1. 1 EU S UPPORT TO STRENGTHENING COMPETITION IN S ERBIA Arpad Hargita EU-SCS A project financed by EU Implementing consortium lead by Hungarian Practice: Competition law and financial markets

2. Introduction 2 I. Scope of competition law in the financial sector II. Speciality of financial sector III. GVH recent practice: cases and sectoral investigation a) Full repayment loan cartel case b) Interchange fee case c) Sectoral investigation

3. I. I. Scope of competition law in general 3  May be different in different countries (legal systems), but in Hungary and most Member States: a) sectorally neutral b) ownership neutral (state and non-state)  Scope of competition act covers autonomous market behaviour of undertakings → exception where otherwise regulated by statute

4. I. Scope of competition law 4 a) it is provided otherwise by law: “ the guiding price and quantitative restrictions are exempted from Article 11 of the Competition Act on restrictive practices. ” (Act No. XVI. of 2003 on the Agricultural Regime) or b) the conduct was not autonomous as a result of sector- specific regulation that is in force All sectors fall under the scope of general antitrust law in Hungary, except: Case 24/1999. The Stock Exchange should be treated as an association of undertakings The scope of competition law was not really questioned in our cases:

5. II. Special feature of financial markets 5 Financial markets – which are at the heart of a well functioning market economy – have a specialty: the functioning of the market relies on trust → the collapse of one key bank could cause a domino effect and can lead to the loss of confidence in the whole financial system, while → in a normal market a failure of one market participant creates an opportunity for other players to gain advantageous positions

6. II. Special feature of financial markets 6 a) prudent (stabile and secure) functioning hindering taking too high risks b) growing efficiency → offering cheaper and better products Two main public objectives: competition is not the cause of the crisis, rather the lack of prudent regulation ( see the foreign currency loan situation in Hungary) in case of a proper prudent regulation financial institutions can not engage in competition that would be dangerous These are not contradictory objectives

7. III. Hungarian cases – Full prepayment loan cartel 7 Background and facts:  From 2006 to 2008 mortgages based on foreign currencies became more popular in Hungary as those loans had much better interest rates (20-30 % lower) than HUF loans  Due to the financial crisis serious problems arose: hundreds of thousands of debtors having difficulties paying back the loans:  Exchange raising from 160 to 240-260 in case of CHF  2010: full ban on the foreign currency based mortgage debtors  2011 Sept. new law: allowing debtors to pay back their real estate mortgage at a fixed, preferential exchange rate of 180 HUF (market rate was around 230-240 HUF). It was intended that the resulting incurred losses would be borne by the banks.

8. III. Hungarian cases – Full prepayment loan cartel 8  Consumers were permitted to repay their loans via two methods: a) they could repay the full amount of their loan using their own resources or b) they could apply for a refinancing HUF loan  Claims for full prepayment had to be submitted by consumers to the banks by 30 December 2011, and by 30 January 2012  13 banks (representing 90 % of the market) participated at the so called “Retail risk breakfasts ” held on 15 September and on 3 October 2011 → during the breakfast held on 15 September, the participants decided on a plan aimed at restricting access to the refinancing HUF loans.  The 4 biggest banks participated at bilateral meetings at executive management level as well, during which they shared information on their strategies which would enable them to coordinate their strategies concerning the prepayments

9. III. Hungarian cases – Full prepayment loan 9 Decision of the Competition Council :  Based written evidence (e-mails, internal notes) CC found that 11 banks coordinated their strategies to reduce the full prepayment of foreign currency based mortgages on fixed exchange rates by limiting access to HUF loans  9 billion HUF fine - factors taken into consideration:  Suffered losses by the banks and liquidation, capacity were taken into account as mitigating factors  Implementing the strategy was an aggravating factor There have been also abuse cases regarding the raising of the fee of end payment of loans, but ended with commitments: banks offered to pay back the difference,and the procedure ended that way without a decision finding that there has been a violation of competition law

10. III. Hungarian cases – MIF case 10 2008-2009 – Visa/Mastercard and 7 banks fined for fixing the interchange fee total fine of 1.9 HUF billion  Interchange fee is a “price” that the card acquiring bank pays to the card issuer bank → before 1996 and after 2008 it was not uniform  In 1996 banks concluded an agreement to introduce the same IF for Visa/Mastercard:  no real chance for competition between Visa and MasterCard and competition between the acquiring banks was also restricted,  the agreement the level of merchant service charges (that is the fee paid to the acquiring bank by the retailer and most important factors in competition between banks operating POS terminals ) were indirectly influenced.

11. III. Hungarian cases – Sectoral investigation 11 2007-2009 GVH conducted a sector enquiry on customer mobility in the retail banking as it found that providers tend to enjoy asmmetric benefit, which has harmful effects on competition Basic presumption : benefits of competition are restricted if freedom of choice prevails only when contracts are concluded and consumers can not switch to other products Results of investigation : a) general conclusion: shortcomings of regulation of switching distort consumers choice b) market of household loans: four factors distorting competition:  unilateral modifications are applied too broadly, and consumers have no time/possibility to react because of the short time (15 days to react)  significant direct expences of switching (4-10 % of the net present value of the loan is the switching cost)  lack of transparency  non portability of state subsidies to mortgage loans means switching causes giving up the subsidy

12. III. Hungarian cases – Sectoral investigation 12 c) Market for current accounts: lack of transparency makes switching difficult Suggestions: - Product comparison website for both products - Portable state subsidy - Legisliation maximalizing the overall closing charges - Restricting unilateral contract modification rights

13. 13 Thank you for your attention!