The Banking Sector Under the Regulatory Microscope 

May, 2007 - Sebastian McMichael

The financial services industry recently witnessed a plethora of competition investigations. The banking sector, in particular, has attracted the attention of competition watchdogs in an increasingly complex regulatory environment.

Following an 18-month European sector enquiry, UK banks seem to have largely escaped the danger of significant enforcement actions, except possibly in relation to credit cards.

The inquiry is but one piece in an increasingly complex regulatory jigsaw and needs to be viewed in the context of national investigations. We will therefore first review the EC Commission's report before commenting on various UK inquiries that impact on the financial sector.

There are two strands to the Commission's report on retail banking: first, payment cards and, second, current accounts and related services.

In relation to payment cards, the report raises concerns over the highly concentrated nature of certain national markets. The Commission is concerned about the large variations across the EU in interchange fees (that is the charges paid between the banks servicing retailers) given that these charges are often passed onto the end consumer. In essence, the Commission wants to see the levels of such fees reduced.

As regards retail banking, the Commission makes much of the fact that the markets are still national and show little sign of convergence. The fact that the retail banking market is national is not, however, that surprising given that customers tend to be local. Similarly, the fact that the markets have not converged is not by itself a competition issue.

However, the Commission identified three particular areas of concern:
· co-operation amongst smaller banks that may go beyond what is necessary to achieve pro-competitive efficiencies;
· accessing credit registers - this is sometimes granted only on discriminatory terms and,
· tying (or bundling) of different products.

While many of the issues identified seem to be rather speculative, co-operation between competitors is most likely to lead to enforcement action. Where co-operation takes place between small, local or regional banks in order to provide a wider geographic footprint or to allow them transcendent geographic market limitations this may well be pro competitive. But where such co-operation goes beyond what is strictly necessary to achieve this, real and significant issues arise.

Given the structure of the UK banking system, this seems largely directed at the continent, but could present an opportunity for UK banks to prise open previously closed doors.

This does not mean that all is rosy in the UK. The financial services sector has seen its fair share of competition investigations, probably more than any other industry except for price regulated utilities.

The Competition Commission has recently completed its inquiries into the supply of home credit and store card credit services. It is also currently examining the Northern Irish personal banking sector as well as the supply of payment protection insurance services. Other areas of regulatory focus are payment systems, default charges and credit cards. The level of regulatory attention is unlikely to subside soon as retail banking will remain a focal point for the Office of Fair Trading.

The common theme running through large parts of the various competition investigations into financial services is that too much money is being made by the banks at the expense of consumers. Allegations of high prices to consumers are easily picked up by the media and much moral support is received from the Treasury Select Committee.

For business there are obvious compliance costs involved in dealing with multifarious regulatory investigations, in particular by tying up senior management resources in addition to external advisers. Further costs arise from the implementation and monitoring of remedies that UK authorities have the power to impose.

This could, rightly or wrongly, be regarded as a tax on doing business in that sector. However, the jury however is still very much out on the question of whether the authorities have achieved an outcome that merits the expense and resources of the investigating authorities themselves. Superficially, some charges may have been reduced or abolished, but it is likely that they will (or already have) materialised in other parts of the system.

More fundamentally, however, what is largely overlooked by regulators and the media is that while the businesses await the outcome of multiple investigations, they tend to defer important decisions and investments.

Consequently, the particularly high level of regulatory attention in different areas of financial services brings with it the danger of achieving the opposite of dynamic competition: stasis instead of dynamism and paralysis instead of innovation.

John Schmidt is a partner and Sebastian McMichael is a solicitor, both specialising in competition law with the commercial law firm Shepherd and Wedderburn LLP.



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