On 24 March 2011 the Federal Government introduced into Parliament its revised Bill to outlaw price signalling between competitors in defined industry sectors.
At this stage the Competition and Consumer Amendment Bill (No. 1) 2011 is intended to apply only to the banking sector but may be extended by regulation. The Australian Competition and Consumer Commission (ACCC) is reportedly already pressing for the Bill to apply generally across the economy, and specifically to include retailers of unleaded petrol. The Bill is subject to further consultation, and is likely to be reviewed by a Parliamentary Committee, but could become law by early 2012.
Why you should be concerned about the Bill
The Government has decided there is a "gap" in Australian law and that new measures are required, citing the fact that "unlawful information exchanges" between competitors are unlawful to various extents under the laws in the UK, USA and Europe.
However, the Bill introduces very broad prohibitions which appear to go considerably further than any law we have seen operating in these other jurisdictions.
If enacted, the Bill will capture many forms of disclosure that are likely to be benign or actually pro-competitive, as well as those cases of disclosures that are actually likely to damage competition or consumer interests.
It is of particular concern to legitimate lenders and ordinary commercial practices in the banking industry, which we look at below.
The Bill is also a cause for concern more broadly, given that it provides that regulations may be made to extend its operation to other industries, but does not include any criteria or guidance as to how those industries will be identified.
It is clear from the lengthy discussion in the Explanatory Memorandum accompanying the Bill that the Government has no real evidence of how widely (or not) "undesirable" price signalling is occurring in Australia. The Bill is therefore a step in the dark to stamp out a practice, the real extent of which seems to be completely unknown.
The costs of compliance however to business will be significant, since almost every public announcement will need careful vetting; staff will need to be trained, and consideration given to when a company may lawfully disclose a past or future price to an entity, which may also be a competitor, and whether an exemption applies.
What is the Bill about?
In brief, the Bill will outlaw, subject to certain exemptions:
- private signalling – any disclosure of past, current or future price information to competitors or potential competitors; and
- public disclosure of any information about the discloser's past, current or future prices, capacity to supply or strategic intent where the disclosure is made for a purpose of substantially lessening competition in any market.
Most attention will focus on the prohibition of private disclosures to competitors, since this will be a strict liability offence, carrying a maximum civil penalty of $10 million, irrespective of the purpose or the effect of the disclosure on competition.
Exemptions – when pricing disclosures to competitors may occur
The Government has sought to address concerns about the breadth of the proposed prohibitions by including a number of exemptions to allow a competitor to communicate pricing information to another competitor.
Under the Bill, disclosure will be permitted where:
- the disclosure is authorised by law - such as under the continuous disclosure obligations under the Corporations Act faced by a corporation listed on the ASX;
- where prior notification of the intended disclosure is given to the ACCC and no objection is raised by the ACCC within a prescribed period (likely to be 14 days);
- disclosures are made to a customer or a supplier concerning the prices which they will pay or receive for transactions with the discloser;
- accidental disclosures occur beyond the discloser's control or where it was not known (and could not reasonably have been known) that the recipient was a competitor.
- pricing is disclosed in relation to an M&A transaction eg. during due diligence investigations; or
- the disclosure is to a fellow participant in a joint venture or proposed joint venture.
Do the exemptions go far enough?
In announcing the Bill, the Treasurer said "This Bill is fundamentally about stamping out conspiratorial behaviour by the big banks which is not caught by our competition laws", and he added, "we are not talking about ordinary commercial communications. Every Australian bank will be able to communicate with its customers, shareholders, market analysts, employee and other stakeholders in the ordinary course of business – just like they always have been able to do".
He added, "All banks will be able to fully comply with any continuous disclosure obligations they have, such as discussing their funding costs".
Yet concerns have been expressed that the exceptions in the Bill might not extend to commonplace banking transactions such as syndicated loans or subordinated debt arrangements.
For example, one of the exemptions allowing a competitor to communicate pricing information to another competitor is where the disclosure is to a fellow participant in a "joint venture" or proposed "joint venture".
Transactions involving syndicated loans and related workouts, where competing lenders meet and exchange lending rate and fee proposals between themselves in connection with a syndicated loan or related workout, are not usually thought of as "joint ventures". The definition in the Act of a joint venture requires an "activity" to be carried on "jointly" by two or more participants. Recent media reports indicate the Government will encourage the ACCC to issue broad guidelines confirming such syndicated activities are exempt joint ventures. Notwithstanding the ACCC's guidelines, the definition of joint venture in the Act is not clear and a court may take the view that a syndicate of lenders does not comprise a joint venture. The consequences for a breach of the legislation are considered below.
In addition, in many transactions, lenders may need to disclose information to competitors that are not part of a syndicate, and the joint venture exemption clearly would not apply in these circumstances.
An example is the typical need for senior lenders and subordinated lenders to disclose to each other their respective pricing and terms so that each group of lenders can assess the entire capital structure of the borrower. Disclosures between competing lenders in that context does not appear to fall under any of the existing exemptions, other than opting for an ACCC notification.
The ACCC Notice exemption
Reliance on the need to notify each and every such arrangement seems to be a clumsy requirement. Difficult issues of confidentiality will apply to the information required to be submitted to the ACCC under that procedure.
The Bill introduces this new exemption process in addition to the exemptions already flagged in the Exposure Draft. This process will allow companies an exemption, on a case-by-case basis, if they file with the ACCC a notice of an intention to disclose specific pricing data to nominated competitors, for a specified purpose.
The exemption will apply automatically if, after a short period, (likely to be 14 days), the ACCC has not objected to the filing (on the ground that the notified conduct is contrary to the public interest). However the ACCC will also retain a right to later remove an exemption, on notice and without any retrospective effect, at any time after further review.
There are questions over the utility of the notification option:
- will the notice be public or confidential?
- will it be too cumbersome to flood the ACCC with notices about everyday transactions which of themselves pose no concerns to competition?
- how will the ACCC review such notices? Can it undertake public market inquiries over the intended disclosure? And with which parties – the other competitors or customers?
Civil consequences for lending and enforceability?
While the ACCC will enforce the new law, it appears that customers will also be able to seek damages and injunction actions over unlawful price disclosures.
The civil impact of disclosure conduct which contravenes the new law is an important issue for the banking sector. For example:
- Would the loan arrangements that result from an unlawful disclosure between syndicate members be invalid?
- Will a borrower be able to stymie enforcement action taken under a syndicated loan, if the exemption in the Bill does not apply for some reason?
- Will a party that suffers a loss caused by the conduct of other persons (eg. lenders) that contravened the new prohibition be able to receive compensation?
Risks in that area will clearly worry lenders.
We expect that there will be considerable debate over this Bill in coming months.
However it appears the Government is committed to some reform in this area, so that the real question is what changes might be made to the Bill before it becomes law to address the serious concerns of the banking industry.
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