Frankfurt am Main, 14. April 2010 Sophie Ahlswede Deutsche Bank AG/DB Research P.O. Box 60262 Frankfurt, Germany e-mail: sophie.ahlswede@db.com Tel. +49 (0)69 910 31832 Deutsche Bank response to the public consultation on the study on tying and other potentially unfair commercial practices in the retail financial service sector General remarks Deutsche Bank welcomes the opportunity to comment on the European Commission s public consultation on the study on tying and other potentially unfair commercial practices in the retail financial service sector. We commend the Commission for its efforts to increase the level of understanding of European retail financial services markets and to pursue an evidence-based approach towards any regulatory measures in this area. We support every endeavour to harmonise EU legislation concerning retail financial services in a targeted way to ensure a further integration of this market to the benefit of European consumers and financial services providers. Nonetheless, we wish to explain why the results of this particular study do not provide a suitable basis for regulatory measures on tying and other potentially unfair practices (also referred to hereinafter as the practices ). As a first remark, we would like to stress the difference between cross-selling, tying and bundling. Cross-selling is a legitimate commercial practice conducted by many goods and services providers and is appreciated, if not in fact demanded by many customers. The main difference is that tying has an element of coercion whereas cross-selling does not. In the study, tying is subsumed under cross-selling, which we think is misleading for a reader unfamiliar with these terms. On the basis of the study, the uninformed reader might therefore associate a negative connotation with cross-selling that is not warranted. The most obvious reason why the study is not a suitable basis for regulatory measures is the very limited empirical database. This might partly be attributed to the methodology used. It was predictable that a survey among the potential suppliers of the practices would not lead to enthusiastic support especially since cross-selling and unfair practices were not well distinguished. Other institutions surveyed such as supervisory authorities, associations and central banks do not, by definition or by law, possess most of the information on the level of detail asked for in the study. Consumers were only asked via associations. A random mystery shopping exercise might have led to an empirically sounder and more credible database. In addition, even solid empirical data does not explain much without a sound theoretical basis. In our view, the theoretical foundation of the antitrust test and the customer impact test which are used in the study leaves room for improvement. Therefore, the second reason why the study is not a suitable basis for regulatory measures is the questionable assumptions on the interdependency of the effects of the practices and certain indicators used in the study for the antitrust test and the customer impact test, e.g. market concentration, customer mobility and profitability. The legal analysis carried out in the study provides a useful insight into different national levels of consumer protection as regards the practices. It also displays the heterogeneity as regards the effectiveness of legal provisions in the Member States. For example, the practices are encountered in countries that ban tying and other potentially unfair commercial Page 1 of 6
practices (e.g. BE, PT and SK), whereas they are not prevalent in other countries that do not ban those practices (e.g. DE, LT). As a conclusion, national legislation is not unambiguously fulfilling its aim in this matter and hence its effectiveness in general may be questioned. This conclusion, however, is also based on the limited empirical database. Responses to consultation questions (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? We do not agree with most of the study s findings and conclusions as they are based on limited data and geographical coverage and questionable assumptions on the interdependency of tying, on the one hand, and other market characteristics, such as market concentration, account mobility and profitability, on the other. An analysis of potential impacts of tying and other identified potentially unfair practices on that basis is not reliable. Conclusions of the study should therefore be treated with great caution, bearing in mind the (limited) basis for those conclusions. In particular, we do not agree with the potential impact of the practices on the different stakeholder groups. Combined product offerings result from free decisions made by consumers and providers. The product range of providers is a reflection of what consumers demand and what is profitable for providers to offer. Combined products are therefore not an impediment to competition, but the result of market processes. (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. A comparison of the prevalence of tying and other practices and values of the indicators used in the study leads to the conclusion that interdependence between the two does not always exist. The construction of the antitrust test and the customer impact test and the assignment of negative or positive scores are partly not comprehensible, as the following examples show: One assumption is that tying has a negative effect on customer mobility. This implies that a lack of customer mobility is always a negative sign of customers being locked in. However, low customer mobility may simply be an indicator of satisfaction with a current provider. Anyway, testing the assumption with data from the study it emerges that no clear interdependence between tying and customer mobility exists: Czech, Hungarian and Portuguese banks use non-beneficial tying (according to the study) but customer mobility in the area of current accounts is higher than the EU-25 average (in 2005, according to the retail banking sector inquiry 1 ). Another assumption in the customer impact test associates insufficient customer mobility with specific product features. The duration of a product, the intensity of trader-customer contact and the complexity of a product are computed as negative regarding switching costs which supposedly lead to reduced customer mobility. While the isolated interdependence between those factors and switching costs might be true, it cannot be held against e.g. a 30- year mortgage loan that it has a long duration and requires advice. Duration and advice are product features demanded by customers and do not in themselves lead to consumer harm. Furthermore, a long-term customerprovider relationship is normally deemed to be beneficial, especially when 1 European Commission (2007), Report on the retail banking sector inquiry, Commission staff working document, SEC(2007) 106, p. 71. Page 2 of 6
trust-sensitive services like financial services are concerned. Furthermore, a direct interdependence between switching costs and customer mobility does not apply, as many other factors influence the customer-bank relationship. For example, a study on Nordic retail banking showed that 70% of consumers would not switch their financial service provider even if no costs were associated with switching. 2 The study concludes that unfair conducts are negatively associated with customer mobility as it finds a negative relationship between customer mobility figures from the retail banking sector inquiry and the customer impact test scores (although not statistically significant). 3 This is not surprising as the customer impact test is in part based on the assumption that tying has a negative impact on customer mobility and scores are assigned accordingly. But, as the above example shows, a clear causal relationship does not seem to exist. An implicit assumption is that the practices have more negative effects where the retail banking market is more concentrated (higher concentration leads to a negative impact in the overall antitrust score). This assumption has no logical or empirical basis. The authors argue that high concentration may reflect weaker competitive pressure. This is doubtful. First, despite high concentration competitive pressure may still be high but scores in the antitrust test do not account for this. Secondly, no explanation is offered as to how weaker competition pressure promotes negative effects of the practices. A comparison of the results of the study does not lead to a clear indication of dependency between the two factors: Italy, Czech Republic and the Netherlands reported a relatively high number of unfair cases of tying, yet they display completely different concentration ratios in the banking sector (IT: 33.1%; NL: 86.3%). A weak correlation between the level of cross-selling and market concentration is also mentioned in the retail banking sector inquiry. 4 Profitability is assumed to be a sign of less competitive behaviour in the market. 5 Therefore, high profitability leads to a negative impact on scores in the antitrust test. The fact that higher profitability may also be an effect of efficient work processes to the benefit of banks and consumers is, by definition, ruled out in the score. The indicators profitability, market concentration and regulatory entry barriers are meant to help assess whether the conduct of firms would lead to the eventual usage of their market power to the detriment of consumers. However, the authors do not explain how these factors are causally connected to the use of the practices. A number of assumptions and some of the data used lead to a very high number of potential switchers and cross-border switchers: the assumption of the rational consumer (every consumer would switch if it were economically sensible) is very far from reality and thus produces higher results for consumers that would switch cross-border. Data from the survey is used in order to consider the magnitude of customers that would switch cross-border. This data is very inconsistent and on top of that is used in the least conservative way (calculations take the maximum shares of consumers affected). In addition to this questionable input, the results contradict earlier results of the study. Two examples: Surprisingly, Germany would be among the countries with the highest number of potential contracts to switch upon 2 Nordic competition authorities (2006), Competition in Nordic Retail Banking, p.81. 3 Final report on tying and other potentially unfair commercial practices in the retail financial service sector (2009), p. 373 (Referred to as Report (2009) ) 4 European Commission (2007), p. 74. 5 Annexes of the Final report on tying and other potentially unfair commercial practices in the retail financial service sector, p. 92. Page 3 of 6
elimination of unfair practices despite the result of the survey that no unfair cross-selling was found in Germany. 6 Another example is Belgium, where 7.3 m contracts with a current account as a gateway product and portfolio management as a combined product are allegedly potential switchers 7 even though this combination was not ticked in Belgium s survey 8. Despite all the positive effects of the above-cited assumptions on the scores, both overall test results indicate no major problem. Furthermore, the study does not account for the fact that even if unfair practices 9 might be applied by some providers this would not coerce consumers in any way because, behaving rationally (this is an assumption made in the study), they shop around. In conclusion, this points to the more realistic picture that a large part of the unfair practices reflects the normal result of a market where demand and supply meet, guided by the preferences of the participants. A market distortion might exist if all providers in a specific region (considering that financial services are still largely a local business) were to use the same unfair practices regarding the same products. However, based on our knowledge about market practices employed by our local competitors and ourselves, this is not the case. As regards concrete examples, we may provide you with the following information: Deutsche Bank does not tie any products with mortgage loans, consumer credit or current accounts as gateway products. We noted increased interest from mortgage customers in insuring payment protection in the case of unemployment during the past year. We offer this insurance as an optional product and no different conditions apply for the gateway product when this insurance is taken out. As regards current accounts, Deutsche Bank offers accounts without supplements as well as packages that combine a current account with other products. This way, every customer may choose her/his preferred option. We did not register any complaints as regards tied products. (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? As mentioned in the response to the previous question, we do not see specific negative effects of these practices for market participants as they are ultimately a result of the interaction and the individual preferences of market participants. Especially, after looking at other sectors we do not see a specific problem for financial services. Of course, information and knowledge asymmetries between providers and consumers have to be taken into consideration. In our view, the following three aspects could help to avoid harm for consumers by the practices: 1. Recently enacted legislation (UCPD) and measures that are about to be implemented in the Member States such as the CCD will show their effect in the coming years. In order to assess those effects a reasonable period of time (3-5 years after implementation in the Member States) should be allowed for market participants to adapt and use the provisions. Once an assessment of existing legislation has taken place a cost-benefit analysis should be carried out as to whether further harmonising measures on EU level are necessary in order to ensure an equal level of consumer protection against unfair commercial practices across borders. 6 Report (2009), p. 347. 7 Report (2009), p. 386. 8 Report (2009), p. 250 and p. 349. 9 We refer here to the practices described in the study as cross-selling practices (1.1.1) and conditional sale of products and services (1.1.2.1), not to aggressive commercial practices (1.1.2.2). Page 4 of 6
2. Transparency, disclosure and information are crucial in order for consumers to take informed decisions. However, measures to increase transparency, disclosure and information may not reach the consumer if he/she does not read the information due to an information overload or does not comprehend it due to a lack of financial knowledge. 3. Financial education is the basis for consumers to be able to take informed financial decisions. Pre-contractual information and advice will only benefit consumers when they are being enabled to appreciate the information they receive from financial services providers in a critical manner. (4) Are you aware of complaints from stakeholders, in particular consumers, regarding tying and other identified potentially unfair practices? Please describe. We registered sporadic feedback from customers complaining about too little information on the costs of payment protection insurance. However, these costs are explicitly stated in the contract. This complaint might be an effect of the vast amount of information consumers face when taking out a mortgage and the respective payment protection insurance. (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? We do not see a need for Commission action, due to three reasons: First, the results and conclusions of the study are not reliable (see general remarks and answers to questions 1 and 2). Legislative measures on this basis are more likely to distort the market than to benefit consumers. Second, starting from the basic assumption that consumers are mature and responsible citizens taking free decisions regulation should only correct market imperfections. It should not limit product choice or freedom of contract. A market distortion as described above (response to question 2) was not detected by the study and Deutsche Bank, based on our experience as a retail bank operating in six EUcountries, is not aware of such market distortions either. Third, a harmonised legal base is desirable in the light of the very heterogeneous legal situation in the Member States. However, a number of relatively new EU legislative measures came into force only recently or have yet to be transposed into national legislation in the Member States. As a first step it is therefore recommendable to monitor the effects of existing legislation (see answer to question 3). (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? This question should be answered after the practices in other sectors have been assessed and after possible differences that would warrant sector-specific legislation have been considered. So far, we do not see an issue as regards unfair practices that would be specific to financial services. In general, horizontal legislation is preferable. (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? The reasons and motivation for this development are not assessed properly in the study. It is most likely a reflection of market participants preferences, e.g. the Page 5 of 6
convenience of being able to contract several products with one provider, and better risk management on the part of the provider. Insofar as a problem exists, the same response as for question 3 applies accordingly. Page 6 of 6