Anticipated acquisition by Lloyds TSB plc of HBOS plc Report to the Secretary of State for Business Enterprise and Regulatory Reform 24 October 2008 Contents I OVERVIEW ................................................................................................ 4 Conclusions ............................................................................................... 4 Merger jurisdiction ...................................................................................... 5 Substantive competition assessment ............................................................. 5 Remedies................................................................................................... 7 Public interest consideration ......................................................................... 7 II PROCEDURAL OVERVIEW ........................................................................... 8 III PARTIES AND TRANSACTION.....................................................................10 The parties................................................................................................10 Transaction rationale ..................................................................................10 IV JURISDICTION AND LEGAL TEST ................................................................11 V THE COUNTERFACTUAL ............................................................................13 Introduction to the OFT's general approach to the counterfactual.....................13 The appropriate counterfactual in this case ...................................................14 Conclusion on the counterfactual .................................................................23 VI AREAS OF OVERLAP .................................................................................25 VII PERSONAL CURRENT ACCOUNTS...............................................................27 Market definition........................................................................................27 Horizontal assessment................................................................................29 Conclusion................................................................................................41 VIII BANKING FOR SMES .................................................................................44 Market definition........................................................................................44 Horizontal assessment................................................................................45 Conclusion................................................................................................52 IX MORTGAGES ............................................................................................53 Market definition........................................................................................53 Horizontal assessment................................................................................53 Conclusion................................................................................................58 X AREAS IN WHICH COMPETITION CONCERNS DO NOT ARISE.........................60 Introduction ..............................................................................................60 Savings ....................................................................................................60 Personal loans ...........................................................................................61 Credit cards ..............................................................................................62 General insurance ......................................................................................63 Payment protection insurance......................................................................64 Wealth management ..................................................................................68 Pensions...................................................................................................68 Banking services to large corporations ..........................................................69 Treasury and capital markets.......................................................................69 Asset finance – fleet car hire.......................................................................70 Life insurance............................................................................................71 XI COORDINATED EFFECTS THEORIES CONSIDERED BY THE OFT......................73 Introduction ..............................................................................................73 Financial products sold to larger firms and wholesale banking ..........................74 Financial products sold to personal customers and SMEs ................................74 Conclusion................................................................................................79 XII NON-HORIZONTAL THEORIES CONSIDERED BY THE OFT ..............................80 XIII EFFICIENCIES............................................................................................81 XIV SUMMARY OF VIEWS OF INTERESTED PARTIES ON THE IMPACT OF THE MERGER ON COMPETITION................................................................................84 Introduction ..............................................................................................84 PCA .........................................................................................................84 SMEs .......................................................................................................85 Mortgages ................................................................................................85 PPI...........................................................................................................87 Savings ....................................................................................................88 Personal loans ...........................................................................................89 Credit cards ..............................................................................................89 General insurance ......................................................................................90 XV SUMMARY OF VIEWS OF INTERESTED PARTIES ON THE PUBLIC INTEREST CONSIDERATION ..............................................................................................91 Merging parties..........................................................................................91 Tripartite Authorities ..................................................................................92 Third parties in the financial sector...............................................................92 Consumer interest groups ...........................................................................93 Other representations .................................................................................94 XVI REMEDIES – UNDERTAKINGS IN LIEU..........................................................95 Relevant principles .....................................................................................95 Assessment ..............................................................................................96 XVII ASSESSMENT AND REPORT.......................................................................97 Assessment ..............................................................................................97 Advice......................................................................................................98 ANNEXE 1 – INTERVENTION NOTICE ..................................................................99 ANNEXE 2 – COPIES AND EXTRACTS OF SUBMISSIONS ON THE PUBLIC INTEREST CONSIDERATION ............................................................................................100 Lloyds and HBOS.....................................................................................100 Tripartite Authorities ................................................................................106 Third parties active in the financial sector ...................................................140 Consumer interest groups and other responses ............................................148 3 I OVERVIEW CONCLUSIONS 1. The Office of Fair Trading (OFT) hereby reports to the Secretary of State for Business Enterprise and Regulatory Reform (the Secretary of State) in relation to the anticipated acquisition by Lloyds TSB Group plc (Lloyds) of sole control of HBOS plc (HBOS) which was announced on 18 September 2008 (the transaction). On 18 September 2008 the Secretary of State, in exercise of his powers under section 42(2) of the Enterprise Act 2002 (the Act), gave a public interest intervention notice (the Notice) to the OFT and required it to investigate and report on the transaction in accordance with section 44 of the Act within the period ending on 24 October 2008 (see Annex 1 for the Notice). 2. As required by section 44(4) of the Act, the OFT's report contains four principal 'decisions'. These are that the OFT believes 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 • 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 (SMEs), and mortgages,