Vice President of the European Commission responsible for Competition Policy
SGEI reform and the application of competition rules to the financial sector: themes for dialogue with the European Parliament
European Parliament, ECON Committee
Brussels, 22 March 2011
Honourable members, Ladies and Gentlemen:
I want to thank the ECON Committee and its chairperson, Sharon Bowles, for inviting me to this structured dialogue. Today, I will touch upon a number of issues that are moving the competition policy agenda forward: from the application of State aid rules to the Services of General Economic Interest (SGEI), to the revision of our best practices in antitrust and the issue of collective redress. I will also update you on the issue of State aid to banks and report on our other initiatives in the financial sector.
I will start from the most imminent initiative: tomorrow, I will submit to the College of Commissioners a communication on the reform of EU State aid rules on services of general economic interest. This will launch the political debate that will lead to the revision of the Monti-Kroes package of 2005, which expires in November.
The Lisbon Treaty put greater emphasis on the essential role of public services whilst recognising their diversity in the European model of society. Protocol 26, in particular, acknowledges the need for a high level of quality, safety and affordability of services, objectives that the Commission very much shares. At the same time it recalls the wide discretion of national, regional and local authorities in providing, commissioning and organising them. Article 14 mandates both the Union and the Member States, each within their respective powers and competences, to take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfil their missions. Article 14 also provides a new legal basis for the European Parliament and the Council to establish these principles and conditions.
It is important to recall that State aid control does not apply to all public services. The reform the College will discuss tomorrow is about those services that are economic in nature – the SGEI. Only government funding of this latter category of public services is subject to EU competition law and, more specifically, to the control of State aid. The reform is based on the Commission’s exclusive power of State aid control, under Article 106 of the Treaty, to assess the compensation for the provision of public services.
The reform takes a particular significance in the context of the crisis. On the one hand, more people have come to rely on public services to make ends meet; on the other end, governments are strapped for cash. These two conflicting trends call for a more efficient use of resources available. It is only fair that an SGEI provider should be compensated for the costs of providing a public service plus a reasonable profit margin. However, the current post-Altmark rules do not take into account how the costs incurred by the SGEI provider compare to those of a well-run undertaking. We cannot take for granted that they do, especially in those cases where the company entrusted with the public service obligations has not been selected through a tendering procedure. I think it is in the interest of the quality of the service itself and of the efficiency of public spending that these questions are asked in particular in network industries, such as public transport and the post, characterised by large commercial activities with clear EU-wide dimension. The rules can also be further clarified to make it easier for Member States to apply them and to increase legal certainty. This follows from a recurrent comment we have received from our stakeholders that in certain cases the present package was too complex to use.
The new guidelines will take better account of the huge diversity of SGEI in Europe, which range from large-scale commercial services to social services delivered at a local level – such as home care for the elderly. Therefore, I would like to introduce the principle that our control should be more diversified, more proportional, and better adapted to the nature of the services provided. This means that the rules for certain social and local services that have little or no impact in terms of competition law should be simplified. As I said, tomorrow we’ll launch the final political debate on the reform. On the basis of this debate, we will draft the texts of the new package in the summer. Finally, the new package will replace the old one in November. During this period, I would like to continue keeping the Parliament involved, as was the case until now.
Other reforms in the pipeline
This proposed reform is not the only one we have in the pipeline in the State aid domain. Whilst continuing to deal with the rescue and restructuring of individual banks, we are also working on new guidelines to handle State aid to banks as of 2012; on guidelines for State aid in the context of the EU Emissions Trading Scheme; revising the State aid regime applicable to the shipbuilding and maritime sectors, and carrying out the mid-term review of our framework for Research, Development and Innovation. This work is to be completed this year.
For decisions to be adopted later, we are also starting the internal discussion on new regional aid guidelines, broadband guidelines and the new framework on subsidies to film and audiovisual. I'm also preparing a re-assessment of State aid rules applicable to airports and airlines. I will launch a consultation on this next month. I have also inherited a large number of complaints against the aid granted to low-cost airlines and from the latter against the historical operators, and it is high time we deal with them. On top of this, I am starting to think about a broader reform of the State aid procedures. It is clear that State aid will be a space to watch this year and the next.
Reforms planned in other policy areas include the revision of our best-practices package on how we conduct antitrust procedures, on the role of the Hearing Officer, and on the submission of economic evidence. We are reviewing the package on the basis of a public consultation and of the experience I have gained after a year of operation. The revised package should be ready after the summer. Finally, there is the collective redress issue. The public consultation runs until the end of April and the Commission will adopt a position on the common principles of collective redress by the end of the year. After this, in 2012, I intend to put forward a legislative initiative for private enforcement consistent with those principles.
Regulating and monitoring finance
Now I would like to spend some time on to the work we are carrying out in the area of finance and banking. Over the past couple of years we’ve had to restore the financial system and make sure that a crisis like this would never happen again. We are still using the special crisis regime for banks based on the Treaty provisions. Market conditions permitting, new rules for the rescuing and restructuring of banks will enter into force as of 1 January 2012.
What is our assessment of the massive public rescue of banks? The study requested by your committee is being prepared, and will be ready in June. But everyone knows that the bill for Europe’s taxpayers has been large. According to our figures, in 2008 and 2009 Member States reported to have used about €2,340 billion of the support approved. The breakdown for 2009 is as follows:
€827 billion in guarantees on bank liabilities,
€141 billion in capital injections,
€110 billion on the relief of impaired assets, and
€29 billion in liquidity and bank funding support.
For a total of about €1,107 billion. Figures for 2010 are not yet available.
Our task is to control that the aid is limited to the strict minimum necessary by making sure that the banks contribute their share to the burden of the rescue by divesting valuable businesses, not just hiving off their impaired assets to government-run bad banks, and adopt sounder and more sustainable business models. We also make sure that the beneficiaries would not use public subsidies to undercut unaided competitors or that they use their capital to pay capital holders before the taxpayer.
So far, we have adopted 32 final restructuring decisions. We are monitoring closely how our conditions are respected and the restructuring implemented. This is not always easy. We get signals from the market that some of the subsidised banks behave aggressively and when we have evidence of this behaviour we immediately intervene to correct it. The main point is that when a decision is adopted the dialogue with the Commission is not over. It continues until we are satisfied that the decision is implemented correctly and that the bank is able to stand on its feet, with no further need of State support. I am committed to ensuring that our decisions are implemented in every detail.
The restructuring of Europe’s banking sector is not over either. We have 24 ongoing cases where we will have to take decisions on the final restructuring of banks; some of which are rather challenging.
This applies to the Irish banks, where the situation of the financial sector and of the sovereign debt have already required EU and IMF support.
This also applies to the four pending German cases: WestLB, Bayern LB, HSH and Hypo Real Estate, which are struggling to find sustainable business models.
Finally, it applies to a few cases in Greece, Austria, Portugal, and Slovenia; and we expect to receive a few more in the course of the year.
While each case is analysed on its own merits, we apply the same principles in our assessment.
Firstly, aided banks must restructure to return to long-term viability. They must have a strong capital base and sustainable funding sources to retain the confidence of the markets. They must be able to generate profits so that they can provide credit to households and companies without any need to rely on State support. This requires banks to re-focus on their core business and abandon loss-making activities.
Secondly, the banks and their capital holders must contribute to the costs of restructuring in order to limit the burden for the taxpayer. Our rules on burden sharing require that the banks pay a price to the State for the aid they receive, and that they refrain from remunerating shareholders through dividends – and hybrid capital holders through coupons – until there is sufficient capital on their books.
Thirdly, the banks cannot use the aid to expand to the detriment of unaided competitors. Let us not forget that there are more prudent banks in Europe which did not have to turn to the public purse for support during the crisis. Allowing aided banks to acquire their competitors with the help of State aid would be bad policy; therefore we require that the aided banks are temporarily banned from making acquisitions. To prevent the subsidy from distorting competition, banks need to divest some of their assets and observe certain rules on pricing.
In sum, we have been doing the job of resolution authorities, at the same time protecting financial stability, public finances, and a level playing field in the internal market. Now – in parallel to our work on crisis management and resolution – we are preparing the permanent rules for the rescuing and restructuring of financial institutions, to be introduced on 1 January 2012.
Looking beyond banks, I regard State aid control – and competition policy in general – as the natural complement of the drive towards a better regulation and supervision of financial markets in Europe. Let me briefly give you a few examples.
In the field of payment cards, mobile, and internet payments, we are looking at issues such as interoperability, governance, standardisation, and transparency. In parallel with regulatory initiatives that you are discussing, we have brought cases against MasterCard and Visa. MasterCard’s commitments to reduce interchange fees for cross-border transactions with consumer debit and credit cards are being implemented under the supervision of a Trustee. Similar commitments offered by Visa Europe – limited to debit cards – were also accepted and made binding. Our investigation continues into the fees applied by Visa Europe on cross-border credit and deferred debit-card transactions in nine Member States.
Two other ongoing cases – involving Thomson Reuters and Standard and Poor’s – illustrate our attempts to discipline companies that handle information that is indispensable for the financial industry. The concern we are trying to resolve with Thomson Reuters is about the codes it uses to identify securities; these codes are necessary for customers to retrieve company data from competitors, something they cannot do at the moment. This would appear to create a barrier that raises the cost of switching from one provider to another. As to Standard and Poor’s, the case is about the price charged for the use of the International Securities Identification Numbers – or ISINs. The company has a monopoly in the assignment of these numbers to new securities issued in the US and in their distribution to the financial community. We have concerns that Standard and Poor’s may charge too much for the use of these identifiers; in particular, indirect users must pay a license fee although there are no intellectual property rights on these numbers.
Another issue on the table which may bring more transparency and stability to the financial world refers to some aspects of the functioning of the credit default swaps market. We are discussing the best course of action to take during these very weeks.