Competition Commission of Mauritius
Coming to grips with Abuse of Market Dominant Positions
— MURLI DHAR
Commercial banks grant housing loans to customers. It is usual for such loans to be accompanied by a life assurance or a Decreasing Term Assurance (DTA) policy taken at the cost of the borrower. The insurance policy serves to protect the bank in the event of loss of life or serious disability of the borrower during the usually long currency of the housing loan.
The Executive Director of the Competition Commission of Mauritius (CCM) started an investigation in August 2010 under the Competition Act 2007 to determine whether banks may be restricting loan takers from freedom to opt for a DTA of their own choice and hence at a lower cost in view of a prevailing practice among banks to bundle up the housing loan together with the insurance policy as one package. Other house mortgage lenders may be doing the same but let us focus on banks in the present case.
Banks and insurance companies are distinct entities. The bank might then be selling the insurance product of a company and the cost of the insurance policy would not necessarily be to the best advantage of the borrowing customer if he had the choice to shop around for it on the market. The bank might therefore be using its dominant position vis-à-vis bank customers to make them take up the loan and the DTA as a single package. The investigation has led the Executive Director to the conclusion that “eight of the thirteen banks that were under investigation have engaged in conduct that has the effect of preventing, restricting or distorting competition in breach of section 46 of the (Competition) Act”.
The Communiqué from the CCM dated 30th August 2012 states that the final decision concerning the finding of the Executive Director rests with the board of the CCM and that the board will give a hearing to the concerned banks before putting down its decision in the matter. If the breach is confirmed and the sanction for this breach is pronounced by the CCM’s board, it will act to arrest a tendency among Mauritian commercial and non-commercial (i.e., public bodies) enterprises to take their counterparties for granted.
The hapless customer of the big commercial banks is often confronted with a take-it-or-leave-it attitude on the part of the banks. This is not limited to housing loans which entail a lot of formalities before they are finalised. Although it is stated that bank customers are free to look for the best deals they can secure on the market, the reality is not so simple. Mobility is highly restricted by the market structure and prevailing practices.
First, there has to be a standing banker-customer relationship for someone to strike a deal with a bank. The customer therefore often finds himself tied up to “his/her” bank for practical reasons. This is where his account is to be found. This might also be the only place where all or nearly all his assets are tied up as security for loans taken or still alive at the time another loan is contemplated. It is not impossible, but rather not an easy task, to move the security along, among different lenders unless one is in relatively big business with numerous properties that may be attached as security for distinct facilities obtained. For different reasons of convenience, therefore, the customer is in practice bound to deal with a single bank of which he is a customer.
Second, even if the customer were to look for the best deal on the market, he would find little advantage to it as key rates (exchange rate, interest rate, commission for guarantees, L/Cs, Standing Orders, Inward and/or Outward Remittances of funds, Commissions and Service fees duly broken down into as many compartments as possible to the best advantage of banks, etc) are more or less identical at the different banks. It is usually not worth the candle to move from one place to the other, transaction after transaction. Perhaps big business houses could secure some advantage by so doing but that is not applicable to the majority of bank customers who are medium to small transactors.
Banks claim that they are closely aligned in all of these fees, rates and commissions charged because of the close “competition” among them. One wonders whether this holds water or whether others, the smaller banks, are not actually forced to toe the line adopted by banks having dominant positions on the market, if only to remain profitable. In a sense, bank customers are a victim of their own decision not to diversify their banking activity widely enough among the existing banks. The result is that, despite the oncoming of newer banks on the market, they end up paying the prices for banking services as determined by the major banks operating on the market.
In the case that has gone before the Competition Commission presently, it may well be that the local insurance market is as lopsided in structure as the domestic banking market in which a couple only of the entities account for the lion’s share of the market. In other words, there might well be minor price differences for the same policy among insurance companies but not big enough as would be the case if true competition prevailed on the market among companies of equal financial strength capable of honouring their obligations. Unfortunately, it will not be in the domain of the Competition Commission to gauge the comparability of the insurance product on offer by gauging the intrinsic financial strength of individual insurance companies.
We may have to put up with such structural market imperfections which dictate non-competitive prices to consumers of financial services overall. However, it is a step in the right direction for the Competition Commission to make inroads into a market for goods and services which has been riddled with monopoly abuses since centuries and is continuing in this direction especially in the market for goods. This is obvious from successive price hikes of consumer goods, with those traders left behind at the first round following suit at the next round. And so on. The hapless consumer is being depleted at each round but you can’t make a real difference to it if trading bodies like the State Trading Corporation, which were initially set up to stop the abuse, give up their part of the battle on behalf of consumers in the name of liberalisation and price decontrol. The situation is thus not different for the consumer faced with a successive battery of price increases from providers of financial and other services, from the other side.