Competition Law and Policy Special TUTORIAL FOR BANKERS Presented at the INTERNATIONAL LAW INSTITUTE
Layout of Presentation • Definition • Objectives • Brief Background • International Competition Policies • Competition Law and Policy in East Africa
Competition Law and Policy - Definitions • Competition law, (Anti trust law) deals with the law that prohibits conduct that substantially distorts fair competition in the economy or a given sector. • Competition Policy is the overall environment in an economy that relates to control of anti-competitive practices. • Competition law is the first avenue to address competition policy. • Both law and policy generally regulate competition in a market by regulating anti-competitive conduct. • i.e conduct relating to monopolies, mergers, and restrictive trade practices like collusion, price fixing, market sharing, boycott of suppliers, etc.
Objectives of Competition Law • To ensure fair competition among providers of services in any given sector – finance and banking. • To check business giants from abusing their market dominance through market distortive business practices. • To promote competition among firms which results in greater efficiency and cost reduction. • Consumer welfare. • Competition improves efficiency in production and supply and enables production of goods at lower prices with wider choice.
Brief Background to Competition Law Dates back to Roman Empire where Roman Legislators tried to control price fluctuations and unfair trade practices. Business practices of market traders were scrutinized and severe sanctions were given to traders dealing in unfair trade practices.
Background Continued • Through the Middle Ages in Europe, Kings and Queens repeatedly cracked down on monopolies, even those created by state legislation. • Practice led to development of the English Common Law doctrine of Restraint of trade, which became the precursor to modern competition law. • English Common law and practice influenced the creation of the US Antitrust laws, which in turn had significant influence on the development of the European Community Competition Laws after 2nd World War. • European Community Competition laws major foundation to modern day competition laws in majority of States.
Position today Today, the 2 most Influential systems of competition regulation are the United States Antitrust law and the European Union Competition law.
Basic Composition of Competition Policy – 3 Key Practices 1. Cartels Agreements or coordination of market behavior of firms with the objective or effect of preventing, restricting or distorting competition. Eg Agreements that directly or indirectly fix purchase or selling prices or any other conditions that eg limit production. For cartels to be prohibited, competition has to be negatively affected to a considerable extent.
Basic Composition of Competition Policy – 3 Key Practices 2. Abuse of Dominant Position A company holds a dominant position when it can behave independently from both competitors and consumers who have limited possibilities to react to such behavior. Competition law thus deals with control of firms that have dominant positions in an industry. Abuse includes eg charging prices or imposing terms that are unjustifiably burdensome, working in ways that impede market access by other competitors or induce them to abandon their operations.
Basic Composition of Competition Policy – 3 Key Practices 3. Mergers and Acquisitions • 2 or more previously independent firms merge or one firm acquires control over another/ others enabling it to exercise a decisive influence on all their operations. • Mergers are prohibited if they create or strengthen a dominant position which significantly impede directly or indirectly the existence or development of effective competition. • Eg one bank merging with others in the economy thereby influencing the interest rates in the markets.
Finance and Banking Sector in Perspective • Banks have a unique standing in the economy hence the need to give them greater protection than other industries. • Failure of one bank could precipitate a failure of several other banks. • This is because eg of inter bank lending, failure of one bank could lead to withdraw of deposits from other banks, etc. • Hence there is great need to protect the sector from unfair business practices by other financial institutions.
Competition Policy and Banks - History • Many Countries have not historically applied a competition policy in the banking sector. • However, with the increase in privatization and deregulation, and the presence of foreign financial institutions, there has been a growing need to address competition policy in relation to financial firms. • USA was the first country to insist that the banking sector ought to be affected by Competition Laws and Policy. • This was stated in the Supreme Court decision of United States V Philadelphia National Bank, that stipulated that the financial sector was also to be subject to the anti-trust law regime.
Competition Policy and Banks - History • Hence enforcement of competition policy in the banking sector has become increasingly standard in major developed economies. • In practice, however, actual competition in the financial market has been limited by entrance and merger regulations, and branching regulations. • The result has been improved access to finance through lower interest rates for loans and lesser collateral requirements as banks fight for customers.
Regulations Used to Deter Anti –Competitive Practices Entrance and Maintenance Regulations • Tightening grant of bank licenses through tough financial and senior management requirements for license acquisition. • Strict and continuous monitoring of quantitative and qualitative conditions for the continued operation of banks. • This restriction affects both new entrants and ownership through acquisition. • Also, existing banks are kept on equal footing hence minimal occurrence of anti-competitive behavior.
Regulations Used to Deter Anti –Competitive Practices Exit Regulations • Banks are protected from insolvency due to the effects this would have on the financial system – done through capital injection by governments. • Bank difficulties that could lead to exit are usually discerned through monitoring hence problems are quickly rectified. • As such, early structural intervention plans or early warning systems are implemented as prompt corrective action.
Regulations Used to Deter Anti –Competitive Practices Branch Regulations • Regulators restrict the no of established branches and in which areas, to control competition. • In Japan eg, branching would only be allowed if other banks of the same category were also permitted branches in the same Area. • Since coming of ATMs and internet banking, branching is more relaxed.
Regulations Used to Deter Anti –Competitive Practices Merger Regulations • Bank mergers are subject to a dual approval process –both the Central bank and the Competition authority are involved in approval of merger. • Regulatory authority reviews licenses of merging Banks so as to authorize alterations. • Rationale – take into consideration financial stability implications.
Regulations Used to Deter Anti –Competitive Practices Discretion of the Banking Regulator • The banking regulator is usually given a certain degree of discretion. • If wide discretion is granted, there is a stronger competition policy. • In several developing countries today, discretion is in the form of the Minister’s approval.
Regulations Used to Deter Anti –Competitive Practices Inter Bank Agreements • Agreements among banks are necessary for the existence of efficient payment systems. • Eg in order to guarantee interoperability across banks of ATMs, banks have to agree on how to share the cost of transactions. • With debit and credit cards, banks have to agree on how to share the costs between issuers and acquirers. • These agreements tend to have the effect of being anticompetitive.
COMPETITON AND GATS • The manner in which foreign financial institutions enter new financial markets is largely affected by the host country’s schedule of commitments in GATS. • A high entrance of foreign financial institutions in a market promotes greater competition in the market. • GATS has been instrumental in promoting liberalisation of financial markets. • As a result, there are clarified conditions for market entry, better guidelines for foreign players and better publicity to ensure transparency of the financial system.
International Enforcement • Competition law has been substantially internationalized along the lines of the EU and USA Model. • Doha negotiations currently having talks on competition law enforcement being a global matter. • The new established International Competition Network (ICN) is a way for national authorities to coordinate their own enforcement activities.
Council of Minister Meeting - Jan 2001 • An EAC Competition Policy and Law be developed the activities of which should be determined by the principle of subsidiarity. • Objective of policy, which should cover all sectors shall be to ensure, protect and promote free competition. • Secretariat facilitate the process of a Model EAC Competition Policy and Law on the basis of existing Partner States Competition Policies and Laws. • Competent, strong, independent and autonomous regional authority be established to implement Community’s Policy and Law. • EAC Competition Policy to be concluded in tandem with the CU Protocol.
EAC Competition Policy • Article 75 (1), Competition is one of the elements to be contained in the Customs Union Protocol. • Competition Law also embedded in Common Market Protocol • Art 33, Prohibited Business Practices. • Art 36 (1) on Consumer Protection • EAC Competiton Act
EAC Competition Act • Came into force in Feb 2009. • Act based on internationally accepted minimum requirements for competition law and policy, viz: • UNCTAD’S draft Model Law on Competition • World Bank and OECD considerations on the same • The EU position on competition • WTO on going discussions on Competition
EAC Competition Act • The Act generally covers the following issues; • Restrictive Agreements • Abuse of Market Dominance • Mergers and Acquisitions • Independence of the Enforcing Authority through grant of quasi judicial and administrative power and due process. • Transparency, non discrimination and procedural fairness. • Cartels • Power to cooperate with regional and international organizations and foreign competition authorities.
Concluding Remarks • Some EAC States do not have individual Competition Acts. • Uganda still with a draft bill. • Position of Rwanda? • Competition policy though applied, on basis of international law and instruments to which we are signatories.