Consultation on the Study on tying and other potentially unfair commercial practices in the retail financial service sector
The EU commissioned a study on tying and bundling of financial products which is more known as "linked products". The study has been conducted by CEPS, who largely depends on ECRI, a bank sponsored research entity in Brussels. (See recent ECRC comment). Its main findings are summarized in the ECRI Newsletter by Sarah Cheliout under the title Can bundled and tied financial products harm consumer welfare?.
The Commission has asked for comments until April 14, 2010 at http://ec.europa.eu/internal_market/consultations/2010/tying_en.htm.
The iff comments that have been submitted today are as follows:
Contribution submitted by the institut für finanzdienstleistungen e.V.(iff)
General assessment
(1) Do you agree with the study’s findings and conclusions, in particular regarding the identified potential impact of tying and other identified potentially unfair practices on the different stakeholders groups?
iff comment:
(1.1) The problems of tying/bundling have been discussed extensively in law under notions like "linked products" ("verbundene Geschäfte") and have led to a number of special regulations (e.g. right of withdrawal, price disclosure, disclosure of integrated total amount, special rules on cancellation and continuity etc…). In the associated discussions concerning these regulations, a substantial amount of empirical research has shown which forms of tying are especially harmful for consumers and markets. It is regrettable that this study ignores the experience, the legal responses and the rich discussion which already exists on tying in financial services, and restarts with a quite formal approach. This leads to conclusions which are unsatisfactory in the light of the big problems causing detriment especially in credit and insurance.
(1.2) However, even if one excludes consumer law as a yardstick for tying and restricts research under a more macro-economic perspective with competition the legal foundations of fair competition should be kept in mind. The basic rule on tying in competition law with regard to this study can be found in Art. 101 (1) (e) of the (consolidated) EU-Treaty which forbids:
"all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market... especially (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."
(1.3.) The finding of the study that tying and bundling lead to the same effects and that they are equally detrimental to competition is already part of this general rule which forbids legal "agreements" like "tying" as well as "concerted practices" like "bundling". Both should be treated alike, and this acknowledgment should not only be a result of the research but its starting point. The related research on bundling is therefore irritating.
(1.4) While this is a minor problem, answering legal questions with economic models is more severely confusing. Whether tying is "anti-competitive or unfair to consumers and SMEs" (see EC Consultation document p.3) can not be answered directly by "An economic approach to tying ..." as the headline of the research in Chapter 2 calls it. The research report then makes the following assumption with regard to tying: "only under certain circumstances can it be considered as detrimental to customers – the fact that the tying firm is dominant on its relevant market for the tying product is indeed one of these circumstances."
(1.4.1) The empirical research and the economic interpretations consequently presuppose, contrary to Art. 101, that tying and concerted practices are somehow acceptable because such practices also serve customers' interest and "are advantageous to providers". Art. 101 (3) instead, while providing for exceptions, requires that such exceptions be publicly "declared" and not taken as a given and as implicitly allowed by the Treaty. In so far there is an artificially positive starting point for tying in the project and its findings which turns the Treaty upside down. Competition has to justify itself against profits from tying.
(1.4.2) The Treaty and similar national law state that already the "purpose" of excluding competition is seen as detrimental to competition. Its effects and advantages are therefore a question for those who can allow such practices but not the question whether tying and bundling should be addressed in general. One would therefore first have to clarify whether "nature of the contract" requires this kind of tying or whether there is a "commercial usage".
(1.4.3) The danger inherent in such reasoning lies in the fact that the findings on economic profits and losses depend on economic assumptions (see Report p.57 ff). Will long or short term interest prevail? Can consumer advantages be reduced to money claims? Are structural claims like having justice and fair competition in a market considered as important or only a means to exercise individual freedoms?
To start with, what about the notion "consumer". It implies that all consumers of financial services represent "the consumer" (e.g. see p.59 "consumer's surplus" from references to the two males "Adam and Bob", or p.60 "consumer welfare" etc...). It is either a pure logical model or derived from the non-existent "average consumer". The empirical consumers and their fates within tied products are not surveyed.
The following summary is consequently restricted to the interest of an "ideal consumer" as an information seeker in an investors' market and has little relevance to the often highly indebted customers confronted with risk-based pricing in a refinancing situation, conditions which in fact exist in most of the cases where tying and bundling occurs. Instead, the report does not even appear to acknowledge or recognise that tying today is highly related to usurious exploitation when arguing:
"Tying practices, when not leading to efficiencies that are passed on to consumers, may reduce customer mobility, price transparency and the comparability of providers on the market, increase switching costs and negatively affect consumer confidence." (p.407)
The model based on average consumer's interest is a highly questionable artificial construction of a certain economic theory where the emphasis of agents is on profit, interest rate and cost reduction of better-off consumers, whereas the majority of consumers are empirically shown to put emphasis on liquidity and needs.
(1.5.) The aforementioned problems have biased the findings of the research.
(1.5.1.) The report makes no distinction between products, consumers, needs and importance of the different constellations in which tying and bundling is applied. It therefore summons up all forms of tying and provides exorbitant figures on tying and bundling in Europe (tying is reported to represent "one third" of cross-selling practices). The report builds up the false image that tying is an integral part of the market. It further supports the impression that tying and bundling stems from similar interests by relating these practices to cost efficiency motives. In fact there is no tying or bundling as such. It depends on the circumstances.
In our view, the most significant error is committed when the most known form of tying, the tying of bank accounts with other products, are identified together with the tying of life insurance with loans or mortgages. Aggregating these figures and writing on tying by mixing such different types of tying is not only inadmissible for empirical consumer research, but the law itself is even better informed when Art. 101 requires that a distinction be made between "natural links" and "purposes" where tying seeks additional profits from creating artificial ties.
(1.5.2) Directive 2008/48/EC is the fruit of extensive discussions on tying but with comprehensive distinctions with regard to the different purposes and effects of tying and bundling. The longest history concerns the tying of brokers' services to credit (something that is overlooked in the report), the other is the tying of credit insurance to loans (which the report takes well into account). The dominant tying of bank accounts in the report has also been dealt with in Directive 87/102/EEC. Both Directives treat these forms of tying very differently since they acknowledge their different purpose and origin and should by no account be identified combined or quantified in one amalgamated figure on "tying", nor should it be given an overall assessment. Such empirical shortcomings are comparable to evaluating the existing "ties" between human beings in general i.e. without regard to their gender, age and their purposes, such as building a family, friendship, co-operation, neighbourhood, recreational groups etc..
(1.5.3) DG SANCO had commissioned extensive empirical research in the 1990s on tying especially from the Centre de Droit de la Consommation (Louvain-La-Neuve) with regard to broker services and from the institute for financial services (Hamburg) on tying of insurance services in 1998 and 2002. In a recent research report on credit insurance for a major bank, iff has described the practices, incentives, developments, social effects, price differences and applicable rules in tied insurance products in Germany. These studies provide empirical insight into such tying practices in the different EU Member States. These and other similar national research studies should have been used or complemented by similar own findings. Instead, the study pretends that tying could be studied and evaluated without regard to its special purposes and the historical experience.
(1.5.4) One could learn from these studies that wherever a product is easily available separately on the market serving the same purpose (like life insurance at less than half of the cost with more than ten times a better outcome for consumers' liquidity), such findings can only be explained by its misuse from the power a creditor exercises in consumer credit where debtors have to fear exclusion. In contrast, where there is no alternative, like in brokerage for small sums, it is up to the legislator to make the relation between broker and supplier apparent and force them to provide one price only.
(1.6.) Tying of bank accounts is similar to tying of broker services in so far as it provides a natural tie which has enormous advantages for example in credit card credit for customers who want to keep track of their consolidated debts, participate in the competitive interest rates in the larger market of overdraft credit, and benefit from a historically developed consumer protection on access and administration of bank accounts. Directive 87/102/EEC was aware of these functions and restricted its application to the misuse of such tying when exorbitant fees were claimed.
(2) What other comments/suggestions would you have, including possible evidence supporting or rebutting the findings of the study? Please provide, where possible, concrete examples/quantitative information.
Empirical research on tying and bundling which distinguishes between credit, payment services and investment products or insurance would provide insight into the socially and economically different environment of consumers and SMEs and make this study also valuable in light of consumer protection. One hypothesis also found in the answers given to the research team should be taken seriously: The problem of tying is largely linked to borrowers who are confronted with costly and unnecessary insurance products or investment products where they are captured by the suppliers in refinancing, small credit, and other situations of restricted choice. The problematic systems of such tying is driven by kick-back provisions and circumvention of price disclosure and usury rules.
Impact of tying and other identified potentially unfair practices
(3) How could it be ensured that market participants do not suffer from the negative effects of those practices? What could help consumers to avoid being locked in by these practices?
Instead of asking what effects tying has on competition, one should better ask which forms of tying and bundling including the detrimental practices of circumvention, are produced by a lack of competition and consumers' abilities to act freely on the market.
The reduction of the research questions to mobility and cost as well as benefit to providers and investor-consumers deters the attention from the real problems of consumers when financial products are tied to each other uni-laterally.
(4) Are you aware of complaints from stakeholders, in particular consumers, regarding tying and other identified potentially unfair practices? Please describe.
See answers elsewhere e.g. 1.5.3 referring to past research.
Possible follow-up
This project should be followed by empirical research into the concrete situations of consumers using tied products in different areas. The legal distinctions should be kept in mind. There is also a need to put together existing legal answers to tying on the European as well as on the national level.
(5) Do you believe that, based on the findings of the study, the Commission needs to address the issue of tying and other identified potentially unfair practices? If yes, what are your views on the form that such a policy response should take?
Yes, but first additional research is necessary.
(6) If you consider that a legislative solution on the EU level is necessary, do you believe that the issues should be dealt with by sector specific legislation or by horizontal legislation (e.g. in the context of the review of the Unfair Commercial Practices Directive?
Tying is a consumer problem and less a problem of competition law. No EU Member State has competition law which addresses these practices effectively, especially for vulnerable consumers. Also, the research relates to standard contract term law which is no competition law. This path should be used as well as the rich experience inherent in a multitude of existing legal approaches.
(7) In the light of the study’s finding that in Member States where tying is officially banned, bundling tends to replace it with practically the same effects, what solution would you suggest to solve the problem?
Competition law already includes bundling into tying as a form of circumvention. Consumer law, since long, addresses bundling in its interdiction to achieve the same illicit goals through forms of separated contracts. This path should be continued and made more effective.
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Note: The institut für finanzdienstleistungen (iff) is an independent, internationally-oriented non-profit organisation providing research and advice in the field of sustainable financial services. The institute creates electronic data-processing programmes for providers of financial advice to consumers, is active in financial education initiatives and organises stakeholder conferences in the area of financial services. Iff has issued a number of publications and has conducted numerous research projects for the European Commission’s services including studies on equity release schemes, calculation of the APRC, legal issues with regard to cross-border selling of financial services, as well as other studies on consumer disclosure issues and a review of legislation and practices concerning over-indebtedness. iff is financed exclusively through current projects and does not receive any public subsidy. It is a medium-sized enterprise, whose employees are drawn primarily from academic circles, the majority of whom have studied, lecture or practice law. The iff is founding member of the European Coalition for Responsible Credit, formed in 2006 to promote the principles of responsible credit and fair finance. For more information see: www.responsible-credit.net |
