The article is based on a speech by the Director General of the Competition Authority at a morning seminar on the Icelandic banking system, organised by ASÍ, BSRB, BHM and the Consumer Association on 3 October.
This article reviews the application of competition law to the banking and financial markets, summarises the conclusions from that work, and sets out the way forward.
First, it should be noted that the barriers to competition in the payment card market reflected the situation in the banking market for a long time. For a long time, two companies operated in the payment card market, both largely jointly owned by the three major banks and handling transaction processing for their respective brands, VISA and Mastercard. When a new competitor, Kortaþjónustan, entered the market, it faced significant barriers to competition.
These obstacles were highlighted by Decision No. 4/2008, Breach by Greiðslumiðlun hf., Kreditkort hf. and Fjölgreiðslumiðlun hf. of the prohibition provisions of the Competition Act. The case concerned multiple instances of anti-competitive conduct by the companies, the abuse of a dominant market position by Greiðslumiðlun, and anti-competitive behaviour within the framework of Fjölgreiðslumiðlun, a company jointly owned by, among others, the banks. These infringements, among other things, prevented smaller competitors from entering the market and harmed the public. The companies reached a settlement with the Competition Authority and paid administrative fines totalling 735 million króna, which is equivalent to about 1.5 billion króna at today's prices.
Furthermore, the companies committed to complying with conditions aimed at creating a better competitive environment for the future. The settlement led to the companies competing with each other for the processing of both brands (Visa and MasterCard), and Korta gained a foothold. Additionally, the operations of Fjölgreiðslumiðlun were transferred to the Central Bank of Iceland under the name Greiðsluveitan.
Subsequently, there were changes to the ownership and structure of the Reiknistofu bankanna and its owners, who were, in essence, the three banks, requested an exemption for the cooperation that its activities constitute. By decision no. 14/2012, Application for an exemption regarding the activities of Reiknistofu bankanna hf., Detailed conditions were imposed on the operations of the Reiknistofnun. These were aimed, among other things, at ensuring that new and smaller competitors of the banks had full access to the services of the Reiknistofnun on the same terms as its owners. Furthermore, anti-competitive cooperation within the Reiknistofan was prevented and competition in the information technology market was protected.
Following amendments to the Competition Act, which came into force at the beginning of 2021, the Competition Authority no longer has the remit to grant a formal exemption from the prohibition on collusion or to impose conditions on such cooperation. The conditions are therefore no longer in effect, but the obligation remains on Reiknistofan and its owners to ensure that cooperation on its platform complies with the exemption provisions of the Competition Act.
Valitor's conduct has once again come under the scrutiny of the Competition Authority, Thus, in Decision No. 8/2013, the Competition Authority concluded that the company had again abused its dominant market position and had also breached the conditions set out in the aforementioned Decision No. 4/2008. The company was thus found guilty of undercutting in transaction handling and misusing confidential information about its competitors, to which it had access due to its issuance of cards for banks and savings banks. The company was fined 500 million króna, which is equivalent to almost 700 million króna at today's prices. The decision, including the fines, was subsequently upheld by the Supreme Court.
Two years later, or by decision no. 8/2015, an infringement by Arion Bank, Íslandsbanki, Landsbankinn, Borgun and Valitor of the prohibition on illegal collusion and the prohibition on anti-competitive conduct by associations of undertakings was found. The infringements that were acknowledged concerned collusion in relation to the setting of interchange fees and the awarding of reward points, and all the companies entered into a settlement with the Competition Authority regarding the outcome of the case. Furthermore, the companies committed to undertaking extensive measures to enhance competition, which included, among other things, the introduction of a maximum interchange fee. Furthermore, the settlements stipulated changes to the ownership of the two payment card companies, which were no longer under common and parallel ownership. The companies paid administrative fines totalling just over 1.6 billion krónur, which is equivalent to almost 2.3 billion krónur at today's prices.
With decisions no. 22, 24 and 25/2017, the Competition Authority concluded investigations that began with complaints from smaller competitors regarding, among other things, the banks' terms for the provision of mortgages. The three commercial banks reached a settlement with the Competition Authority. On this basis, each of the banks undertook to implement measures aimed at
Among other things, the banks committed to not imposing prepayment charges on variable-rate loans to small businesses and individuals. By decision no. 4/2023, made earlier this year, it was concluded that Arion Bank had breached the ban on prepayment charges on loans to small businesses, and the bank reached a settlement with the supervisory authority to pay a fine of 80 million krónur.
The aforementioned settlement from 2017 has also recently come under discussion in connection with Indó's entry into the banking market. Indó has publicly pointed out that the terms of Íslandsbanki and possibly other banks in foreign exchange transactions may, at the very least, contravene the objectives of the settlement. The Competition Authority is now reviewing those terms and is seeking information from the banks.
The Competition Authority has also looked into the conduct of the Association of Financial Institutions, and Decision No. 7/2022 outlines the association's breaches of competition law and the directives that apply to it, based on a previous decision. The infringements concerned the SFF's participation in public discussions on the pricing of insurance companies. The association reached a settlement with the Competition Authority regarding the outcome of the case, paid a fine of 20 million króna, and implemented measures to prevent a recurrence of the infringements.
This review of cases does not include mergers in the financial market. On the one hand, since the collapse, the Competition Authority has taken over 60 decisions in which conditions have been imposed on the banks or investment firms acting on their behalf, regarding their takeover of businesses in various sectors of the economy. The purpose of the conditions is primarily to ensure fairness and competition in the relevant markets.
However, the supervisory authority has examined several mergers of financial institutions, including decision no. 13/2022., Merger of Rapyd and Valitor. During the investigation, the merging parties reached a settlement with the regulator which, among other things, involved the sale of a diverse portfolio of transaction processing agreements and thus addressed the merged company's dominant position in the transaction processing market. Subsequently, Kvika bank purchased the aforementioned portfolio of transaction processing agreements, pursuant to decision no. 14/2022.
In the first half of this year, Íslandsbanki and Kvika were in so-called preliminary talks with the Competition Authority, in connection with the banks' discussions about a possible merger. Those talks were subsequently terminated.
Finally, it is worth mentioning that the Competition Authority has written several reports and opinions concerning competition in financial markets. These include Discussion Paper no. 1/2011, Competition in the banking market, report no. 1/2013, Financial services at a crossroads, and report no. 1/2018, A vision for the financial system. These reports suggest various ways to enhance competition in financial markets. In this regard, the following may be mentioned:
When this analysis is viewed in the context of the report by the Minister for Culture and Commerce's working group on the charging and profitability of the commercial banks, a considerable degree of resonance can be found. In particular, much has been achieved, but competitive oversight is still lacking.
For example, it is noteworthy that while the optimisation of the banking system resulted in lower cost ratios, the increased operational efficiency of the banks and the reduction of the special bank tax did not translate into a lower interest margin, but rather into improved profitability. It is clear that bank customers would have benefited more from the efficiencies if competition had been more effective.
Taking into account the Competition Authority's experience from previous investigations and the findings of the report, the Authority considers the following key points should be borne in mind when formulating future policy on the financial market:
Authorities in the financial markets have a significant role to play in this regard. The main objective of financial market regulation is to promote sound and secure financial activities. However, it is essential that these rules do not create unnecessary barriers for new and smaller players. It is therefore important that, in the regulation and supervision of the financial market, careful consideration is given to how the entry of new players can be facilitated, without compromising legitimate safety interests. This applies, for example, to the requirements imposed when new banks commence operations or when laying the foundations for a secure and efficient payment system.
In this regard, it must be borne in mind that the right combination of regulatory requirements and effective competition creates the groundwork for robust and secure financial services in the long term.
Operating companies in the financial market must also consider this in relation to partnerships and joint ventures that bring them considerable benefits. For example, it is crucial that the services of the Reiknistofu bankanna are not only open to all, but also priced in such a way that small, new players can establish themselves.
Thirdly, it is important to closely monitor any consolidation in the financial markets. It is natural for operating companies to seek opportunities for increased economies of scale. However, it is unacceptable for such actions to reduce competition, as this risks the owners of the companies involved enjoying the benefits alone, instead of them being shared with customers on a competitive basis.
Experience also shows us that smaller pioneers are of great importance in the financial market. Companies such as Kortaþjónustan, Kvika and Indó have been mentioned here. In some cases, such companies can have a greater impact on the competition than their market share suggests. In competition law, the English term „maverick“ is often used for such phenomena. The competition authority pays particular attention to this when monitoring mergers in the financial market.
Fourthly, it is important to consider ways to strengthen customer oversight of the banks. This is indeed addressed in the working group's report. The settlements that the supervisory authority reached with the banks in 2017, and which were mentioned here, are aimed, among other things, at increasing customers' ability to switch service providers and thereby create competition. This needs to be addressed more effectively by the Competition Authority, other government bodies, and the banks themselves. This is one way to counteract tacit collusion in the banking market.
It is therefore possible to agree with the report's authors that there is scope to strengthen competition oversight in this country. In the context of the development of the economy and the importance of competition in the market, the Competition Authority has been under considerable pressure in recent years. The Competition Authority has pointed this out to the government and will continue to do so.
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