European Union And Competition Law Update

FINANCIAL SERVICES SECTOR

The two developments reported in this issue underline the importance that the competition authorities attach to transparency, consumer switching ability and the possibility of market entry as sources of increased competition in financial services markets.

Commission issues Green Paper on retail financial services

This need to facilitate switching and crossborder service provision is emphasised in the European Commission's Green Paper on Retail Financial Services, published on 2 May. The Green Paper builds on the results of the Commission's sector inquiry into retail banking and its interim report on business insurance. The Green Paper focuses on the need to enhance consumer welfare and remove cross-border barriers in this sector. It highlights the modest current cross-border activity, wide variation in prices, restricted product diversity and choice. The Commission's aim is to ensure properly regulated open markets which meet consumers' needs, offer choice, value and quality. It wishes to lower prices, enhance consumer confidence and empower consumers. Although there is little to object to in these aims, the steps that will be taken in order to achieve them are less clear and are still the subject of further consultation.

CC reports on Northern Ireland current accounts

On 15 May, the UK Competition Commission issued its final report and orders following its 2-year inquiry into the market for current account services in Northern Ireland. In addition to a fairly predictable order to increase transparency in relation to charging structures (interest rates, charges and deductions), and improvements to the switching process to ensure that customers who switch banks do not incur costs in doing so, the CC ordered banks to offer a chargefree and interest-free overdraft facility to new customers for at least three months, provided that the customer would be eligible for such a facility under the bank's usual credit scoring policy. Where the customer is not eligible for such an overdraft or does not wish to have one, banks must guarantee to refund the customer any charges and interest which are incurred within a minimum period of three months after the new personal account is opened and which arise from failures in the switching process (regardless of whether charges and interest were the result of an error by the new bank). The new measures will come into force in Northern Ireland next year to coincide with likely changes throughout the UK resulting from the current review of the Banking Code by the Banking Code Standards Board (BCSB) and the introduction of the Consumer Credit Act 2006.

UTILITIES SECTOR

Following the European Commission's selection of full separation of ownership of energy transmission networks from other activities in the sector, as the preferred remedy for a number of the ills identified in its sector inquiry report, unbundling has been debated further at a political level, but meanwhile the Commission is pushing ahead with individual investigations which may have the same outcome.

Energy unbundling - state of play

The European Parliament Committee on Industry, Research and Energy voted on 18 June in favour of unbundling as the most effective tool to promote competition in energy markets. The Plenary Session of the European Parliament will vote on the issue in mid-July and is likely to follow the Committee's lead.

In contrast, a majority of EU Member States appear to oppose ownership unbundling, although a compromise solution, under which the energy suppliers could retain ownership of the gas and electricity networks, with the networks being operated by new independent companies, has been proposed in order to satisfy the objections of countries such as Germany and France. Eight countries (Denmark, Spain, the Netherlands, Belgium, Sweden, Finland, Romania and the UK) have lobbied the European Commission, urging it to continue with its unbundling proposals.

Commission initiates proceedings against RWE and ENI, alleging obstruction of market access

On 11 May, the Commission announced that it had sent statements of objections to ENI and RWE, initiating proceedings against them for alleged breaches of Article 82. The Commission launched a number of investigations into the conduct of energy suppliers across Europe in 2006, and has been identifying priority cases to establish precedents for the various issues that it wishes to tackle. RWE and ENI are now the first two cases to be taken forward to the next stage. The Commission's case against RWE concerns prices charged for access to gas networks operated by RWE TSO, and allegations of inflation of RWE TSO's costs, maintenance of an artificial network fragmentation and failure to release transportation capacity to allow customer switching. The Commission alleges that these practices create additional barriers to entry into the regional wholesale gas supply market in RWE's core grid area in North Rhine-Westphalia, protecting RWE's dominant natural gas supply business and resulting in market foreclosure, principally by raising rivals' costs, to the detriment of consumers. The Commission accuses ENI of capacity hoarding and strategic underinvestment in the transmission system, leading to the foreclosure of competitors and harm for competition and customers in supply markets in Italy. The Commission sees the allegation of strategic underinvestment in particular as a new departure in its enforcement of Article 82. The Competition Commissioner, Neelie Kroes, has expressed her readiness to order unbundling in cases such as this if it proves necessary, so it is conceivable that unbundling will be ordered in individual cases rather more quickly than whatever flavour of sector-wide unbundling results from the current political process.

MERGERS

The cases reported in this issue raise a number of themes, including the competition treatment of investments by private equity firms, and investigations into narrowly-defined and small markets.

HgCapital abandons proposed crash test dummy acquisition

The rise of private equity firms, and their increasing interest in driving consolidation of the industry sectors in which they invest, mean that they are becoming more likely to encounter overlaps between their acquisition or investment targets and their existing portfolio companies. These overlaps will be treated in the same way as overlaps in transactions involving trade buyers, and in some cases can spell the end of acquisition plans. A...

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