Digital Markets, Competition and Consumers Bill

Evidence submitted by  NatWest Group plc to the Public Bill Committee on the DIGITAL MARKETS, COMPETITION AND CONSUMERS Bill (DMCCB02).

Submission by regarding CMA fining powers for breaches of market investigation remedies

1. NatWest Group plc ("NatWest") welcomes the opportunity to provide written evidence to the Public Bill Committee in respect of the Digital Markets Competition and Consumers Bill (the "Bill"). NatWest is a banking and financial products provider, which offers personal and business banking, private banking, investment banking and corporate financing.

Executive Summary

2. This submission is focused on a discrete element of the Bill (schedule 9, part 3) that confers on the CMA a power to impose fines of up to 5% of an undertaking’s global turnover for breaches of orders and undertakings that relate to market investigations conducted by the CMA [1] . NatWest has for many years had in place policies and procedures to ensure compliance with two potentially relevant obligations:

a. the 2017 Retail Banking Order (which emanates from the CMA’s retail banking market investigation from 2014 to 2016, conducted in accordance with the requirements of the Enterprise Act 2002), and

b. the 2002 SME [2] Banking Undertakings (which emanate from a market investigation by the Competition Commission, conducted in line with the requirements of the Fair Trading Act 1973).

3. It is not clear from the current drafting of the Bill whether the power to impose fines will apply to either of these obligations, given that both obligations pre-date the Bill. The obligations would likely have been drafted differently if fines for breaches had been in contemplation at the time they were concluded.

4. NatWest submits that the drafting of the Bill should be clarified to make it clear that it only applies to orders and undertakings that come into effect after the date the Bill becomes law. This would ensure that the potential for fines is taken into account by all stakeholders when new obligations are under consideration.

5. In addition, given that the power to impose fines appears to be based on a strict liability ("without reasonable excuse") standard, NatWest would welcome more direction from Parliament and/or Government on the circumstances in which fines may be imposed, and/or a reduction in the cap to 1% of global turnover.

6. The CMA is a highly regarded competition regulator. When it comes to remedies for mergers or market investigations, the CMA has a stated preference for structural remedies (such as divestments) over behavioural remedies. In part this is because behavioural remedies require ongoing monitoring and are likely to become less relevant over time as markets evolve. It appears to us that (for understandable reasons) monitoring compliance with ageing Orders and Undertakings is not an area of primary focus for the CMA.

7. NatWest respects the CMA’s need to ensure that it possesses all the tools necessary to ensure compliance with behavioural remedies. However, NatWest is concerned that the CMA’s current approach makes it difficult for firms to satisfy the CMA that they are taking appropriate and proportionate steps to ensure compliance. The CMA states in its guidance that "any instance in which a firm fails to comply with any obligation… regardless of any effect on competition or customers", will be viewed as a breach, "irrespective of how they occurred, including whether deliberate, accidental or through ignorance of the obligations". All breaches must be reported to the CMA.

8. The CMA considers a breach to be material if it impacts more than 50 customers. In a market such as financial services, where there are millions of customers (both individual consumers and SMEs), it is hard to conceive of a situation in which a breach that affects 50 customers could in any way have an adverse impact on competition. Nonetheless, based on this approach, the CMA may consider it justifiable to impose fines for breaches that exceed this threshold.

9. NatWest therefore has reservations about the CMA being granted a wide discretion to impose large fines for breaches of market investigation remedies. If such a power is to be granted, NatWest considers that a review of the CMA’s overall approach to compliance would be warranted.

10. NatWest therefore requests the Committee to consider the following:

a. That the drafting of the Bill should be clarified to make it clear that it only applies to orders and undertakings that come into effect after the date the Bill becomes law, and that the fining power needs to be curtailed to 1% of turnover.

b. If the CMA is to be granted a power to impose fines (whether prospective or retrospective), a review should be conducted of the CMA’s approach to the enforcement of market investigation remedies.

11. We set these points out in more detail in the annex below. We would welcome the opportunity to discuss these proposals further with the committee or relevant officials. We have shared a copy of this submission with the CMA.

Contact:

Simon Burden

Head of competition law, Natwest

This submission contains the following:

a) Background on the two obligations and the CMA’s powers;

b) Natwest’s view of the CMA’s current approach;

c) Proposals for amendments to the Bill and a change in CMA approach.

(a) The 2017 Retail Banking Order and 2002 SME Undertakings

12. These two obligations were established in response to market investigations where the CMA (and its predecessor) found that competition in retail banking markets was not effective. In broad terms the purpose of the obligations is to enhance competitive rivalry by making it easier for consumers and small (SME) businesses to switch provider.

13. The Retail Banking Order 2017 is wide ranging. We call out just two examples in this submission of measures designed to promote customer switching: first, a requirement for banks to display the results of quarterly customer surveys of bank service quality, online and in branches; secondly, a range of requirements relating to the display of SME lending pricing, including the display of representative rates on websites.

14. The 2002 SME Undertakings came into effect after a market investigation by the Competition Commission. All but one aspect of the 2002 SME Undertakings were revoked by the CMA in 2014. [3] The remaining element imposes a requirement on banks to ensure that SME customers are not required to open or maintain a business current account as a condition of obtaining a loan.

15. Both sets of obligations require in scope banks annually to attest their compliance to the CMA.

16. In its guidance on enforcement of market investigation remedies, [4] the CMA considers "any instance in which a firm fails to comply with any obligation… regardless of any effect on competition or customers", to be a breach, "irrespective of how they occurred, including whether deliberate, accidental or through ignorance of the obligations". All breaches must be reported to the CMA within 14 days of discovery, no matter how small. The CMA sets a low threshold for what it considers to be a material breach: for example, in respect of information remedies, it states that a breach that affects more than 50 customers of a mass market product would be material.

17. In the operation of their compliance programmes, banks report a number of (predominantly very minor) breaches each year to the CMA.

18. The CMA has the power to issue public letters censuring banks for breaches. [5] If the CMA considers a breach to be serious, it can in addition issue legally enforceable Directions to banks to undertake corrective action, including appointment a third party to audit their compliance approach and undertake customer remediation, where required.

(b) The CMA’s current approach to compliance and enforcement

19. The CMA is a very effective and highly regarded independent competition law enforcement agency. For understandable reasons, monitoring compliance with ageing Orders and Undertakings is not an area of primary focus for the CMA.

20. The CMA’s current approach (which requires all breaches to be notified, and applies a low materiality threshold) makes it difficult for firms to satisfy the CMA that they are taking appropriate and proportionate steps to ensure compliance. In a market where there are millions of customers (both individual consumers and SMEs), it is hard to conceive of a situation in which a breach that affects 50 customers could have an adverse impact on competition (which is ultimately what CMA remedies are designed to protect).

21. The CMA appears to treat minor breaches that are detected early and self-reported by firms as problematic. The CMA will often send a public letter of censure in respect of such breaches. An alternative way to view early detection and reporting of breaches would be that it signifies that a firm has effective compliance policies in place, and that no further action is required. Natwest is concerned that the low thresholds that the CMA sets for issuing public letters indicates that the CMA may correspondingly set too low a threshold for the imposition of fines.

22. We suspect that the CMA views the steady stream of self-reported minor breaches as an indication that its public letters do not have a deterrent effect. This is not the case – rather it is simply not possible to achieve 100% compliance while running an effective business. At NatWest the public letters that the CMA sends receive a significant amount of attention from senior staff, and require explanation, root cause analysis, and reassurance that improvements have been made to prevent a recurrence.

(c) Proposed amendments to the Bill and request for re-evaluation of CMA approach to compliance

(i) Fines should not apply retrospectively

23. First, we request that the Bill is amended to make it clear that it only applies to obligations that take effect after the Bill has been passed. This would be consistent with the proposed new wording for section 161A of the Enterprise Act (contained in para 15 of schedule 9), which states that the CMA cannot accept an undertaking unless it has provided information about the possible consequences of non-compliance. We interpret this to mean that the 2002 SME Undertakings cannot be subject to fines on the basis that no such information was provided before the SME Undertakings were given. By extension, the same principle ought to apply in respect of Orders that pre-date the conferral of a fining power.

24. We would like to see this made explicit in the drafting of section 167A(1) (set out at para 17). We propose the following amendment (in underline):

Enforcement of undertakings and orders: imposition of penalties

(1) In respect of enforcement undertakings or enforcement orders that become effective after [date that the DMCC Bill is passed into law] the relevant authority may impose a penalty on a person in accordance with section 167B where the relevant authority considers that a person has, without reasonable excuse, failed to comply with an enforcement undertaking or enforcement order.

25. This amendment would ensure procedural fairness. Parties who are subject to obligations in future would be able to consider the CMA’s fining policy and/or guidance, and make proposed amendments to the obligations that take these into account. Parties would also be able to seek clarity upfront from the CMA on the types of breaches that may attract fines, before they decide to sign up to the obligation or challenge it in the Courts.

(ii) Fines should be capped at 1% of global turnover

26. It is important to distinguish between the fining powers for market investigation remedies and the fining powers for merger control remedies. The latter may require a higher threshold as these may often involve one-off high stakes transactions where parties are incentivised to take risks. This contrasts sharply with ongoing, granular, detailed compliance obligations, that are often typical of market investigation remedies.

27. Further, while we do not consider that fines are warranted or necessary for the purposes of ensuring compliance with market investigation remedies in financial services, we acknowledge there may be other sectors where the entities subject to obligations may be less incentivised to ensure compliance. However, even in respect of more fragmented industries, it is difficult to conceive of circumstances in which a fine of 5% of turnover is necessary to act as a deterrent. A fine of 1% should be more than enough, particularly as repeat offenders could quicky accumulate a number of fines, without the need for exhaustive investigation by the CMA. This is even more so the case in respect of what is in essence a strict liability ("without reasonable excuse") offence.

28. Breaches of market investigation remedies are of a completely different order of magnitude to breaches of merger investigation hold separate undertakings (where the stakes are much higher for the parties), or breaches of competition law (where a 10% cap is applied).

29. Furthermore, the Secretary of State will have the power to increase the fine threshold if a lower threshold is seen as unworkable in the future. [6] It seems to us to be the right approach that, given this power, the threshold starts from the lower 1% level.

30. We consider these amendments would also avoid adding additional and disproportionate compliance burdens on parties such as NatWest, which could undermine the UK Government’s wider ambitions in the context of economic growth to ensure we have a competitive financial services sector.

(iii) Re-appraisal of the CMA approach to compliance with market investigation remedies

31. If the CMA is to be granted a power to impose fines, NatWest would welcome a review of the CMA’s approach to monitoring compliance that looks at best practices across a range of regulated sectors. A more proportionate approach would reduce the compliance burden on both the regulator and the regulated.

June 2023