Member Article

On 3 October, the European Commission fined Visa €10.2 million (approximately £7 million) for its refusal to admit Morgan Stanley Bank International Limited of the UK as a member of the Visa network. The fine is to be seen in the context of continuing regulatory scrutiny of the financial sector, and the banking sector in particular, at both the EU and UK level.

Background

The case arose from Visa's refusal (from March 2000 to September 2006) to admit Morgan Stanley as a member of the Visa organisation. Based on its investigation, the Commission concluded that retailers expect banks to offer card acceptance contracts as a package including both Visa and MasterCard. Consequently, Visa’s refusal to admit Morgan Stanley as a member not only prevented Morgan Stanley from providing services to retailers as regards Visa transactions (which represent about 60% of the market), but also as regards other payment cards transactions. Focussing on the UK market (specifically the market for providing merchants with card acceptance capabilities), the Commission considered that Morgan Stanley was one of the few operators that could successfully enter this concentrated sector. Further, Morgan Stanley was considered to have the necessary qualifications to operate efficiently in the market and its entry could be expected to contribute to more efficient competition in the UK with the knock-on positive effect on prices and the quality of services.

Visa's justification for the exclusion was an internal rule which provided that Visa would not accept as a member any applicant deemed by the board of directors to be a competitor. However, the Commission concluded that Morgan Stanley was not a competitor of Visa in the EU because it had no payment card network and that there was no realistic possibility that Discover, Morgan Stanley's US card network, would expand to the EU given high barriers to entry. The Commission considered that the rule was also applied in a discriminatory manner- Visa had admitted Citigroup (the owner of the Diners Club network) and several shareholders of JCB Co. Ltd. (the owner of the JCB network) as Visa members.

An aggressive watchdog with a keen appetite

While the Commission's investigation was based on a complaint by Morgan Stanley, the complaint was subsequently withdrawn after Morgan Stanley had reached a settlement agreement with Visa and was admitted as a Visa member. The Commission, however, decided to proceed with the adoption of an infringement decision. The motivation behind this was Visa's continued denial that it had acted anti-competitively and the Commission's view that it is important for the proper functioning of the single market for payments that anti-competitive practices are seen to be unacceptable and sanctionable. At the very least, this case clearly demonstrates the Commission's appetite to take on perceived anti-competitive practices in the banking sector. With Visa announcing its intention to appeal the Commission's decision to the European Court, the Commission's fight is not over.

Visa in a slightly broader context- Interchange fees under the regulatory microscope

MasterCard is also in the regulatory firing line as the Commission continues to investigate its cross-border interchange fees (the charges paid between the banks servicing retailers). The Commission's initial view is that the pre-determination by MasterCard of a minimum price that retailers must pay for accepting MasterCard/Maestro branded cards restricts price competition between member banks. Regulatory action in this arena is bolstered by the Commission's 18 month sector inquiry into retail banking. In its final report, the Commission raised general concerns over the highly concentrated nature of certain national markets and specific concerns about the large variations across the EU in interchange fees given that these charges are often passed on to the end consumer. In essence, the Commission wishes to see the level of such fees reduced.

Meanwhile, the UK's Office of Fair Trading (the OFT) has decided to expand the scope of its investigation into MasterCard and Visa's current UK interchange fee arrangements relating to consumer and commercial credit cards, charge cards and deferred debit cards to include immediate debit cards. The OFT is continuing this investigation despite its announcement in February that it would not undertake further work on access and governance arrangements of UK card schemes, at least for the moment. As the OFT notes, the governance of major card schemes operating in the UK (Visa, MasterCard and Maestro), is primarily at European and international level and the European Commission's contribution to the SEPA project (an industry initiative that aims at creating a single market for payments) includes the access and governance arrangements of payment schemes.

Visa in a broad context- the banking sector under the regulatory microscope

We have mentioned above the Commission's sector inquiry into retail banking and the SEPA initiative. At the UK level, the OFT has publicly stated that banking is key priority area of work and the sector has been subject to more competition investigations than probably any other industry, excepting price-regulated utilities. In particular:
Personal Bank Current Account Pricing
Following a fact-finding exercise into unauthorised overdraft charges, the OFT launched in April a market study into personal bank current account pricing, alongside a formal investigation into the fairness of charges for unauthorised overdrafts and returned items. The OFT is examining a number of issues including: (i) whether the widespread provision of so-called free banking delivers sufficiently high levels of transparency and value for customers; and (ii) the implications for competition and consumers if there were a shift away from the widespread provision of these type of current accounts. In relation to unauthorised overdraft charges, the OFT is considering whether these fall foul of the fairness test in the Unfair Terms Contract Regulations. Further to a test case lodged by the OFT on 31 August, the High Court is due to consider in the near future whether or not the regulations apply to such charges.
SME Banking Review- Some Small Relief
In its SME banking review (which covers the provision of banking services to small and medium sized enterprises) the OFT, and then the Competition Commission ( the CC), now, broadly, consider that there has been sufficient improvement in competition to warrant removing the transitional undertakings agreed by the four main banks in England and Wales subsequent to a CC investigation in 2002. Under the undertakings, Barclays, HSBC, Lloyds and RBS each undertook to offer SME accounts with a minimum interest rate of no less than 2.5% points below base rate or no money transmission charges.The CC has provisionally concluded that these obligations should be done away with, though it considers that the banks should be obliged to publish, and to notify the OFT, of any increases in charges or introduction of new charges.

It is a small amount of regulatory relief, however, as the CC considers that the banks should continue to be obliged to comply with certain behavioural undertakings designed, amongst other things, to (i) make switching easier and faster; (ii) make prices more transparent; and (iii) stop banks from bundling SME services with other services (such as loans or personal current accounts). These behavioural undertakings apply in Scotland.

The CC's final report is expected in the near future.

And the Rest...

The investigations above are just two pieces of a regulatory jigsaw. The OFT, for example, is feeding into the ongoing review of the self-regulatory codes of practice governing British banking. Amongst other things, the OFT has called for a new banking code to include, for example, greater price transparency for customers. This would includes the end of a reliance on hidden charges as well as improving the quality of information to ensure easy comparisons across different products. Then, of course, there was/is also the OFT's inquiries into personal current accounts in Northern Ireland and payment protection insurance, both of which led to market investigations references to the CC. In relation to Northern Ireland, the CC concluded in May that Northern Irish banks must make improvements to their personal current account services and provide better information to their customers in relation to services, charges and interest rates. The CC is still looking at the payment protection insurance issue.


The Cost of Doing Business



For business there are obvious compliance costs involved in dealing with multifarious regulatory investigations, in particular by tying up senior management resources in addition to external advisers. Further costs arise from the implementation and monitoring of remedies that UK authorities have the power to impose.



This could, rightly or wrongly, be regarded as a tax on doing business in that sector. However, the jury however is still very much out on the question of whether the authorities have achieved an outcome that merits the expense and resources of the investigating authorities themselves. Superficially, some charges may have been reduced or abolished, but it is likely that they will (or already have) materialised in other parts of the system.



More fundamentally, however, what is largely overlooked by regulators and the media is that while the businesses await the outcome of multiple investigations, they tend to defer important decisions and investments.



Consequently, the particularly high level of regulatory attention in different areas of financial services brings with it the danger of achieving the opposite of dynamic competition: stasis instead of dynamism and paralysis instead of innovation.