1 Competition: retail
banking
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6238/07
+ ADD 1
COM(07) 33
| Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report)
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| Legal base | — |
| Document originated | 31 January 2007
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| Deposited in Parliament | 8 February 2007
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| Department | HM Treasury |
| Basis of consideration | EM of 21 February 2007
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee
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Background
1.1 Under Regulation (EC) No 1/2003 on implementation of the competition
rules in Articles 81 and 82 EC the Commission may conduct an inquiry
"into a particular sector of the economy or into a particular
type of agreements across various sectors" if "the trend
of trade between Member States, the rigidity of prices or other
circumstances suggest that competition may be restricted or distorted
within the common market".
The document
1.2 Retail banking, which is defined by the Commission as including
banking services to consumers and small and medium enterprises
(SMEs), remains the most important sub-sector of banking, representing
over 50% of total Community banking activity. The Commission has
estimated that in 2004 retail banking activity in the Community
generated gross income of €250-275 billion (about £172-189
billion), equivalent to approximately 2.0% of total EU GDP.
1.3 A number of factors such as market fragmentation,
price rigidity and customer immobility suggested to the Commission
that competition in the Community's retail banking market does
not work effectively and it decided in June 2005 to open an inquiry
under Regulation (EC) No 1/2003 into the retail banking sector,
in particular in relation to cross-border competition. The Commission
looked at two complementary aspects — the payment cards
market and the markets for current accounts and related services.
Interim reports on these two aspects were published on 12 April
2006 and 17 July 2006 respectively.[1]
This document is a Commission Communication covering the final
report on the inquiry, DG Competition Report on Retail Banking
Sector Inquiry. In large measure the document suggests, after
examining potential problems, how the Commission itself, Member
States, National Competition Authorities (NCAs) and the retail
banking sector could strengthen competition in retail banking
through competition law enforcement and regulatory and self-regulatory
measures.
1.4 The Commission's report examines and discusses
the context for its conclusions under two headings:
- competition in the market for
current accounts and related services, including market characteristics
of retail banking in the Community, market structures and financial
performance, credit registers and banking competition, cooperation,
setting of policies and prices and customer choice and mobility;
and
- competition in the market for payment cards and
payment systems (that is account-based money transfer systems)
— including cashless payments, a single market for payment
services, point-of-sale card payment systems, market concentration
and integration, cardholder fees, merchant fees, interchange fees,
profitability of the payment cards industry, free funding periods
for payment card transactions, membership and governance rules,
cross-border competition in "acquiring" (that is providing
card acceptance services to merchants), payment infrastructures
and multilaterally agreed interchange fees for ATMs and for non-card
payments.
1.5 The Commission says that inquiry has identified
symptoms suggesting that competition may not function properly
in certain areas of retail banking and has confirmed that markets
remain fragmented along national lines, including in retail banking
infrastructures such as payment systems and credit registers,
meaning that integration is far from complete. Amongst the points
the Commission notes are:
- market structures differ considerably
among Member States in terms of both the degree of market concentration
and the identity of leading players;
- key aspects of the infrastructure for retail
banking remain fragmented both on the market side (clearing and
settlement systems and credit registers (of financial information
on individuals)) and on the legal side (tax policies, regulation
and consumer protection regimes);
- significant barriers to entry exist from economies
of scale, the branch network and consumer immobility through to
regulatory barriers such as prudential rules used to block cross-border
mergers or acquisitions and behavioural barriers, resulting from
incumbents' behaviour;
- information asymmetry (that is where customers
lack or are unable to act on full information), low price transparency,
high switching costs, and product tying (that is two or more products
sold as a package when at least one of these products is sold
separately, thus forcing a customer to buy products not necessarily
wanted in order to obtain a specific product) are factors, common
across all Member States, which reduce consumer mobility;
- distribution models for retail banking products
vary to some degree across Member States and according to the
product being sold. Whilst the branch network remains the primary
channel, especially for "full-service" retail banking,
it is increasingly complemented or substituted by other means
such as telephone or internet; and
- while the scope of direct state intervention
in the retail banking sector has narrowed, Member States continue
to intervene in several ways, from the promotion or preferential
treatment of certain bank types to the prevention of cross-border
market entry. But NCAs have been becoming increasingly active
in the retail banking sector and regulators at Member State and
Community level increasingly encourage self-regulation to deliver
market-efficient outcomes.
1.6 On current accounts and related services the
Commission draws particular attention to three competition concerns:
- on credit registers, with respect
to unfair access conditions, partial data sharing and regulatory
barriers;
- savings and cooperative banks traditionally have
had close ties (for example they often run their own payment infrastructures,
have joint risk management and protection scheme for deposits
or have a common business and marketing strategy) which may appreciably
restrict competition either between themselves or in relation
to other actual or potential competitors; and
- in relation to the prices and policies of banks,
information asymmetry, administrative burdens, low price transparency,
product tying and closing charges combine to enhance switching
costs thereby reducing consumer mobility. Immobile consumers in
turn weaken competition by enhancing banks' market power to set
higher prices and creating a barrier to entry to new entrants
hoping to provide full service retail banking.
1.7 The Commission's main findings in relation to
competition in the market for payment systems are:
- payment card fees vary significantly
across Community markets, which may suggest the presence of competition
barriers. It focuses on interchange fees — the inter-bank
fee paid to the card issuer (the bank that issues the payment
card) by the card acquirer (the bank that provides card acceptance
services to the retailer) for each card payment transaction. The
Commission finds that interchange fees magnify card issuers' profits
and that the setting of interchange fees may be subject to the
exercise of market power. Preferential interchange fee arrangements
between local banks may also raise barriers to entry for foreign
banks wishing to join card schemes. It notes an ongoing debate
about how far interchange fees are indispensable to enable the
efficient operation of payment card networks;
- the Commission finds that some membership rules
and governance arrangements may create barriers to competition
in payment card markets. In particular, most card schemes restrict
participation to credit institutions or organisations controlled
by credit institutions. High membership fees may dissuade new
entrants from joining schemes. Certain governance arrangements,
such as the obligation on some members to provide business-sensitive
information without reciprocal data sharing may distort competition
between the member banks; and
- in relation to payment systems other than payment
cards the Commission says systems are not integrated and their
organisation and structures vary significantly. This means that
a bank operating in different Member States must adapt to different
national systems. Operators of clearing systems may create further
barriers to market entry, for example most clearing systems only
admit banks. High joining fees may also act as a barrier to competition.
Interchange fees for credit transfer and direct debit may also
distort competition.
1.8 The Commission concludes that the sector inquiry
has identified four key issues that will need to be followed up
by it and the NCAs:
- the design and operation of
payment systems, including card payment systems;
- credit registers;
- cooperation between banks; and
- the setting of banks' prices and policies, including
product tying.
The Government's view
1.9 The Economic Secretary to the Treasury (Ed Balls)
comments first in relation to current accounts and related services,
noting that the key point of relevance to the UK competition authorities,
the Office of Fair Trading (OFT) and the Competition Commission
(CC), concerns the findings on the setting of the prices and policies
of banks, that is product tying, bank charges and consumer mobility
issues, and saying that all of these issues are being addressed
in one form or other. But he adds that the OFT and CC will be
considering whether there is any more that should be done following
the Commission's inquiry and that his department has made a number
of suggestions in relation to these issues in its response to
the review of the Banking Code.[2]
1.10 On product tying the Minister comments further:
- in 2002 the CC investigated
the supply of banking services to SMEs and found evidence of "complex
monopoly" among the main UK clearing banks;
- in order to strengthen competition and improve
the ability of SMEs to switch, the CC recommended several shorter-term
transitional undertakings along with longer-term behavioural measures;
- the latter included measures to limit the tying
of products such as loans and current accounts;
- in autumn 2002 the main UK clearing banks undertook
not to directly or indirectly require SMEs to open or maintain
a current account as a condition of the granting or maintaining
of a loan or deposit account;
- the OFT has recently completed its review of
the SME market. It still believes that longer-term behavioural
remedies are necessary as switching rates are still low;
- it is likely that the OFT will advise the CC
to discontinue transitional price-controls but to continue with
the longer-term behavioural remedies. The CC should publish its
provisional decision by the end of April 2007;
- the OFT will also think about building longer-term
behavioural remedies into the Banking Code review; and
- there is currently no work on product tying in
the personal current account market.
1.11 On bank account default charges the Minister
says:
- the OFT launched a fact-finding
exercise following its press release of 7 September 2006 noting
that the principles applicable to credit card default charges
were applicable to bank account default charges;
- the OFT will not consider whether a further
detailed investigation of the fairness or level of individual
bank default charges is needed or what solution, market-led or
other might be require until the end of this exercise in March
2007; and
- the UK's "free-banking/cross-subsidisation
model" lies at the heart of what the OFT is tackling in its
current account default charge inquiry (and its related work on
credit cards and payment protection insurance). This pricing model
is inherently opaque and therefore creates the potential for abuse
in terms of pricing and selling practices.
1.12 Turning to issues of consumer mobility the Minister
tells us:
- the CC will shortly be reporting
on its proposed remedies to tackle the competition issues in the
personal current account market in Northern Ireland;[3]
- as solutions to improve consumer mobility (by
improving transparency and switching) dominated the CC's draft
notice of possible remedies, the OFT is keen to wait for the final
publication, which is expected in Spring 2007;
- the OFT will be considering the most appropriate
mechanism, for example self-regulatory measures such as the Banking
Code review, to implement measures to tackle switching costs thereby
enhancing consumer mobility; and
- it should be noted that any changes to the Banking
Code as a result of the Northern Ireland inquiry would apply equally
throughout the UK.
1.13 On payments systems the Minister notes the Commission
says that antitrust enforcement action may be appropriate to address
several of the competition issues identified in the document,
including discriminatory access and governance arrangements and
interchange fees in some payment card schemes, and that any enforcement
action would proceed in consultation with the NCAs. He says that:
- the OFT published a press notice
on 22 February 2007 emphasising that the governance of major card
schemes operating in the UK is primarily at Community and international
level and that, while the Commission is keeping access and governance
arrangements of payments under review, the OFT will not undertake
further work on this; and
- the Commission and the OFT are currently undertaking
separate enforcement action relating to European and UK interchange
fee arrangements.[4]
1.14 Also the Minister reminds us that the draft
Payment Services Directive aims to deliver a Community internal
market in payment services, including credit and debit cards.
The proposal would harmonise the regulatory regime across Member
States and introduce a new Community-wide licensing regime for
non-bank payment service providers. A Payment Services Directive
would also support delivery of the industry-led Single Euro Payments
Area (SEPA) initiative, which is intended to enable efficient
cross-border payments in euros within the Community. The Minister
adds that the Government supports a Directive that would increase
competition in the payment services market.[5]
Conclusion
1.15 This document discusses issues of importance
and topicality to consumers, both individuals and SMEs, of retail
banking services. We recommend it for debate in European Standing
Committee so that Members can examine further the Commission's
findings and the Government's practical responses.
1 See http://ec.europa.eu/comm/competition/antitrust/others/sector_inquiries/financial_services/retail.html
. Back
2
See http://www.bankingcode.org.uk/noticehome.htm . Back
3
See http://www.competition-commission.org.uk/inquiries/ref2005/banking/index.htm
. Back
4
See http://www.oft.gov.uk/news/press/2007/20-07 Back
5
(27104) 15625/05: see HC 34-xvi (2005-06), para 8 (25 January
2006), HC 34-xxxii (2005-06), para 6 (21 June2006) and HC 41-iv
(2006-07), para 16 (14 December 2006). Back
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