No. ME/01009
Report under Section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 18 June 2001, to the Secretary of State under section 86(1) of the Act
I recommended to your predecessor in my advice of 13 February that he should refer this merger to the Competition Commission (CC). I expressed concern that the proposed acquisition would lead to the elimination from the market of one of the most significant branch-based competitors to the largest four banks, giving rise to a clear possibility of a substantial lessening of competition, primarily in the market for personal current accounts, where it would strengthen the position of what was already the largest provider. I suggested that increased concentration in this market was to be seen in the context of existing (albeit possibly diminishing) barriers to entry and expansion, and customer inertia characterised by low levels of switching.
In further advice, provided at the request of Mr Byers on 20 February, I explained why I did not consider that accepting undertakings in lieu of reference would be appropriate. Mr Byers accepted my advice, and referred the merger to the CC on 23 February.
The CC found that a merger situation qualifying for investigation existed, on the basis that the assets test in the Act was satisfied. The analysis in their report examines in depth the competition concerns which led me to recommend reference. The CC conclude that the merger may be expected to operate against the public interest with the specific adverse effects that prices would be higher, and customer choice and innovation would be reduced, compared with the situation that could be expected to arise in the absence of the merger. Their concerns relate not only to the market for personal current accounts, but also to the market for banking services to small and medium-sized enterprises - which, as you know, is the subject of an ongoing CC inquiry under the complex monopoly provisions of the Act.
The CC reviewed various possible remedies short of prohibiting the merger, including divestment of businesses, divestment of branches, and undertakings on products and prices. They concluded, however, that - considering the nature and extent of the adverse effects that they had identified - prohibition was the only effective remedy. In their view, the remedy of prohibition is both necessary and proportionate to the adverse effects.
I agree with the CC's conclusions as to the effects of the merger on competition and the public interest, and with their proposed remedy of prohibition. I recommend that you ask me to obtain section 88 undertakings from Lloyds TSB to implement this remedy.
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