On 10 March 2009, a year after nationalisation, the Office of Fair Trading (OFT) published its report on the impact of public support for Northern Rock on competition in financial services.

The OFT's overall findings

The OFT has concluded that public support during the period February 2008 – February 2009 did NOT have a significantly adverse effect on competition.

The report did not consider the impact of Northern Rock's announcement of 23 February 2009 that it would increase its mortgage lending by up to £14 billion over the next two years. The OFT did nonetheless expect that the increase in mortgage lending would mean that "the impact of public support for Northern Rock may be more significant in the future".

However, the OFT notes that it is unable to draw definitive conclusions, in part due to the fact that the data available does not represent "normal market conditions". No-one can be sure when normal market conditions will return. This will cause problems for the OFT's ongoing review of this area in its Financial Services Plan (see below).

The scope of the report

Specifically, the OFT report studied the effect of the Northern Rock nationalisation on:

(a) the markets for personal current accounts, savings and investment products, and

(b) the mortgage market.

The markets for personal current accounts, savings and investment products

On the markets for personal current accounts, savings and investment products, the concern was that the public perception of Northern Rock as "safer" than other banks might cause distortions. On the basis of the "available information" and Northern Rock's small market shares, the OFT concluded that any such adverse competition impacts are "likely to be minimal or insignificant".

The mortgage market

On the mortgage market, the concern was that competition might be skewed if Northern Rock were able to take advantage of a lower cost of capital to offer mortgages at lower prices and increase its market share. The OFT has, however, concluded that it is unlikely that Northern Rock would be able to use public support as a means to access funding at rates likely to distort competition in the mortgage market.

Financial Services Plan

The Government committed during the passage of legislation to nationalise Northern Rock in February 2008 that the OFT would publish an annual report on Northern Rock. However, it seems that this will be the only report of its type, as the OFT has announced that future review of Northern Rock will be carried out within its Financial Services Plan.

The OFT's Plan is expected later in 2009, following a public consultation to be launched this month on an OFT Financial Services Strategy. It is expected to cover consumer and competition issues across the financial services sector, encompassing where appropriate consideration of competition issues relating to public support to banks "including, where relevant, Northern Rock". This will presumably take into account the upheavals in financial services markets over recent months and the European Commission's evolving guidance on state aid in the financial crisis.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 11/03/2009.