Written evidence submitted by the Competition
Commission
This note provides an overview of the role of the
Competition Commission ("CC") and a summary of the CC's
inquiries relating to aspects of the banking and financial services
sectors during the last 10 years.
ROLE OF
THE CC
The CC is an independent public body which conducts
in-depth inquiries into mergers, markets and the regulation of
the major regulated industries. All of the CC's inquiries are
undertaken following a reference made to it by another authority,
most often the Office of Fair Trading (OFT) (which refers merger
and market inquiries), or one of the sector regulators (which
can refer markets within their sectoral jurisdictions or make
regulatory references in relation to price controls or other licence
modifications) or as a result of an appeal from a decision of
one of those sector regulators.[67]
Under the Enterprise Act 2002 (the Act), the OFT
can review mergers to investigate whether there is a realistic
prospect that they will lead to a substantial lessening of competition
(SLC). The OFT may seek undertakings from the merging parties
to address any competition concerns. If that is not possible it
may refer the merger to the CC for an in-depth investigation.
The CC has wide ranging powers to remedy any competition concerns,
including preventing a merger from going ahead or requiring a
company to sell off part of its business. In exceptional circumstances
where public interest issues are raised, the Secretary of State
may intervene as provided for in the Act, and may prevent a merger
from being referred to the CC or may make a merger reference himself.
The Act also enables the OFT (and the sector regulators)
to investigate markets and, if they are concerned that there may
be competition problems, to refer those markets to the CC for
in-depth investigation. In market investigations the CC has to
decide whether any feature or combination of features in the market
prevents, restricts or distorts competition, thus constituting
an adverse effect on competition (AEC). If the CC concludes that
this is the case, then it must seek to remedy the problems that
it identifies either by introducing remedies itself or by recommending
action by others.
Undertakings or orders are the primary means by which
remedies are given effect under the Act (and the Fair Trading
Act 1973). The OFT has a statutory duty to keep these undertakings
under review, and if it considers that due to a change of circumstances
a set of undertakings or an order should be varied or terminated,
then the OFT refers it for consideration by the CC. Responsibility
for deciding on variation or termination of undertakings lies
with the CC.
In relation to regulatory references, the CC's role
is dictated by the relevant sector-specific legislation.
SIZE, STRUCTURE
AND OPERATION
OF THE
CC
The CC operates under a Chairman (Peter Freeman)
and Chief Executive (David Saunders). CC governance is provided
by the CC's Council comprising in addition the three Deputy Chairmen
and three non-executive members.
The CC employs about 140 staff, the great majority
of whom are professionals (primarily lawyers, economists, business
advisors and inquiry staff).
The CC also employs about 35 part-time Members,
who are experienced industry figures, professors of economics,
competition lawyers, etc. Members are paid only for the inquiries
on which they serve and, whilst appointed by the Secretary of
State,[68]
are completely independent of political control.
Inquiries are conducted by a small Group of CC Members
(selected and appointed to the inquiry by the Chairman), normally
led by the Chairman or one of the Deputy Chairmen. Decisions in
individual cases are taken by consensus[69]
by the Group (who are by statute sovereign) working closely with
the expert staff team.
The CC is widely recognised for being highly transparent:
inquiry Groups hold hearings with parties and publish evidence,
working papers and provisional decisions to ensure that parties
are appraised of the issues under consideration. The CC publishes
an administrative timetable for each inquiry and is bound by a
statutory time limit for determining competition cases.[70]
Whilst the CC's focus is primarily on competition,
it necessarily takes other public policy issues into account,
particularly when considering remedies.
The CC's work on mergers and markets is subject to
judicial review by the Competition Appeal Tribunal (CAT), and
on regulatory matters also by the general courts.
THE CC'S
INQUIRIES RELATING
TO THE
BANKING AND
FINANCIAL SERVICES
SECTORS
The CC has completed six reports on topics within
the banking and financial services sectors over the past 10 years.
Four of them were under the 2002 Act:
— Payment
Protection Insurance, January 2009 (followed by remittal November
2009-October 2010).
— Northern
Irish Personal Banking, May 2007.
— Home
Credit; November 2006.
— Store
cards; March 2006.
Two earlier reports were made to the Secretary of
State under the Monopoly and Merger provisions of the Fair Trading
Act 1973:
— SME
Banking - a monopoly inquiry—March 2002 (reviewed August
2007).
— Lloyds
TSB/Abbey National—a merger inquiry—July 2001.
Details of these inquiries are set out in Annex A.
Annex A
SUMMARY OF THE CC'S INQUIRIES IN THE BANKING
AND FINANCIAL SERVICES SECTORS
PAYMENT PROTECTION
INSURANCE (February 2007-January
2009 followed by remittal November 2009-October 2010)
Terms of reference and status of the remittal
— The
reference followed a super-complaint from Citizens Advice and
covered the supply of all PPI services (except store card PPI
services) to non-business customers in the UK. The CC reported
on 29 January 2009, requiring a prohibition on selling PPI at
the same time as credit - the point-of-sale prohibition (POSP),
a ban on selling single-premium PPI policies (where a multi-year
policy is paid for in one up-front fee, added to the cost of the
loan; the FSA took action on this in parallel and there are now
no single-premium personal loan PPI policies sold) and various
remedies to increase and improve information flow and transparency.
— On
30 March 2009 Barclays challenged aspects of the CC's final report
including inclusion of the POSP in the package of remedies. Lloyds
and Shop Direct Group Financial Services Ltd (which sells retail
PPI through brands such as Littlewoods) intervened in support
of Barclays; the FSA intervened in support of the CC. In October
2009, the Tribunal upheld the CC's conclusions as to the competition
problems in the market but ruled that the CC must consider further
the inclusion of the POSP, taking account of the possible loss
of convenience for consumers in no longer being able to buy PPI
at the same time as credit.
— Following
a remittal from the CAT in November 2009, the CC carried out a
detailed analysis of the impact of the POSP on customers' convenience,
including conducting a customer survey. In October 2010 the CC
confirmed the POSP for all forms of PPI except retail PPI (a small
part of the overall PPI market).
Product market
— PPI
services are insurance services supplied to protect a borrower's
ability to maintain credit repayments in the event that the borrower
suffers an accident and/or sickness and/or unemployment and, under
some policies, death. Short-term income protection (short term
IP) sold alongside credit was found also to be PPI - whilst the
sales focus is on a customer's income rather than outgoings, the
policy typically insures the same events in the same way, with
the same benefits. PPI is predominantly sold through three distribution
channels: face to face contact in branches (over half), over the
telephone, and over the internet.
— Most
PPI policies are sold by credit arrangers (banks, building societies,
mortgage intermediaries) at the point of sale of the credit being
issued but there are a few providers of PPI policies that do not
also supply the credit to be insured (ie stand-alone PPI).
— The
CC found that PPI sold by an individual credit arranger is not
in competition with other credit arrangers' products (though is
in competition with the very small stand-alone PPI/short-term
IP market), hence each credit arranger selling PPI is a virtual
monopolist.
— Given
the market definition, markets are essentially monopolies. In
terms of share of supply, the newly-merged Lloyds Banking Group
has 40-50% of gross written premiums.
Key issues
— The
CC found there to be little competition among distributors and
intermediaries in relation to the supply of any type of PPI policy
sold at the point of sale. The CC found the following features
of the market causing an AEC: the extent of competition between
providers was limited (on both price and non price factors); there
were barriers in terms of customer search for PPI policies (time
consuming, limited information available, complexity of policies,
misunderstandings in relation to PPI improving the credit application
process, low level if stand-alone provision); barriers to switching
(eg access to consumers' credit information); barriers to entry
and expansion; and the point of sale advantage in selling PPI
combined with a credit product (ie stand alone providers were
at a competitive disadvantage); barriers to new entry (eg building
scale and access to customers at point of sale).
— The
consumer detriment included higher prices, less choice and less
innovation. Total consumer detriment would be significantly more
than £200 million per year (some elements of consumer detriment
could not be quantified including the scale of the adverse selection
problem).[71]
— The
CC found that if a POSP were introduced there would be an overall
benefit to consumers of all types of PPI (save retail PPI). Some
customers would value an opportunity to reflect on their options
away from the credit point-of-sale. In addition the package of
remedies - including the point-of-sale prohibition - would introduce
competition which is likely to bring substantial benefits to consumers
in terms of lower prices, better products and more choice.
Remedies
— Remedies
included prohibiting selling PPI at the credit point of sale and
transparency measures for consumers (eg price comparison tables,
the provision of annual statements), all PPI providers must provide
comparative data to the FSA, a prohibition on the sale of single-premium
PPI policies, a requirement to unbundle retail PPI from merchandise
cover. The remedies will be implemented by means of an order.
STORE CARDS
(March 2004-March 2006)
Terms of reference
— The
OFT's reference specified the relevant market as the supply of
(a) store card credit services and (b) consumer credit services
through store cards. The CC requested a change to the terms of
reference to include also insurance services (ie insurance purchased
in association with provision and use of store cards). The geographic
market was the UK.
Product market
— By
taking out a store card, a cardholder enters into a direct contractual
relationship with the provider, not the retailer. Providers often
offer store card insurance (PPI) covering card repayments.
— The
main sources of income for store card providers are interest income
on balances not settled within the interest-free period; card
related insurance income; income from fees levied for late payment
of accounts; and other income including merchant fees from certain
retailers.
— The
store card market remains an important source of credit and associated
insurance. There were more than 11 million store cardholders with
outstanding balances of well over £2 billion.
— The
distribution chain comprised department stores and clothing retailers,
and store credit providers typically financed and administered
the store cards on their behalf. At the time, six large lenders
(five of which were quoted companies) accounted for around 90%
of the market. A few retailers, notably Argos, financed and operated
their store card programmes in house; however, most contracted
their store card operation to a provider who managed it on their
behalf. The two largest providers were General Electric Consumer
Finance UK (GECF - largest provider having a share between 50-70%)
and HSBC Group (HSBC - the second largest providing John Lewis
and Marks and Spencer).
— There
were found to be two relevant economic markets: an "upstream"
market, where providers compete for retailers' store card contracts;
and a "downstream" market for the supply of credit and
insurance through store cards to retailers' customers.
Key issues
— There
were no adverse findings in the upstream market and in particular
no barriers to entry by financial institutions.
— In
the downstream market, the CC found that there was little or no
competitive pressure on setting APRs; there was little or no competitive
pressure on the levels of late payment fees or on the pricing
of insurance sold with store cards; and providers did not include
sufficient information on their statements. Many store card programmes
had APRs clustered around 30% and there was little competitive
pressure to reduce them.
— Various
features of the market had the effect of insulating from competitive
pressures consumer credit and insurance services provided through
or in association with store cards.
— Detrimental
effects on consumers included higher prices, less choice, and
lack of transparency. Over the period since 1999, consumer detriment
was found to have amounted to at least £55 million a year
and possibly significantly more.
Remedies
— Remedies
related primarily to increasing consumer transparency and included
full information on statements (key items of information to be
prominently displayed on the front page of the store card statements
eg the current APR and an estimate of interest payable next month);
an APR warning on store card statements; and the provision and
prominent display of a facility to pay by direct debit. Where
store card providers offer a package of payment and price protection
or payment and purchase[72]
protection, they must offer payment protection alone as a separate
item. All remedies were implemented by an order. The remedies
are now under review following the implementation of the EU consumer
credit directive.
HOME CREDIT
(December 2004-November 2006)
Terms of reference
— The
reference from the OFT followed a super-complaint from the National
Consumer Council. The product market was defined as the provision
of credit, typically in small sum cash loans, the repayments for
which are collected in instalments (often weekly or fortnightly)
by collectors who call for that purpose at the customer's home.
The geographic market was the UK.
Product market
— The
mean value of a home credit loan was around £300. APRs generally
exceeded 100% and for loans of around 6 months often exceeded
300%.
— All
parties investigated were legitimate licensed businesses (to be
distinguished from illegal lenders ie loan sharks).
Key issues
— At
a national level, this was a highly concentrated market and one
in which the leading lender (Provident) had a very substantial
market share. The CC found that Provident accounted for around
60% of the supply of home credit in the UK on most measures, and
that the six largest lenders together accounted for over 90% of
UK supply.
— Two
features contributed to the weakness of competition creating an
AEC: insensitivity of customers to prices and the failure of lenders
to compete in any significant way on price. There were also incumbency
advantages for established lenders (ie knowledge of customers'
credit worthiness). Price insensitivity and incumbency advantages
were preserved by the lack of data sharing, customers' requirement
for an agent they can trust and the regulatory prohibition on
door-to-door canvassing of loans.
— The
CC found that customers generally paid higher prices than could
be expected in a competitive market and on average £20 higher.
Remedies
— Four
remedies were selected with the objective of increasing price
transparency and decreasing information asymmetries between incumbent
lenders and other lenders. These remedies were: increased data
sharing on payment records through credit reference agencies;
requirement for lenders to publish their prices for home credit
loans; better information provision to customers on loan accounts;
and early settlement rebates.
NORTHERN IRISH
PERSONAL BANKING
(May 2005-May 2007)
Terms of reference
— The
reference from the OFT followed a super-complaint from Which?
and the General Consumer Council for Northern Ireland (GCCNI).
The terms of reference for the inquiry covered the supply of Personal
Current Account (PCA) banking services in Northern Ireland.
Product market
— The
product market covered all personal current accounts (PCAs) but
not other types of personal financial products such as credit
union accounts and offset/current account mortgages.
— The
inquiry categorised the banks into "clearers" (eg Governor
and Company of the Bank of Ireland, AIB Group - trading as First
Trust Bank, Northern Bank and Ulster Bank) and "non clearers"
including building societies (Abbey National, Alliance & Leicester,
Halifax, Nationwide, Woolwich), banks based in Great Britain and
banks providing a remote service.
Key issues
— The
inquiry analysed branch networks including entry and expansion;
bank conduct including charging structures and complexity for
the consumer; customer conduct including levels of switching;
unilateral and co-ordinated effects and financial performance.
— The
features that restricted or distorted competition in the PCA market
in Northern Ireland were (a) unduly complex charging structures
and practices; (b) lack of transparency in banks' explanation
of charging structures to consumers; (c) lack of consumer switching
between PCAs and banks.
Remedies
— The
CC's remedies aimed at increasing transparency of charges for
consumers and covered clear language, explanations of the level
of charges and interest rates, advance notice of charges and debit
interest incurred and changes to the switching process. Remedies
were implemented by means of an order.
SME BANKING (2000-02
monopoly investigation, Fair Trading Act 1973)
Terms of reference
— On
20 March 2000, the CC was asked by Ministers to investigate the
supply of banking services by clearing banks to small and medium-sized
enterprises. The CC was required to determine whether a monopoly
situation existed, whether firms exploited their monopoly position
and what could remedy any exploitation.
Product market
— The
CC defined SMEs as businesses with a turnover of up to £25million.
— The
CC found the market for SME banking to be highly concentrated
especially with regard to the four largest clearing groups (Barclays,
HSBC, Lloyds TSB and Royal Bank of Scotland Group) that accounted
for over 90% of liquidity management services in each geographic
region.
Key issues
— For
a number of reasons customers showed an unwillingness to switch.
— There
was a similarity of pricing between the major banks; the use of
selective negotiation to reduce prices for those considering switching;
and high barriers to entry (including branch infrastructure and
high sunk costs).
— The
CC found that as a result of the consumer and competition issues
identified, the four largest clearing banks were charging excessive
prices and therefore earning excessive profits.
Remedies
— The
Secretary of State asked the OFT to negotiate remedies to give
effect to the CC's recommendations. As a result, a number of behavioural
and transitional undertakings were given by the four largest banks.
Behavioural undertakings were designed to: make switching easier
and faster; limit bundling of services, and improve price information
and transparency to SMEs. Transitional undertakings were also
sought to strengthen competition in the short term. These required
the banks to offer either current accounts paying interest (at
BoE base rate minus 2.5%) or accounts free of core money transmission
charges.
OFT and CC review of undertakings given by banks
(August 2007)
— OFT
found that the transitional undertakings had been successful in
achieving increased levels of competition and that the four banks
had complied with their requirements. The market had however become
more competitive due to the impact of the behavioural undertakings
and general market trends. The OFT therefore recommended the four
banks be released from their transitional undertakings but that
the behavioural undertakings remain in place to address their
concerns over customer switching levels and customer awareness
of costs.
— The
CC largely agreed with the OFT's advice, and decided in December
2007 to lift the temporary price controls that had been imposed
in 2003.
LLOYDS TSB/ABBEY
NATIONAL (February-July 2001 merger
inquiry, Fair Trading Act 1973)
Terms of reference
— Proposed
merger between Lloyds TSB and Abbey National.
Product market
— Lloyds
TSB was one of the four leading clearing banks (others were Barclays,
HSBC and RBS/National Westminster Bank). Lloyds and Abbey National
were found to overlap in the following product markets: financial
products sold to personal customers (current accounts, mortgages
and savings accounts); markets for financial products sold to
small and medium enterprises (SMEs); markets for financial products
sold to larger firms and wholesale banking.
Key issues
— The
proposed merger would reduce competition in the supply of banking
services to SMEs as it would eliminate one of the very few players
outside the big four. The merger would result in higher prices
for personal current account (PCA) and SME banking services, and
decrease innovation and consumer choice. Efficiency gains would
result from the merger but the CC did not consider these would
be passed on to consumers in the form of reduced prices.
Remedies
— The
CC concluded that there were no possible remedies in relation
to the PCA and SME markets short of prohibiting the merger that
could adequately address the adverse effects. The Secretary of
State accepted this recommendation and prohibited the merger.
4 November 2010
67 The sectors include airports, air traffic services,
electricity, gas, financial services, postal services, railways,
telecommunications and water. Back
68
For an eight year term following open competition. Back
69
The CC would not normally expect to reach a decision from which
more than one member dissented. Back
70
Two years for a market investigation; 24 weeks plus 8 weeks extension
for a merger review. Back
71
High PPI prices are likely to have resulted in adverse selection
in the markets for PPI, resulting in increased claims costs on
PPI policies and increased impairment costs on credit sold to
PPI customers, compared with the levels that would arise given
the lower PPI price levels that we would expect in a well-functioning
market. A further detriment to consumers as a result of high PPI
prices is therefore the increased costs of supplying PPI at high
PPI prices due to adverse selection: paragraph 77 of the CC's
report, January 2009. Back
72
ie protection covering damaged, lost or stolen purchases. Back
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