Hewitt accepted the findings and recommendations of the Competition Commission and the advice of the Director General of Fair Trading, both published today, that the merger may be expected to operate against the public interest.

In announcing her decision, Hewitt agreed that the merger should be prohibited. "This is because it would reduce competition in the markets for personal current accounts and banking services for small and medium sized enterprises, with the adverse effects in both markets of higher prices to customers and reduced innovation," she says.

The Competition Commission noted that personal current accounts (PCAs) were the core product in personal banking. The merger would increase the share of the PCA market held by the four leading banks (Barclays, HSBC, Lloyds TSB and RBS/NatWest - the big four) from 72 to 77 per cent. Within that Lloyds TSB, already the market leader, would increase its share from 22 to 27 per cent. The merger would also remove one of the main sources of competition to the big four.

The Commission concluded that it was important for competition that there are well-established rivals to the big four banks because:
* the entrenched position of the big four remains strong;
* there is very little switching between banks by customers;
* telephone and Internet-based providers, as alternatives to branch-based (multi-service) providers, remain niche players only;
* branch-based players entering the industry in the last 10 years have grown only slowly despite offering better terms than the big four.

The Commission considered that Abbey National was an important force for competition in the PCA market, regardless of whether the proposed merger between Bank of Scotland and Halifax proceeded. It concluded that the acquisition of Abbey National by Lloyds TSB could be expected to lead to higher prices and a loss of innovation.

In SME banking, the Commission concluded that the market was highly concentrated, and dominated by the big four. The Commission noted that Abbey National was only a recent entrant to this market, but considered that its brand name, national network of branches and presence in personal and some business markets made it one of the very few players outside the big four able to compete in the SME market.

The Commission accepted that the merger would yield some efficiency savings. However, it did not consider that these would be passed on to consumers in reduced prices. It also concluded that the merger would harm consumer choice, with the possible loss of existing Abbey National products.

The Commission considered a number of possible remedies, including the divestment of existing Lloyds TSB or Abbey National businesses, including Cheltenham and Gloucester and Cahoot; the divestment of large numbers of bank branches including their customer base; undertakings regarding the terms of individual products to be offered by the merged group; and steps to improve customer information. It concluded that such steps would not be effective and raised practical problems of implementation.

In a brief statement, Lloyds TSB responded: "The financial services market in the UK is a highly competitive market. We remain firmly of the view that a combination of Lloyds TSB and Abbey National would not have impacted adversely on competition."