Banks forex collusion; auto sector 'after market': Competition Commission briefing

Economic Development

21 February 2017
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Competition Commissioner gave a briefing on the exchange rate/currency trade collusion investigation. The investigation emanated from information that was already in the public domain as well as investigations that were ongoing in Europe, UK and the US on the subject matter. The Commission received some information from various sources indicating that there was some illegal trading involving the rand and the dollar that was subject to collusion, and so in April 2015, an investigation was officially launched. The Commission monitored the situation very closely, and started talking to some of the banks without investigations being carried out to seek an understanding on how far the conduct has gone and whether SA has been affected. People and institutions that were involved were then given the opportunity to come clean without prosecution through its corporate leniency policy which provides for persons or institutions that come forward, to receive immunity. The collusion was taking place largely through a trading platform owned by Reuters, where bidding and offers were taking place, and on another platform owned by Bloomberg, to seek to coordinate pricing.

Initially, the Commission started with just a few banks and then expanded the scope of the investigation, so through the investigation process the Commission received a leniency application from Barclays/ABSA which cooperated and provided more information on the activities, and there is a conditional agreement with them for immunity but this is dependent on the extent of its cooperation with the Commission. As a result, the Commission is now working with Citibank, who are relatively small in SA and therefore would have played a small role in the collusion. Citibank has agreed to testify for the Commission, as of yesterday the agreement was filed with them at the Tribunal which includes an admission of guilt, and fine of about R69.5 million, which constitutes 4% of its South African turnover. The case has now been referred to the Tribunal, and the Commission is expecting to hear the answers from the banks. The SA banks involved included Standard Bank, Investec and ABSA. The Commission has also been working closely with the international counter-parts as the investigation unfolds, and looking at the same witnesses so it was very important that there is coordination so that investigations are not compromised.

Members asked the Commissioner questions about its relationship with the other competition commissions around the world; how widespread the communication is with the other commissions; whether these activities extended illegal profits to the bank financial and equity partners, as well as to their international partnerships or other banks; how the Commission was affected knowing that the banks continued with these activities whilst it knew what was going on; when the investigation was finalised; what caused the Commission to announce the referral to the Tribunal; which banks have been offered leniency; was Standard Bank and Investec given the same opportunity as Citibank; if there are any other settlements other than the R69.5 million Citibank settlement and the amounts; if the collusion affected the exchange rate of the rand at all; if individual clients were harmed; how the Commission will be able to determine the extent of that harm; how through legal instruments the Commission will ensure these activities are prevented in future, and what legal tool can government put in place for these banks to pay affected communities; and if other banks might also be involved.

The Commission also spoke about the work it is doing in the auto sector where the Commission identified a problem emanating from a number of complaints received about the ‘after-market’ in the auto sector.  This is the market that exists after buying a car, when you need to service it. The Commission found that this market is closed, because there are exclusive agreements that restrict where you may service the car as these services can only be done by authorised dealerships. Although they are independently owned, they are branded, more like franchises of the manufacturers, and this is where you also buy spare parts for the car. This is enforced through warranty conditions and sometimes through conditions by insurance companies. This has a significant impact on SMMEs because their people who could be running workshops and servicing cars and actually own these businesses and qualify to do the work but they are pushed out of the market.  The Commission met with the auto industry and the DTI and there were no justifiable answers to this problem. It will meeting with the industry players on 17 March to try and resolve the issue.

Members asked the Commissioner asked which legislation is going to be amended or is already in the pipeline to curb unfair competition and cartels within industries.

Meeting report

Opening Remarks
The Chairperson spoke about the important work that the Competition Commission is doing on banks. The matter is still under investigation and there are prosecutorial procedures taking place. The Commissioner will not be making a formal presentation on the matter due to the cases that are pending.

Competition Commission  on the recent developments in the banking industry
Mr Tembinkosi Bonakele, Competition Commissioner, stated that the Commission started the investigation on currency trading largely as a result of information that was already in the public domain at the time, which emanated from some of the investigations that were conducted elsewhere in the world, in Europe, UK and the USA. Members will recall that there was a big investigation around interest rate fixing and this extended later to currency trading. The Commission monitored the situation very closely, and also started talking to some of the banks without an investigation, basically seeking to understand how far the conduct has gone and whether SA had been affected. The Commission received some information from various sources indicating that there was some illegal trading involving the rand and the dollar that was subject to collusion, and so in April 2015, an investigation was officially launched.

The Commission gave people who were affected the opportunity to come forward and come clean, because the Commission has a corporate leniency policy which states that whoever comes first and discloses will receive immunity. It was discovered that there was collusion taking place largely through a trading platform which is owned by Reuters, where bidding and offers was taking place, and there was another platform which is owned by Bloomberg, to seek to coordinate pricing so that if one had to buy the rand you would inform other traders not to bid so that the price of rand can go down and you can buy at that moment. If you needed to sell, they would create an impression that there was a demand through fictitious bid in their computer systems, and create the impression that there are bids. This was then reinforced through telephones and meeting, the meetings were not entirely possible because the traders are based in Johannesburg, New York and London. What was then discovered was that in that system, so it is not very hard to determine who was not involved. Initially, the Commission started with just a few banks and then expanded the scope of the investigation, so through the investigation process the Commission received a leniency application from Barclays/ABSA which cooperated and provided more information, and there is a conditional agreement with them for immunity but this is dependent on the extent of its cooperation with the Commission. This is a highly complex investigation, it is very hard to crack the system from the outside so the Commission needed to collaborate with people from the inside to assist. So with that help and assistance, the case is currently under-way and there are more witnesses needed to solidify the investigation. As a result, the Commission is now working with CitiBank, who are relatively small in SA and therefore would have played a small role in the collusion. CitiBank has agreed to testify for the Commission as of yesterday the agreement was filed with them at the Tribunal which includes an admission of guilt, and  fined of about R70 million (R69.5 million), the fine only constitutes 4% of their South African turnover. The case has now been referred to the Tribunal, and the Commission is expecting to hear the answers from the banks and the SA Banks involved include, Standard Bank, Investec and ABSA. The Commission has been working closely with the international counter-parts as the investigation unfolds, and looking at the same witnesses so it was very important that there is coordination so that investigations are not compromised.

Discussion
Mr P Atkinson (DA) stated that the rand is indeed quite a useful currency and in some countries is in demand. He asked the Commission about its relationship with the other competition commissions around the world, as well as how widespread is the communication with the other commissions.

Mr S Mbatha (EFF) asked if there is a possibility that these activities by their very nature subsequently extended illegal profits to the bank’s financial and equity partners in the provinces, as well as soliciting the illegal profits to their international partnerships or other banks.

Mr S Tleane (ANC)  expressed appreciation for the good work the Commission is doing on this subject matter given that the investigation started some years ago but is only being wrapped up now. He asked how that affected the Commission knowing that these banks continued with their trading activities and were breaking the law which the Commission suspected but could not do much to stop the situation.

Dr M Cardo (DA) asked when the investigation was finalised, and what caused the Commission to announce the referral. He asked which banks have been offered leniency, and was Standard Bank and Investec given the same opportunity as the other bank (Citibank). With that being said, are there settlements other than the R69.5 million Citibank settlement, and if so, could the Commission furnish information about those settlements. Is it possible that the collusion could have affected the rand/dollar exchange rate at a minimal level. If so, how were individual clients  harmed and will the Commission be able to determine the extent of that harm?

Mr I Pikinini (ANC) stated the Commission is one of the strongest pillars to fight corruption in the country. He commended the Commission for the work that it is doing on the subject matter, and expressed his pleasure with the information submitted by the Commissioner today.

Mr Mbatha asked what constituted the first settlement because most people lost jobs in various industries in the country, with the mining being the hardest hit and it has not recovered since, and more money went outside the country illegally. All of this stemmed from sophisticated ways of killing the rand and ensuring that commodities are hit hard. So will the Commission ensure that it will consider the lives of the ordinary people who suffered from these activities, through legal instruments, and what can the government put in place as a legal tool for these banks to pay for these activities that affected communities. They reach these agreements and receive fines but little goes to ordinary citizens who might be hit hard by these illegal activities.

The Chairperson asked if the Bloomberg platform is only in SA and used by the banks and what was the role of other banks, were they not involved at all or are there investigations still going on.

Mr Bonakele replied that he agrees that the rand is one of the most traded currencies in the world amongst currencies from emerging countries because about 70% of it is traded outside the country, so there is a lot of speculation around it and maybe because of that the conduct was quite widespread that involved other currencies. The US is looking very closely at the US and UK currency, it is fair to say that there was a lot criminal activities around the rand as observed by the international counterparts as well, and it was largely hit by these activities. There are still ongoing proceedings around the country and in the US, so we do not want to compromise the process, and it is in the public domain that criminal charges have been laid, particularly strongest towards the rand.

Mr Bonakele replied on the extension of illegal benefits to other firms that we have not done a study on the matter, but rather stuck to the facts, and the Commission has not looked at how far the impact has been. It would require an in depth study to look at how widespread the impact was.

In terms of what government can do to assist and control banks, this has been brought to the attention of the Reserve Bank and Treasury, and they were also informed when the case was referred to the Tribunal. The Commission has participated in the process that Treasury is running to come up with better regulation of banks in the form of a specific market regulator, and Parliament has been seized with that work as well as through the Financial Sector Regulation Bill (FSRB). The Commission has made proposals in that space to contribute in strengthening the regulation. Gaps were identified and they have been attended to as far as the Commission knows. The Commission has raised the point about how the banks can be closely monitored in the area of trading as well as mergers involving banks. Many of these things will become clear as the case unfolds. There are areas in the law that can be improved. We were worried about African Bank when it collapsed. The authorities encouraged the big four commercial banks to rescue African Bank and now all those banks are shareholders of African Bank. The Commission looked at that transaction and it is not ideal because African Bank cannot be expected to compete with those banks. When the Commission was notified about the transaction, it tried to introduce an exit strategy and relinquish that shareholding within a certain time period. That did not work due to jurisdictions which can be taken away by the Minister of Finance.

With regards to civil claims, the Commission has not yet done the study on the impact, so a lot this is anecdotal for now and by law the Commission does not institute civil claims but can assist in the process by providing information to those who may want to bring civil claims, although the Commission would prefer to stay out of that process for a variety of legal reasons.

It was a bit of a difficult situation to accept that the wrongdoing was happening, but the Commission kept things professional and maintained confidentiality, and one would have hoped that the banks would have stopped when they heard that investigations were being conducted. The Commission was not really interested about when they stopped because this has been going on for too long, but rather when they did actually stop, to inform the Commission on how it can be prevented from happening again.

With regards to political considerations in the investigation, there is absolutely none, the commissions works within its own time frame and independently, and it is quite a widespread process. It had an idea already before the end of last year that it would be pressing charges. By the 14 February the Commission decided to refer the case to the Tribunal, after it ensured that it is ready to press charges, and on the 15th the papers were filed. The Commission values its autonomy, and anyone can appreciate the sensitivity of the sector in question. He commended the government for not interfering.

Investec and Standard Bank were treated the same, and the leniency policy has been put out there for everyone to have access to it and be on equal footing. The Commission would institute maximum penalties to ensure that the conduct is deterred and to encourage other institutions to come forward early, otherwise the fines will be steep.

On other settlements, there are no discussions currently happening to settle with other banks at this stage. The aim of the traders was to affect the value of the currency, either it is expensive or cheap, so there was no other purpose for than the commissions that the traders were paid, but the only issue that can be debated is whether this had a long term effect on the rand. So it is a very complex exercise to determine the impact, and the Commission does not necessarily have to do that for the prosecution. However, people are welcome to do that exercise because it would present useful information regarding the impact.

On the harm caused towards consumers, it is very difficult to quantify but no one can make the suggestion that consumers were not harmed, because when the currency is weak it impacts on consumers. There are big buyers of currency, people who import and export goods and services, these were probably impacted the most because the impact would have been more direct.

The Bloomberg platform is a large global platform that was used by everybody including those who were trading and communicating from New York. It is the most widely used platform for rand trading all over the world and this is where they would signal to each other how much they had in orders and how they could help each other maximise their profits.

With regards to other banks, so far it has not been decided if there is evidence against them to pursue them or not. This is an ongoing matter and what the Commission found has now been furnished to the Tribunal. With regards to the Citibank settlement, it is a matter of judgement, in terms of fairness, but it was indeed low and as a prosecutor sometimes difficult decisions have to be made because there is a bigger case that needs to be run.

The Chairperson noted that the investigation is still ongoing, and suggested that after the work has been concluded, the Commission could update and inform the Committee in more detail about the investigation.

Auto Sector briefing
Mr Bonakele briefed the members about the advocacy work that the Commission is doing in the Auto Sector indicating that the Commission has identified a problem stemming from a number of complaints received about the ‘after-market’ in the auto sector. This is the market that exists after buying a car, when you need to service and maintain it, and take it to panel beaters or mechanics if its damaged or needs repairs. The Commission found that this market is closed, because there are exclusive agreements that restrict where you may service the car as these services can only be done in authorised dealerships. Although they are independently owned they are branded, more like franchises of the manufacturers, and this is where you also buy spare parts for the car. This is enforced through warranty conditions and sometimes through conditions by insurance companies.

This has a huge impact on SMMEs because their people who could be running workshops and servicing cars and actually own these businesses and qualify to do the work. The Commission advised that quality controls can be put in place to ensure quality services but there is no reason why these SMMEs should not be allowed to service the cars. Panel beating is affected and restricted, this affects the pricing because the few that are able to do the work charge more because there is no competition and consumers have no choice. This impacts on the consumer.

The Commission has looked at other countries in the world with a similar problem and this problem has been solved in countries like Britain, Russia, China, US and India. The Commission has worked closely with Russia because the Russians have come up with soft regulations to get the industry players to sign a code of conduct, and UK did it through regulation by requiring the companies to open up the markets.

This also affects the people who want to manufacture the parts, because the parts might never make it to the market. Even if you wanted to trade the parts, you cannot because the markets are so closed. It can be checked in the industry set standards and parts can be tested. So the current situation does not allow people to even manufacture parts, even if they come from the same factories. The Commission met with the industry and there are no justifiable answers to this problem. It also met with DTI but there were also no justifiable answers. And it was important to meet with the DTI considering that it offers all sorts of incentives. The Commission is currently in discussions with the sector, and it is calling all key stakeholders from the industry to try and reach a consensus without having to prosecute anyone. The Commission is meeting up with it on 17 March to try and resolve the issue. There are auto companies that are very helpful, and agree that the sector needs to be opened up. This is going to be a big victory for SMMEs if the market is opened up. The Commission is calling out to everybody to offer support to ensure that the sector is opened up for SMMEs. The Commission will update the Committee after the 17 March meeting, and if no consensus is reached, it will have to go back to the drawing board.

Dr Cardo asked the Commissioner provide an indication about which pieces of legislation are going to be amended or are already in the pipeline to curb unfair competition and cartels within industries.

Mr Bonakele replied that he is not in a position to answer the question. The Minister of Trade and Industry is better positioned to answer to any legislative amendments that are in the pipeline to curb unfair competition. With regards to the auto sector, government seeks to relate to the industry by working together with it, because of the number of jobs it creates, particularly the big players in the industry to ensure that the sector becomes more favourable to the 'after-market'. Therefore, this way if consensus is reached it will not react by shedding jobs. 

The Chairperson thanked the Commission, and declared the meeting adjourned. 

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