UK: 'Too big to fail, but not too big to be unbundled?' a paper by the Chairman of the Competition Commission on the possible scope of any market investigation into banking

Last Updated: 2 June 2010
Article by SJ Berwin's EU & Competition Team

Peter Freeman QC ("PF"), Chairman of the Competition Commission ("CC") contributed a paper to the St Gallen International Competition Forum's third session titled 'Too big to fail, but not too big to be unbundled?' on 20 May 2010 (the "Paper") of his personal views on some of the competition issues around the UK banking sector. The Paper examines various approaches that could be taken to a (currently hypothetical) CC market investigation into the UK banking sector, the possible scope of any such investigation and possible remedies. PF identifies three key issues underpinning the current debate: (1) large-scale state support; (2) concern regarding the scale and profitability of banks; and (3) whether competition has suffered due to the collapse of banks and consolidation in the market. He also makes it clear that the issue of splitting up the banks is one for government, whereas his paper deals with competition. PF's comments on the 'moral hazard' issue, that the banks are too big to fail and therefore have no incentive against incurring excessive risk, only go so far as stating that increased regulation (particularly capital requirements) may not, of itself, be sufficient to curb risk taking.

PF notes that the competition agenda has shifted from that of 2008-2009, when the key concern was to preserve fair competition due to the state support of banks, to a more general discussion as to whether competition in the banking sector needs to be restored or increased. He also remarks that competition concerns in the UK banking sector are not new; there have been a wide range of competition concerns in the banking sector over the past few years. However PF observes that the action taken in relation to these concerns has tended to focus on sub-sectors of the financial services industry, falling short of a comprehensive investigation.

It is in this context that PF identifies that the scope of any market investigation into the banking sector has the potential to be very large (and that the CC has not been daunted by large investigations in the past). However the scope of any investigation will necessarily be limited by the statutory two year time limit on CC investigations. PF identifies the potential scope of the investigation:

"Depending on the terms of reference, such an investigation could potentially cover the supply of banking services provided to personal and business customers (for example SMEs) and to services provided between banks as well as the nature and extent of competition and co-operation between banks. Activities other than lending, liquidity and deposit taking might also be involved (e.g. advisory and capital-raising services by investment banks)."

Regardless of the scope, PF identifies that the essential task of any CC investigation is to assess the individual and collective market power of the banks which they were able to exploit to the detriment of consumers. The CC investigation would follow the usual statutory framework, exploring "the core competition issues in the sector including market definition and structural features of the market, unilateral effects, coordinated effects and customer behaviour." Nevertheless, this would be no ordinary investigation and it would be necessary to consider a number of wider issues. These matters would include the effect of government intervention, the legacy of the Lloyds/HBoS merger and, PF believes, any CC investigation should consider the co-ordination of competition with "wider prudential or moral hazard measures".

Notwithstanding the investigations broader context, PF comments that there will still be the clear need to consider what the focus of a CC investigation should be, for example particular products or services, types of customer or geographic region. The starting point could be an analysis of concentrations, but should then move on to other issues such as barriers to entry and regulation.

If the CC were to find any serious problems this may well result in structural remedies and possibly the unbundling of businesses for competition reasons (as distinct from any measures implemented by the financial authorities to tackle prudential/moral hazard concerns).

Although PF's Paper does not represent the CC's view on a market investigation into the banking sector, it does provide some useful insights into the potential scope of any such investigation and the issues it might seek to address

To view Community Week, Issue 473, 28 May 2010, in full, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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