| Commission’s investigation will have serious implications |
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| The EU’s Competition Commissioner, Neelie Kroes, is due to start investigating the financial services sector to identify obstacles to competition, be they ‘regulation, State aid or private barriers’. Tom Carney says that this is an opportunity for the Irish financial services industry to shape future regulation of competition in financial services. |
The announcement by the Commissioner for Competition Policy on 10 March 2005 that the EU Commission will investigate the financial services sector merits serious consideration.
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Commissioner Kroes views EU financial services markets as key to Europe’s overall competitiveness and will proceed with her investigation of that sector ‘with an open mind and a constructive approach’ promising that where the Commission identifies obstacles to competition ‘- be [they] regulation, State aid [or] private barriers -’, it will ‘propose solutions, working closely with national administrations, regulatory bodies and competition authorities’.
This announcement has implications for all Irish financial service providers. It sets the tone for future regulation of financial services in Europe/Ireland and marks the first step in another phase in EU regulation of the four infrastructures (finance, communications, energy and transportation) underpinning the Union’s economy.
The Commission has invited interested parties to identify for it national/EU regulatory barriers to effective competition in the financial services markets. Irish financial service providers now have a valuable opportunity to advise the Commission of regulatory rules and other practices which unnecessarily fetter effective competition in the marketplace. It is an opportunity for them, also, to shape the future management of competition in the market for financial service provision.
The purpose of this article is to put Commissioner Kroes’s announcement into context within a complex web of inter-relating national and EU laws which govern European financial service provision.
As a matter of EU law, financial services are subject to the free movement of capital, free movement of services and establishment provisions of the EC Treaty. At national level, the financial regulator is responsible primarily for the prudential regulation of domestic financial service providers while recent decisions of our Competition Authority highlight that it is also assuming a greater role in the management of Irish financial services. The Authority’s ‘Study of Competition in the Provision of Non-Investment Services in Ireland: Report and Recommendations’ (December 2004), its March 2005 ‘Report on Competition Issues in the Non-Life Insurance Sector’ and its recent enforcement action resulting in the High Court’s decision in The Competition Authority v [Irish League of Credit Unions] indicate, at national level, that financial service providers must, going forward, be more mindful of Irish and EU Competition rules.
The EU is on the cusp of redefining its regulatory framework for competition management in the financial services sector. Its system of finance is one of the four infrastructures upon which Europe’s economy rests. Competition in the sector has been singled out for special attention by the rule makers. Central to understanding the reason behind the Commission’s sector investigation is the recognition that State (and even existing EU) ‘regulatory rules’/’regulatory barriers’ can hinder effective competition in the market place. So too is the confirmation that ‘private barriers’ (read anti-competitive practices by financial service providers) can distort competition.
The Commission has decided that the most efficient way to tackle barriers to competition in Europe’s financial markets is (i) to identify those barriers; (ii) review and consider information received from ‘own sources’ and interested parties; and (iii) take appropriate action in conjunction with national governments, regulators and competition authorities within an agreed (revised) regulatory framework to address issues identified. We should appreciate this development in the context of the EU’s historic law-making activity for the sector and see it as the commencement of the third of three phases whereby the financial services markets of the various Member States will be integrated into a single competitive EU internal market for financial services:
• In the early days of the Common Market, the sovereign Member State financial services markets were subject only to European Court of Justice decisions under the EC Treaty where governments infringed free movement of services and capital provisions;
• Subsequently, EU law makers, adopting legislation to facilitate free movement of financial services by ‘minimising’ (not eliminating) to an acceptable level ‘prudential’ and other State regulatory barriers, sought to ‘harmonise’ national rules to achieve the free movement of financial services between Member States (resulting for example in the right to ‘passport’ services or to establish branches in another Member State);
• Now, there is recognition that even ‘minimum’ harmonised Community and State regulatory barriers, while facilitating free movement of financial services, can still hinder competition between service providers.
There is a need to address those barriers through appropriate cooperation between the Member States and the EU itself (the so-called Renewed Lisbon Strategy).
To expand: first, Member States of the early Common Market were entitled to maintain national laws for the prudential protection of consumers of financial services - including insurance and investment services – provided they did not contravene the requirements of the EC Treaty in relation to the free movement of services and/or capital. Where a national legal/regulatory provision unlawfully fettered the free movement of goods or capital, the European Court of Justice, at the suit of the European Commission, held the offending State rule to be in breach of the legal requirements of the Treaty. Ruled unlawful, the national provision was unenforceable and, on a case-by-case basis, slowly the European Court of Justice achieved ‘negative integration’ of Europe’s financial services market. This process was too slow.
As a second step, ‘positive integration’ of EU financial services markets was pursued through legislation, primarily in the form of EU Directives. The Single European Act and the Delors Package in the 1980s set the tone. Recognising that Member States were entitled under EU law to enforce national prudential requirements to protect legitimate national interests (like consumer protection), the EU found it necessary to harmonise national requirements (obstacles to the free movement of services and capital) to an acceptable level to facilitate the free movement of services and service providers. Within the framework of pre-emptive EU legislation, national law/regulatory requirements could only be adopted/enforced by governments or regulators where they complied with the requirements of an applicable EU Directive or Regulation. The Investment Services Directive and the Life and Non-Life Directives are prime examples of pre-emptive EU legislation transposed into national law, which entitled the Irish government/regulators to apply national regulatory rules only within parameters set out in EU legislation. Service providers now enjoy free movement of services from one Member State to another within a framework defined by the EU. They enjoy the certainty that so long as they act within a framework emanating from EU legislation, they can deliver services cross border.
EU pre-emptive legislation facilitates the free movement of services and capital up to a point only - through the harmonisation of national prudential/regulatory obstacles to an acceptable level. Effective competition is not guaranteed in a market where minimum harmonisation of national prudential or other rules is pursued only to facilitate free movement. EU harmonising rules recognise that EU/State regulatory barriers may persist within acceptable levels. Harmonisation, as a general rule, does not eliminate national prudential or regulatory obstacles. Even harmonised Community and Member State regulatory rules, as a matter of fact and law, can and do operate as effective regulatory barriers to effective competition. Such barriers are restrictive and resulting needs for compliance are costly.
It follows, therefore that the Commission has commenced upon a third phase of EU rule making to improve competition in financial services markets - a programme for the identification and ultimate elimination, hopefully of all regulatory barriers which ‘unnecessarily and sometimes unintentionally’ hinder effective competition in the financial services sector. The approach must be welcomed. Burdensome and unnecessary regulation costs the Irish financial services sector, our economy and ultimately the consumer. It affects our competitiveness at EU and international levels.
It is reasonable to believe that the ultimate result of the Commission’s sector investigation will be establishment of a revised model for managing competition in Europe’s financial markets. An appreciation of current frameworks for competition management will provide a key to understanding where the future may lead us.
At present, at Irish and EU levels, competition is managed using three legal models:
1. The punishment of past anti-competitive behaviour and the deterrence of future unlawful conduct through the enforcement of ex post Competition laws which provide for administrative fines or criminal sanctions, including fines and imprisonment;
2. The ex ante control of market structures, with a view to preventing future anti-competitive behaviour through the enforcement of Irish and EU Merger Control laws; and/or
3. The enforcement of sector specific legislation by a regulator which sets out ex ante clearly defined obligations to be adhered to by firms within clearly defined market structures with a view to achieving effective competition within the sector.
Present trends for enforcement of competition law in the Irish financial services sector appear unpredictable.
Any programme to infuse future legal certainty for market players should be viewed as good.
In respect of (i) above, Section 4 of the Irish Competition Act, 2002 (‘the Act’) prohibits collusive agreements or anti-competitive practices between two or more undertakings (companies, firms and persons) at national level, which have as their object or effect the prevention, restriction or distortion of competition in the market place. Article 81 of the EC Treaty prohibits such agreements or practices where they have an impact at EU level. Under this model too, Section 5 of the Act prohibits ‘abusive behaviour’ by one or more undertakings of a ‘dominant position’ in a relevant market, which significantly impedes competition. Article 82 of the EC Treaty condemns this behaviour where it affects competition in the EU.
Under (ii) above, Part 3 the Act sets out the Irish framework for the management of mergers and acquisitions.
The Competition Authority has the power to veto mergers/acquisitions between undertakings, which concentrate control of market structures in the hands of a limited number of players resulting in a negative impact on competition. Only ‘large’ mergers/acquisitions involving undertakings with annual turnover of €40 million may be considered as falling within the scope of the Competition Act, 2002. ‘Super mergers’ with undertakings having aggregate annual worldwide turnover of €5 billion (or €2.5 billion) fall within the exclusive jurisdiction of the EU Commission where they give rise to a concentration of market control which would significantly impede effective competition in the common market, in particular as a result of the creation or strengthening of a dominant position.
We have seen greater reliance over the last decade on the third model (described in (iii) above). Sector regulation is the model adopted for management of competition in the telecommunications and postal sectors and more recently for the gas and electricity markets.
A sector is said to be regulated when the behaviour of economic operators is managed by an independent body within pre-defined market structures having regard to pre-defined legal obligations with the goal of achieving fair competition in those market structures; which sector, upon deregulation, may be managed ex-post by general competition authorities.
We can assume that any future framework for the management of competition in the financial services sector, at EU or Irish level, may rely on at least two, or perhaps a combination of all three, models as a suitable framework for competition regulation. One might see in the future, perhaps, a dedicated Competition Unit in the Financial Regulator applying pre-defined competition rules within markets pre-defined in legislation, regulating effective competition in the Irish financial services market. That unit may work alongside other units of the Financial Regulator, like the Consumer Director ensuring that effective competition results in real benefits for new entrants, competitors and consumers. It is also foreseeable that the enforcement of prudential rules may be limited to ensuring compliance with a reduced set of regulatory requirements, which do not fetter competition at national or supra-national levels.
The future success of Irish financial service providers at Irish and European levels depends, to a large extent, on their ability to grasp and exploit the benefits of the EU’s internal market. It may also depend on their aptitude to read and react to evolving regulatory trends. The Commission, by initiating a sector investigation, is obviously concerned that the regulatory framework is deficient and hindering competition. Irish service providers have an opportunity to input into the future shape of the EU/Irish regulatory framework for financial services, a framework which must deliver effective competition management. The benefits of a level playing field for competitors should be apparent to all concerned. The Irish financial services industry is urged to raise with the Commission in a coordinated way, evidence of regulatory obstacles and inefficiencies caused by the current EU and/or Irish regulatory framework. Trade associations and business groupings within the sector should, it is recommended, have this matter on their agendas. Positive reaction now will bear efficiencies and fruit later. |
Tom Carney is a senior associate solicitor in Dillon Eustace, and a lecturer in EU Merger Law and EU Telecommunications Law at Trinity College Dublin.
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| Article appeared in the May 2005 issue.
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