OPINION

Is state aid law relevant to depositor protection?

At the time of writing (6 October), the worldwide financial storm has enveloped Europe. It is impossible to predict what may have happened by the time this is read. The most prominent issue of the day has been the expansion of bank depositor protection schemes.

As a solution to the overall crisis, depositor protection is barely relevant, but it is a top priority for national economies. When faith in banks falters, action must be taken to stop a panic withdrawal of cash. Only national governments have power to act, and they have to do so immediately.

In principle, schemes under Directive 94/19 do not fall into the state aid net because they are funded by the banks. However, a sudden and vast expansion would involve public funding and a state guarantee – the factor that calms the market. A call to pay the scheme out in full would only be made in circumstances where state aid rules had ceased to be of much relevance: Ireland's pledge of €400bn is nearly 2.5 times its GDP.

The rational outcome would be for all EU countries to extend their schemes to cover all retail deposits in their own banks – they would all have to protect either depositors in their own banks or resident depositors in any bank. The EU has no power to force any action, although the Commission is to draw up a new directive.

If governments worked to make the coverage reasonably uniform, there would be few competitive differences between national regimes. Charges that one was unfair would be silenced. In any event, the EU banking “passport” allocates the regulation of banks to their home state, so the preference of one's own banks is consistent with the general scheme of things.

So far, the UK, Ireland, Greece, Germany, Austria, Denmark and Spain have announced a full-blown guarantee of deposits, although the UK's is only implicit, based on a legitimate expectation from what was said after the run on Northern Rock in September 2007. Few details are yet known, but the UK, Ireland and Germany certainly acted in response to an urgent systemic threat.

Ireland's action is the most far-reaching, and potentially the most doubtful under state aid law. Unlike the others, it extends beyond retail deposits to corporate accounts, covered bonds and interbank lending. Corporate customers are the most likely to move their (relatively large) deposits around, and this might be seen as a lure to depositors, especially those in the UK.

Its coverage of interbank lending is interesting. Banks' reluctance to lend to each other is a major factor in the broader financial crisis. It could be that the state guarantee of an individual interbank loan would have more power to break the vicious circle than the floods of liquidity made available by central banks. It certainly seems worth a try.

State aid law is facing a moment of truth. A crisis such as the current one threatens the existence of the financial markets. While it lasts, competition among financial institutions is at best a secondary consideration.

DG Competition has rightly acted with restraint. A great deal of discussion takes place before any announcement is made but, apart from a brief denunciation of Ireland's action by Commissioner Kroes, DG Competition has said little in public about depositor protection.

Moreover, state aid law has always been the most political of the Commission's powers. It would lose all credibility with the public if little-known rules on state aid were invoked to defeat a rescue attempt. Aggressive pursuit of Ireland in the wake of the Lisbon treaty referendum would also seem to be ill-advised. DG Competition's reticence is therefore the right course of action.

Celia Hampton

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NEWS

Saving Bradford & Bingley

The European Commission has authorised the UK authorities’ rescue aid package for Bradford & Bingley (B&B), the building society turned bank.  Following extensive discussions with the Commission, the UK gave notification on the 30 September of the measures taken to protect retail depositors and ensure financial stability. Within 24 hours, the Commission decided that the package met EU rules on rescue aid.

Neelie Kroes, the EU competition commissioner, was keen to underline the Commission’s ability to “move extremely quickly to provide legal certainty for rescue measures”. This case demonstrates that “state aid control is not an obstacle to protecting the interests of depositors and promoting financial stability,” she added. 

At the close of 2007, B&B had a balance-sheet total of £52bn and 197 branches. But by last month, it was in serious financial difficulty and, on 27 September, the UK’s Financial Services Agency withdrew the troubled bank’s licence to accept deposits, effectively closing it down. B&B was nationalised, with the British government taking control of the bank's mortgages and loans, and B&B's £20bn savings arm and branches being sold to Abbey and its Spanish parent, Santander. To provide assurance to wholesale depositors and borrowers, and to preserve wider financial market stability, the British government also put in place guarantee arrangements for six months to safeguard certain wholesale borrowings and deposits with B&B.

The Commission concluded that the measures amounted to state aid.  However, they could be authorised as rescue aid in line with the EU guidelines for rescuing and restructuring or liquidating firms in difficulty. Under these rules, rescue aid must be given in the form of loans or guarantees lasting no more than six months, except when (as in the case of B&B) structural measures are urgently required.  

The UK authorities will submit a restructuring and/or liquidation plan within six months. This will be examined by the Commission under its restructuring aid rules.

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NEWS

UK homebuilding sector is competitive

The OFT has recently published its Homebuilding in the UK market study (www.oft.gov.uk/shared_oft/reports/comp_policy/oft1020.pdf). The report concludes that, although the sector is broadly competitive, many homebuyers experience faults or delays. To try and remedy this, the industry has agreed to develop its own code of conduct and redress scheme for consumers.

According to the study, there was little evidence of competition problems in the supply of new homes in the UK.  Broadly speaking, the barriers to entering the market are low. Prices are set through homebuilders competing for sales against each other and are severely limited by the prices of existing homes. Individual homebuilders do not have the market power to restrict supply in order to inflate prices.

On the other hand, homebuyers can experience a range of problems, including delays in moving into their new house and faults in the new home.  There are also often difficulties when it comes to the sales process, including reservation fees, the clarity of information given to homebuyers and potentially unfair contract terms.

To try and remedy this, industry representatives have agreed to set up a steering group to draw up a code of conduct and redress scheme for consumers. The aim is to have this scheme fully operational by March 2010. If the group does not make adequate progress or fails to come up with an effective solution, there could be a statutory redress mechanism funded by a levy on the industry.

The study also found no evidence that homebuilders are able to hoard land for anticompetitive reasons or to withhold a large amount of land with planning permission on which they have not begun to build. Having a stock of land helps a homebuilder cope with housing market fluctuations and reduce its exposure to risk resulting from the planning system.

Apart from the homebuilding firms, the available information suggests that the largest landbank may in fact be that held by the public sector. Homebuilders are, to some extent, constrained by the availability of suitable land. If the government and devolved administrations want to ease this constraint in future, then one way of doing this would be to make more public sector land, which is suitable for development, more readily available to homebuilders.

The market study was launched by the OFT in June 2007.

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NEWS

€676m fines for paraffin wax cartel

Nine groups, including ExxonMobil and Total, have been fined a total of €676,011,400 for taking part in a cartel in paraffin wax.

Referring to themselves as the “paraffin mafia” or the “Blue Saloon” (after the hotel bar where some of their meetings took place), the cartel members – ENI, ExxonMobil, Hansen & Rosenthal, Tudapetrol, MOL, Repsol, Sasol, RWE and Total ­– fixed prices for paraffin wax in the EEA. Shell also took part in the cartel but blew the whistle on its activities and so did not have to pay a fine under the Commission’s leniency provisions.

The price-fixing and market allocation went on between 1992 and 2005.

Paraffin waxes – a market worth almost €500m – are used in the rubber, packaging, adhesive and chewing gum industries, as well as in the production of the wax coating on cheese, of candles, waxed paper, paper cups and plates, chemicals, tyres and car components. “There is probably not a household or company in Europe,” said Competition Commissioner Neelie Kroes, “that has not bought products affected by this ‘paraffin mafia’ cartel.”

ExxonMobil, Sasol, Shell, RWE and Total were also involved in price-fixing for slack wax, which is the raw material used to make paraffin waxes, and is itself used to make items such as particle board. The cartel members sold slack wax to end-customers in Germany.

All the cartel participants fixed prices, with ExxonMobil, MOL, Repsol, Sasol, Shell and Total also allocating markets and customers.

Following Shell’s report and application for immunity, the Commission investigation started with surprise inspections in April 2005.

Sasol was the cartel leader and so its fine was increased by 50%. ENI’s fine was increased by 60% because it had previously taken part in similar cartels. Sasol, however, had its fine reduced by 50% because of its co-operation with the investigation. Repsol and ExxonMobil were also granted a reduction of their fines – 25% and 7% respectively.

In setting the fines, the Commission took into account the sales which had been affected and the combined market share of the companies, as well as the geographical scope of the cartel agreements.

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NEWS

Former BA executive faces jail for price-fixing

A former executive of BA has agreed to plead guilty, serve eight months in jail and pay a fine for taking part in a conspiracy to fix rates for international air cargo shipments.

Keith Packer, former commercial general manager for British Airways World Cargo, will plead guilty to charges under the US Sherman Act in a court in Washington DC. He was involved in a conspiracy to fix rates for international air shipments. Packer has agreed to serve eight months in jail, pay a $20,000 fine and co-operate with the US Department of Justice in its ongoing investigation into a massive conspiracy to fix prices for international air cargoes. The plea agreement is yet to be accepted by the court.

The price-fixing conspiracy began at least as early as March 2002 and went on until at least February 2006.

The investigation has so far led to charges involving nine companies and three individuals. Packer is the first foreign national to be charged. In August 2007, British Airways plc pleaded guilty and was sentenced to pay a $300m fine for conspiring to fix cargo rates for international air shipments and to fix passenger fuel surcharges for long-haul international air transportation. Korean Air Lines, Qantas Airways and Japan Airlines have also paid fines for their role in the price-fixing conspiracy, as have SAS, Cathay Pacific, Martinair, Air France and KLM Royal Dutch Airlines (reported in CLI in July 2008).

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OPINION

Should we settle?

The European Commission’s new cartel settlement procedure

by Isabelle Rahman*

The European Commission’s campaign against cartels is stronger than ever and its recently introduced settlement procedure is yet another tool in its cartel enforcement arsenal. One of the primary stated aims of the new settlement regime is to introduce procedural efficiencies, thereby reducing the backlog of unresolved cartel investigations and freeing up vital Commission resources to pursue further prosecutions.

Despite the existence of a dedicated unit within DG Competition to tackle the fight against cartels, the Commission’s lengthy administrative proceedings prevent cartel investigations from being efficiently processed. It is not unusual for such proceedings to drag on for a period of three to five years and, with most defendants opting to appeal, the overall duration of a cartel investigation can exceed 10 years. The option of a settlement route should, in theory, enable a speedier resolution to many cartel investigations. While the Commission’s goal of introducing fast-track cartel proceedings should be welcomed, defendants should nonetheless consider both the benefits and risks before opting for the settlement route. 

Main features of the settlement procedure

The procedure was introduced on 30 June 2008 and is embodied in Commission Notice 2008/C167/01 and an amendment to Regulation 773/2004. After conducting an initial investigation, the Commission may, at its discretion, invite undertakings to enter into settlement discussions. The companies engaged in settlement discussions are not able to negotiate with the Commission concerning the existence of the alleged cartel infringement, the evidence supporting it or the level of fines. Essentially, as indicated in a speech by Neelie Kroes, the European commissioner for competition, on 19 November 2007, “the Commission will not bargain about evidence or objections”.

A company willing to settle must therefore, after being informed of the Commission’s objections and evidence against it, acknowledge its liability for the infringement and indicate the maximum fine it considers acceptable in what is termed a “settlement submission”. It must also relinquish its right to a formal oral hearing, as well as full access to the Commission’s evidence file. Finally, it must accept that it will receive only a streamlined version of the Commission’s statement of objections and final decision, which will focus on the essential elements of the case.

In exchange for agreeing to settle, the company benefits from:

• a fine reduction of 10%, which is cumulative with any reduction given under the leniency programme;

• an expedited procedure, significantly reducing its litigation costs;

• an early opportunity to review information on the evidence;

• an early estimation of likely fines that will be imposed; and

• certain safeguards against discovery of its settlement submission in the context of private actions.

Companies faced with a Commission investigation sacrifice a significant number of their procedural rights in deciding to settle and thus need to assess carefully whether the settlement package offers enough of a reward. While settling avoids costly, long drawn-out proceedings, and provides for a quicker closure of the investigation, the potential drawbacks of the Commission’s settlement package cannot be ignored. Faced with the non-negotiable and discretionary aspect of the settlement process, companies may decide not to give in to a procedure that leans heavily in favour of the Commission. Whether the principal reward of a 10% reduction in fine provides enough incentive to settle will depend on a careful case-by-case analysis of the benefits and risks associated with choosing the settlement route.

Benefits v risks analysis

Participating in a cartel is a serious anticompetitive violation and punishing participants is one of the Commission’s primary policy objectives. Deterrence is achieved through the imposition of extremely high fines. In 2007, the Commission levied a fine of nearly €1bn in the elevators and escalators case, which remains the highest fine in an EU cartel case (COMP/E-1/38.823). Given that potential corporate fines can reach up to 10% of a company’s total worldwide turnover, choosing to settle – instead of challenging – the Commission’s findings requires careful consideration of a number of factors on a case-by-case basis.

First, all settling parties receive a uniform 10% reduction without consideration of individual circumstances. The Commission will only offer settlement after conducting an initial investigation and deciding it has sufficient evidence against a company. If, in viewing this evidence, a company accepts that a clear infringement and its participation are undeniable, contesting the Commission’s case will probably prove to be a futile endeavour, entailing a long and costly process with significant ongoing negative effects on a company’s reputation and share value. In such cases, the benefits of the settlement route, especially a quick and efficient resolution, should be welcomed. On the other hand, such a minor fine reduction may not provide sufficient incentive to settle in cases where companies believe that the evidence against them is weak.

Second, parties committed to settling will have to accept a reduced level of transparency in the Commission’s process. They will receive a streamlined version of the statement of objections and the final decision, both of which only outline the essential elements of the case that were taken into consideration.

Furthermore, the parties do not receive full access to all the evidence in the Commission’s file and must give up their right to a formal oral hearing. Without full access to the evidence, there is an increased chance of erroneous or inaccurate information forming the basis of settlement discussions. There is an even greater risk of this when dealing with complex matters. However, the Commission, at its discretion, may allow parties to view additional documents in its case file, provided this does not skew the aim of procedural efficiency. The effectiveness of the process will thus partly depend on the Commission’s ability to minimise information asymmetries and to guarantee participants that they are engaging in a fair process.

Third, the uncertainty of the process may be a drawback. Parties to a settlement will be given an estimation of the amount of likely fines. The exact final amount will only be notified at the end of the administrative process. In addition, the Commission retains full discretion to withdraw from the settlement process even after a company has acknowledged its liability in a written submission. In practice, parties may therefore end up poorly placed to contest the Commission’s statement of objections if they have already admitted liability in their rejected settlement submission.

Another area of concern is how the Commission will deal with “hybrid” cases. Such cases can arise where certain parties in a cartel investigation decide to settle, while others do not. Since the Commission will need to proceed with the full administrative procedure in the case of non-settling parties, the procedural efficiencies it wishes to gain in the cartel prosecution will be lost.

Finally, while the Commission’s settlement procedure preserves a company’s right to appeal the final decision, it is difficult to see how companies could, in practice, challenge a decision where they have acknowledged liability during settlement proceedings. Appeals are an important strategic route for many cartel participants seeking to reduce fines. In 50 cartel cases between 1998 and 2007, fines were appealed in 45 cases by one or more firms. In the 27 appeals that have now been decided, 16 firms received a reduction in the Commission’s fine. Some received reductions of more than 50% of their fines. By admitting liability in the settlement proceedings, companies lose their ability to challenge the evidence and may end up accepting more liability than the Commission would have assigned to them following a full investigation. It is therefore essential for a company to assess the scope of its involvement in the infringement immediately following an investigation, and be ready to consider whether the benefits of settlement outweigh giving up a chance of absolution and the safety net of an untainted appeal.

Synergies between settlement and leniency

The 10% reduction in fine, which is a key benefit of the settlement procedure, may provide greater incentive to settle, if it is preceded by a leniency application.

The Commission’s leniency programme is a critical component in detecting and deterring cartel activity. The success of leniency has probably been the main catalyst in the backlog of investigations and the resultant need to introduce a settlement procedure. It provides the opportunity either to obtain full immunity from fines or to receive a reduction of between 20%-50%, depending on the stage at which a company has provided value-added information to aid the Commission’s investigation. Unlike in settlement, leniency applicants retain their full right to access all of the evidence on file with the Commission, as well as their right to a formal oral hearing. In addition, leniency serves as an investigative tool to gather evidence, whereas the aim of settlement is focused on procedural economies.

While the two procedures are clearly distinct, their functions are complementary. Indeed, the settlement route should be particularly appealing for leniency applicants since the latter do not usually contest their liability. Settlement will enable leniency applicants to expedite a resolution of their case, significantly reduce their litigation costs and receive an additional fine reduction.

Settlement and the risk of private litigation

Choosing to settle also needs to be carefully balanced against the threat of private damage actions. Settlement decisions establish the existence of an infringement and will serve as binding proof of fault in any subsequent litigation. While the widespread use of private action damages in the US has yet to be seen in Europe, the Commission is keen to encourage private enforcement proceedings, as evidenced by its white paper Damages actions for the breach of EC antitrust rules (COM(2008) 165), published in April 2008. If these proposals are adopted, the landscape of competition litigation may change in the EU, with all alleged cartel victims having easier access to damages.

The availability of a decision acknowledging a company’s liability can only make things easier for plaintiffs in a private action. Companies contemplating settlement therefore need to assess the risk of further follow-up damages litigation at the national level. A 10% fine reduction is unlikely to entice defendants to admit full liability if they are consequently dragged back into court to defend against private enforcers for a number of years.

Gauging the success of the settlement procedure

A number of jurisdictions have experience of settlement procedures in cartel cases, including the US, Canada, Australia, Germany and France. Their experiences confirm that parties will be more inclined to settle if there is an assurance of fair treatment and clarity in procedures. Therefore, the Commission’s current system may need to be fine-tuned to increase its transparency and predictability.

Despite some obvious shortcomings, it is in both the Commission’s and defendants’ interests to ensure that the settlement procedure succeeds. As other jurisdictions have proven, settlement can be a win-win strategy, providing essential benefits to both the prosecution and defendant. The Commission will need to develop a good track record in its implementation of this new procedure and convince participants that the benefits of the system outweigh its potential drawbacks. Time will therefore tell whether the Commission is able to make its settlement procedure an effective speedy alternative route in cartel investigations.

*Isabelle Rahman is a partner in the antitrust / competition group at Dechert LLP (Brussels)

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