In this case before the Competition Appeal Tribunal Merger Action Group (www.mergeractiongroup.org.uk) challenges the Secretary of State's assertion (a Government discretionary decision, 18 & 31 September) that the takeover of HBoS by LTSB not be referred to the Competition Commission (CC) because the public interest of Financial Stability is greater than competition issues. In effect, Government (and the two banks) either know and accept that competition in UK domestic banking will suffer and/or they have good grounds for believing this merger is so urgently vital in the interest of the stability of the UK financial system that there is no time for a referral, and/or the Government has good grounds for believing this merger would not be against the public interest to have competitiveness among UK banks maintained. The two banks will enjoy roughly 30-40% of UK domestic banking, which is twice the level considered a 'dominant' position. To be in a position of dominance, a business must have the ability to act independently of its customers, competitors and consumers. Establishing if a company is dominant requires a complex assessment of a number of elements but, as a general rule, if a business has a 50% market share there is a presumption that it is dominant. However, dominance has been found to exist where market share is as low as 40% and even 15%. To be a major player in a market only requires 5% market share. Under EU law, Article 82 requires dominance in a substantial part of the European Union, but there is no requirement under Chapter II that a dominant position must be held in a substantial part of the UK, meaning that, in theory at least, dominance could be considered to exist in a fairly small area of the UK e.g. Scotland or North of England or even a sub-region.
Having a dominant position does not in itself breach competition law. It is the abuse of that position (or the potential for likely abuse in the absence of safeguards) that is prohibited. Examples of behaviour that could amount to an abuse by a business of its dominant position include:
- imposing unfair trading terms, such as exclusivity e.g. in factoring by banks;
- excessive, predatory or discriminatory pricing e.g. in mortgages;
- refusal to supply or provide access to essential facilities e.g. SME overdrafts;
- tying e.g. stipulating a customer for one loan product must also purchase all or some of a second product such as insurance.
In this context it is a powerful statement by the OFT that competition will be damaged according to the conclusions of its report, which is why MAG wants the merger referred to the CC. Exceptions may be sought if some other larger benefit of the merger is sufficient to substantially outweigh a loss of market competitiveness. And this benefit should be long term, not just a short term benefit! But, as Sir Ian Burt and Sir George Mathewson reasonably stated (two senior bankers who should know intimately about these things) in their published letter, financial market conditions have changed since 18 September such that financial stability should not be an issue following the Government's intervention (£56bn) to supplement the reserve capital of UK banks of systemic importance. 
Therefore, they say that the benefit of financial sector stability is no longer served by this merger and no longer relevent as a reason for not referring the merger to the CC. The Government based its decision on the views of the FSA, which MAG asserts are irrelevent and/or has failed to respect section 46(2) of the Competition Act (1998) and is seeking an order quashing the Secretary of State's decision pursuant to the power conferred by section 120(5) of the Act.Clearly, stability is a short term concern while market competitiveness is a longer term concern. But, the latter appears to be of substantially less importance to Government (deciding on behalf of the general public interest). The Government's reliance on advice from the FSA is odd insofar as it is the Bank of England, not the FSA, that is responsible for UK financial sector stability. The FSA is responsible for UK financial sector resilience. If the Government's decision had been based on 'resilience' not 'stability' its argument might appear more valid. There is absolutely nothing in the Bank of England's many reports, especially in any of its Stability Reports/Reviews that indicate bank mergers as a factor of interest or concern in this context? The FSA states on its website merely, "The announcement of the proposed merger with Lloyds TSB is a welcome move as it is likely to enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector." There is no basis offered for this claim? The FSA adds that "The merger will be subject to shareholder approval and approval by the FSA, OFT and some overseas regulators."
But, the OFT does not approve. On 24th October it recommended referring the merger to the CC, advice overriden at the discretion of the Secretary of State on 31st October. The report, which the OFT submitted to the Secretary of State on 24 October 2008, contains the following advice and decisions: there is a realistic prospect that the anticipated merger will result in a substantial lessening of competition in relation to personal current accounts (PCAs), banking services for small and medium sized enterprises (SMEs) and mortgages . The OFT's concerns on PCAs and mortgages are at the national (Great Britain) level, while its concerns on SME banking services are focused on Scotland. In addition, the OFT cannot exclude competition concerns arising at the local level in relation to PCAs and SME banking services. No further competition concerns are considered to arise in relation to the other identified overlaps between the parties in retail banking (savings, wealth management, personal loans, credit cards and pensions), corporate banking (banking services to large corporations, asset finance/fleet car hire) and insurance (PPI, life, general), and in the absence of any offer of remedies from the parties, 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. The OFT finds that the combined market share of HBoS & LTSB would be 30-40%!
The challenge by the Merger Action Group (MAG) should be allowed to challenge the basis for the Government's belief i.e. whatever technical advice it received whereby it considered it could anticipate or make unnecessary a full enquiry by the CC. Information required from the two banks on this question are determined to be business-confidential and therefore can be delivered in summary only to MAG and the Tribunal? NOTES
Details of Competition Appeal Tribunal procedures are at www.catribunal.org.uk
Merger Action Group (“the Applicant”), is an unincorporated association of persons and businesses established in Scotland, challenging a decision by the Secretary of State for Business, Enterprise & Regulatory Reform (contained in a document entitled “Decision by Lord Mandelson, the Secretary of State for Business) not to refer to the Competition Commission the merger between Lloyds TSB Group plc and HBOS plc under Section 45 of the Enterprise Act 2002 dated 31 October 2008” (“the Decision”). On 18 September 2008, the former Secretary of State, the Rt. Hon. John Hutton, issued a notice to the Office of Fair Trading (“OFT”) pursuant to section 42 of the Act (“the intervention notice”) stating that the stability
of the financial system in the United Kingdom ought to be specified as a public interest consideration in section 58 of the Act. The Secretary of State further stated that the stability of the UK financial system may be relevant to a consideration by the OFT of the merger situation arising out of the proposed merger
announced by Lloyds TSB Group plc (“Lloyds TSB”) and HBOS plc (“HBOS”) on 18 September 2008 (“the Merger”).
The intervention notice required the OFT to investigate and provide a report to the Secretary of State in accordance with section 44 of the Act within the period ending on 24 October 2008. The intervention notice also indicated that the Secretary of State would lay before Parliament for its approval an affirmative resolution to specify the new public interest consideration under section 58 of the Act. The relevant order completed Parliamentary scrutiny on 23 October 2008 and came into force on 24 October. The new public interest consideration has been added to the Act as section 58(2D). The OFT produced a report under section 44 of the Act dated 24 October 2008 entitled “Anticipated acquisition by Lloyds TSB plc of HBOS plc” (“the Report”)2. The Report includes decisions to the effect that it is or may be the case that arrangements are in progress or in contemplation which, if carried into
effect, will result in the creation of a relevant merger situation and the creation of that merger situation may be expected to result in a substantial lessening of competition (“SLC”) within a market or markets in the United Kingdom for goods or services, including personal current accounts, banking services to small and
medium enterprises and mortgages such that further inquiry by the Competition Commission (“the CC”) is warranted. The Report also provides that any relevant consumer benefits did not outweigh the SLC and it would not be appropriate to deal with the matter by way of undertakings under paragraph 3 of Schedule 7 to the Act. In deciding whether to make a reference to the CC under section 45 of the Act, the Secretary of State is required, under section 46(2) of the Act, to accept the decisions of the OFT as to the creation of a relevant merger situation which may be expected to result in SLC.The Decision states that the new public interest consideration contained in section 58(2D) of the Act, the stability of the UK financial system, is relevant to this case and that taking account only of the SLC and the public interest consideration, the Secretary of State believes that the creation of the relevant merger situation is not expected to operate against the public interest. The Secretary of State considers that the Merger will result in significant benefits to the public interest as it relates to ensuring the stability of the UK financial system and that these benefits outweigh the potential for the Merger to result in the anti-competitive outcomes identified by the OFT. The Decision (www.berr.gov.uk/files/file48745.pdf) states that no reference will be made to the CC (Competition Commission).
REFERENCES
1998 Competition Act - http://www.statutelaw.gov.uk/legResults.aspx?LegType=All+Primary&PageNumber=18&NavFrom=2&activeTextDocId=1455848
Case Name: Merger Action Group v Secretary of State for Business, Enterprise and Regulatory Reform
Case Number: 1107/4/10/08 Date Registered: 28 November 2008
Status: Summary of application published on 1 December 2008. By an Order of the President, made on 1 December 2008, the time for making a request for permission to intervene was abridged until 5.00pm on 2 December 2008. A case management conference took place on 3 December 2008 when HBOS plc and Lloyds TSB Group plc were granted permission to intervene. A hearing has been fixed for 12pm on 8 December 2008 with a time estimate of one day.
Tribunal: President - Sir Gerald Barling, Michael Blair QC, Professor Peter Grinyer
Documents: Order of the Tribunal (Confidentiality ring) - (17Kb) 03 December 2008
Order of the Tribunal - (17Kb) 03 December 2008 (http://www.catribunal.org.uk/documents/Order_proceedings_1107_Merger_031208.pdf)
Order of the President (abridging time for requests for permission to intervene) - (14Kb) 01 December 2008 (http://www.catribunal.org.uk/documents/Order_confidentiality_1107_Merger_031208.pdf)
Summary of application - (42Kb) 01 December 2008
http://www.catribunal.org.uk/documents/Summary_1107_MergerActionGroup_011208.pdf
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From The Scotsman
Published Date: 01 December 2008
By HAMISH MACDONELL
SCOTTISH POLITICAL EDITOR
THE takeover of HBOS by Lloyds TSB was condemned as a "shotgun marriage" yesterday by one of the leaders of the group behind a last-ditch legal attempt to stop the deal. The Merger Action Group (MAG) – made up of businessmen, bank customers and shareholders – is seeking a legal ruling against Business Secretary Lord Mandelson's decision to set aside the Office of Fair Trading's (OFT) concerns over competition policy when he waved through the deal. Group spokesman Malcolm Fraser said: "What we are wanting to do is make a level playing field so other people can look at whether there is an independent option for a stand-alone bank based in Edinburgh. "That is a better bid possible for shareholders than the shotgun marriage that is on the table at the moment." Mr Fraser, an Edinburgh architect who was responsible for the repair and renewal of HBOS's historic headquarters in the city, said the deal with Lloyds TSB would mean the loss of a "vastly important national institution" which would be merged into a "superbank". He added: "We believe at the time the decision to force the merger was made, the decision was unlawful. There were not grounds to make that decision." The Scotsman revealed on Saturday that MAG is to seek the ruling from the Competition Appeal Tribunal (CAT) – a specialist legal body whose function is to decide appeals on competition issues. Tribunal cases are heard by panels chaired by a judge who sits with two experts. The UK government overruled competition concerns raised by the Office of Fair Trading when it gave the deal the green light. Lord Mandelson said at the time that the public interest of "preserving the stability of the financial system" outweighed any potential anti-competitive effects. But MAG claims that the due legal process has been ignored and it is asking the CAT to sit in Edinburgh to hear the case, as both banks are registered in Scotland. The action group hopes to be able to reveal the names of supporters from politics and business over the next few days, but will only do so when those involved have signed up to the group, rather than just announcing their names in advance. The group already has the support of 150 people who have signed up to its website www.mergeractiongroup.org. uk and the leaders hope to have 1,000 public backers by the end of the week. It will cost a "six-figure sum" to pursue the case through the appeal tribunal, but again the organisers believe they will raise the necessary funds. Alex Neil, an SNP MSP and consistent critic of the takeover, said MAG's challenge should win support from "business, savers and investors across Scotland". He said: "The OFT report makes clear that in creating a new 'superbank' the UK government's forced merger of Lloyds TSB and HBOS will harm the interests of customers, businesses and the mortgage market. "Add to that the impact this will have on employment in Scotland and across the UK and it is difficult to see any benefit for anyone other than Gordon Brown or the management of both banks from this deal." HBOS spokesman Shane O'Riordain said yesterday that the legal bid by MAG had "no merit whatsoever". He added: "It is an unnecessary distraction and we would ask this group to reconsider their action. Our recommended transaction with Lloyds TSB is in the interests of all our stakeholders, including those in Scotland."
From MAG's site:
The CAT (Competition Appeal Tribunal) was created in 2002 under the Enterprise Act (Act) to review appeals concerning competition. It has the power to annul decisions in the same way as a judicial review, including decisions made by the Secretary of State in relation to competition. When a merger is announced that could lead to concerns over competition the Secretary of State asks the Office of Fair Trading (OFT) to submit a report to review whether there has been a Significant Lessening of Competition, SLC. The OFT will also assess whether there are any customer benefits that might balance the SLC or whether the parties in the merger will agree to any remedies (such as selling a business) that will alter the SLC. The OFT will then submit its report to the Secretary of State together with its decision whether the merger should be submitted to the Competition Commission. The Secretary of State may overrule the OFT decisions on grounds of public interest such as National Security as set out in the Act. The Secretary of State has the power to create an intervention order to add additional grounds of public interest. Once the merger is referred to the CC, then the CC will make a full report on competition and decide on the remedies including preventing a merger from happening. Any decision in this process may be challenged by an aggrieved person by appealing to the CAT which has the power to quash the decision in a similar way to judicial review. The decision of the CAT can also be challenged through an appeal to the Court of Session.
The CAT is presided over by Sir Gerald Barling QC and has a group of Chairman (High Court Judges) and members (industry experts) from which a panel, usually of three is chosen to review each case. Usually three weeks are given to give the public a chance to submit further applications but this period can be shortened. Further information on the CAT can be found on http://www.catribunal.org.uk.
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