Top Competition Issues in Financial Services in 2022

There have been recent, separate calls to reform the merger control regimes in Australia and the UK.

• In August 2021, the ACCC proposed a significant overhaul of Australia's merger control regime, seeking to "start a debate" with the objective of fixing what the ACCC sees as significant deficiencies in the current regime.
• In July 2021, the UK Government published two consultations, which include reforms to the UK merger control rules.

If implemented, the reforms will have significant implications for financial services firms contemplating acquisitions.

The reforms are in line with a global trend towards greater scrutiny of mergers and a tougher approach to assessing their potential anti-competitive effects – with greater risk of transactions being opposed or subject to remedies.

Key Takeaways

• The proposed Australian reforms, if implemented, would represent a fundamental shift in the way mergers are assessed in Australia. They would shift the balance of power towards the ACCC, likely resulting in more mergers being subject to scrutiny and opposed or subject to remedies, and would limit the options available to merger parties to appeal ACCC decisions or bypass the ACCC altogether.
• If implemented, the UK reforms are likely to see a wider range of mergers scrutinised by the CMA, including acquisitions of innovative startups with little to no UK presence or turnover, which would not currently meet the UK thresholds.
• Transactions between financial services firms and large digital platforms would be subject to tailored merger review rules in both Australia and the UK, which may have implications for transactions involving fintech.

Background

The Australian and UK merger regimes share several common features. One key feature is that they are both "voluntary" and "non-suspensory" regimes (outliers by global standards), meaning there is no requirement to notify the relevant regulator of a transaction and no prohibition on completing a transaction prior to the regulator's review. They differ in their approach to jurisdictional matters – in the UK, deals are subject to the jurisdiction of the CMA where certain turnover or share of supply thresholds are met, whereas there are no similar jurisdictional thresholds in Australia – any acquisition of shares or assets within Australia may be caught by the substantive prohibition.

Australia's proposed merger reforms

The reforms proposed by the ACCC would move the Australian regime closer to the UK in relation to jurisdictional matters but away from the UK (and towards other major regimes like the EU and China) on the matter of notification requirements and suspensory obligations.

The ACCC's proposed reforms fall into three categories.

1. A new formal merger review process

The key aspects of the reforms as to merger clearance process are as follows:

• A single review process to replace the current options of pre-assessment, informal clearance, merger authorisation or declaration by the Federal Court.
• A mandatory system (rather than a voluntary one) requiring acquisitions above specified thresholds to be notified.
• A suspensory system prohibiting mergers from completing until ACCC clearance received.
• Prohibiting mergers from completing where the ACCC decides the transaction contravenes the substantive test.
• Retention of a simplified process for expeditious consideration of transactions unlikely to have anticompetitive effects.
• ACCC "call in" power to review mergers that do not meet the specified thresholds but which the ACCC considers could raise competition concerns.

• ACCC decisions subject to only limited merits review by the Australian Competition Tribunal.

2. Changes to the substantive merger test

The key aspects of the reforms as to merger clearance analysis are as follows:

• Amending the merger factors considered to determine any "likely effect" of "substantially lessening competition" to focus on structural conditions changed by an acquisition, including the inclusion of further factors to address the potential capacity of acquisitions to result in loss in competition and increased access to control of data, for example.
• Defining the term "likely" in the substantive test as "a possibility that is not remote", which is a lower standard than used today.
• Deeming certain acquisitions to be more likely to substantially lessen competition based on the existence of substantial market power.
• Allowing the ACCC to consider other agreements (besides the underlying sale agreement) in its merger review.

3. Reforms to deal with acquisitions by large digital platforms

The ACCC proposes a tailored merger review test applying to certain large digital platforms containing a lower notification threshold and lower threshold for establishing competitive harm.

The ACCC has framed the proposals as "opening the debate" on the future of Australia's merger control regime. Further details are still to be developed (eg what specific notification thresholds would apply) and it is unlikely that the proposed reforms will be considered by the Federal Government before the next Federal election (due to occur by late May 2022). With a new ACCC Chair and Commissioner due to start this year, it will be interesting to see not only what appetite the Federal Government may have for reform, but also how vigorously the ACCC continues to pursue these proposed reforms under its new leadership.

The UK's proposed merger reforms

The Policy Reform Consultation sets out proposals for a 'rebalanced' merger regime including:

• changes to jurisdictional thresholds:
  • raising the current turnover threshold for the target of a merger from £70m to £100m, and creating a safe harbour for mergers involving small businesses with less than £10m worldwide turnover each; and
  • a new jurisdictional threshold where one party has UK turnover of £100m or more and at least a 25% share of supply in the UK or a substantial part of it.

• a more efficient Phase 2 process, including allowing the CMA to agree commitments earlier, streamlining the competition analysis, and an option to request automatic reference to Phase 2.

The Digital Markets Consultation includes proposals for a distinct merger regime for firms designated as having 'strategic market status' (SMS) in digital markets, including:

• an obligation on firms with SMS to inform the CMA of all mergers in advance;
• a transaction value threshold combined with a UK nexus test;
• mandatory review for the largest SMS transactions; and
• lowering of standard of proof at Phase 2 from the current "balance of probabilities" to a "realistic prospect" of a substantial lessening of competition.

The consultations closed on 1 October 2021. If adopted, the proposed reforms would constitute a major overhaul of the UK merger regime, as well as the UK competition and consumer rules more generally (see our previous summary).

Implications for the financial services sector

Australia

The proposed reforms would apply across all sectors of the economy, but be of particular relevance to financial services firms engaged in strategic acquisitions and large financial firms with a significant presence in one or more markets. The proposed changes would allow the ACCC to scrutinise acquisitions that financial services firms would not otherwise contemplate notifying to the ACCC under the current regime, which would require deal timelines to factor in this additional scrutiny. Financial services firms would not be permitted to proceed with completing their transactions pending ACCC review, and could expect the ACCC to oppose more transactions - given the substantive threshold for opposing mergers is lower and the avenues for appeal are more limited.

Large financial institutions that could be alleged to enjoy substantial market power in a market would face an even higher threshold for obtaining approvals by reason of the proposed deeming provision for mergers involving firms with substantial market power.

Transactions between financial services firms and large digital platforms could also receive greater scrutiny, being subject to lower thresholds for notification and a lower test for establishing competitive harm, which may have particular implications for the fintech sector.

The UK

The key change for financial services firms is likely to be the new jurisdictional threshold in the Policy Reform Consultation: a wider variety of transactions involving large financial institutions may be subject to CMA review, irrespective of the size or UK market position of the target. Notably, acquisitions where the target has no UK presence will also be captured where the acquirer meets the threshold.

This change is intended to allow the CMA to address so-called 'killer acquisitions', where a new entrant (eg a fintech startup) is bought out before it can bring its product to market, and mergers that facilitate the leveraging of market power across different products/services, eg where a bank acquires a provider of complementary services such as payments, real estate or utilities.

Similarly to Australia, the Digital Markets Consultation could also have implications for transactions and joint ventures between financial services firms and any tech giants that are designated as having SMS, particularly in the fintech sector.

Authors: Ross Zaurrini, Partner; John McKellar, Senior Associate; and Laura Carter, Senior Associate. 

With thanks to Alicia Gormly of Ashurst for her contribution. 

Ensuring fair competition both within and between payment systems is a focus of reforms in both Australia and the United Kingdom in 2022.

Key Takeaways

• The Australian and UK Governments have both set out detailed programs of work to transform aspects of each country's payment systems in 2022 and beyond.
• Both sets of reforms are designed to promote fair competition within and between payment systems and to ensure that regulation keeps pace with new technology, consumer preferences and global developments.

Australia

In December 2021 the Government released its response to the Review of the Australian Payments System, the Senate Select Committee on Australia as a Technology and Financial Centre Final Report, and the Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services. The Government response (Transforming Australia's Payments System) outlines a detailed program of work for 2022, including a number of reforms that relate to ensuring fair competition in and access to the payments system. Highlights include:

• Expanding the definition of "payment system" and adding a new Ministerial designation power: The Government response agrees to expand the definition of "payment system" in the Payment Systems (Regulation) Act 1998 (Cth) to ensure the RBA can continue respond to new innovations in the payments ecosystem. The Government has also agreed to introduce a Ministerial designation power to allow the Treasurer to designate payment systems when it is in the national interest. The Treasurer will delegate this power to the RBA. Consultation will occur in 2022 and will include consideration of digital wallet providers and buy-now-pay-later services.
• Introducing functionally-based regulation and a single, tiered payments licensing framework: The Government response agrees that regulation should be functionally based, to ensure appropriate regulatory coverage. The Government has also agreed to a single, tiered licensing framework to improve regulatory oversight.
• Mandating the ePayments Code for payments licensees: The Government response notes that it supports consumer protections and will require licensees to comply with obligations under the ePayments Code. The Government will consider how the ePayments Code should be updated and brought into regulation.
• Facilitating transparent access to payment systems: In order to encourage competition and innovation in the sector, the Government has agreed to consider how obligations that facilitate easier access could be incorporated into its new single, tiered payments licensing framework. This will form part of a broader consultation it will undertake on the licensing framework.
• Conducting further analysis on de-banking: De-banking occurs when a bank withdraws banking services from, or refuses to provide banking services to a customer. _¹ The incidence of de-banking is reportedly growing, particularly for entities engaging in cross-border payments. The Review of the Australian Payments System noted that de-banking was a serious concern for competition and innovation in payments.

In response, the Treasurer will request the Council of Financial Regulators work with relevant agencies to consider the underlying causes and possible policy responses to de-banking. This will include considering the ACCC proposal for a due-diligence scheme through which international monetary transfer suppliers can address the due-diligence requirements of the banks in relation to anti-money laundering / counter-terrorism financing requirements (which are often cited as a reason for de-banking), as well as options for greater transparency for businesses who have been de-banked or other relevant proposals. The Treasurer will issue Terms of Reference and request this advice by mid-2022.

• Improving transparency of payment costs for merchants: The Government response noted that the RBA will be taking steps to improve the transparency of payment costs for merchants.

United Kingdom

Whilst competition policy in the UK payments sector has recently focused on traditional payment systems (such as ongoing work by the Payment Systems Regulator ("PSR") into card-acquiring services and access to cash), there has been a steady shift in recent years towards regulatory initiatives that support and promote alternative methods of payment, which we expect will accelerate in 2022.

Both the UK Government's response to its Payment Landscape Review in October 2021 and the PSR's five year strategy announced in January 2022 have identified the promotion of competition between, as well as within, rival payment systems as a priority area where further action is required. These initiatives include:

• Stronger governance for Open Banking enabled payments: The Government and the PSR are considering stronger governance for payments that use Open Banking technology, in order to encourage consumers to use interbank retail payment methods (payments initiated directly from a customer's bank account, rather than through a debit or credit card), thereby stimulating innovation and competition between payment systems.

In particular, stronger governance for Pay.UK – the UK operator for retail interbank payment systems – may include powers to amend and enforce existing interbank rules (Pay.UK has limited enforcement powers at present), as well as new funding arrangements for Pay.UK that are designed to support and promote competition and innovation in "overlay services" that utilise interbank systems operated by Pay.UK (such as the UK's forthcoming New Payments Architecture ("NPA")).

The PSR has also recognised the need for greater coordination on rules and standards between relevant industry participants, including Pay.UK and the Open Banking Implementation Entity (the body responsible for software standards and industry guidelines for Open Banking), particularly following the introduction of the NPA, as more organisations become responsible for the ownership and maintenance of new payments standards and infrastructure.

• Consumer protection for interbank payments: The Government has identified limited consumer protection as a factor inhibiting the adoption of interbank payment methods. In this connection, the PSR is also considering whether to give Pay.UK a leading role in developing consumer protection rules, including system-wider standards of service or redress.
• The Government is also taking steps to support initiatives by the PSR to introduce redress mechanisms for victims of authorised push payment ("APP") scams (fraudsters that manipulate victims into making large bank transfers to them), and has confirmed that it will "legislate to address any barriers to regulatory action at the earliest opportunity". The PSR expects to publish a policy statement during the first half of 2022 outlining the policy measures to intends to introduce to protection against APP scams, following a consultation launched in November 2021.
• Cross-payments: The UK Government (in conjunction with the Bank of England) is supporting the implementation of the G20 roadmap to enhance cross-border payments, which includes addressing the challenges of addressing the challenges of cross-border payments (namely their cost, speed, access and transparency) in relation to wholesale, retail and remittance payments across payment methods. In addition, whilst the PSR does not regulate cross-border banking or remittance payment systems, it has confirmed a new programme of work in January 2022 concerning recent post-Brexit increases to interchange fees applied to cross-border card payments.
• Future-proofing the regulatory framework for payments: The UK Government will launch a consultation in 2022 on bringing "systematically important firms in payment chains" into Bank of England regulation and supervision under the Banking Act 2009, in order to manage the risks those systems could pose to UK financial stability, particularly in circumstances where the increased use of digital payments and non-traditional payment methods have resulted in payments activities no longer being conducted primarily by banks. In addition, the UK Government and the Bank of England are continuing initiatives launched into 2021 to explore new forms of digital money, such as stablecoins and a possible UK central bank digital currency.

However, whilst the UK Government and the PSR's priority areas over the coming years will include promoting non-traditional payment methods, it remains the case that competition regulators are enforcing competition laws across the payments sector as a whole. In this regard, it is likely that the PSR will be focusing on new competition law enforcement case work following the conclusion of its first cartel investigation under Chapter I of the Competition Act 1998 ("CA98") in January 2022, which resulted in fines totalling more than £33 million in connection with non-poaching and customer allocation agreements in relation to pre-paid cards. The independent energy regulator for Great Britain, Ofgem, has also recently accepted binding commitments from PayPoint in November 2021 (including voluntary redress payments of £12.5 million) in connection with exclusivity agreements in the provision of energy pre-payment services contrary to Chapter II of the Competition Act 1998.

Global issues

Finally, an "area to watch" globally in 2022 and beyond will be the interface between the regulation of digital platforms and payment services, especially in response to the entry by 'Big Tech' businesses in the payments industry. The CMA is expected to publish its final report to its market study into mobile ecosystems in June 2022 (following publication of its interim report in December 2021), which examines among other things the terms and conditions that Apple and Google apply to in-app payments processed through their respective in-app payment systems. The CMA is also at the information gathering stage of a separate investigation into Apple AppStore under Chapter II of CA98, which is examining the conditions attached to app developers using various 'in-app' functionalities, such as requirements to use Apple's payment system.

The ACCC also raised these issues in its Digital platform services inquiry - Interim report No. 2 - App marketplaces in March 2021. It noted its view that app developers should not be restricted from providing users with information about alternative payment options. The ACCC is continuing to monitor these issues, as are several other regulators around the world.

Footnotes

• ACCC Foreign Currency Conversion Services Inquiry, Final Report, July 2019, page 2,

https://www.accc.gov.au/system/files/Foreign currency conversion services inquiry - final report_0.PDF

Authors: Melissa Fraser, Partner; Hong-Viet Nguyen, Partner; and Amanda Tesvic, Senior Expertise Lawyer.

With thanks to Emile Abdul-Wahab of Ashurst for his contribution. 

The Commonwealth Prosecutor has sensationally walked away from the highest profile criminal case in the financial services sector in recent memory after three and a half years of vigorous court battles. The prosecution's case had been mired in allegations of serious defects in the investigation conducted by the Australian competition regulator, the ACCC.

Key Takeaways

• The Commonwealth Director of Public Prosecutions has abandoned the high profile banking cartel prosecution only months before the case was due to be tried before a jury.
• While the prosecutor is not required to provide reasons for its decision, the accused had repeatedly raised questions regarding deficiencies in the criminal investigation that preceded the laying of criminal charges.
• The collapse of this prosecution should not alter the prevailing practice of financial services firms operating in Australia carefully assessing whether proposed collaborative arrangements ‎potentially give rise to cartel risk and, if so, ‎appropriately managing that risk.

After pursuing three multinational banks and six individuals for over three and a half years for alleged criminal cartel conduct, the Commonwealth Director of Public Prosecutions (CDPP) dropped all charges on 11 February 2022.

The CDPP first laid criminal charges in June 2018 against ANZ Bank, Citigroup, Deutsche Bank and six executives, alleging cartel conduct with respect to the underwriting of a failed share placement in 2015 – a step that, understandably, sent shockwaves through the financial services sector in Australia. JP Morgan was granted immunity from prosecution by the CDPP for earlier reporting the conduct to, and cooperating with, the Australian Competition and Consumer Commission (ACCC) under its cartel immunity policy.

The case was due to be heard and determined by a jury in June 2022.

The CDPP had earlier abandoned all charges against ANZ Bank and two executives, and significantly reduced the scope of its case against the remaining accused by dropping a suite of charges.

Why did the CDPP abandon its case?

The brief media release issued by the CDPP stated only that the charges were being dropped because there were no longer reasonable prospects of convicting the accused following a detailed review of the evidence and receipt of submissions from solicitors for the accused. The CDPP is under no obligation to give detailed reasons for dropping the charges and neither the accused nor the general public should expect to receive any further explanation.

In the lead up to the CDPP's decision to drop the charges, the accused had raised important questions regarding alleged deficiencies in the criminal investigation conducted by the ACCC and material legal defects in the formal indictment documents prepared by the CDPP. In fact, the accused had, for some time, been foreshadowing that they would apply to permanently stay the proceedings based on alleged procedural defects ‎in the ACCC's investigation and evidence.

The accused were also seeking to end the proceedings on the basis that the cartel offences do not apply, as a matter of law, to the ‎supply of publicly listed shares. The determination of this application by the Court may have provided some clearer guidance ‎regarding the application of competition laws in financial markets but the Court will now not be ‎required to determine this fundamental issue.

Legal risks of collaborating in financial services transactions are unchanged

The dropping of these charges ahead of trial, and before any substantive issues were determined by the Court, unfortunately leaves financial services markets with little further clarity about the application of competition laws in complex capital markets transactions. Importantly, it does not establish any legal precedent regarding the legality of the specific conduct in the case or the application of competition law to financial services transactions more generally.

Accordingly, financial services firms must continue to be vigilant in the management of competition law risk moving forward. Firms considering engaging in ‎collaborative practices – whether that be across equity capital markets, debt capital markets, or syndicating ‎lending arrangements – should continue to carefully assess whether proposed arrangements potentially give rise to cartel risk and, if so, ‎how best to manage that risk. In this respect, the joint venture exception to cartel conduct remains fundamental in managing cartel risk in Australia. ‎

Enforcement risk for the financial services sector remains a real possibility

The ACCC's media release following the CDPP's abandonment of the case stated that the ACCC investigated this matter and referred it to the CDPP because the ACCC considered the conduct to constitute a cartel and stood to damage competition and the Australian economy. The decision to ultimately drop this case, it said, was an independent prosecutorial decision of the CDPP and not the ACCC.

Outgoing ACCC Chair Rod Sims has reportedly commenced an internal review into the case to identify lessons that the ACCC could learn moving forward. The ACCC's investigative procedures have substantially improved over the past several years, at least in part due to the deficiencies in their previous practices that this case exposed. It is unlikely that the serious procedural errors that were allegedly made in this case will be made again. That, of course, will be of little comfort to the individuals and banks involved in this failed prosecution.

Mr Sims' tenure as ACCC Chair comes to an end in March this year. It remains to be seen whether his successor – former external competition counsel Gina Cass-Gottlieb – will continue the ACCC's intense scrutiny of the financial services sector.

Importantly, the ACCC's cartel immunity policy remains an effective enforcement tool for the ACCC – and a significant incentive for participants in the financial services sector.‎

Author: Ross Zaurrini, Partner.

With thanks to Andrew McClenahan and Ben Hartsuyker of Ashurst for their contribution.

On 28 April and 20 May 2021, the European Commission ("Commission") issued two infringement decisions imposing fines on a number of banks in relation to two separate cartels relating to: (i) Supra-sovereign, Sovereign and Agency ("SSA") bonds and (ii) European Government Bonds ("EGB").

Key Takeaways

• The Commission accepts that exchange of information between traders is inherent to the trading of bonds between those banks (e.g. for the purposes of sourcing liquidity and/or offsetting risk). However, the information exchanged must be limited to what is strictly necessary for bilateral trades between dealers and must not include any information relating to specific counterparties.
• Membership of a persistent chatroom, in the Commission's view, suffices to presume knowledge of (and participation in) anti-competitive communications that take place in the chatroom (even where there was not participation in the relevant communication).
• Both decisions are currently under appeal.

Background on bonds markets

Bonds are debt securities which enable entities to raise cash (e.g. to fund expenditures, investments or refinance existing debt). They are usually distinguished by reference to the identity of the issuer and the currency in which they are issued. The Commission's investigations focused on:

• SSA bonds issued in US dollars; and
• sovereign bonds issued in euros by the central governments of the Eurozone (EGB).

Bonds are first sold to market participants on the "primary market" through auctions (tendering process) or syndicates (private placement process). They are then traded between banks, brokers and investors on the "secondary market". The secondary market for the trading of bonds has the peculiarity that traders act both as competitors (vis-à-vis third party customers) and potential customers (e.g. in relation to bi-lateral inter-bank trades).

Commission's EGB and SSA decisions in a nutshell

On 28 April 2021, the Commission found four banks liable for operating a cartel in the EEA secondary trading market for SSA bonds denominated in US Dollars in the period between 2010 and 2015. It imposed fines totalling EUR 28 million on three banks: Bank of America Merrill Lynch, Crédit Agricole and Crédit Suisse. As the immunity applicant, Deutsche Bank received full immunity from fines.

On 20 May 2021, the Commission found seven banks liable for operating a cartel in the primary and secondary markets for EGB between 2007 and 2011:

• It imposed fines totalling EUR 371 million on UBS, Nomura, and UniCredit;
• RBS (now NatWest) received full immunity from fines as the immunity applicant and UBS received a 45% reduction in fines for its cooperation with the Commission's investigation;
• WestLB (now Portigon) was not fined as it did not generate any net turnover in the business year preceding the date of the Commission decision;
• Bank of America and Natixis (the third leniency applicant) were not fined because both undertakings had left the cartel more than five years before the Commission commenced its investigation. Nevertheless, the Commission considered that there to be a legitimate interest in reaching an infringement finding against the two banks.

Focus on the conduct at issue

As regards the conduct on the primary market, in the EGB investigation the Commission raised concerns relating to the alignment of conduct in the run-up to auctions, and in particular with attempts to coordinate:

• bidding on the primary market by exchanging information on parameters such as mid-prices, bidding levels and volumes;
• the level of overbidding (i.e. bidding higher than the prevailing market price of the bond on the secondary market) on the primary market.

As regards conduct on the secondary market, in its SSA decision the Commission expressly accepted that exchange of information between traders is inherent to the operation of bonds since they need to explore trading opportunities (e.g. to source liquidity or offset risk) with each other as potential customers. However, it found that the exchange of information went beyond what was necessary for the purposes of legitimate price discovery in the context of bilateral trades between dealers. Examples of conduct found to be unlawful include:

• discussions on prices shown to specific counterparties or to the market generally;
• exchange of current, or forward-looking, information on trading strategies and positions;
• coordination of trading activity (including agreements to refrain from bidding or offering, to remove a bid or offer from the market, or to split trades between each other).

Multilateral chatrooms equate continuous physical meetings

In both cases, the conduct was allegedly implemented through a series of contacts between traders, primarily occurring in persistent multilateral Bloomberg chatrooms (the use of which has since been banned by banks). According to the Commission, knowledge of, and participation in, anti-competitive communications taking place in the chatroom may be presumed from membership of the relevant persistent chatroom. The Commission reached this conclusion despite the absence of evidence that traders had actually seen discussions in which they did not actively participate.

The Commission's reasoning could extend to other messaging applications allowing for group conversations, such as WhatsApp or Signal (to which the Commission and other competition authorities can require access when conducting an investigation).

Conclusion

The EGB and SSA decisions follow a number of cartel decisions concerning benchmark manipulation and collusion on foreign exchange trading strategies and confirm the Commission's focus on cartel enforcement in the financial services sector.

Both decisions are currently under appeal proceedings in Luxembourg. Whilst the SSA decision was challenged by Credit Suisse and Credit Agricole, all addressees (with the exception of Natwest, the immunity applicant) appealed the EGB Decision. The ongoing litigation will test the Commission's approach to the legal concepts of restriction by-object and single and continuous infringement, as well as the calculation of fines in these complex financial services markets.

Author: Duncan Liddell, Partner.

With thanks to Jessica Bracker of Ashurst for her contribution. 

On 18 August 2021, the UK's Competition Appeal Tribunal ("CAT") certified the application by Mr Walter Merricks CBE to bring an opt-out class action on behalf of 46 million UK consumers who suffered loss as a result of anticompetitive interchange fees imposed by Mastercard between 1992 and 2008.

Key Takeaways

• The bar to certification was effectively lowered by the Supreme Court which favoured a more permissive approach for certification of collective actions, paving the way for future collective actions.
• After the first opt-out collective proceeding in the UK was certified in August 2021, two further actions have been certified and ten are currently pending.
• Damages in collective proceedings are often substantial and may be calculated on an aggregate basis, without reference to the loss of individual class members.
• Further guidance on the selection of class representatives is expected in 2022.

Background

Applications to bring collective proceedings may be brought on behalf of a class, either on an opt-in or opt-out basis, for claimants with similar or related interests. The CAT plays an important role as gatekeeper and is required to "certify" collective proceedings, confirming that the actions raise the same, similar or related issues and are suitable to be heard collectively.

After a slow start to regime, the Supreme Court handed down a seminal judgment in Mastercard v Merricks (see our previous update here), which clarified how the CAT should assess applications for certification of class actions. This decision paved the way for further applications to be filed in the CAT, with ten currently awaiting certification and further applications anticipated in 2022.

Following the Supreme Court's decision, the CAT reconsidered Mr Merricks' application to bring an opt-out class action on behalf of 46 million consumers and, in August 2021, certified the application (see our previous update here). Shortly thereafter, the CAT certified a further two collective actions: (i) against telecoms company BT in relating to alleged excessive pricing residential landline services (Le Patourel v BT), and (ii) against multiple trains operators in relation to the unfair pricing of train fares (Gutmann v South Western Trains Limited and others).

From these cases, a number of key themes have emerged.

Collective actions are not limited to follow-on damages claims

To date, the CAT has certified one follow-on claim (Merricks) and two standalone claims (Le Patourel and Gutmann) (see our update here). In standalone cases, the class representatives do not have a binding infringement decision by a regulator to rely on; instead, they must prove both that relevant conduct infringed competition law and that that conduct resulted in loss. Both standalone actions allege abuses of dominance, relying on novel theories of harm. The CAT considered the cases to be "arguable" and therefore eligible to proceed as collective actions. BT has been granted permission to appeal the certification decision in Le Patourel by the UK Court of Appeal.

The CAT's willingness to certify standalone claims based on novel theories of harm is likely to embolden claimant firms and funders to bring additional claims.

Opt-out collective actions

Following the Supreme Court's decision, the CAT has proven its readiness to certify claims brought on an opt-out basis. All three actions certified in 2021 were granted permission to proceed as opt-out claims. In Le Patourel, the CAT gave particular weight to the composition of the claimant class and the low likelihood of such a group actively commencing proceedings (despite being readily identifiable). In that case, the class is made up of especially vulnerable, elderly customers, but the CAT's reasoning suggests that it will be inclined to permit collective actions to proceed on an opt-out basis where the class is primarily comprised of unsophisticated consumers.

Record-breaking damages claims

While the loss suffered by each individual claimant may be small, the potential size of the claimant class may mean that defendants face significant potential liability. Mastercard is currently facing the largest damages claim (over GBP 10 billion) in the history of the English civil courts and the claims in Le Patourel and Gutmann are valued at approximately GBP 590 million and GBP 93 million respectively.

Litigation funding arrangements

Collective actions are typically backed by litigation funding arrangements. These funding arrangements have been unsuccessfully challenged in a number of cases (including in Merricks). The Court of Appeal provided further clarity on the position of litigation funding arrangements in two collective proceedings arising from the Trucks cartel (see our update here) which confirmed that litigation funders who only provide funding to claimants are not providing "claims management services" and such arrangements do not constitute damages-based agreements, meaning opt-out collective actions may be backed by litigation funding arrangements.

Carriage disputes may become more common

With the proliferation of collective actions, there is an increased risk that the same class of claimants will be the subject of different, competing claims. In these circumstances, a dispute may arise as to which set of proceedings should have carriage of the duplicated claimant class: a so-called "carriage dispute". Until now, the English courts have not had to address this issue. However, competing applications are pending before the CAT by Mr O'Higgins and Mr Evans in relation to follow-on claims in the FX spot trading follow-on damages proceedings. Similar issues have arisen in proposed collective proceedings arising from the Trucks cartel. The CAT's resolution of these issues will be particularly important for defendants, to ensure that there is no prospect of double recovery, and no duplication of actions.

Conclusion

2021 was a significant year in the development of the UK's nascent collective actions regime. As anticipated following the Supreme Court's judgment in Merricks v Mastercard, additional collective actions have been filed and more are likely to follow. In its consideration of these cases, we expect the CAT to provide further substantive guidance on the novel theories of harm which have been proposed in certain cases.

Author: Duncan Liddell, Partner.

With thanks to Hayden Dunnett and Imogen Chitty of Ashurst for their contribution. 

Merchant Interchange Fees ("MIFs") have been subject to antitrust scrutiny for over 20 years, with infringement decisions by the European Commission, new regulation of certain types of MIFs and private damages actions.

Key Takeaways

• Summary judgment available for claim periods up to 8 December 2015, when the EU implemented a regulation regulating certain categories of MIFs.
• For claims relating to periods after 8 December 2015, the impact of the Interchange Fee Regulation ("IFR") will need to be considered as part of the counterfactual.
• Further regulatory reform is likely, with the UK Payment Services Regulator ("PSR") and the UK Parliament's Treasury Select Committee looking at Visa and Mastercard's schemes.

Background

Merchant interchange fees and Visa and Mastercard's four party schemes have been consistently in the competition and regulatory spotlight since the mid-1990's, with significant developments in both private actions against the two card schemes, as well as potential regulatory reform following Brexit.

Private actions

2021 saw a number of significant developments, including the UK Competition Appeal Tribunal ("CAT") certifying the opt-out collective action against Mastercard seeking GBP 14 billion in damages (see our update here).

There are still a significant number of outstanding private claims against Visa and Mastercard in relation to MIFs, with further claims having been filed in December 2021.

The UK Supreme Court's 2020 decision in Sainsbury's v Mastercard (see our update here) has provided claimants with important clarity on the relevant "counterfactual". In addition, the CAT gave judgment on several key issues in late 2021 in respect of eight sets of proceedings on behalf of over 680 claimants (merchants and local authorities):

• Summary judgment for claim periods prior to 8 December 2015: Based on the UK Supreme Court's decision in Sainsbury's v Mastercard, summary judgment was granted against Visa and Mastercard in relation to the UK and Irish domestic and intra-EEA MIFs for a period up to 8 December 2015. This should provide further clarity to other claimants with a similar claim period and allow these claims to proceed to an assessment of quantum.
• Claim periods post-8 December 2015 will need to consider the impact of the IFR: For claim periods ending after 8 December 2015, summary judgment will not be awarded against Visa and Mastercard and whether there was an infringement of competition law will need to be determined at trial. The EU's IFR came into force on 8 December 2015 and capped the total MIF which Visa and Mastercard were permitted to set for certain categories of MIF. The claimants sought to argue that the capped MIFs (pursuant to the IFR) were irrelevant to the counterfactual. The CAT rejected this argument and indicated that they could not exclude the possibility of a different counterfactual, in circumstances where the IFR impacted MIF rates.
• Claimants cannot read Sainsbury's v Mastercard across to other MIFs in order to obtain summary judgment: For MIFs (including inter-regional MIFs) which have not been the subject of prior infringement decisions by the European Commission, the CAT indicated that whether the MIF infringed Article 101 of the Treaty on the Functioning of the European Union and/or Chapter I of the UK Competition Act 1998 will be a matter for trial.

While recent case law has provided some clarity, there are important outstanding legal issues to resolve before any claim is finally resolved, including:

• Whether the relevant counterfactual MIF for claims after 29 April 2015 will be zero (per the Supreme Court decision in Sainsbury's v Mastercard) or at a positive rate;
• Issues relating to quantum, including pass-on. Quantum has not been determined in any proceedings since the Supreme Court's decision in Sainsbury's v Mastercard. Sainsbury's claim was the most developed and has now been withdrawn against both Visa and Mastercard, bringing nearly 10 years of litigation to an end.

Given the significant number of third party claims still pending against both Visa and Mastercard, it is likely that these issues will still occupy significant court time in the future.

Further regulatory reform

Following the UK's withdrawal from the EU, Visa and Mastercard's cross-border MIFs for UK consumer purchases with merchants in the EU increased significantly, with online purchase fees increasing from 0.2% to 1.15%. The increased MIFs culminated in a threat by Amazon to remove Visa credit cards as a payment method on its platforms. This threat was ultimately withdrawn.

Both Visa and Mastercard's schemes are in the sights of the UK Parliament's Treasury Committee and the PSR. The PSR has publicly questioned whether there is sufficient rivalry in the market and have suggested that "doing nothing" is not an option, which suggests future regulatory intervention is being considered.

Conclusion

With the potential for further regulatory intervention, and the continuing relevance of MIF claims progressing through the UK courts, 2022 is likely to be another significant year for MIF related developments.

Authors: Duncan Liddell, Partner.

With thanks to Hayden Dunnett of Ashurst for his contribution. 

More than a decade after Australia’s introduction of unfair contract term protections for consumers and five years since their extension to small businesses, the unfair terms regime has found its way back in the spotlight.

• On 9 February 2022, a Bill was introduced into the House of Representatives proposing changes to Australia's existing unfair contract terms laws._¹   Following a period of consultation on proposed reforms published in an exposure draft in August 2021,_²  the now slightly revised Bill introduced to Parliament marks the first step toward major changes to the unfair terms regime in Australia.
• Key changes include: introducing new prohibitions on the proposal of, use of, application of or reliance on, unfair terms in standard form consumer or small business contracts; significant penalties for breaches of these prohibitions; a broader range of remedies for courts to impose in relation to terms found to be unfair; and expanding the class of contracts that will be covered by the unfair contract term protections.
• The changes will commence 12 months after the Bill is passed into law; designed to ensure businesses have time to review and adjust their contracts and practices if required. Now is the time for the financial services sector to consider how the proposed changes will impact their contracting practices.

In this article we canvass the proposed reforms to the unfair contract terms regime, reflect on enforcement in the financial services sector under the existing regime, and outline how financial services businesses should prepare for the implementation of the new regime.

Key Reforms

Prohibition and penalties

In a bid to strengthen the enforcement provisions and remedies under the unfair contract terms regime, the Bill introduces new prohibitions against:

• entering into a standard form contract which contains an unfair term; and
• applying or relying (or purporting to rely) on an unfair contract term.

Each of these prohibitions can be contravened multiple times in relation to the same contract or even in relation to the same unfair term (if relied on more than once). Each contravention would attract a pecuniary penalty – presently the maximum pecuniary penalties for contravention of a civil penalty provision under the ASIC Act are as follows:_³

• for corporations: the greater of 50,000 penalty units (AUD 11.1 million); 3 times the benefit of the conduct (if the court can determine the value of the benefit); or 10% of the annual turnover of the party for the previous 12 months (up to a maximum of 2.5 million penalty units, or AUD 555 million); and
• for individuals: the greater of 5,000 penalty units (AUD 1.1 million) or 3 times the benefit of the conduct (if the court can determine the value of the benefit).

Additional remedies

The Bill introduces additional remedies for courts to impose in unfair terms proceedings, including:

• clarifying that the court can make orders to void, vary or refuse to enforce part or all of a contract or any collateral arrangement if this is appropriate to prevent loss or damage that is likely to be caused. The new provisions do not require a court to consider that they will redress actual loss or damage. The Bill retains the automatic voiding of an unfair term under the current law;
• orders to prevent or reduce likely damage or redress actual damage to any person (including non-parties) by a term that is the same or substantially similar in effect to a declared unfair contract term that is contained in any of the Respondent's existing standard form consumer or small business contracts (even if that contract is not put before the court or identifiable when the court makes the order); and
• injunctions restraining a party from including a term that is the same or substantially similar in effect to a declared unfair contract term in any future standard form contracts.

Expanded class of contracts

Under the ASIC Act, the protections will apply to a small business contract where:

• the upfront price payable is ≤ $5 million;_⁴ and
• one party has < 100 employees or < $10 million turnover._⁵

Part time employees will be counted as a fraction of a full-time equivalent employee.

Meaning of standard form

In addition to the current matters a court must take into account in assessing whether a contract is standard form, the Bill requires a court to take into account whether a party has used the same or a similar contract before. The Bill also clarifies that a contract may still be standard form despite there being an opportunity for: (i) a party to negotiate changes that are minor or insubstantial in effect; (ii) a party to select a term from a range of options; and (iii) a party to another contract or proposed contract to negotiate terms of the other contract.

Exemptions and exclusions

The Bill introduces additional remedies for courts to impose in unfair terms proceedings, including:

• operating rules of licensed financial markets such as the ASX;
• operating rules of licensed clearing and settlement facilities;
• real time gross settlement systems approved by the RBA; and
• certain life insurance contracts.

The reforms are proposed to come into effect 12 months after the Bill is passed into law, allowing a period of time for standard form contracts subject to the new regime to be reviewed and, if necessary, amended. The Bill contemplates a review of the amendments 2 years after commencement.

Unfair Terms Enforcement Action in Financial Services

In 2018, ASIC and the Australian Small Business and Family Enterprise Ombudsman successfully secured commitments from the big four banks to improve the terms of their small business loan agreements. Following this, ASIC commenced unfair contract terms proceedings against two Australian banks - in two separate cases before the Federal Court in 2020 and 2021, a number of terms included in several of Bank of Queensland and Bendigo & Adelaide Banks' small business loan contracts were found to be unfair. The Federal Court declared several terms void and unenforceable in these cases, including:

• unilateral variation clauses to vary the terms and conditions of contracts without giving borrowers advance notice or an opportunity to exit the contract without penalty;
• event of default clauses to unilaterally determine whether a default has occurred without giving borrowers an opportunity to address the issue;
• indemnification clauses to make a claim against a customer for losses caused by the bank's mistake, error or negligence; and
• conclusive evidence clauses which meant that if the bank issued a certificate stating an amount owing by a customer, that amount would be assumed to be correct unless the customer could prove otherwise.

There are a range of standard form contracts prevalent in the financial services sector, including: small business bank loans, broker terms and conditions, credit contracts, equity release products such as reverse mortgages, new technology agreements such as blockchain based agreements, wallet services, and insurance contracts. The current Bill puts unfair contract terms squarely back on the agenda and we expect more investigations and enforcement activity in this sector. 

Preparing for What's to Come

Now is the time for the financial services sector to:

• review your standard form contracts to ensure there are no unfair terms; and
• reassess your suppliers and customers to determine whether or not they will constitute a small business under the definitions in the new regime.

Footnotes

1. Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Cth) (Bill). The Bill includes amendments to the unfair contract terms provisions in Part 2-3 of the Australian Consumer Law (ACL) and Part 2 (Division 2, Subdivision BA) of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act).
2. Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2021: Unfair contract terms reforms.
3. Section 12GBCA, ASIC Act. The Bill proposes amendments to section 12GBA(6)(a) of the ASIC Act to make the unfair terms provisions in Subdivision BA civil penalty provisions. Section 12GBCA of the ASIC Act sets out the current pecuniary penalties applicable to a contravention of a civil penalty provision. Different penalty provisions will apply to non-financial product or financial services contacts that are subject to the regime under the Australian Consumer Law.
4. The $5 million threshold is consistent with the Australian Financial Complaints Authority's exclusion of complaints about small business credit facilities that exceed $5 million. Note that the reforms would remove from the ACL the current contract value thresholds.
5. The unfair contract term protections in the ACL will apply to small business contracts if one party is a business with less than 100 employees or turnover less than $10 million.
6. Namely, whether one party was required to reject or accept the terms of a contract in the form in which they were presented and whether another party was given an effective opportunity to negotiate the terms of the contract.
7. Following Government reforms passed in early 2020, unfair contract terms protections extended to insurance contracts from 5 April 2021. However, under the Bill, the unfair terms regime will be taken not to apply or ever have applied to certain life policies within the meaning of the Life Insurance Act 1995, which have been replaced, linked or unlinked.
   

Author: Melissa Fraser, Partner.

With thanks to Adelle Elhosni and Rubaina Sehgal of Ashurst for their contribution.