Competition issues are much to the fore in the UK banking
sector, as speculation mounts on the possible emergence of a rival
bid for Abbey from a UK domestic bank to displace the offer made by
Banco Santander Central Hispano. Consolidation and
internationalization are two parallel trends in the financial
services sector, so merger control is not the only aspect of
competition law of concern.
Changes to UK competition law after EC modernization
EC Regulation 1/2003 took effect on May 1 2004. The Regulation
has greatly changed the framework of competition law enforcement
throughout the EU. National competition authorities and national
courts now share the responsibility for the application and
enforcement of Articles 81 (prohibition of anti-competitive
agreements) and 82 (prohibition of abuse of dominance) of the EC
Treaty with the European Commission. As a result of this
modernization of the EC Competition law regime, in the UK the
Office of Fair Trading (OFT) has been given new powers and
responsibilities in relation to the conduct of competition
investigations.
Legal exception regime and the requirement to
self-assess
To harmonize UK competition law enforcement with EC competition
law, notification is abolished and replaced with the legal
exception regime. The Competition Act 1998 (CA 98) is amended
through deletion of sections 4 to 5, 12 to 16 and sections 20 to 24
relating to the Chapter I and II notification systems.) It is no
longer possible to apply for an individual exemption from the
Chapter I prohibition (prohibiting anti-competitive agreements).
Agreements infringing the Chapter I prohibition will be void from
the outset; if the agreement meets the exemption criteria it will
be automatically valid.
Section 9 CA98, which sets out the criteria for exemption from
the Chapter I prohibition (that is, the Article 81(3) equivalent),
contains a new provision to the effect that, in any Chapter I
infringement proceedings, the undertaking seeking to rely on an
exemption will bear the burden of proving that the exemption
criteria are satisfied.
Parallel exemptions (exemptions from the Chapter I prohibition
by virtue of an exemption from Article 81) will now only be
available if the relevant agreement falls within an EC block
exemption regulation or is covered by a Commission decision to the
effect that Article 81(1) does not apply to the agreement or that
the conditions of Article 81(3) are satisfied. Individual
exemptions granted before May 1 2004 will continue to have effect
until they expire or are revoked.
With the abolition of the notification regime, companies must
now carry out a self-assessment as to whether an agreement
satisfies the conditions for exemption. If an agreement does
infringe the Chapter I prohibition, the company should consider
whether the agreement is exemptible in that the benefits it creates
outweigh its anticompetitive effects.
By virtue of the Vertical Exclusion Order, all vertical
agreements (apart from price-fixing) are excluded from the scope of
the Chapter I prohibition. This order will be repealed from May 1
2005. Businesses have until then to bring any vertical agreements
into line with the Act, as necessary. Companies should therefore
carry out a competition audit on their vertical agreements in force
to ensure that they comply with Chapter I.
Powers of investigation
The OFT's power to conduct an investigation under section 25 of
CA 98 is amended to cover cases where the OFT believes that there
are reasonable grounds for suspecting that Articles 81 or 82 have
been infringed. However, the OFT cannot carry out a Chapter I or
Article 81 investigation if there are reasonable grounds for
believing that an agreement is exempt under a block exemption.
Penalties
The OFT's power to impose penalties under section 36 CA98 is
extended to cover infringements of Articles 81 and 82. The
Competition Act 1998 (Determination of Turnover for Penalties)
Order 2004 amends the 2000 Order, under which statutory fines could
be calculated on the basis of the group's UK turnover in the
previous three years. Statutory fines will be aligned by reference
to EC rules so the maximum penalty imposed by the OFT for any
infringement will be 10% of an undertaking's worldwide turnover for
the previous business year.
Changes since the Enterprise Act was introduced
Over a year has passed since the Enterprise Act 2002 (EA) came
into force (the substantive competition and consumer provisions of
the EA came into force in June 2003). Awareness among the business
community of the changes made by the EA is increasing, albeit
slowly. A business survey carried out for the OFT, Competition
Act & Consumer Rights (prepared by Synovale, dated May
2004), showed that, in terms of industry sector, the highest
awareness levels were shown for the banking, manufacturing and
retail sectors, where 35%, 31% and 31% respectively were aware of
the EA.
Criminalization of cartels
The detection and sanctioning of cartels in Europe has become a
top priority. One of the reasons behind the EC modernization
programme (described above) was to free up valuable EC resources to
concentrate on tackling what is thought of as the main competition
concern: cartels. Combating cartels has likewise become one of the
OFT's main priorities. It too benefits from the freeing up of
resources since EC modernization. The EA last year added the
possibility of imposing criminal sanctions on individuals to the
OFT's armoury in its fight against cartels.
Part 6 of the EA gives the OFT new powers to investigate
individuals suspected of involvement in hard-core cartels. The EA
makes it a criminal offence for an individual to dishonestly agree
with one or more persons that two or more undertakings (at the same
level in the supply chain, that is, horizontal agreements) will
engage in the most serious cartel activities: price-fixing,
market-sharing, bid-rigging or limiting production or supply. The
new offence carries the maximum penalty of conviction of five
years' imprisonment and/or an unlimited fine.
The EA also introduced increased investigatory powers enabling
the OFT to target both the undertakings involved and the main
individuals leading those undertakings into cartel activity. This
includes powers to require individuals to answer questions and
provide relevant information or documents, and allows the OFT to
enter premises under warrant to take possession of relevant
documents. The EA amended the Regulation of Investigatory Powers
Act 2000 (RIPA) so that the OFT can now conduct intrusive
surveillance of residential premises, including hotels and private
vehicles, when investigating criminal cartels and to install covert
cameras or listening devices. To safeguard against abuse and ensure
a proportionate response, surveillance requires sign-off from the
chairman of OFT and the Office of the Surveillance Commissioners.
The OFT was granted additional powers under RIPA in January 2004 so
that the OFT is now permitted to use direct surveillance (for
example, watching someone's office) for cartel investigations under
both the EA and CA 98. (On January 6 2004, the OFT published
guidance explaining how it will exercise powers for investigating
suspected criminal cartels and on August 31 2004, published two
further codes of practice explaining how the OFT will use its
powers to manage covert human intelligence sources and to use
covert surveillance.)
With the introduction of the EA, executives or other
decision-makers in financial services firms operating in the UK now
need to be aware of both the civil and criminal consequences of
engaging in cartel activity. Price agreements (such as, agreeing
uniform maximum fees, or other types collusion on prices and rates)
constitute hardcore infringements of competition law and are
usually the main focus of attack from competition authorities.
Nevertheless, all multilateral interchange fees that banks pay to
each other as participants in payment systems (either remote, such
as debit transfers, or face-to-face, in the form of debit or cards)
are usually considered acceptable if there are legitimate
cost-allocation devices. Technical cooperation between financial
service operators also usually does not cause concern.
It is also important for individuals to be fully aware of the
options available to them should they become subject to a criminal
cartel investigation in the UK. For example, the OFT can grant
no-action letters to individuals who blow the whistle on cartels
and cooperate fully with an investigation, guaranteeing them
immunity from prosecution (but not in Scotland). This is similar to
the leniency regime under CA98, which has proved successful (half
of the OFT's administrative investigations now result from
leniency). But some care is needed when deciding whether to go down
this route. Several conditions attach to no-action letters - the
individual has to: admit to the cartel offence; refrain from
further participation (unless directed to do so); provide all
information it has on cartel activity; and maintain continuous and
complete cooperation throughout the investigation.
Recent cases in the financial services sector -
cartels
Competition authorities have been successful in uncovering
cartels in the financial services sector and this is likely to
continue. The European Commission has been particularly active in
this area and investigations have produced some high-profile
results.
For example, in June 2002, the Commission imposed fines
totalling €124.26 million ($151.82 million) on eight Austrian banks
for their participation in a price-fixing cartel. This followed
dawn raids in June 1998 that unearthed a highly institutionalized
price-fixing scheme (through CEO's meeting as the so-called Lombard
Club), which covered the whole of Austria and all banking products
and services.
More recently, the Commission announced on July 8 2004 that it
has sent a statement of objections to Groupement des Cartes
bancaires (GCB) and to nine French banks, which are all members of
GCB's board of directors, in relation to a suspected infringement
of Article 81(1). This followed dawn raids conducted in May 2003 on
GCB and banks suspected of being party to secret market-sharing
agreements.
GCB is an economic interest grouping comprising 155 banks and
manages the French payment card system. The Commission suspected
that there were secret agreements to share the market between the
large banks and restrict competition from new entrants offering
cards. New charges imposed by GCB (increasing costs by up to €23 a
card a year) meant new entrants had been forced to cut back plans
to introduce new cards.
So far no criminal investigations have been carried out under
the EA but it would not be surprising to see the first
investigation soon. The OFT in its Annual Review 2003/04 stated its
commitment to "investigate carefully - together with the Serious
Fraud Office (and the Crown Office in Scotland) - potential
criminal cartel offences."
New merger control regime
In the EU there still remains a number of suppliers of financial
services, and merger notifications have for the most part not given
rise to competition concerns. However, it is recognized that the
market is becoming increasingly consolidated and with that
competition concerns are likely to increase with the
ever-decreasing number of players on the market.
The EA brought changes to the UK merger control regime and much
of the merger provisions in the Fair Trading Act 1973 have been
replaced. The biggest changes are:
- Removal of ministerial involvement. Decision-making on
merger control lies (with exceptions for national security) no
longer with the Secretary of State but with the OFT and the
Competition Commission (CC) as specialist, independent
competition authorities.
- There is a new jurisdictional test - the turnover test
(replacing the old assets test), which is met if the target
company has a UK turnover of £70 million ($125 million). The
share-of-supply-test remains the same: it is met if the merging
parties will together supply at least 25% of goods or services
of a particular description, either in the UK as a whole or in
a substantial part. The test is only met if the share of supply
increases as a result of the merger. Notification of a merger
remains voluntary.
- Mergers are generally assessed against a pure competition
test, rather than the wider public interest test that formerly
applied. Mergers are prohibited, or remedies required, if they
would result in a substantial lessening of competition (SLC).
In practice, this test has been applied for some years.
After the appeal of the original decision not to refer the
proposed acquisition by Torex plc of iSoft plc to the Competition
Commission, the OFT has had to revise its guidance on when a
relevant merger will be referred. If the OFT believes that a
transaction, satisfying one of the jurisdictional tests set out
above, will or may result in SLC, then it must either refer the
transaction to the CC or, if appropriate, seek undertakings from
the parties in lieu of a reference. If referred, the CC will
conduct a full investigation.
Recent cases in the financial services sector - merger
control
In the financial services sector, there have so far been six
merger notifications to the OFT under the EA, two in 2004 and four
in 2003. None of these notifications have resulted in a referral to
the CC.
Two recent mergers considered by the OFT show that, despite
consolidation, many areas of the financial services sector remain
competitive, with the increased globalization of the sector.
The OFT cleared the completed acquisition by The Thomson
Corporation of TradeWeb Group LLC on July 23 2004. The OFT found
that the parties overlap in the provision of post-trade
pre-settlement processing (PTP) services for fixed income
securities (FIS) trading. Thomson provided PTP through Omgeo LLC (a
joint venture). Tradeweb had limited presence in the UK and did not
compete directly with Omgeo. At the horizontal level it was found
that the current overlap was limited. Concerns raised by third
parties regarding foreclosure of the trade execution market, given
that it and PTP services were highly complementary, were dismissed
by the OFT.
On February 27 2004, the OFT cleared the proposed merger between
Bank of America Corporation and FleetBoston Financial Corporation,
finding the merger would not result in a substantial lessening of
competition. The OFT found that, although there were overlaps
between the parties in product markets in the UK (provision of
corporate banking, foreign exchange services and derivatives
trading services), the combined share of supply of these products
was low and the increment with the merger small. In addition, the
OFT found that there is a broad range of competitors active in
these sectors in the UK (including JP Morgan, Citigroup, and
Deutsche Bank) and the banking industry, particularly provision of
corporate banking services, appears to be becoming increasingly
globalized, widening the possibilities for established banks abroad
to begin offering products in the UK.
Market investigations in the financial services
sector
The financial services sector has been the subject of a number
of market studies.
In March 2004, in its first market investigation reference to
the Competition Commission under the EA, the OFT referred the
supply of store card services after its own study into the
sector.
In March 2004, the OFT set up a Payment Systems Task Force to
examine competition in payment systems. The Task Force issued a
questionnaire on March 15 2004 seeking views on payment systems
relating to access, pricing, price transparency and governance. (A
report on the results has not yet been published.) This follows on
from the OFT's report on payment systems (both clearing systems and
payment cards) published on May 22 2003 (the Payment Systems
Report).
The Members Forum rules
In the Payment Systems Report, the OFT considered the Mastercard
UK Members Forum rules and access to credit and debit card schemes
and merchant acquiring by non-bank bodies. The OFT's preliminary
findings were that the forum rules restrict competition because the
multilateral interchange fee is set too high. The OFT is continuing
an investigation into the Mastercard interchange fees under the
CA98 and is in talks with Mastercard.
In relation to access to credit and debit card schemes and
merchant acquiring by non-bank bodies, the OFT is concerned that
the cost of merchant acquiring facilities is such that smaller
retailers are not able to secure competitive rates as they lack the
buy power of their larger competitors. The OFT is considering
whether any action is needed after the conclusion of the appeal of
the European Commission's decision in August 2001 on Visa's
rules.
Changes to Banking Code rules
In the Payment Systems Report, the OFT recommended changes to
the Banking Code rules regarding floats (operated by banks in
non-simultaneous transfers of money and clearing practices). The
OFT concluded that, though the charges and costs of the clearing
system do not adversely affect competition, some changes should be
made to Banking Code rules on clearing.
On April 30 2004, the OFT recommended several changes to the
Banking Code.
Firstly, the OFT recommended that changes be made to the system
of floats. When some payments are made (for example, by standing
order or by telephone and internet), after money is removed from
the payer's account, the bank will hold the money for 2 days before
paying it into the payee's account. This float can be invested in
those two days and earn additional revenue, which banks have kept,
without paying any interest to customers in respect of the two-day
period. The OFT has said that payments from interest bearing
accounts should accrue interest for the payer in respect of the two
days in which they are held as floats by banks.
Also, the OFT has recommended that, if the payer is overdrawn or
becomes overdrawn because of the payment, they should not be
charged overdraft interest for the two-day period.
The reasoning behind these two recommendations is that customers
should receive some benefit from the float.
The OFT has further recommended that banks inform customers in
advance of their clearing practices, including clearing times for
payments and receipt of funds. Banks should also make explicit any
deviation from central minimum clearing times. Being aware of
clearing practices is of benefit to customers by assisting them to
manage cash flows. Transparency in this area would enable customers
to exercise more informed choices about which banks they use. The
Banking Code Standards Board is reviewing and will announce any
changes in September. These will come into force in March 2005.
Investigations under the Financial Services And Markets Act
2000
The OFT is responsible under the Financial Services and Markets
Act 2000 (FSMA), which regulates financial services and markets,
for keeping under review the rules and practices of the Financial
Services Authority (FSA), recognized investment exchanges and
recognized clearing houses. If the OFT considers that any of the
rules or practices have an adverse effect on competition, it is
required to report this finding to the Treasury, Competition
Commission and FSA.
Review of impact of FSMA on competitiveness
In November 2003, the OFT announced that it would carry out a
review of the impact of the FSMA on competitiveness in the
financial services sector as part of a broader government review of
the impact of the FSMA. This review is divided into three stages.
The first stage develops a methodology for assessing the impact of
the FSMA. The second stage applies that methodology and assesses
the impact of the FSMA on competitiveness in the financial services
sector. The third stage will identify particular areas in the
financial services sector that require more in-depth scrutiny.
The OFT published the first stage of the review in April 2004.
The methodology was developed by a firm of independent economic
consultants, OXERA.
The methodology sets three questions for the review to
answer:
- Does the FSMA unduly distort the competitive structure in
particular markets?
- Does the FSMA unduly reduce the dimensions of competition
in particular markets?
- Does the FSMA duly facilitate market functioning in
particular markets?
The second stage of the review will be carried out by OXERA and
completed by late 2004.
Review of London Stock Exchange's (LSE) annual issuer
fees
After an increase in some of the LSE's annual issuer fees during
2002 - 2003, the OFT decided to investigate the increases under the
competition scrutiny provisions of the FSMA. During the
investigation, the LSE agreed to reduce the annual issuer fees
charged to UK companies whose shares are traded on its main market,
and to reduce fees to companies listed on the AIM (effective from
April 1 2004) and not to increase them for a further two years.
After the LSE's price reduction, the OFT decided that there was no
adverse effect on competition and there was no need for a CC
investigation.
Author
biographies
Alastair
Gorrie
Coudert Brothers
Alastair Gorrie specializes in EU and competition law, including
UK competition law. He also advises on customs and international
trade matters and international commercial law. His areas of
industry expertise include automobile and telecommunications, media
and technology.
Gorrie's experience in the area of competition policy includes
advising on: the application of the merger control regimes,
including making the necessary filings and contacts with the
authorities; commercial conduct with respect to dominance and
abuse, including replying to statements of objections and appeals;
investigations for participation in cartels, including replying to
requests for information and statements of objection, attendance at
oral hearings and negotiations with the authorities; and
constructing and implementing competition law compliance
programmes, including dawn raid advice. In the telecommunications
field, he advises on both the regulatory and competition
aspects.
In the area of customs and international trade, Gorrie advises
on customs classification, valuation and origin issues and customs
procedures; market access issues; export control; and examining
obligations under the WTO and bilateral trade agreements. He also
advises on EU single market matters, including product
authorizations, labelling and packaging; parallel trade;
advertising and marketing; and public procurement rules.
Additionally, Gorrie advises on international commercial law
matters, including drafting distribution, agency, commissionaire
and licensing agreements; and managing multi-jurisdictional
assignments.
Tim Miller
Coudert Brothers
Tim Miller specializes in UK and EU regulatory and competition
law.
Tim has advised on issues including both making and defending
Chapter II and Article 82 complaints to the Office of Fair Trading
in the UK and the European Commission respectively concerning the
abuse of a dominant position. He has advised companies in various
industrial sectors (for example, financial services, energy,
chemicals, telecoms, film, sports and household products) on
various aspects of UK and EU competition law.
Recent competition law work has included Chapter II advice on
launching a new product in the financial services market, merger
control, analysis in the electricity industry and state-aid work in
sport.
Coudert Brothers
60 Cannon Street
London
EC4N 6JP
United Kingdom
Tel: +44 20 7248 3000
Fax: +44 20 7248 3001