Northern Rock cleared of competition concerns

11 March 2009

A report from the Office of Fair Trading (OFT) has concluded that the nationalisation of Northern Rock did not damage competition in the financial services sector.
According to the report, there had been no "significant adverse" impact on competition in the banking sector. Previously, there had been concerns that Northern Rock had an unfair advantage over other banks and building societies, especially as its savings customers receive 100% protection on their money, whereas those with other providers are only guaranteed to receive compensation on the first £50,000.  

As part of its nationalisation deal, Northern Rock agreed to keep its share of the savings market  below 1.5% in the UK and 0.8% in Ireland. Last October, it was forced to pull most of its savings range in order to keep to these terms.

It was also restricted to limiting its mortgage origination to no more than 2.5% of the market by value each year.

One issue investigated by the OFT in its report was whether the public perceived Northern Rock to be a safer bank than its competitors, because of its government backing. However, it concludes that public perception of safety has not signifcantly impacted on competition in the marketplace.

The OFT is also satisfied that there are no signs that Northern Rock took advantage of its nationalised status to borrow from wholesale markets and distort the mortgage market by offering more favourable rates.

Change is a-coming
Since the OFT was enlisted by Yvette Cooper, chief secretary to the Treasury, to carry out the report, Northern Rock has been given the go-ahead by the government to increase its lending by £14 billion over the next two years. The move is just one of a host of government and Bank of England measures designed to increase mortgage lending, boost house sales and revive the flagging economy.
The OFT's report disregards this plan, stating it "falls outside the period of the report".

But with fears over the impact on competitiveness in the market potentially resurfacing, the OFT says it will continue to monitor concerns across the financial services sector. This will include Northern Rock, as well as Lloyds Banking Group and Royal Bank of Scotland, which are now both majority owned by the Treasury.

Despite the OFT concluding that competition in the banking sector has not be compromised, it does warn that the fact that Northern Rock is arguably a 'safer bank' than others in the market could have allowed it to easily expand its market share of savings and current accounts, as well as investments products.

While the terms of its nationalisation agreement didn't allow it to take advantage, there is a risk of a longer-term negative impact on competition.

"Consumer harm could follow if depositors and borrowers, post financial turbulence and public support, through inertia are effectively locked-in to products that offer poor rates and do not switch to take advantage of products offering better rates," the OFT warns.

"In this sense, public support could provide Northern Rock with an 'unfair advantage' today that has a negative long term impact on competition."


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