Industry Committee on Nov. 18th, 2009

[The Vice-Chair, Liberal, Anthony Rota]

Good afternoon. Welcome to the Standing Committee on Industry, Science and Technology, meeting number 44. Pursuant to Standing Order 108(2), we are studying credit card interchange fees and debit payment system in Canada.

We have two witnesses here today. From the Competition Bureau, I'd like to welcome Richard Taylor, deputy commissioner of competition, and Martine Dagenais, assistant deputy commissioner of competition.

You both have 10 minutes to make a presentation, and that will be followed by a number of questions. Who would like to start?

Mr. Taylor, please go ahead.

[Richard Taylor, Deputy Commissioner of Competition, Civil Matters Branch, Competition Bureau]

Thank you, Mr. Chairman and members of the committee, for inviting the Competition Bureau to take part in the committee's hearings on credit and debit card issues.

My name is Richard Taylor and I am deputy commissioner of civil matters branch at the Competition Bureau. Joining me today is Martine Dagenais, the assistant deputy commissioner of civil matters branch.

l would like to begin with a few words about the Competition Act and our role at the bureau.

Competition is a valuable and creative force in our economy. It can foster innovation and lower prices, it can increase efficiency and can allow for greater consumer choice. Through the Competition Act, Parliament has identified and prohibited a number of activities that undermine a competitive marketplace. The Competition Bureau is an independent law enforcement agency that is responsible for administering and enforcing the Competition Act.

Among other things, the act prohibits anti-competitive practices such as price fixing, abuse of dominance, and deceptive marketing practices that are likely to have a significant negative effect on competition. The act also gives the bureau the mandate to review mergers to determine whether they would result in a substantial lessening or prevention of competition and to take action if we conclude they do so.

As a statute of general application, the Competition Act does not regulate individual transactions between buyers and sellers. Rather, the act seeks to develop and maintain the conditions necessary for a competitive marketplace. It is important to note that under the act businesses are generally free to set their own prices at a level the market will bear. For the bureau, high prices or fees are a concern only when they are the result of a contravention of the act, such as price fixing or abuse of dominance. In the case of abuse of dominance, the courts have confined the law to prohibit only those anti-competitive acts by a dominant firm or firms that are designed to exclude competitors and lessen competition significantly in a given market.

I want to stress that the bureau takes very seriously the possibility of any contravention of the Competition Act. We do not hesitate to take action when warranted. Recently, we negotiated the divestiture of 104 retail gasoline stations in southern Ontario to resolve our concern that, in the absence of such a divestiture, the Suncor/PetroCan merger would have resulted in a substantial lessening of competition, meaning higher pries for consumers at the pump.

In a separate matter, there have been a number of guilty pleas and fines totalling nearly $3 million to date in a major gasoline price-fixing case in Quebec that we investigated and referred to the Department of Public Prosecutions for prosecution. In another area of our work, in October a man was sentenced to three and a half years in jail for operating an employment opportunities scam involving counterfeit cheques. This was the result of an extensive investigation by the bureau in cooperation with a number of domestic and international enforcement partners. These and other examples show that we take seriously our role to enforce the act.

The bureau receives and reviews upwards of 15,000 complaints a year. Since the beginning of this year, courts have levied over $19 million in fines resulting from bureau criminal investigations. These are some of the measurable results of the bureau's work.

Having said that, I would now like to turn to the issue at hand today.

The committee heard this past spring from a number of witnesses who are concerned about the current state and future of the credit card and debit card markets in Canada. These are very complex markets, with many stakeholders and few easy answers.

Let me first address the issue of credit cards. At this time, the bureau's investigation into the interchange fee is ongoing. This investigation is to determine whether there has been a breach of the act. During a spring appearance before the Senate banking, trade and commerce committee, I confirmed that the bureau was looking at possible contraventions of the act regarding credit card fees. Specifically, we are examining interchange fees and the rules applicable to merchants who accept credit cards and whether there may have been a contravention of the price maintenance or abuse of dominance provisions of the Competition Act. As I noted earlier, these are complex investigations involving significant amounts of data and detailed analysis by numerous bureau staff and outside economic and industry experts.

The price maintenance provision is contained in section 76. This section was recently amended by Bill C-10. Price maintenance may occur when a supplier by agreement, threat or promise, influences upwards or discourages a reduction in the price of a product or service. It may also occur when a supplier refuses to supply a customer or otherwise discriminates against him or her because of a low pricing policy.

Section 79 is the abuse of dominance provision of the act. This section prohibits dominant firms from engaging in the practice of anti-competitive acts that have in the past, present, or future the effect of substantially preventing or lessening competition in the market. That being said, the size of the business, even one that dominates a particular market, is not in itself a cause for concern under the Competition Act. As I mentioned, the courts have limited the definition of an abuse of dominance to those actions that are designed to exclude competitors and harm competition.

I would note that we are not alone in looking at the way interchange fees are set to determine whether there is a violation of competition laws. Of course, we are following developments in the credit card industry in Canada, but we are also monitoring private litigation in the United States and investigations by foreign competition and regulatory authorities around the world. We have followed the deliberations and proceedings in both the House and the Senate on this issue. It is quite apparent that there is a great deal of interest and concern in Canada and around the world on the issues the committee is studying. We are committed to deciding on a course of action with respect to the current inquiry in the coming weeks.

The second issue we have been asked to address today, namely the debit card market, has certainly been of general interest, particularly in light of the recent entry of Visa and MasterCard into the market.

The manner in which these developments engage the bureau is that Interac is seeking the bureau's consent before it files an application with the Competition Tribunal to restructure from a not-for-profit association to a for-profit entity. The tribunal issued the consent order in 1996 that addressed concerns the bureau then had regarding the activities of the members of Interac, mostly the large banks, who, at the time, controlled the debit network. The consent order provided for several measures to increase competition in the market for debit products, including easier access to the network. The consent order prohibits Interac from operating on a for-profit basis.

The original order was not entered into lightly and amending a consent order is no small matter, it should only be done after carefully reviewing the available facts. I should add that it is incorrect to say that the bureau will decide this matter. We need to decide whether, having examined all the evidence, we would challenge an Interac application to the Competition Tribunal to change the terms of the Consent Order. In any event, whether or not the bureau challenges such an application, it is the Competition Tribunal that will ultimately decide whether Interac is allowed to restructure.

We anticipate making a decision in the coming weeks on whether to challenge Interac at the tribunal. We will make our decision public at that time. The bureau understands the importance of this very complex industry to every Canadian. We are acting prudently, with the tools we have, to ensure a pro-competitive outcome.

And with that, Mr. Chairman, I thank you and your fellow committee members for your time, and I welcome any questions committee members may have.

[The Vice-Chair, Liberal, Anthony Rota]

Thank you very much, Mr. Taylor.

Ms. Dagenais, do you have a presentation to make?

[Martine Dagenais, Assistant Deputy Commissioner of Competition, Civil Matters Branch, Competition Bureau]

No thank you, Mr. Chairman.

[The Vice-Chair, Liberal, Anthony Rota]

All right. Then we'll go to the question period. First we'll hear from Mr. McTeague, of the Liberal Party.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Mr. Chairman and all colleagues. I'm going to share the time allotted to me with Mr. Garneau.

Mr. Taylor, I'll try to do this as best I can with a bit of a broken voice.

I think for most of us here there is great concern that we may come to the point where we can't unscramble scrambled eggs and in fact put these things back together. One concern that has been raised, Mr. Taylor, is of course the dominant position of Visa and MasterCard on the credit side, which of course you're inquiring on from two perspectives: the price maintenance and the abuse of dominance provision. However, I am concerned that as we have these discussions here as a committee, and as your bureau continues its work in terms of making a determination on the Visa front, the debit card market is already changing, and changing rapidly.

Point of sale terminals are now being transferred, with priority routing going to either Visa or MasterCard. Interac cannot find itself in a position, without a change in the consent order, to be able to have a semblance of opportunity to compete, considering, of course, the structure of its mandate--who operates Interac.

I'm wondering, Mr. Taylor, from your perspective, if speed, if getting to this issue a lot more quickly, is not a priority. How do you proceed? How will you be able to ensure that there will be sufficient competition if in fact most of the details that we see now are already in place? Merchants, of course, will have already signed contracts if there is no formal regulation to prevent them.

[Richard Taylor]

Mr. Chair, I see a number of aspects to that question.

I would like to say that we are acting with all due speed, and we hope to have an answer for Interac in the coming weeks. I might add that Interac still has 99.99% of the point of sale debit market.

While MasterCard recently rolled out Maestro and has approached merchants, and while Visa will be rolling out their debit card shortly, it's not at all certain that they will end up with a dominant position. Of course, we are very concerned, and we don't want to unnecessarily unfetter Interac, but we also want to make sure that if the order that was signed in 1996 and has worked so effectively is changed, it is changed on the basis of valid facts.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Taylor, I guess we're not concerned about what happened in 1996. The reality is far different from it was then, and I appreciate the need to respond more quickly.

I wasn't only referring to the consent order, sir, but also to how we hope to see progress on the front of the determination of whether Visa and MasterCard, in the view of the Competition Act, do in fact have and exercise a dominant position, which naturally will eventually seep its way into the debit card market and change it irrevocably.

As well, is there any consideration being given by the bureau--if any complaints have come before the bureau--with respect to whether or not a below-cost selling strategy by one of the players to undermine the 99.99% that you've referred to has in fact been entertained, or even discussed, or even considered, and how long it will take to respond?

[Richard Taylor]

I would reiterate that we are very concerned. I can say that we are looking at all aspects of this matter.

You mentioned priority routing. You mentioned a number of aspects to these markets, but all I can say is that we are seized with the matter and we are putting a lot of resources on the matter. We are aware of the matter. We are taking the matter very seriously. But beyond that, as I think you know, Mr. Chairman, I cannot give you details as to what we are or are not looking at, only because no law enforcement agency can divulge publicly what they're up to and hope to ever get anywhere.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Mr. Taylor, on the face of it, the current situation with respect to debit cards and the consent order that is in being with Interac seems to be a fairly good one in terms of costs, both for users of debit cards and for merchants. In your words, what would be the benefits of allowing greater competition? I mean, there can be two outcomes, in my opinion. Either costs will go up for consumers and/or merchants or they'll go down. If they go up, would that be something the Competition Bureau would weigh in on or is that not part of your responsibility?

[Richard Taylor]

As I said in my introductory remarks, Mr. Chairman, if costs and prices go up and there is a violation of the Competition Act, that would very much concern us. So if that hypothetical situation were to happen and it was due to an anti-competitive act that is covered by the Competition Act, we would certainly be concerned just given the sheer size of this market and its importance.

The one important thing to remember is that the cost competition is one element and it has to be looked at closely. We'd also have to look at actual facts, not just at what people are saying publicly. We don't just look at the public information that people are looking at. We use subpoenas and search warrants and we get to their actual strategic plans. We get their actual financials and we look at them. Our analysis is extremely detailed of all these matters that we have as priorities, and I would say credit cards and debit cards are very high on our priority list. The commissioner has made it very clear to me that we need to get to the bottom of this very quickly.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

If I understand you, if it turns out that costs go up for either users of debit cards or merchants, or both, as long as there's no perceived violation of the Competition Act it's irrelevant to your organization.

[Richard Taylor]

Mr. Chairman, we can only enforce the act that Parliament has given us. They've made some amendments in Bill C-10 that improve our ability tremendously to deal with those things. Hypothetically, there are many reasons costs can go up. I can't speculate as to which section might be applicable. It very much depends on the practices that give rise to that cost, which is then a higher price for consumers.

If it's caused by an anti-competitive practice, then we can look at it. There are over 30 in the act, or perhaps more, and we would have to look at whether it fits into one of those. We're only the gatekeepers. Ultimately, the courts have to decide as to whether it does.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you for that explanation.

This is a very specific one. Does the Competition Act prevent merchants from negotiating as a group for low-cost financial services in the debit card business? Is that something that would be looked upon as anti-competitive behaviour?

[Richard Taylor]

It depends. It can be. Again, based on circumstances, buying groups can raise issues if they represent a large proportion of all buyers in a market.

[The Chair, Conservative, Michael Chong]

Thank you.

Mr. Bouchard, go ahead please.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Thanks to you as well, Mr. Taylor and Ms. Dagenais, for being here with us this afternoon to answer our questions.

My first question refers to a comment that you just made. You said that the bureau receives and reviews more than 15,000 complaints a year. First, how many of those complaints are investigated? Is it 1%, 5%?

I have another question in the same vein. Are those complaints categorized? For example, is there a percentage of complaints that comes from individuals and another from businesses? Are those complaints classified by category, depending whether they're related to thefts or other offences? I'd like to have some information on that subject.

[Richard Taylor]

First, we've received 15,000 complaints this year. That's an estimate, but I imagine that one percent of them will be investigated. However, to give you more details, I would like to ask my colleague Ms. Dagenais to answer your question.

[Martine Dagenais]

As my colleague Richard mentioned, quite a small percentage of complaints result in official investigations. However, that does not necessarily mean that we don't examine all complaints in detail. You've asked us how we classify the complaints when we receive them. The distribution is done by the nature of the complaint, and thus is based on the section of the act it concerns.

For example, if it concerns an abuse of dominant position, the complaint is forwarded to us. If it's a case of deceptive telemarketing or deceptive advertising, the complaint is sent to the Fair Business Practices Branch. If it concerns the acquisition of a player, the complaint is naturally forwarded to the Mergers Branch. The service standards of that branch are very clear. When a merger is involved, we determine whether it is not complex, complex or highly complex. We are able to determine whether there is a competition problem or concern. Then we apply service standards respecting mergers. Those standards are public and enable us to apply time criteria.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

That's very good. You seem to apply a rigorous treatment.

[Richard Taylor]

Mr. Chairman, I would simply like to add that the 15,000 complaints concern one subject, one sector. These aren't 15,000 individual complaints.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Do all the complaints come from individuals or do businesses file complaints as well? Are those complaints allocated?

[Martine Dagenais]

Everyone can file a complaint with the bureau: a consumer—

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

But are you able to determine, for example, that 60% of complaints come from individuals and 40% from businesses?

[Martine Dagenais]

I don't believe we do that kind of categorization. The objective is to determine whether the act has been violated. That's really how we classify our complaints at the bureau.