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OFT to investigate impact of public funding on banks’ competitiveness

The Office of Fair Trading is to investigate how public funding for banks may unfairly impact on competition in the market.

The watchdog is to develop a Financial Services Plan this year, which will look at how banks that have received taxpayers’ cash could unfairly gain market share as consumers turn to lenders that are endorsed by the government.

A report published by the OFT last week stated that public ownership of Northern Rock did not unfairly impact on competition in the year to February 2009.

The OFT was obliged to produce a report investiga-ting competition concerns when the bank was nationalised in February last year.

Given the lender’s original policy of winding down its mortgage book, the OFT ruled these concerns were not borne out.

But now that Northern Rock has pledged a £14bn boost to mortgage lending over the next two years, worries over competition may be reignited.

The OFT report reads: “Given the significant changes in the sector since the commitment to produce a report on Northern Rock was made the OFT has agreed with the Treasury that this approach is no longer the most suitable.

“It is anticipated that work conducted within the Financial Services Plan will cover consumer and competition issues across the financial services sector.”

The report adds: “This will include consideration of competition issues relating to public support to banks including, where relevant, Northern Rock.”

Northern Rock says it is mindful of the competition concerns ex-pressed by the OFT and that it is working with the Treasury to ensure competition is not hampered in any way.

A spokeswoman for Northern Rock says: “The OFT report demonstrates our compliance with the self-imposed competitive framework in relation to both savings and mortgages in 2008.

“We will be doing further work in conjunction with the Treasury to develop details of our business plan.”

She adds: “As part of this we may need to review our competitive framework in light of changing economic conditions and our aim to offer up to £14bn of new mortgage lending in the next two years.”

Melanie Bien, director of Savills Private Finance, says concerns over competition need to be weighed against the alternative scenario of major lenders being allowed to fail.

She says: “There is probably a case that public ownership affects competition in the market but it’s a tricky situation.

“Without taxpayers’ money propping them up, some banks may fold and then we would not see the boost to lending that comes with government help.”

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