During the parliamentary debate of the Banking (Special Provisions) Bill 2008, which resulted in the temporary public ownership (TPO) of Northern Rock, a commitment was made that the OFT would publish an annual report assessing any competitive implications of the public support for Northern Rock.
After considering the limited available information, Northern Rock's competitive framework over the period was analysed and in the context of wider financial instability, the OFT has concluded that during the period of analysis, February 2008 to February 2009, public support for Northern Rock did not have a significant adverse impact on competition.
It is important to remember that since Northern Rock was taken into TPO the market has changed beyond recognition and many of the initial concerns about the impact on competition of public support for NR must now be seen in the wider context of extreme financial turbulence.
The report is for this period because it's the first calendar year of temporary public ownership (TPO).
The Competitive Framework was included in Northern Rock's Restructuring Plan which was published in March 2008. The Framework contained specific targets and commitments to ensure that Northern Rock did not gain an unfair advantage as a result of the public support it was receiving.
Given the turbulence in the financial markets and increase in Government support to the banking sector as a whole, the OFT does not plan to produce a Northern Rock Specific Report in the future.
As reported in the Pre Budget Report 2008, in March 2009 the OFT will publish for consultation, a financial services strategy. Following consultation, the OFT will develop a financial services plan. It is anticipated that work conducted within the plan will examine both consumer and competition issues across the financial services sector, including where appropriate the consideration of competition issues relating to public support for banks including Northern Rock.
There is some data which shows that Northern Rock did experience an increase in inflows of retail deposits for a short period (in September and October 2008). These inflows stopped in November and December 2008. At the time of our analysis, the data for the subsequent period did not exist. It should, however, be noted that Northern Rock's Competitive Framework capped the amount of deposits it could accept and the information reviewed by the OFT suggests this Framework is being complied with.
This report was produced in response to a specific commitment made to Parliament by a Treasury Minister during the passage of the Bill leading to the nationalisation of Northern Rock. No similar commitment has been made in relation to other banks. However, the OFT will continue to take an interest in the financial services market and as part of this will consult on a Financial Services Strategy at the end of March.
Before the financial crisis began, the OFT was already conducting a number of projects looking at financial services. These include: the Personal Current Accounts (PCA) market study, the banking test case on overdrafts and the review of the Payments Council.
In line with the Pre-Budget Report 2008, the OFT will publish a Financial Services Strategy for consultation in March 2009. Following that consultation, the OFT will develop a Financial Services Plan. It is anticipated that work conducted within the Plan will examine consumer and competition issues across the financial services sector.
Elements of the assistance given to Northern Rock were required to be notified to the European Commission, in accordance with European Community rules on State aid. The European Commission has already determined that the nationalisation of Northern Rock did not constitute State aid, has cleared some elements of State aid granted to Northern Rock (as rescue aid) and is currently considering the lawfulness of other elements of aid (as restructuring aid).
A strategy setting out the OFT's role in the financial services sector, its desired outcomes for consumers and businesses, how it intends to work with Government and other stakeholders, an approach to the challenges and a clear work programme. Following consultation on the Financial Services Strategy, the OFT will develop a Financial Services Plan. It is anticipated that work conducted within the Plan will examine consumer and competition issues across the financial services sector including, where appropriate, consideration of competition issues relating to public support for banks, including Northern Rock.
The European Commission has concluded that the temporary public ownership of Northern Rock does not, under European Community law, constitute State aid to the extent that the former shareholders are only compensated on the basis of the value of the company without any State support.
At the end of February 2009 revisions to Northern Rock's business plan were announced. Further announcements will be made by Northern Rock and HM Treasury once the details of the arrangements are finalised.
The changes announced in February are too late to fall within the period of study covered by our report. Further, they have not yet been implemented and the details of other signalled changes are not yet known, making it impossible to gather information at this time. The OFT will continue to take an interest in developments to identify any emerging competition concerns.
Both reports are looking at Government actions relating to Northern Rock but they each have a different focus. The NAO report is looking at efficiency issues and value-for-money for the taxpayer in the Temporary Public Ownership of Northern Rock. The OFT report is looking at any significant adverse impacts on competition as result of pubic support to Northern Rock.
We used our market study powers in sections 5 to 7 of the Enterprise Act 2002 to gather information and produce this report.
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