Banking Sector build-up begets new laws on price signalling - Corporate and Company Law

Introduction

In the context of recent political debate about the state of competition in Australia's banking sector and in answer to a perceived gap in Australia's cartel laws, in the last month, we have seen the release of two separate but similar bills for proposed Federal legislation seeking to target "price signalling".

In this article we comment on the two bills and compare them with recent guidance issued by the European Commission, which explains how the EU competition laws address the same issue. Under existing EU law, price signalling and other strategic information disclosures between competitors are already likely to be regarded as a competition law infringement.

Background

On 22 November 2010, the Opposition released a Private Members' Bill entitled the Competition and Consumer (Price Signalling) Amendment Bill 2010 ("Opposition Bill"). On 12 December 2010, the Government released an exposure draft for public consultation entitled the Competition and Consumer Amendment Bill (No.1) 2011 ("Government Bill").

The Government Bill is one of a number of reforms announced on 12 December devised in response to a perceived need to "promote a competitive and sustainable banking system" in Australia.¹ Whilst the likely impact of the Government Bill on the banking sector must be considered in the wider context of all of the proposed reforms, this article discusses its key components against the background of Australia's existing competition laws and against the Opposition Bill.

Both bills are modelled on concepts that feature, in part, in Australia's existing competition law. However, existing competition law is generally only triggered where parties have formed a "contract, arrangement or understanding". Therefore, price signalling and other "facilitating practices", which are often unilateral in nature, will not therefore typically be caught. The bills can be viewed as a positive step towards outlawing certain "facilitating practices" that are already prohibited in some other jurisdictions, including the EU, as explained in more detail below. At the same time, however, consideration must be given to their varied potential to suppress legitimate, and potentially pro-competitive, dissemination of information to the market.

Both bills propose to regulate one-way communications of price-related information by a corporation to its competitors (often called price signalling). Significant civil (but not criminal) penalties that already apply for cartel conduct and other anti-competitive conduct will apply to these restrictions. The Government Bill, however, is not just confined to price-related disclosures. It also seeks to regulate the communication, by a corporation, of information about its capacity to supply or acquire and other aspects of its commercial strategy related to certain goods or services.

With this greater breadth of relevant subject matter and through the inclusion of a per se prohibition against certain private disclosures, the Government Bill currently constitutes a tougher stance on price signalling and similar practices. By not including an "effects" test, it also arguably removes some of the uncertainty and burden on business to "crystal ball gaze" about the likely competitive effects of a disclosure.

At the same time, however, the Opposition Bill is perhaps more focussed on the current banking industry issue at hand, being price signalling and price signalling only. Additionally imposing a two-limb "purpose" and "effects" test (and therefore raising the bar), it may be viewed as a more tolerable reform.

Government Bill (Competition and Consumer Amendment Bill (No.1) 2011)

The Government Bill introduces two key provisions to regulate facilitating practices. Interestingly, however, the provisions will only apply to goods or services that are prescribed by regulation (Prescribed Goods or Services).² Presumably, goods or services supplied in the banking industry, particularly on the retail side, will be the central focus of the first tranche of regulatory prescription. However, there is scope for any good or service supplied or acquired in any industry to be listed as a Prescribed Good or Service.

In addition to an "accidental disclosure" exception³, the Government Bill makes some other sensible and logical carve outs. Disclosures authorised by law or by a corporation to related bodies corporate are not caught.⁴ The Government Bill also provides that a party that obtains >ACCC authorisation to make a disclosure will not contravene the Private Price Disclosure Provision or the Facilitating Practices Provision.

The first operative provision of the Government Bill (the Private Price Disclosure Provision) is focused on private disclosures about pricing information made by a corporation to competitors or potential competitors that are not made to any other person. Such disclosures are prohibited outright regardless of their purpose or the effect they may have on competition.

Specifically, the Private Price Disclosure Provision provides that a corporation must not disclose information relating to a price for, or a discount, allowance rebate or credit (Pricing Information) in relation Prescribed Goods or Services supplied or acquired by the corporation in a market and the disclosure is a "private disclosure" to "competitors".⁵

The Private Price Disclosure Provision will, if enacted, effectively outlaw discussions between competitors about pricing. With the exception of some specific practical carve outs to protect legitimate disclosures from being caught, the message being sent by this drafting is that it considers all pricing communications between competitors are anti-competitive even where there is no consensus between the parties about what they will do with the information and even if there is no action taken.

The specific exceptions to the application of the Private Price Disclosure Provision are:

Price Disclosures made where the Prescribed Goods or Services are to be supplied by one party to the other (recipient) for the purposes of re-supply by the recipient⁶
where the corporation did not know or could not be expected to have known that the person to whom the Price Disclosure was made was a competitor or potential competitor⁷
where the Price Disclosure was made only between participants in a joint venture for the production and/or supply of goods or services for the purposes of the joint venture⁸
where the Price Disclosure was made in connection with a proposed arrangement for the acquisition of any shares in the capital of a body corporate or any assets of a person by or from the corporation.⁹

The second operative provision (the Facilitating Practices Provision) is focused on any type of communication by a corporation about pricing, capacity or commercial strategy. However, the disclosure is not prohibited unless it is for the purpose of substantially lessening competition.

Specifically, the Facilitating Practices Provision provides that a corporation must not disclose information (publicly or privately and whether or not to a competitor) relating to:

Pricing Information in relation to a Prescribed Good or Service supplied or acquired by the corporation
the capacity or likely capacity of the corporation to supply or acquire Prescribed Goods or Services, or
any aspect of commercial strategy of the corporation that relates to Prescribed Goods or Services,

and the disclosure is made by the corporation for the "purpose of substantially lessening competition".¹⁰

The Court may have regard to a non-exhaustive list of factors in determining whether or not there has been a disclosure made for an anti-competitive purpose which are:

whether the disclosure was a private disclosure to competitors
the degree of specificity of the information
whether the information relates to past, current or future activities
how readily available the information is to the public, and
whether the disclosure is part of a pattern of similar disclosures by the corporation.

Anti-competitive purpose can be inferred from the conduct of the corporation, any other person and other relevant circumstances.

Interestingly, the Government Bill ignores whether or not there is any anti-competitive effect or likely anti-competitive effect. Its focus is solely on whether or not the disclosure has an anti-competitive purpose. The focus on "purpose" ensures that legitimate disclosures, such as those made to communicate prices to customers, are not caught by the provision. No "effects" test also avoids the necessity for any assessment of the likely competitive effects of each pricing announcement that they make before they communicate about prices.

At the same time, however, relatively innocuous disclosures or disclosures that even end up being pro-competitive would be covered if an anti-competitive purpose could be inferred.

Opposition Bill (Competition and Consumer (Price Signalling) Amendment Bill 2010)

The Opposition Bill proposes to prohibit communications by corporations of price-related information to its competitors.¹¹ "Price-related information" is defined to mean information that relates to the price or the terms and conditions of supply or acquisition that may have a bearing on price. Communication of that price-related information may be in any form, and by any means, direct or indirect, public or private, including by way of public announcement.

By dealing with all types of communications and including a broad definition of "price-related information", the single provision of the Opposition Bill seeks to achieve something very similar to that which the two provisions of the Government Bill propose to do. That said, the subject matter of communications caught by the Government Bill is likely to be broader than that caught by the Opposition Bill.

The Opposition Bill attempts to differentiate between legitimate and non-legitimate and anti-competitive and pro-competitive dissemination of pricing information by confining the operation of the prohibition in two main ways. It arguably imposes a higher standard than the provisions of the Government Bill because it requires the corporation to have both the requisite purpose and for the communication to have or be likely to have the effect of substantially lessening competition.

Specifically, the communication must be made for the purpose of inducing or encouraging their competitor to vary its prices or the prices at which it acquires goods or services. A competitor is said to vary its prices for goods or services after receiving a communication if it offers goods or services, of offers to acquire them, at prices or on terms or conditions that differ materially from those that would have applied if it had not received that communications.

Also, the communication must have or be likely to have the effect of substantially lessening competition.

The Opposition Bill does not directly address whether disclosures required by law, such as in the case of the reporting requirements of listed companies, and in regulated industries such as energy and telecommunications, or disclosures made inadvertently would be caught by the provision. Presumably, however, it may not be possible to establish the requisite purpose in these scenarios in order to establish a contravention.

Like the Government Bill, the Opposition Bill will not apply to private communications between related bodies corporate or parties to a joint venture or to conduct that has been authorised by the ACCC.

Certain issues with the drafting of the Opposition Bill become immediately apparent as set out below.

What is a "material" difference in prices?
Is the double-barrel "purpose" and "effect" test too difficult to establish? This is especially the case where in a majority of cases a pricing disclosure would not, in itself, have a substantial effect on competition.
Additionally, a burden is imposed on business engaging in pricing communications to assess whether or not the communication would be likely to substantially lessen competition before each pricing disclosure.
The burden of assessing the likely effect on competition together with the uncertainty about its application may potentially discourage otherwise legitimate and pro-competitive information disclosure and could accordingly limit consumer choice and competition.

Information exchange in the EU

In a coincidence of timing, the European Commission announced on 14 December that it had adopted new guidance on horizontal co-operation agreements, which includes guidance on the competitive assessment of information exchange. This guidance does not represent any significant change to the existing law in the EU, but provides useful, up-to-date information for companies on how the European Commission can be expected to treat information disclosures.¹²

The EU approach is structured differently from that of the two Australian bills. As explained above, Australian competition law is triggered where there is a "contract, arrangement or understanding", and so the new bills attempt to deal with information disclosure that does not amount to an agreement or understanding (for example, a unilateral disclosure) but still has the potential to effect competition. The EU competition rules address this question by applying to a wider range of circumstances than the current Australian rules: they apply to agreements, but also to so-called "concerted practices". A concerted practice is where, without any sort of agreement having been concluded, practical co-operation between companies is knowingly substituted for the risks of competition. Once a concerted practice has been identified, the normal rule regarding anti-competitive agreements applies under Article 101 of the Treaty on the Functioning of the EU: the concerted practice will be prohibited if it has the object or effect of restricting, distorting or preventing competition.

The EU's new guidance confirms that information disclosure can constitute a prohibited concerted practice if it reduces strategic uncertainty in the market, thereby facilitating collusion. Importantly, the guidance states that a concerted practice can arise when only one company reveals strategic information to a competitor - there is no need for reciprocal or multi-party exchanges of information.¹³ Further, a company that receives strategic information from a competitor will be assumed to have taken it into account in its future behaviour (and therefore be party to the concerted practice) unless it responds clearly to reject the information. The current Australian bills do not expressly address the potential for the recipient of the information to be a party to the contravention. However, a recipient may be liable if it can be said to have aided, abetted counselled or procured or been knowingly concerned in the contravention.¹⁴

The information that the EU rules regard as likely to cause concern is information of strategic value - the guidance lists information related to prices, customer lists, production costs, quantities, turnovers, sales, capacities, qualities, marketing plans, risks, investments, technologies and R&D programmes as potentially strategic data, with price and quantity information likely to be the most important.¹⁵ Factors such as the age and specificity of the data will all be relevant to assessing its strategic value.

The guidance confirms that this can be an area of potentially serious competition law liability in the EU: it states that private exchanges between competitors of their individualised intentions regarding future prices or quantities would normally be considered and fined as cartels.¹⁶

The EU rules do allow for an exception to the Article 101 prohibition where the exchange of information would lead to efficiency gains that can be passed on to customers (under Article 101(3)). For example, cost benchmarking may be pro-competitive if it allows companies to improve their own best practices, and thus pass on savings to customers. However, it is important to note that to benefit from this exception, the information exchange must be necessary to achieve the efficiency - so, for example, an exchange of individual cost data might not be really necessary to achieve benchmarking benefits when the same efficiency could have been achieved using less sensitive aggregated data.

It will be interesting to see how the different approach that is being taken in Australia to deal with information disclosure develops - and in particular whether or not the two systems, despite their different structures, ultimately produce a similar outcome as far as business compliance is concerned.

Conclusion

The Government Bill will be open for public consultation until 14 January 2011 and the Opposition Bill has been referred to the House of Representatives' Standing Committee on Economics for further consideration. Any likely change in this arena is still some time off.

That said, it would appear that the momentum for reform is building, particularly in the banking sector.¹⁷ Significant debate on this issue can certainly be expected

Endnotes

1 Press Release, Commonwealth Treasurer A Competitive and Sustainable Banking System, 12 December 2010, 13 December 2010.
2 s44ZZT of Government Bill.
3 s44ZZU(3).
4 s44ZZYof Government Bill.
5 s44ZRW of Government Bill.
6 s44ZZZ(1) of Government Bill.
7 s44ZZZ(2) of Government Bill.
8 s44ZZZ(3)) of Government Bill.
9 s44ZZZ(4) of Government Bill.
10 s44ZZX of Government Bill.
11 s45A of the Opposition Bill.
12 European Commission Communication: Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, not yet published in the Official Journal. See in particular Chapter 2: General Principles on the competitive assessment of information exchange.
13 Ibid., paragraph 62.
14 s75B of the current Trade Practices Act 1974 (Cth).
15 Ibid., paragraph 86.
16 Ibid., paragraph 74.
17 On 18 November 2010, the Greens introduced into the Senate the Banking Amendment (Controls on Variable Interest Rate Charges) Bill 2010 (Greens Bill). The Greens Bill focuses on a specific amendment to the banking laws to prevent banks from changing their interest rates other than in accordance with the reserve bank announced increments. However, this reform does not relate to the broader competition issues and so has not been addressed in this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Australia: Banking Sector build-up begets new laws on price signalling