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Banking & Finance | Legal

The antitrust paradox – and how to overcome it for a healthy financial services market

29 Nov 2021, by Amy Sarcevic

To maintain health in the financial services sector – or indeed any sector – two key things are needed: innovation and competition. These two things are interdependent. For innovation to flourish, competition is needed. And for competition to flourish, innovation is needed. To encourage both, antitrust regulation is used. But, when too stringent – or not designed correctly – a paradox emerges: over-regulate the market to promote competition and risk a decline in innovation – one of the very outcomes antitrust policy seeks to avoid.

So how much is too much when it comes to antitrust regulation; and what does the ideal antitrust policy look like? Competition Lawyer Andrew Low – a speaker at this year’s 31st Annual Credit Law Conference – says the question gets more complicated, the deeper you probe.

“Traditionally, competition laws were seen as playing a critical supporting role in a free market economy; premised on the general acceptance that a free market economy was best, or at least better than a government regulated one,” he said. “But in some highly dynamic markets – and in the face of disrupted industries – there is a growing sense that this philosophy has not served us well,” he said.

“In dynamic digital markets we seem to be grappling with the weaknesses of ex post competition enforcement, which is too slow, and a sense of increasing market failures – in particular, the failure to regulate for concentration of economic and political power.”

Indeed within financial services, competition regulator ACCC is still grappling with the issue of tech companies getting so big that they risk impeding market entrants and activity from smaller players. This year, the ACCC announced that it was investigating Apple Pay restrictions on banks, noting that, “[…] you get a party like Apple that builds up its own internal business system, but then they get so big that you say, hang on, is what you did when you were small still appropriate when you are big?”.

However, regulating too early doesn’t come without risks. For mergers, it could water down opportunities for key consumer innovations, Low argued. “In certain circumstances, continued permission-less innovation could fundamentally restructure our markets in ways that, over time, hinder innovation, with outcomes that work only for a few, not the many. But it is dangerous to assume this is always the case,” he said.

Growing concern

Within digital economies – including fintech – the challenge is pronounced and growing, as technology giants are accused of muscling in on disruptive innovations and boosting their – already contentious – market share.

“It’s hard to design competition policy in a market that is fast-moving and highly unpredictable,” said Low. “Intervene too quickly and you may stifle innovation. Move too late and you may lose the opportunity for innovation. The Facebook [now Meta] / Instagram merger is an often-referred-to case in point. Some say there was a lost opportunity for a competitive alternative to Facebook – and others say there was no way of foretelling the tremendous success of Instagram”. This uncertainty remains for disruptors in the finance or fintech space.”

While a string of inquiries – notably the ACCC’S Digital Platforms Inquiry – have lit a fire beneath this topic, we have yet to settle the approach on our existing regulatory tools, Low said.

“Half a decade ago, many of the discussions around competition in the digital economy space were highly theoretical. In 2016, the ‘Can Robots Collude’ dialogue addressed the – then hypothetical -scenario of AI exhibiting anti-competitive behaviour. Today, following a number of in-depth Inquiries, the issue of big tech, big data and AI is very much reshaping our markets, yet we haven’t settled on the desired state of regulation for these.”

Structural challenges

Part of the challenge in striking the right balance with antirust regulation comes from the way the system is structured, with the emphasis currently on the ACCC to think about how disruption is regulated.

“We shouldn’t rush to think regular-led policy is a good outcome, even though positive actions are being taken by the ACCC,” said Low. “Policies by the regulator will reflect their institutional character, which for the ACCC is inherently couched in its enforcement-led capability.

“However, focussing on problematic conduct – and proposing solutions for that specific conduct – may not be the healthiest way. Competition enforcement has traditionally been focussed on seeking penalties to deter anticompetitive conduct. But in dynamic markets, what conduct is seen to be anticompetitive can look wildly different to different people.”

Indeed, competition policy associated with the digital economy in Australia has largely been driven by the ACCC’s substantive 18-month inquiry into digital platforms and their impact on media. This and other work by the regulator is based on what Low describes as a “problem – solution” framework.

“It’s based on a framework of reform that arises from the specific issues the ACCC was asked to inquire into; namely the interaction between digital platform providers – such as Google and Facebook – and traditional news and media markets. It should not be assumed to be a roadmap to assess the full effects of digital disruption,” he said.

Within financial services, the “problem-solution” framework is also evident. In 2018, the ACCC compelled major banks to provide extensive pricing information in support of its residential mortgage products price inquiry. Beyond this, the ACCC suggests that, “a range of structural and behavioural indicators suggest that Australia’s banking sector is not vigorously competitive.”

Another way?

The answer, Low says, is for competition regulation to be directed at facilitating competitive innovation. “When this happens, the two things can be the best of friends,” he said.

Additionally, greater collaboration between industry and government to develop codes of conduct and commercial norms would trump the current approach.

“At present much of the emphasis has been granting the competition regulator with greater laws for enforcement,” he said.

Drawing on his expertise in competition law, Low will give further commentary on this issue at the upcoming 31st Annual Credit Law Conference.

This year’s event will be held 8-10 December at the Hilton Sydney.

Register now to secure your seat.

About Low

Andrew Low is a Special Counsel in Gilbert + Tobin’s competition and regulation group with more than ten years’ experience. Andrew’s practice provides complex advice and advocacy for clients in high profile matters across each core area of the Competition and Consumer Act: mergers, enforcement investigations, inquiries and disputes.

Andrew has experience in the technology, health, retail, financial, insurance, resources and industrial sectors – both in Australia and internationally – and commercial litigation in the Federal Court of Australia. Prior to joining Gilbert + Tobin, Andrew was an associate to a Federal Court judge.

Andrew has a particular expertise in digital issues for competition policy and regulation, and has contributed significantly to thought leadership in this area. He is also recognised and sought after by clients for his digital economy expertise. His thought leadership is supported by in-depth commercial experience, advising large tech companies, including Microsoft, Expedia and Fitbit.

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