No. ME/01009
Report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, given on 13 February 2001 and 20 February 2001, to the Secretary of State for Trade and Industry under section 76 of the Act
ADVICE GIVEN ON 20 FEBRUARY 2001
In this submission I advise further under section 76 of the Fair Trading Act 1973 on the above merger situation, to address in particular the issue of possible undertakings in lieu of reference to the Competition Commission.
The power to accept undertakings in lieu of a reference is best deployed when the competition issues raised by a merger are easily identified and straightforwardly remedied, without compromising the rationale for the merger. As I said in my advice to you of 13 February, in this case I do not believe that it is possible to devise undertakings which would address the concerns identified in such a way as to remove the need for further investigation of the proposed merger. This conclusion does not, of course, prejudge the outcome of any investigation by the Competition Commission or the possibility of devising remedies short of prohibition in the event of an adverse finding.
Lloyds TSB offered some specific undertakings, which were summarised as follows in my earlier advice to you:
Lloyds TSB also made a more general offer to me to discuss 'these or any other possible undertakings' and, if necessary, to agree to a revised timetable, which would entail withdrawal of the Merger Notice which requires you to announce your decision on a reference by Friday 23 February.
In the paragraphs which follow I consider each of the proffered undertakings in more detail.
As I mentioned in my earlier advice, the banks are already taking welcome measures to facilitate switching, by setting new standards in the Banking Code and automating the transfer of direct debits and standing orders via the BACS system by the end of this year. The undertaking offered by Lloyds TSB would go somewhat beyond this, for example by setting tight time limits and offering compensation if they are not met.
I have looked at the evidence on the nature and causes of switching costs in the current account market, such as that in your Department's recent report on switching costs. I am not confident that the changes to the Banking Code, which will happen irrespective of the proposed merger or undertakings in lieu of reference, will have so decisive an impact on the willingness of customers to switch as to remove the competition concerns arising from the proposed merger. The same applies for the relatively modest enhancement beyond the Banking Code measures offered by Lloyds TSB. I would also repeat the point which I made in my earlier advice, that the effect of any changes in ease of switching may depend in part on the competitive structure of the market.
Furthermore, given the information, also referred to in my earlier advice, that switching takes place to a large extent from one 'Big Four' bank to another, the effect on the overall competitive structure of the market of what might only be a moderate increase in switching levels, from what is in any case a very low base, is open to question. Even allowing for an increase in switching levels, the clear possibility remains of substantial lessening of competition as a result of the elimination from the current account market of Abbey and its branch network and the increment to Lloyds TSB's market share which would be created by the proposed merger.
Additionally, as part of the Government response to the Cruickshank Report, the Treasury's Banking Services Consumer Codes Review Group is undertaking a review of the effectiveness of the Banking and Mortgage Codes and is seeking views, particularly on the customer codes for personal retail consumers, by the end of February. It is not possible to say now what will emerge from that review, for example whether it will make recommendations that go beyond what Lloyds TSB is offering. But in any event it is difficult to see that the undertaking offered by Lloyds TSB removes the clear possibility of adverse effects of the merger.
The undertaking proposed by Lloyds TSB to increase transparency would require it to go beyond the requirement of the Banking Code to advise all savings customers of the rates on all savings products at least once a year, by notifying all its personal customers with current accounts, savings accounts and borrowing accounts, and credit card customers of all its personal product rates and charges twice a year, including reference to sources of market comparison of rates (e.g. Moneyfacts, Financial Mail).
While it would be a welcome increase in transparency, the impact of this change would be limited - customers would still need to go to other sources to make comparisons and, since this is also a unilateral proposal by Lloyds TSB, there is no guarantee that the other banks would follow suit to facilitate the comparison. Lloyds TSB has provided me with no information or assessment of its own as to the extent to which their customers might be influenced by such increased transparency. I note that it would require further effort (and expense, since publications containing comparative information are not free of charge) on the part of consumers to make the necessary comparisons with other providers and, if they considered it worthwhile, to switch accounts. Again, it is not possible to say what conclusions the Treasury Review Group will reach but, if the Group concludes that this sort of transparency is important and helpful, one would hope to see it emerge in the Banking Code in any case. Given these factors, I again take the view that any benefit to competition to which such measures might give rise would be insufficient to remove the concerns identified in my earlier advice.
This undertaking was offered by Lloyds TSB in response to possible concerns raised by my officials in the course of their assessment of the proposed merger, that the size of its ATM network post-merger might be sufficiently large to enable it to operate independently of the LINK network, for example by reintroducing charges. As explained in my earlier advice, however, in part because of the adverse consumer reaction to explicit ATM charges when they were introduced, I have concluded that this was not a likely outcome of the proposed merger. The proposed undertaking therefore addresses what was a hypothetical concern and would make no difference to the status quo on charges for ATM transactions.
Lloyds TSB has not so far been able to make an unconditional offer to implement this undertaking, because (given Abbey's rejection of its approach) it does not have key information about the organisation and structure of the Cahoot business, and in particular whether it might have contractual obligations which could cause problems. Moreover, divestment would involve transferring obligations to customers, which may not be possible without their consent.
For these reasons alone, an undertaking to divest Cahoot would not, in my view, be a viable undertaking in lieu of reference. In any case, Cahoot's share of the current account market is very small and its divestment would have a scarcely measurable effect on market concentration. Certainly it would be insufficient to compensate for the loss of a substantial branch-based current account provider and an increase of some 5% to the market share of what is already the largest current account provider.
For these reasons I have taken the view that the undertakings proposed by Lloyds TSB would bring marginal benefit in relation to the major competition question raised by this proposed merger. They do not impact on the significant changes to the market structure which this merger would cause and would not counterbalance the clear possibility of a substantial lessening of competition which, I concluded in my earlier advice, would arise.
I have considered Lloyds TSB's offer to discuss other possible undertakings. Again I have concluded that this offer would be unlikely to produce a sufficiently satisfactory outcome to avert the need to recommend referral. The undertakings that Lloyds TSB has offered so far are (with the exception of the conditional offer to divest Cahoot) relatively modest behavioural remedies, to be set against what is a significant structural change. A more substantial behavioural remedy might ameliorate the structural problem and might offer alternative benefits to set against the potential adverse effects, but it would not resolve it. But in general, I believe that it is not for me, as a preliminary investigator, to weigh the balance between benefit and possible adverse effect - that is a task for which the Competition Commission is designed. For me to delay your decision longer would serve no purpose unless I was clear that I could rapidly secure a satisfactory outcome. I do not have that confidence. It seems to me highly unlikely that Lloyds could, at this stage, offer a structural remedy without undermining its stated purpose of the merger. Yet I find it difficult to identify any obviously satisfactory solution which would not involve structural change. I am, therefore, firmly of the view that reference to the Competition Commission for further investigation is the appropriate course of action in this case. Saying that in no way prejudges the outcome of any such investigation.
This feature requires Javascript and Cookies to be enabled on your browser
Register for email alerts or amend your existing account details here.