COMPETITIVE EDGE FINANCIAL SERVICES
RECENT COMPETITION LAW TRENDS
FinTech under the microscope in antitrust...
Technology continues to move up the global antitrust agenda. In the aftermath of its Google Android case and the GeoBlocking Regulation, the European Commission has commissioned a report, due in March 2019, on the implications of digitisation for competition policy. Meanwhile, authorities around Europe are beginning to focus their attentions on the specific antitrust challenges which FinTech presents. For example:
The Portuguese Competition Authority has just published a paper looking at the barriers to entry for FinTech companies posed by the implementation of the EU's new payment services rules. The authority analysed feedback from financial regulators, businesses and business associations, concluding that limits on crowdfunding, investment and access to the central credit register constrain the sector. It has called for "the necessity and proportionality of these limits" to be evaluated;
Earlier in the summer, the European Parliament also released a new study identifying the competition challenges arising in FinTech. It suggests that current efforts should focus on research and market-monitoring, but that any regulatory reform should also take account of competition considerations.
Many of these themes were picked up by the FCA in its third Annual Competition Report, where it cited FinTech as a particular area of interest, alongside advances in smart data, digitalisation and data analytics.
...and in merger control
Two recently opened merger control investigations also illustrate the issues which competition authorities are having to grapple with when it comes to new technology in financial services:
On 1 October 2018, the CMA opened an investigation into PayPal's completed acquisition of iZettle AB, a Swedish mobile payments company, for $2.2bn (1.6bn). The deadline for the publication of a phase 1 decision is on the 26 November 2018. PayPal is buying iZettle from a diverse set of owners (including Mastercard, Amex and Santander) just before it was due to become the biggest Fintech in Europe to list.
The transaction gives PayPal access to a larger merchant base, leading to an overlap with PayPal's own (subscale) acquiring business PayPal Here, but it will still face direct competition in the UK from Square as well as more traditional payment methods. This is the latest in a string of payments acquisitions from PayPal, after it bought Braintree, Venmo and (most recently) Xoom. We would expect the CMA investigation to look closely at the supply of payment services to smaller merchants, the main focus of both iZettle and Square.
After allegedly fending off competition from Google, Microsoft has announced that it has agreed to acquire GitHub, the world's largest coding host with more than 28 million developers, for $7.5bn. On 14 September, Microsoft filed a request for European Commission approval of the acquisition. The Commission has set a provisional deadline of 19 October to reach a decision. On 21 September, the EU sought views on Microsoft's plan to buy GitHub. The Commission's case page can be accessed here.
Amongst its many uses, followers of the open banking movement will recognise GitHub as the open-source ecosystem on which many open banking innovations have been shared and improved. Microsoft Chief Executive Satya Nadella has tried to ease fears from users that GitHub might favour Microsoft products post-transaction, publicly proclaiming GitHub would continue to be an open platform that works with all public clouds. At the time Competitive Edge went to press, however, Microsoft had so far declined to offer remedies to the Commission.
FOCUS ON LOYALTY PENALTIES
On 28 September 2018, Citizens Advice delivered a super-complaint to the Competition and Markets Authority (CMA) regarding concerns that long-term customers who stay with their provider, often after their contract has finished, can end up paying significantly more than the provider's new customers. This is now being referred to as the Loyalty Penalty.
Concerns over Loyalty Penalties are not new. Indeed, this kind of thinking underpinned Martin Wheatley's time at the FCA, as well as its ongoing focus on behavioural-economics. Indeed, the super-complaint coincides with a paper drafted by the CMA and FCA (as part of the UK Competition Network) on 1 October 2018, looking at the impact on consumers of remedies to competition issues. Notably, in that paper the CMA and FCA express concerns that improvements in the
analytics of Big Data could allow firms to treat those customers who are likely to remain for the long-term differently to those who are likely to switch, potentially disproportionately affecting vulnerable customers.
The super-complaint requires the CMA to complete a thorough investigation into the Loyalty Penalty, focusing on vulnerable customers, in five markets:
savings accounts; mortgages; household insurance; mobile; broadband.
Research in support of the super-complaint has found that 8 in 10 bill payers are charged higher prices for remaining with their existing supplier in at least one of the above essential markets, and up to 64% of consumers in one of the above essential markets are not aware they are being charged more than new customers. In total, the research has found that British consumers are losing 4.1 billion a year across all five essential sectors as a result of Loyalty Payments, with the measures disproportionately affecting older, lower income and less educated consumers in particular.
In support of their claim, Citizens Advice draw parallels with the measures that have been introduced to protect loyal consumers against Loyalty Penalties in the energy market, where years of investigation by Ofgem, the CMA and the Government have resulted in a range of new consumer protections, such as capping of bills for vulnerable customers.
The CMA will now investigate and publish a response within 90 days, with possible follow-up actions including calls for a change in legislation or launching a market study.
The super-complaint can be accessed here, and the CMA's case page can be accessed here.
ROUND UP OF OTHER DEVELOPMENTS
CMA refers acquisition of Credit Laser Holdings Limited (ClearScore) by Experian Limited for an in-depth phase 2 investigation
Ex-HSBC trader says US has no jurisdiction in extradition fight
On July 31 2018, the CMA referred the anticipated acquisition of Credit Laser Holdings Limited (ClearScore) by Experian Limited for an in-depth phase 2 investigation. Experian and ClearScore are the largest providers of free credit score checking in the UK, with Experian also being the largest supplier of paid credit score checking in the UK. The CMA raised concerns in its Phase 1 decision that, as the market leaders in this field and each other's main competitor, the merged company would be less likely to innovate to assist people in understanding their finances, leading to people potentially paying more for credit cards and loans.
The CMA subsequently published an Issues Statement (accessed here) on 28 August 2018, which outlines a number of theories of harm it will analyse in the course of its Phase 2 investigation. The Press release is available here, and updates will be available on the CMA case page, available here.
A former trader of HSBC Holdings charged with conspiracy to commit fraud in the United States has won his appeal against extradition to the US as he is a British national with no "significant connection" with the US. The US government are expected to appeal the decision, particularly as there will be no trial of Mr Scott in the UK as the Serious Fraud Office has elected not to pursue the allegations. A transcript of the court judgment can be found here.
Interchange fee dispute
New interchange fee claims
PSR market review into card-acquiring services
CMA activity on Investigation Orders
The Court of Appeal (CA) has given judgment in three appeals concerning the correct approach for assessing the default multilateral interchange fees (MIFs) set by MasterCard and Visa in a competition law context. The CA found that they were bound by the decision of the ECJ in 2014 on this issue and therefore that Mastercard and Visa's interchange fees were unlawful.
Amongst other things, the CA also held that the correct approach to determining the counterfactual was to compare the default MIFs with the counterfactual identified in the ECJ decision, in which there were no default MIFs and a prohibition on ex post pricing or a settlement at par rule, equivalent to a no or zero MIF.
We published a more detailed note here, and a transcript of the court judgment can be accessed here.
It has been reported that Visa and Mastercard are facing further antitrust damages claims in the UK from a number of retailers over alleged anticompetitive card payment fees, including:
Dutch optical retailer GrandVision, as well as 47 of its subsidiaries including Vision Express:
Toys R Us, the US toy retailer:
Grattan and Freemans, clothing retailers that sell via catalogue;
Euromaster, the automotive tire retailer owned by Michelin, as well as a further 10 claimants related to Euromaster; and
Firmdale Hotels, a US and UK located boutique hotel operator.
MasterCard have reported in their recent financial results that they are reserving significant sums relating to litigation settlements with UK merchants.
On 24 July 2018, the Payment Services Regulator (PSR) set out its plan to carry out a market review into card-acquiring services and published draft terms of reference. The review has been prompted by concerns that acquirers have not passed on to smaller merchants the savings they made from the interchange fee caps introduced by the Interchange Fee Regulation, as well as concerns that scheme fees and rules favour larger acquirers.
The PSR proposes to look broadly at the market, focusing on:
any barriers to entry or expansion in card-acquiring services; barriers to switching or searching that merchants face; and availability of services that facilitate merchant decision-making.
The PSR plans to publish the final terms of reference before the end of 2018, which will also set out a proposed timetable for the market review.
The CMA announced on 6 September 2018 that it has decided to launch a limited review of the Payment Protection Insurance Market Investigation Order 2011 (Order) in response to the introduction of the Insurance Distribution Directive (IDD), as well as consultation and the submission of a number of parties. In particular, the CMA plan will assess whether the information requirements of the Order remain appropriate in light of the requirements of the IDD. The CMA case page can be accessed here.
On June 11 2018, the CMA published a letter to Ulster Bank Limited in relation to breaches of the Northern Ireland Personal Current Account Order 2008 (Current Account Order). The letter (accessed here), outlines the actions agreed between the CMA and Ulster Bank to remedy the breaches of the Current Account Order,
including failure to issue the annual summary and the Switching Leaflet to customers.
CMA investment consultants market investigation
Following a referral from the FCA in September 2017, the CMA opened an investigation into the investment consultancy market, publishing a provisional decision on 18 July 2018. This decision found that there is an adverse effect on competition and that material customer detriment may be expected to result from it in both the investment consultancy and fiduciary management markets. The CMA provided a list of several remedies, specifically the
Introduction of mandatory tendering when pensions trustees first purchase fiduciary management services;
Requirement to run a competitive tender within five years if the existing fiduciary mandate was awarded without a competitive tender;
Requirement on investment consultancy and fiduciary management firms to report investment performance to their customers;
Requirement on fiduciary management firms to disaggregate fees for prospective customers and provide greater clarity on costs; and
Requirement on pensions trustees to set objectives when they hire an investment consultant.
Although the FCA welcomed the CMA's in-depth work, investment consultants including Aon have called for the CMA to come forward with clarity and provide guidelines for the industry. The CMA have stated that they will publish the Final Report before the end of 2018.
The CMA's case page is available here.
FCA investment platforms study
On 16 July 2018, the FCA published an interim report for its investment platforms market study. Although the FCA found that the market is generally working well, a number of competition concerns were raised. In particular, the FCA has warned that regulatory measures may be introduced if investment platforms do not make it easier for customers to switch by early next year. The report outlines the FCA's proposals on remedies and confirms plans to publish the final report in Q1 2019.
New FCA Director of Competition
The FCA has announced that it has appointed Sheldon Mills as its new Director of Competition. Sheldon was previously a Senior Director (Mergers and State aid) at the CMA.
EU investigation into potential manipulation of foreign exchange trading
Credit Suisse has confirmed in its quarterly financial report that the European Commission have served a Statement of Objections on it and certain affiliates, alleging that the bank engaged in anticompetitive practices in connection with its forex trading business.
The EU are also reportedly pushing forward an antitrust investigation into banks involved in the manipulation of foreign-exchange markets.
Banks in challenge over release of information
Investment Banks JPMorgan Chase and Crdit Agricole have each filed a lawsuit (contesting a European Commission decision from April 2018) in order to prevent the inclusion of certain information within a public decision on collusion over the setting of the benchmark Euribor interest rate (for which they were fined in 2016). The two claims can be accessed here and here.
State aid clearances
The Commission has approved the prolongation of an Italian guarantee scheme until 7 March 2019 to facilitate the securitisation of non-performing loans as the State guarantees on the senior notes will continue in a manner acceptable for a private operator under market conditions. The press release is available here
The Commission has approved the prolongation of a Danish resolution scheme which facilitates the winding up a small bank (total assets below 3 billion) by Danish resolution authorities until 31 August 2019. The press release is available here.
The Commission has approved the prolongation of two guarantee schemes, one on European Investment Bank lending, and one for credit institutions in Portugal, until 9 February 2019. The press release is available here.
The Commission has announced that Slovenia's proposed new commitment package remains compatible with EU State Aid rules. The Commission previously approved 2.32 billion in State aid under EU State aid rules in December 2013 as a result of the bank's restructuring plan. The press release is available here.
The Commission has authorised a prolongation of the Polish bank guarantee scheme until 30 November 2018 because the scheme, which provides State guarantees for different types of solvent credit institutions in Poland should the need arise, is well targeted, proportionate and limited in time. The press release is available here.
The Commission has approved a prolongation of the Polish resolution scheme for twelve months as it is in line with EU State aid rules, particularly the 2013 Banking Communication and EU banking rules. The press release is available here.
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