of course I would not like this popping up on my web site...and if it did I would contact Linkexchange and request that these kind of banners are not acceptable on my site. If they can control It would appreciate it. If not,I will have to use a different service. You should have ask them in a mature way ...Can we work this out, Instead of coming here and complaining.
About advertising competitors...you now know to ask if it is possible to keep their ads off of your page. It's probably is not possible. If you have good content your visitors won't leave and if they did they will come back. I personally hope that visitors have been to a competing page. That way they know the difference.
I think you should confront them in an adult way and see if things can be worked out. If you had a banner business...would you turn away money or would you descriminate.