Community policing

The European Commission is getting tough on EC-wide competition by launching a three-tier investigation. Elizabeth McKnight reports

The European Commission has initiated sectoral competition law investigations into three sectors of the economy – energy markets, markets for the supply of retail financial services and markets for the supply of business insurance products and services to business buyers in the EU.

Although the Commission has for many years had the power to conduct such inquiries, it has rarely used it. It has preferred to take formal infringement proceedings against particular undertakings where it has identified particular agreements or practices undertaken by dominant firms that tend to restrict or distort competition. In some industrial sectors, the body of case law, which the Commission has developed through case-by-case enforcement activity, has served to promote particular forms of competition, while discouraging other practices. For example, in the luxury goods sector, the selective enforcement of Articles 81 and 82 has, over time, led to the emergence of a model that firms wishing to operate selective distribution systems are effectively obliged to adopt in order to conform to competition law requirements, while effectively blacklisting other forms of competition.

It is therefore particularly interesting that Competition Commissioner Neelie Kroes should have chosen to employ sectoral investigations as a means of clarifying how the Commission expects competition to function in these particular sectors.

All three of the sectors chosen as the subject of sectoral investigation share a common feature: they are sectors in which the European Community (EC) institutions have already adopted legislation designed to open up national markets to competition by facilitating market entry by firms established in other member states.

For example, in the electricity sector, successive EC directives have required member states to ensure that firms operating transmission and distribution networks are obliged to allow third-party use of their networks. Member states are also required to facilitate competition to provide additional generating capacity, and to ensure that so-called “eligible customers” are allowed to choose to take their electricity supply from a supplier of their choice, thereby opening up generation and supply markets to effective competition. Similarly, in the gas sector, operators of gas pipeline systems are required to allow third-party access to their systems, and operators of key storage facilities are subject to similar obligations.

In the banking and insurance sectors, EC legislation has been in place for some time, allowing banks or insurance companies headquartered in one member state, and duly authorised to conduct business there, to use the ‘passport’ granted by the supervisory authorities of their home member state to establish branches, or provide cross-border services, to customers in other member states without the need to obtain any further authorisation from the supervisory authorities of those host member states. Host member states have been required to leave it to the supervisory authorities of the home member state to oversee the prudential supervision of banks and insurance companies. They have been restricted as to the additional conduct of business rules that they may impose on banks or insurance companies establishing branches or offering cross-border services to customers in their territories.

The Commission now wishes to investigate whether these measures have been effective in engendering viable competition, such as to lead in due course to a single EU-wide market in each relevant sector, or whether there remain barriers to inter-state trade and effective competition. Such barriers might include restrictions on cross-border mergers, or anticompetitive agreements or practices, adopted by incumbent suppliers in their home member state, which serve to exclude new entrants from other member states, or (perhaps more likely in the energy sector) long-term supply agreements which foreclose the market to new entrants.

As yet, the Commission has reached no firm conclusions on these matters. It is satisfied that there are sufficient symptoms of a lack of effective competition to justify initiating formal sectoral investigations. Those symptoms include an appearance of price rigidity in particular member states, price disparities for apparently similar services between different member states, and the concentration of supply in the hands of a few suppliers in particular member states.

The Commission is to pursue its inquiries, at least initially, by issuing questionnaires to interested parties and following up with further, more targeted inquiries, meetings with consumer groups and other representative bodies, and consultation in respect of its draft conclusions, before the publication of final reports. Each sectoral inquiry may result in more than one final report, each dealing with different aspects of the market. In the retail financial services sector, it is apparent that the Commission’s initial focus will be on retail banking products, starting with credit cards and other payment cards. The inquiry may then move on to look at other retail financial products and services.

For competition in the UK, such investigations may well appear unnecessary, at least in respect of retail banking services and the energy sector. The retail banking sector has been subject to numerous competition law reviews since the publication of the Cruickhank Review in 2000. It has led to numerous detailed inquiries, including an Office of Fair Trading (OFT) decision approving cooperation arrangements for the sharing of Link cash machines; an OFT investigation of interchange fees charged by MasterCard issuers to merchant acquirers; a Competition Commission investigation of the supply of banking services by clearing banks to small and medium-sized enterprises; a Competition Commission investigation of the supply of store card services; and a similar inquiry in respect of the supply of home credit services in the UK. In the energy sector, Ofgem has overseen the phased introduction of full supply competition in the electricity and gas sectors. It continues to supervise a detailed third-party infrastructure access regime, and has also overhauled the wholesale electricity trading market to promote effective wholesale competition.

The insurance sector has attracted less competition law attention in the UK. But the Commission has reviewed various co-insurance and co-reinsurance arrangements and has issued a block exemption, defining the likely boundaries of permissible cooperation.

It remains to be seen whether, on completion of its present investigations, the Commission will wish to revisit the conclusions of it own previous case law, or to depart from the conclusions reached by national authorities which have looked at the same or similar issues.

Elizabeth McKnight is a partner at Herbert Smith