Irish Competition Authority Decisions

1. The Clearing Rules of the Dublin Bankers' Clearing Committee (DBCC) as amended and revised to March 1987 were notified to the Competition Authority on 25 September, 1992. The notification requested a certificate under Section 4 (4) of the Competition Act, 1991, or in the event of a refusal by the Authority to grant a certificate, a licence under Section 4 (2). Notice of intention to take a favourable decision was published on 13 October, 1995 and no submissions were received. The Minister for Finance was invited to make a submission pursuant to Section 4 (5).

2. The notification concerns the Clearing Rules of the DBCC. The parties to the agreement, with the exception of the Central Bank, each provide banking services to the general public. The Rules are agreed between the parties. The Rules regulate arrangements for the clearing, exchange and settlement of payment transactions within the State involving the four associated banks, the Central Bank of Ireland and TSB Bank.

3. The parties to the arrangements are Allied Irish Banks plc, The Governor and Company of the Bank of Ireland, National Irish Bank Ltd., Ulster Bank Ltd., TSB Bank and the Central Bank of Ireland. Each of these is a member of the DBCC which is an unincorporated association which overseas the operation of the clearing system. The first four are known as the associated banks. They are essentially clearing banks which provide a broad range of retail and wholesale banking services and were traditionally responsible for the money transmission system. AIB and the Bank of Ireland, are Irish owned institutions. Ulster Bank is a subsidiary of the UK National Westminster Bank group and National Irish Bank is a subsidiary of the National Australia Bank group. The Ulster Bank and National Irish Bank are much smaller in terms of size than Bank of Ireland and AIB. TSB bank emerged as a result of a series of amalgamations of the various trustee savings banks which had been located throughout the State. The Central Bank of Ireland was established by the Central Bank Act 1942. Its function is to operate as a central bank, i.e. to regulate commercial banks and other financial institutions, to provide banking services to the Government and to operate monetary and exchange rate policy.

4. The arrangements involve the rules of the DBCC for the clearing, exchange and settlement of payment transactions within the State. Effectively such services are essential in a modern developed economy. The market therefore is that for the provision of such services within the State. The arrangements were designed and introduced to meet the payment clearing needs of the associated banks which traditionally were the main providers of money transmission services. The associated banks process very high volumes of payments on a daily basis. The services provided include:

(a) debit and credit paper clearings e.g. cheques and credit transfers;

(b)electronic fund transfer clearings e.g. direct debits and credits.

In addition the associated banks provide agency services to a number of smaller banks and building societies who are not members of the DBCC. Until November 1994, the Central Bank operated an alternative clearing system, known as the Central Exchange, for smaller banks and the Paymaster General. This was a debit paper only clearing. It has now been disbanded. The Non-Associated bank members of that Exchange and the PMG now inter-face directly with DBCC members for the exchange of debit paper.

5. Traditionally money transmission services were provided almost exclusively by the associated banks which acted as clearing banks. Other institutions such as non-associated banks and building societies did not provide money transmission services but concentrated instead on providing specialist deposit and lending services. This was partly because in the past the regulatory framework restricted building societies to providing only certain financial services. It was also because the money transmission system was traditionally regarded as costly to set up the infrastructure and to operate, involving as it did, the processing of large volumes of paper transactions. The position has changed to some degree due to technological developments and legislative changes. Building societies have been permitted to engage in money transmission services since 1989.

6. Some data on the size of the market is given below. Cheques are by far the most common cashless payment medium. In 1993 total cheque payments amounted to £323bn with credit transfer payments amounting to £290bn.

Table 1: Details of Payment Transactions (1994)

Source: Irish Bankers Federation.

7. The arrangements involve the DBCC rules in respect of the payments clearing system as amended and revised to March 1987. There are two classes of membership of the DBCC - member and associate member. Membership is open to credit institutions supervised by an EU Central Bank, and authorised by the Central Bank of Ireland to provide money transmission services and which meet certain eligibility criteria and other conditions. Institutions which do not meet the membership criteria can become associate members. Associate membership enables such firms to provide full money transmission services to their own clients. Members provide agency services to associate members in respect of the clearing system.

8. The DBCC Rules notified are the Clearing Rules as amended and revised to March 1987. The Rules set out the procedures for clearing payments transactions involving the members and associate members of the DBCC. The specified procedures relate to the following:

1. Clearance of Items.

2. Sorting and Listing.

3. Banks's Standards and Specifications for Clearing Paper.

4. Branch Tiles/National Sorting Code.

5. Settlement.

6. Errors and Differences.

7. Mis-sorts.

8. Unpaids.

9. Answers on Unpaid Items.

10. Lost Documents.

11. Customer Credits.

12. Third Party Credits.

13. Unbranded Cheques.

9. The General Principles for Participation in the clearing system dated December 1989 set out the criteria for participation by institutions in the system. They state that the services provided cover debit and paper clearings and electronic funds transfer (EFT) clearings. It states that there are three fundamental principles applying to membership. These are:

1. The openness of membership to all appropriately supervised credit institutions;

2. The complete integrity, both financial and operational, of the clearing system;

3. The continuing efficiency and effectiveness of the Clearing System, which operates for the benefit of all users at all times.

10. Membership is open to credit institutions supervised by an EU Central Bank, and authorised by the Central Bank of Ireland to provide MTS, and which are significant providers of money transmission services as measured by the volume of paper payment transactions presented against it by other credit institutions. The threshold is set at 6,000 items per day. An institution not meeting this threshold may be admitted if it can show that the threshold will be reached within a reasonable period of time. Institutions must maintain a settlement account at the Central Bank of Ireland, must satisfy the DBCC of its ability to honour its settlement commitments and that it has sufficient experience and expertise to operate a clearing system. The institutions are required to pay entry costs to join the clearing system, in particular impact, developmental, systems and training costs. In addition they are also required to pay towards the annual central administrative costs of operating the system.

11. Associate membership is open to credit institutions supervised by an EU Central Bank, and authorised by the Central Bank of Ireland to provide money transmission services, to credit institutions established and regulated in Ireland under special legislation and to public bodies authorised to issue payments on behalf of Government departments. The principles state that the objective of associate membership is to permit such institutions to have access to the full range of clearing services available in the DBCC so that they can provide full money transmission services to their clients. It states that in this regard ´Associate Members would not be placed at a competitive disadvantage vis-a-vis Members and should have the same quality of service from the clearing as Members.'

12. In support of its request for a certificate the DBCC stated that its objective was to enable members to co-operate by facilitating the clearance of their individual client's payment instruments. They stated that the substantial degree of infrastructure which underlies the clearing arrangement requires a high degree of co-operation among participants to ensure that the payment clearing system operates efficiently and reliably. They stated that clients of associate members were not disadvantaged in any way as the full functional services were provided to both members and non-members. DBCC submitted that full membership involved significant responsibilities and that certain institutions did not wish to take on such responsibilities and might well opt for associate membership, which obviates the need for a bank to set up a clearing infrastructure with the substantial costs which that involved.

13. Members were obliged to conform to all the rules, operational procedures and standards which were there to protect the integrity of the clearing system and were thus indispensable to the efficient and reliable operation of the system. Members were not precluded from entering into other payment clearing systems or arranging bi-lateral or multi-lateral clearance of payment instruments with other parties. DBCC also presented a number of arguments in support of their request for a licence but these are not considered here.

14. On 15 October 1984 the Irish Banks Standing Committee notified the DBCC clearing system to the EU Commission. The Commission found that the notified arrangements did not infringe Article 85(1) of the Treaty of Rome and granted a negative clearance. [1]

15. The Authority, pursuant to Section 4 (5) of the Competition Act, 1991, invited the Minister for Finance to offer observations on the notified arrangements. The Minister welcomed the notification of the Committee's rules as improving the transparency of the money transmission system and providing an opportunity to establish the competitiveness of the system. The Minister was concerned that the DBCC should seek to be as open and accessible as possible to institutions that might wish to participate in money transmission services. With regard to the rules of operation of the DBCC, he expressed the view that the thresholds applied for membership, the costs of membership and other provisions should not be prohibitive for institutions wishing to participate.

16. Section 4(1) of the Competition Act states that ´all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

17. Section 3(1) of the Competition Act defines an undertaking as ´a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' The parties to the present arrangement are the four associated banks, TSB Bank and the Central Bank. All of them are corporate bodies engaged in the provision of banking services for gain and are therefore undertakings within the meaning of the Act. The DBCC is therefore an association of undertakings. The Rules and Regulations of the DBCC is therefore an agreement between undertakings. It also constitutes a decision by an association of undertakings.

18. The arrangements between the various banking institutions regarding the operation of a payments clearing system are not anti-competitive per se. The arrangements do not prevent the parties from participating in other clearance systems or from operating bi-lateral or multi-lateral clearing arrangements with other institutions. The arrangements provide that any institution engaged in providing money transmission services may become a member provided it has a certain minimum level of activity. The DBCC Rules, as notified do not include any provisions which prevent, restrict or distort competition.

19. In the Authority's opinion the associated banks, TSB Bank and the Central Bank of Ireland are undertakings within the meaning of Section 3(1) of the Competition Act, and the DBCC rules constitute an agreement between undertakings. The rules also constitute a decision by an association of undertakings. In the Authority's opinion the Clearing Rules, as amended and revised to March 1987, of the Dublin Bankers' Clearing Committee (CA/122/92E), notified on 25 September 1992 under Section 7, do not offend against Section 4(1) of the Competition Act.

20. The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the Clearing Rules, as amended and revised to March 1987, of the Dublin Bankers' Clearing Committee (CA/122/92E), notified on 25 September 1992 under Section 7, do not offend against Section 4(1) of the Competition Act.

For the Competition Authority

Patrick Massey

Member

23 November, 1995.