Go-ahead for Lloyds TSB merger with HBOS leaves competition law in tatters

Stephen Hornsby, a partner at Davenport Lyons specialising in competition law, says that the Enterprise Act 2002 was meant to ensure that ministers were largely removed from the merger control process.

Ahead of the Act, the Government had maintained that decision-making would become more predictable if mergers were no longer influenced by political considerations. The old test of whether a merger was in the public interest would be replaced with an independent decision on whether there would be a substantial lessening of competition because rivals had joined forces.

Even so, ministers may still intervene in mergers that raise public-interest considerations. And, under a little noticed power, the minister can redefine the public interest with parliamentary approval. The former Business Secretary John Hutton announced in September that he would specify the stability of the UK financial system as a public-interest consideration. This went through after he was replaced by Lord Mandelson in October.

The redefinition had originally been questioned by the Merger Action Group, an association of HBOS shareholders and business customers in Scotland that took Lord Mandelson to the Competition Appeal Tribunal this month. They complained that the merger would reduce choice in the banking sector - which it undoubtedly will.

At the hearing, it became clear that the group was not challenging the Business Secretary's decision to add a new public-interest consideration. Their broader argument that the Government had pre-judged the case for a merger was firmly dismissed last week.

Hornsby says the Scottish businessmen who brought such a "hopeless" challenge had done us all a service by demonstrating that, far from being dead, the old public-interest test could be resurrected by ministers on a case-by-case basis.

"The Enterprise Act did not de-politicise competition policy at all," the solicitor says, "even though we were told that was the intention. This case alerts us to the power to create new exemptions."

As an example, he mentions the motor industry. At the weekend, we saw the stricken US manufacturer General Motors offering partly-paid "sabbaticals" to 5000 staff at the Vauxhall plant in Ellesmere Port, Cheshire.

What would happen, Hornsby speculates, if Vauxhall were "cut loose" by General Motors? Might the British management want to merge with a rival French or Japanese subsidiary that could find itself in a similar position?

In principle, that would be anti-competitive. But the Business Secretary might think that allowing cars to become more expensive was a small price to pay for preserving jobs. In that event, Lord Mandelson would simply need to declare, with parliamentary approval, that maintaining an effective motor industry was in the public interest.

The television industry might be another example, Hornsby suggests. If BSkyB wanted to increase its shareholding in ITV then, subject to restrictions in the Communications Act, parliament might agree that preserving broadcasting channels was equally in the public interest.

But if this catches on, we can expect complaints from those who are left out. The Office of Fair Trading has put a great deal of effort this year into fighting bid-rigging in the construction industry. Why should anti-competitive behaviour be acceptable for bankers and not for builders?

Hornsby's view, which would have sounded almost heretical a few months ago, is that too much competition may be a bad thing - not least because it seems to have encouraged reckless lending by financial institutions.

And once ministers get the taste for intervention, who knows where they will stop? There is currently no restriction on who may own a football club at the moment, since competition rules rarely apply. "If Lloyds and HBOS can merge - something that was, until recently, unthinkable under prevailing competition policy - then anything goes," says Hornsby. "And it probably will."