PTSB's SVR and the Competition Act

LostinKildare

Over in the Politics forum we are discussing PTSB's single variable rate of 5.19%, which is much higher than other banks'.


Various commentators have referred to the rate as "extortionate," and called its use "gouging," because (an unquantified number of) SVR customers are affected by negative equity, loss of income, job instability, etc. and therefore cannot escape the high rates by switching their mortgages to a different lender (i.e., no other bank will have them).


The thread is here:

http://www.boards.ie/vbulletin/showthread.php?t=2056552117


With reference to this description of the Competition Act 2002 on the Competition Authority's web site:

Section 5 prohibits the abuse of a dominant position. It is important to recognise that it does not prohibit a dominant position - only its abuse. Generally a firm is considered to be dominant if it is able to act without taking account of the reaction of its customers or its rivals, e.g. a firm which can increase its prices unilaterally because it knows that its customers have few if any satisfactory alternative sources of supply and therefore little choice but to pay the higher price. The Act is not breached when a firm's vigorous competition takes sales away from less efficient rivals, since this is competition working properly.
http://www.tca.ie/EN/Enforcing-Competition-Law/Competition-Law.aspx

my question is, could PTSB's actions constitute a violation of the Competition Act?

BornToKill

LostinKildare wrote: »

... because the vast majority of customers are affected by negative equity, loss of income, job instability, etc. and therefore cannot escape the high rates by switching their mortgages to a different lender

Are they though? I understood that the majority of PTSB mortgage customers are actually on trackers. I would be surprised if you could establish that the vast majority are unable to switch to an alternative provider of mortgage finance such as AIB, KBC, EBS, ICS, Ulster Bank, etc.

Tom Young

Two queries:

1. Is PTSB in a dominant position in the marketplace - dominance usually being based on a percentage market share, usually in excess of 25%?

2. Where is the perceived abuse? Can a unilateral, contractually maintained rate increase be abuse? (in the economic sense, rather than the Liveline logic of "abuse Joe!!")

My view:

1. Unlikely that PTSB is dominant in the context of the market. Therefore, regulation of their contract terms is unlikely to arise on an ex ante basis.

2. It may not be technical abuse unless, per 1. the undertaking is dominant.

Therefore, it is unlikely to be the case.

Tom

PS: Now, if everyone else in the market follows that move then another remedy may arise.

LostinKildare

BornToKill wrote: »

Are they though? I understood that the majority of PTSB mortgage customers are actually on trackers. I would be surprised if you could establish that the vast majority are unable to switch to an alternative provider of mortgage finance such as AIB, KBC, EBS, ICS, Ulster Bank, etc.

Yes, sorry, the majority of PTSB mortgage customers are on trackers. I meant the majority of SVR customers. I edited the OP.

I do not know how many or what % of SVR customers are unable to switch --- certainly there is a pool of them. They have been pretty vocal online, especially at askaboutmoney.com. Is the number affected important to a determination of whether PTSB's actions constitute an abuse of dominant position? That is, is it a violation if it's 10,000 people, but not if it's 200?

[Making an assumption here, but it seems that it must be a "big enough" group that cannot switch, or else why would PTSB raise the rate so high and risk having lots of performing loans fleeing to competitors?]

LostinKildare

Tom Young wrote: »

Two queries:

1. Is PTSB in a dominant position in the marketplace - dominance usually being based on a percentage market share, usually in excess of 25%?

2. Where is the perceived abuse? Can a unilateral, contractually maintained rate increase be abuse? (in the economic sense, rather than the Liveline logic of "abuse Joe!!")

1. So you're saying that "dominance" is determined by market share. That seems to contradict the definiton of "dominance" given by the Competition Authority:

Generally a firm is considered to be dominant if it is able to act without taking account of the reaction of its customers or its rivals, e.g. a firm which can increase its prices unilaterally because it knows that its customers have few if any satisfactory alternative sources of supply and therefore little choice but to pay the higher price. The Act is not breached when a firm's vigorous competition takes sales away from less efficient rivals, since this is competition working properly.

Is the CA's definition incorrect (or incomplete) then?

2. The "abuse" is exactly what is specified in the CA's example of Abuse of Dominant Position, above:

"[PTSB has increased] its prices unilaterally because it knows that its customers have few if any satisfactory alternative sources of supply and therefore little choice but to pay the higher price."

That is, PTSB is aware that [a group of] its customers, having been affected by income loss and/or negative equity, cannot switch their mortgages to a competitor (i.e., they "have few if any satisfactory alternative sources of supply"), and knowing this, they jacked up their rate, injuring this captive group. The injury is a financial one.

Tom Young

As you very correctly point out, the Competition Act of 2002 does not indicate properly what a dominant position actually is. For the purposes of interpretation, we must look to the genesis of the Act, which is European Union Competition Law.

A dominant position occurs where an undertaking, such as PTSB, acting individually reaches a position of such economic strength in a given market that the normal constraints of competition no longer apply to it or to them. Or in otherwords, the undertaking can act to a considerable extent independently of competitors, customers and consumers.

The principal indicator of dominance is market share and the market power of the undertaking in question (as I mentioned above). The higher the market share, the more likely the undertaking will be dominant.

Other factors can also be assessed such as: Barriers to Entry; Expansion and Exit; Superior Technology of the undertaking; Financial resources; Integration; Fragmentation and other competitors.

The Competition Authority issued enforcement guidelines pertaining to the 1991 and 1996 Acts, in these guidelines, the CA indicated that in addition to market shares, other considerations to be taken into account in determining market power included:

1. The level of concentration in the relevant market (for provision of mortgages in this case);
2. The configuration of the firms in the market (Banks and Building societies - PTSB not being the largest by a country mile);
3. Potential competition on both demand and supply side; and
4. Barriers to entry.

If you want to do some background reading:

See: -

Deane v Voluntary Health Insurance (VHI) Board [1992] 2 IR 319;
Masterfoods v HB Ice Cream Limited [1993] ILRM 145; and
Meridian Communications Limited and Cellular Three Limited v Eircell Limited [2002] 1 IR 17.

In Meridian Mr Justice O'Higgins found that Eircell did not hold a dominant position in the market and stated:

"The evidence in this case is to the effect that Eircell has been and is forced by pressure of Digifone's price re-ductions to lower its own prices and that is incompatible with the independent conduct of the type described in a situation of dominance."

It is my view that there is no dominance, therefore no abuse of dominance, etc.

Tom

PS: That said, I can see how one might jump to that conclusion by reading the Act without considering the genesis of Competition Law in the context of the situation at hand.