Recently the European Commission, for
the first time, launched a formal investigation into the banking sector’s core
lending and deposit-taking businesses. The Commission is investigating an alleged cartel
amongst eight Austrian banks who, between 1994 and 1998, are accused of setting common
interest rates, commission charges and banking fees. This investigation could be the first
of many to come in the banking sector, not only at a European level. In the UK, years of
what many considered ineffective and toothless competition law has now, finally, been
swept away, leading to a tougher regulatory environment. In November 1998 the new UK
Competition Act received its royal assent. Under the new Act the legality of an agreement
and/or conduct will be judged according to its effects, or intended effects, on
competition. Fail to get it right and, for the first time under UK law, companies run the
risk of investigation and, ultimately, substantial fines. This article outlines the new
Act and the affects it could have on agreements in the banking sector.
What will change?
The most significant feature of the new Competition Act is that it will embody, by
reference, nearly 50 years of European Union (“EU”) competition law. The Act
requires that decisions of UK competition authorities and courts are made in a manner
which is consistent with EU law. The Act also incorporates, tantamount, Articles 81 and 82
of the EU Treaty within, what will be known as, the Chapter I and Chapter II prohibitions.
The Chapter I prohibition prohibits any agreement between companies, decisions of
associations of companies, or concerted practices, which may affect trade within the UK,
and which have as their object or effect the prevention, restriction or distortion of
competition within the UK. Examples of agreements in the banking sector which could
contravene this prohibition are those where:
- banks agree to directly or indirectly fix the
prices of their services (e.g. charges for cashing cheques or changing currency);
- agreements to share customers amongst the
banks; or
- exclusive agreements with suppliers, such as
credit card companies.
Any contractual terms or conditions which
are prohibited will be void and unenforceable.
The Chapter II prohibition precludes any abusive conduct by a company which is in a “dominant”
position within a particular market and which affects trade within the UK. To be in a
“dominant” position a company must have a high market share. As a general rule
companies which have over 40% market share could be in a “dominant” position.
Examples of conduct by banks which could constitute an abuse of a “dominant”
position include:
- the charging of excessive or unfair prices
for banking services;
- limiting access to established banking
networks, such as cash machine systems or intra-bank electronic payment schemes; or
- tying commercially unconnected products (e.g.
mortgages and house insurance).
Under the Act, the OFT is given a new
armoury of enforcement powers. Most eye-catching is the right to impose fines of up to 30%
of the UK turnover of any company which contravenes the Chapter I or Chapter II
prohibitions.
What should banks do?
The Act provides risks and opportunities. Banks should consider reviewing all their
current agreements to ensure that their validity and enforceability are not affected by
the Act. Banks should, at the same time, attempt to determine whether any of their
agreements will have to be notified for individual exemption when the Chapter I
prohibition takes effect.
On a more positive note, some banks may want to consider whether the actions of any of
their competitors merit “examination” to establish whether they are engaging in
illegal anti-competitive practices. The OFT has already made it clear that it is keen to
receive complaints, particularly during the initial formative period.
