United Kingdom

Author: | Published: 30 Sep 2004
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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.


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:

  1. Does the FSMA unduly distort the competitive structure in particular markets?
  2. Does the FSMA unduly reduce the dimensions of competition in particular markets?
  3. 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
United Kingdom
Tel: +44 20 7248 3000
Fax: +44 20 7248 3001