It may smack of histrionics, but to say that the world changed in the week that Lehman Brothers crashed has more than a ring of truth to it.
As global financial markets teetered on the edge of meltdown, a panicked UK Government helped orchestrate a rescue package for a near-collapse HBOS, despite a takeover by Lloyds TSB almost certainly flying in the face of competition rules.
Under normal circumstances a proposed union between HBOS, which is classed as a maverick because it used aggressive pricing in an attempt to grab market share, and the much larger Lloyds TSB would be scrutinised closely by the Office of Fair Trading (OFT) and the Competition Commission.
If past experience is anything to go by, the merger could well have been halted – in 2001 the mooted marriage between Lloyds TSB and Abbey National was blocked over fears of too much consolidation in the banking market.
But these have not been normal times and, faced with the prospect of a 12-month competition investigation, the Government made allowances for the process in the Lloyds TSB/HBOS case to be fast-tracked, taking the view
that securing market stability outweighed normal competition concerns.
But given that the initial panic is over and the Government has since stepped in with a multibillion-pound banking bailout designed to stabilise the banking sector, is its action over Lloyds TSB/HBOS still valid, or does it make a mockery of the competition rules?
These questions are difficult to answer definitively, but what is certain is that, if the merger had been mooted in normal times it would have been referred to the OFT ;and ;the ;Competition Commission and, given what happened with Lloyds TSB/Abbey National, would probably have been halted. But that does not mean that the competition rules have been thrown out of the window.
Not exactly, anyway.
“This has been done using existing legislation,” explains one partner at a top 10 firm. “The Enterprise Act 2002 allows the Government to intervene where there’s a public interest reason to do so. They’ve come up with a new public interest test called financial stability. The final decision-maker in this case isn’t the OFT, but the Secretary of State for Business, Enterprise and Regulatory Reform [Peter Mandelson], so it’s a political decision. He’ll weigh up any competition issues found by the OFT against the benefits the merger could make to financial stability. We expect him to decide that financial stability outweighs the competition issues.”
While this clearly puts a whole lot of power into the hands of politicians, the Government has not actually altered the competition rules, as was the case in Ireland.
As a City partner says: “The Government has given itself a broad degree of discretion for banking mergers, which are now treated like newspapers or defence [which were already covered by the Enterprise Act].”
The competition rules have undoubtedly been watered down when it comes to banking mergers, which is certain to have an impact in the short to medium term. In the longer term, the effect is unlikely to be massive.
As one City partner says: “Long term there’s no indication that anyone thinks the competition laws should change. The factors that are causing the crisis might make people think about more rigorous enforcement later. I think that, largely, competition law in three to five years’ time will be the same as it is now.”
The problem in the short term is that, by taking such interventionist action, the Government has set a precedent that could be repeated in other sectors. Even if it is contained within the financial sector, if the provision is used more than once it could actually serve to decrease the competitiveness of the market.
Clifford Chance’s competition practice wrote in a client briefing: “Each successive use of this mechanism would, in principle, decrease the competitiveness of UK financial markets. The UK competition authorities may have some available options to address such market concerns […] such as referring entire markets to the Competition Commission for investigation.
“However, such investigations can take years to complete and if the anticompetitive effects of the merger are simply that prices increase, it would be difficult for the OFT and the Competition Commission ;to ;characterise
such increases as an abuse of a dominant position, particularly if they are the direct result of a merger that was cleared under the UK merger control regime.”
As for the validity of the Government’s actions, now that the initial panic has subsided and a sector-wide prop has been provided, should it still stand by the HBOS rescue?
“The Government bailout is an interesting issue that’s going to have to be considered,” says one partner at a top 10 firm, “but the deal was done at a time when there was a complete emergency.”
The interesting question, which will be almost impossible to ;answer, ;is ;whether ;the Government ;would ;have intervened to help Lloyds TSB and HBOS if its sector rescue package was already in place. The answer, again, comes down to market stability.
“You would need to have looked at the effect of the Government’s proposals on the stability of the market,” says one City partner. “If the market was unstable, the Government would still have intervened. If it had stabilised, it might well not have.”
With the OFT due to report its findings on Lloyds TSB/HBOS as The Lawyer went to press, it is now up to Mandelson to decide whether the merger should get the green light or not. With the implications at stake, it is not a decision he will take lightly.