The Lloyds TSB and HBOS merger found to be in the public interest

23 January 2009

Jeremy Robinson

The Secretary of State has given competition clearance of the Lloyds TSB/HBOS merger after concluding that the merger was in the public interest, despite the OFT’s report  to the Secretary of State for Business, Enterprise and Regulatory Reform, finding that there was a realistic prospect that the anticipated merger will result in a substantial lessening of competition.  The Secretary of State intervened on national interest grounds under the Enterprise Act 2002.  An appeal to the Competition Appeal Tribunal against the Secretary of State’s decision brought by a specially formed grouping “The Merger Action Group” was rejected in a judgment given on 10 December 2008. 

On 18 September 2008, it was announced that Lloyds TSB had reached an agreement to acquire HBOS.  In order for the merger to proceed, shareholder, regulatory and other approvals were required.  On the same day, the Secretary of State issued an intervention notice under section 42 of the Enterprise Act 2002, on the basis that the stability of the UK financial system ought to be specified as a public interest consideration.   This intervention notice required the OFT to provide a report to the Secretary of State pursuant to Section 44 of the Enterprise Act 2002 by 24 October 2008.

At the time of issuing the intervention notice the only specified national interest considerations specified in Section 58 of the Enterprise Act 2002 were national security and newspaper and media public interest considerations.  However, the Secretary of State can modify Section 58 to specify a new consideration.   The intervention notice also indicated that the Secretary of State would promptly lay an order to modify Section 58 before Parliament.

The Enterprise Act 2002 Order 2008, specifying the stability of the UK financial system as a public interest consideration in Section 58 of the Enterprise Act 2002, was laid before Parliament on 7 October 2008, approved by the House of Lords on 16 October, by the House of Commons on 22 October and came into force on 24 October 2008.  It added a new section, 58(2D) to the Enterprise Act 2002 which specifies “the interest of maintaining the stability of the UK financial system” as a public interest consideration for the purpose of public intervention and special merger public interest notices.

This order permitted the Secretary of State to decide whether or not the merger was in the public interest. 

The OFT report, which was submitted to the Secretary of State on 24 October 2008 under Section 44 of the Enterprise Act 2002, states that there is a realistic prospect that the anticipated merger will result in a lessening of competition in relation to personal current accounts, banking services for small and medium enterprises and mortgages.  The concern for regarding the personal current accounts and mortgages covers Great Britain, whereas the banking services for small and medium enterprises is a concern primarily in Scotland.

In relation to personal current accounts, the OFT considered the merger will significantly increase Lloyds TSB’s share of the market, and consequently incentives to compete may be reduced.  The OFT report noted that there was a realistic possibility of a substantial lessening of competition in relation to mortgages, with the combination of the largest and third largest mortgage providers.  It was noted that a cautious approach to a potential lessening of competition in the mortgage market was warranted given the importance of the mortgage business to the UK economy. 

No competition concerns are considered to arise in retail banking, corporate banking and insurance.

The OFT report contains submissions by the Bank of England, the Financial Services Authority and HM Treasury which assess the importance of HBOS to UK financial stability, the likely effect of a failure at HBOS and alternative ways of addressing the problems at HBOS.  The OFT considered the most likely short term outcome, without such a merger, is that the Government would have to intervene, and probably would have brought HBOS into partial or full public ownership. 

The Secretary of State is required under the Enterprise Act 2002 to accept the decisions of the OFT, and also to decide whether it is or may be the case that:

  • the public interest consideration mentioned in the intervention notice is relevant to a consideration of the relevant merger situation; and

  • taking account only of the substantial lessening of competition and relevant public interest consideration, the creation of the relevant merger situation may be expected to operate against the public interest. 

Under 45(6) of the Enterprise Act 2002, the Secretary of State concluded that ensuring the stability of the financial system, justified the anti-competitive outcome which the OFT had identified and that the public interest would best be served by clearing the merger.

The two banks agreed the terms of the acquisition on 18 September 2008.  As a result of the Secretary of State’s decision, and the overturn of the appeal, the final legal approval by the Court of Session in Edinburgh, Scotland was given on 12 January 2009.  The new Lloyds Bank Trading group is due to start trading in January, although it was reported that the Treasury is to own 43.4% of the merged bank after only 0.2% of shares offered to HBOS shareholders and 0.5% offered to Lloyds shareholders were taken up.