On June 13, the European Commission (“Commission”) announced the launch of detailed antitrust investigations of the European Union’s (“EU”) financial services and energy markets. In particular, the Commission will focus on the retail banking and business insurance sectors, and the gas and electricity markets. The Commission is concerned with growing evidence suggesting that EU consumers are not benefiting from fully competitive and integrated financial markets, and the lack of genuinely competitive offers and significant price increases in the energy sector.

Under Article 17 of Regulation 1/2003, the Commission may conduct an investigation of a particular sector of the economy when it suspects that a particular market is not competing effectively. The Commission benefits from a range of investigative powers, including the power to request information, take statements, conduct inspections, request national antitrust agencies to conduct inspections for it, and to impose sanctions for non-compliance.

Retail financial markets have largely showed a lack of integration, despite the introduction of the Euro. Prices for comparable products in retail banking appear to vary considerably across the European Union. For example, the Commission notes that there are substantial differences in domestic interchange fees and merchant service charges in the Member States’ payment card scheme. There is also a variation in profitability of banks across Europe, indicative of perhaps a lack of competition and high entry barriers in some domestic markets. Finally, as recently reported in the European financial press, cross-border mergers in the banking sectors have been limited in number possibly due to protectionist tendencies by national banking agencies.

The Commission will also investigate the possible competitive distortions brought about by the lack of integration in the business insurance sector. The Commission will examine the way the industry is organized, in particular, the setting of standard policy conditions, the extent of cooperation within insurers’ association, and coinsurance arrangements between insurers. The Commission also has concerns about barriers to entry, including the lack of access to risk data and distribution channels, and its effect on cross-border entry.

We expect that the Commission will contact Member State authorities, users of financial services, consumer organizations, financial services intermediaries, as well as banking institutions, insurance companies, insurance services and products, and other providers of retail banking services and products.

The Commission is also determined to see that Member States follow through on their commitment to create competitive energy markets given their importance to European industry. Both gas and electricity prices have risen during 2005, and are expected to rise again in the future, especially for gas. The Commission believes that cross-border flows seem insufficient to constrain price differences between most Member States, and integration between national markets has been slow in many regions. In addition, new market entry has been limited, and market concentration remains very high.

The focus of the gas and electricity investigations will slightly differ since the sectors are at different stages of development, and have a different supply-side structure. The gas inquiry will address concerns on access issues, such as access to large-volume gas supply, flexibility resources, networks and customer markets. The electricity inquiry will focus on price formation in the electricity wholesale markets, which also involves looking at electricity generation and supply, barriers to entry (including long-term agreements), inter-connectors and how companies use them, as well as relations between network operators and their affiliates. The general focus of both gas and electricity investigations is on supply markets (rather than transport), and issues that have pan-European implications.

The Commission will shortly be issuing a questionnaire to a large number of participants in the energy industry, including gas producers, electricity generators, gas importers, electricity and gas wholesalers, transmission system operators and customers, gas storage system operators, gas and electricity retailers and industrial customers.

The results of the Commission’s financial services and energy industry investigations are expected in 2006. They will seek to identify possible distortions of competition, and other market conditions that permit anticompetitive behavior. Accordingly, individual companies, whose anticompetitive practices are revealed by the investigations, may face enforcement action under the EU’s competition laws, either by the Commission or national antitrust agencies. EU Competition Commissioner, Neelie Kroes, acknowledged that these inquiries “are not quick fixes, but show my commitment to using the competition rules to effect long-term structural improvements to the EU economy.”

Authored by:
Neil Ray