Hewitt to mull curb on banks in Lloyds' takeover of Abbey

Patricia Hewitt will face her first test as Secretary of State at the Department of Trade and Industry tomorrow when the Competition Commission's report into Lloyds TSB's planned £19.7bn takeover of Abbey National lands on her desk.

The deal to create a £60bn-banking colossus is highly contentious and many analysts had expected the Government to block it, but the change at the top of the DTI following Labour's election landslide has led to uncertainty. Ms Hewitt, who replaced Stephen Byers, will have to balance Labour's desire to curb companies' power, following accusations that many rip-off their customers, with the government's plans to take decision-making powers on takeovers away from politicians.

The biggest problem with the merger is that it would hand almost 30 per cent of the British current account market to the combined group. A merged Lloyds/Abbey would also overtake Halifax to become Britain's biggest mortgage lender.

"British banks are already criticised for ripping-off their customers by paying low interest rates on savings while charging heavily when accounts fall into the red," said one analyst. "Letting Lloyds and Abbey get together won't improve the situation. I can't see Labour letting this through."

The Commission, which opened its inquiry into the merger five months ago, is expected to recommend that the deal should be blocked unless Lloyds agrees to significant concessions. These could include selling its Cheltenham & Gloucester mortgage and savings specialist or Abbey's entire current account business. Lloyds, however, has said it will walk away from the deal if it asked to sell large parts of itself.

Calls for Lloyds to offload Abbey's internet bank Cahoot are unlikely to satisfy the regulator as it is deemed too small to make a real difference.

Lloyds, led by chief executive Peter Ellwood, last month tried to persuade the Commission that the bank has customers' interests at heart by offering concessions on current accounts if the merger is cleared. These are thought to have included increasing interest rates on some accounts. Other concessions could include selling bank branches to a rival.

Ms Hewitt will have 20 working days to decide whether to block the deal, clear it outright or allow it to go ahead with conditions attached. Although her decision is likely to follow the Commission's recommendation, she has the power to rule on the deal in any way she chooses.

Her decision will have major implications for the entire British banking system with rivals watching closely to see whether further consolidation will be permitted. Barclays is believed to be lining up a white knight offer for Abbey if the Lloyds deal is given the green light. Abbey has already rejected Lloyds' bid as inadequate but its suitor is ready to turn hostile.

Labour plans for a radical shake-up of competition rules, including removing politicians from ruling on takeovers, could affect the outcome. Future policy is also expected to take greater account of the global market rather than focussing on whether merged companies have a too large a share of their industry in the UK.

Such a change could prove positive for Lloyds' ambitions to merge with Abbey National.