FINANCIAL CRISIS: ANTITRUST AUTHORITY ADVISES GOVERNMENT AND PARLIAMENT THAT STEPS FOR BETTER REGULATION OF GOVERNANCE IN BANKS AND INSURANCE COMPANIES ARE ESSENTIAL AND URGENT IN ORDER TO RESTORE FAITH IN THE SYSTEM

The financial system has not responded of its own volition. In a report sent also to Consob and the Bank of Italy, the Authority calls for public intervention in support of the banks to be made part of overall measures to eliminate conflicts of role, to reform obsolete forms of governance, to guarantee independence and to introduce greater transparency to the role of shareholders. It is also necessary to clarify the rules on home loans in order to encourage portability and ensure maximum comparability; and to introduce a summary cost indicator for rates and commissions on maximum overdraft.

Public measures to support banks should go hand in hand with regulatory steps to bring about radical change in governance, making the role of the foundations more transparent and reforming the listed “popular” banks. This opinion of the Italian Competition Authority is expressed in a report sent to the Government, to Parliament, to the Bank of Italy and to Consob; it also points out the need for clarifications in the new regulations on home loans and the introduction of a summary indicator of the overall cost of borrowing and maximum overdraft commissions.

MEASURES ON CORPORATE GOVERNANCE

Despite the anomalies in the system brought to light by the Antitrust Authority’s fact-finding investigation, collective and individual self-regulation has not quickly found expression in a spontaneous reaction, and even the intention does not seem to be there. It therefore seems necessary to impose more immediate regulatory measures, given that shareholding and personal links between competitors may not only lead to significant distortions of competition but may affect the very stability and reputation of the system in an extremely negative way, exposing it to the risk of a dangerous domino effect, especially in the current crisis.
For this reason a first set of regulatory interventions (by Parliament or the government Authorities for specific industries) should address the basic structure of the banking/financial system, eliminating conflicts of roles/functions and guaranteeing transparency in the role of shareholders or financiers with respect to the businesses being financed. In the interests of clarity and in order to reduce the incidence of interlinked shareholdings, consideration should be given to introducing regulations to lower the threshold of 2% above which significant holdings must be declared.
There is also the need for a radical revision of the rules on independent directors: at present, these permit unclear situations to exist, allowing the same party to accumulate different positions in competing companies.

MORE TRANSPARENT FOUNDATIONS

Regulatory steps must be taken, too, with regard to the foundations: their stabilizing role, especially in the present circumstances, must necessarily be balanced with a new way of doing business. The foundations must clarify the decision-making processes employed in exercising their voting rights in companies where they have a stake and must define the criteria used in selecting candidates to be proposed for management committees: these must include the requirement not to propose persons having a conflict of roles. It is indispensable that appointments to governance positions in the foundations themselves and the management of their assets should be governed by objective transparent criteria. Transparency as to the asset management criteria and the making available of full and complete information are factors that should be the subject of regulatory intervention, perhaps by industry.

REFORM OF THE LISTED PUBLICLY-OWNED BANKS (“BANCHE POPOLARI”)

Listed “popular” banks are ever more similar to the SpA formula (ordinary share-capital company) and thus without those particular characteristics that used to justify their legal form and their specific rules, e.g. “one man, one vote”, acceptability clauses, limits on ownership of shares and the use of proxies. For this reason, regulatory intervention is needed to bring up to date the present legal regime which risks becoming merely a means for avoiding changes intended to make the shareholding and governance arrangements more efficient. The various bills before Parliament may be a useful starting point for a timely regulatory intervention.

ENSURING EASY COMPARABILITY OF HOME LOANS

The current crisis and the need to avoid a contraction in the availability of credit justify the regulatory measures adopted by the Government and Parliament. However, it would seem new rules are needed in the matter of mortgages (e.g. re-negotiation/portability) so as to permit customers to compare the different options with ease and to choose the one that is most competitive in terms of price (i.e. with the lowest interest rate). This is fundamental in providing incentives for a true competitive dynamic in the home loan market, to be achieved through active supply and demand based on the portability of home loans and/or their spontaneous re-negotiation, thus avoiding distortions of the spread.

SUMMARY COST INDICATOR FOR OVERDRAWN CUSTOMERS

In the Authority’s view, a clear single summary indicator should be introduced to bring together the different cost items that are chargeable to an overdrawn customer. Customers would thus have a clear and immediate perception of the overall cost of the banking service which would enable them to compare the various offerings on the market and would allow rates to be compared with those considered usurious. This is a crucial aspect of transparency that does not seem to be spelled out in the text of the new regulations. So a legislative clarification is needed to state precisely and definitively the criteria for calculating what a usurious rate of interest is; and regulatory steps are needed to specify a summary indicator of all the cost items payable by the end consumer including any commission on maximum overdraft. In the context of competition rules, it would seem this measure is necessary not only for the end customer/consumer but also for customers that are small and medium businesses. On this point the Authority calls for correction of the current regulatory flaw which, as far as improper commercial practices are concerned, does not allow it to protect small and medium-sized companies.

Rome, 2 February 2009