institute of Personnel and Development sent out a strong message of support for the expansion of flexible working to parents of children under the age of 16, rather than six at present.

Jackie Orme, its chief executive, said: "The existing right to request flexible working is a model example of light-touch regulation that has helped to change attitudes without causing difficulties for businesses.

"Our research shows that many firms, large and small, are going well beyond the existing regulations in any case, extending flexible working to many more employees than required by law.

"They recognise the positive impact flexible working policies have on their businesses," added Ms Orme.

A spokesman for the Business Department said: "The government is absolutely focused on helping business, particularly small business, to cope with the current economic downturn."

Treasury borrowing of 38bn is highest since Second World War


NATIONAL borrowing has soared to its highest level since the end of the Second World War, in a clear sign that the UK economy is struggling.

The Treasury borrowed some 37.6 billion over the first six months of the current financial year, a 75 per cent rise on the same period the previous year and the largest amount since 1946, official figures showed yesterday.

The sum was just over 5 billion short of the 43 billion the Chancellor, Alistair Darling, had budgeted to borrow throughout the entire 2008-9 period and comes before the country is expected to officially tip into recession.

The money was needed to finance rising unemployment benefit claims as people lost their jobs, and in recognition of the fact that less money than planned was heading to the Treasury in tax receipts as the economy slowed down. The government has also signalled it will bring forward spending on major infrastructure projects, such as train lines in London and new schools and hospitals in England, to ensure firms' order books remain busy.

The borrowing figures, published by the Office for National Statistics, also showed that between April and September, net debt had soared well above the government's 40 per cent target to 43.4 per cent.

By the end of September, debt stood at 645.3 billion, including that taken on by the government when it nationalised Northern Rock. Figures on Friday are likely to confirm the country is tipping into recession.