Transcript COMPETITION - EK Consulting Group

Competition Law and
Policy
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SPECIAL TUTORIAL FOR BANKERS
PRESENTED AT THE INTERNATIONAL LAW INSTITUTE
Layout of Presentation
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 Definition
 Objectives
 Brief Background
 International Competition Policies
 Competition Law and Policy in East Africa
Competition Law and Policy - Definitions
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 Competition law, (Anti trust law) deals with the law that
prohibits conduct that substantially distorts
competition in the economy or a given sector.
fair
 Competition Policy is the overall environment in an
economy that relates to control of anti-competitive
practices.
 Competition
law is
competition policy.
the
first
avenue
to
address
 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
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 To ensure fair competition among providers of
services in any given sector – finance and banking.
 To check business giants from abusing their market
dominance
practices.
through
market
distortive
business
 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
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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
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 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
precursor to modern competition law.
became
the
 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
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Today, the 2 most
Influential systems
of competition
regulation are the
United States
Antitrust law and
the European Union
Competition law.
International Competition
Policies
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Basic Composition of Competition
Policy – 3 Key Practices
1. Cartels
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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
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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
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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
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 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
institutions.
practices
by
other
financial
Competition Policy and Banks History
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 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
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 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
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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
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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
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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
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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
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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
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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
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 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
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 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.
EAC Regional Cooperation on
Competition Policy and Law
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Council of Minister Meeting - Jan 2001
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a)
b)
c)
d)
e)
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
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 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
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 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
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 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
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 Some
EAC States
Competition Acts.
do
not
have
individual
 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.