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– Deposits, mortgages and funds
Report 2013:4
Competition on the
financial services market
- Deposits, mortgages and funds
The Swedish Competition Authority's report series 2013:4
The Swedish Competition Authority June 2013
Authors: John Söderström (project manager), Diego Gomez Ruales,
Viktoria Ruggieri and Mårten Törnqvist.
ISSN-nr 1401-8438
Photo: Istockphoto
Contents
Introduction ................................................................................................ 7
1.1
Background .................................................................................... 7
1.2
Debate on banks' financial services ............................................. 9
1.3
Market players in the financial services sector ........................ 11
1.4
Method .......................................................................................... 12
1.5
The Competition Authority's Role, previous
challenges and proposals............................................................ 14
1.6
Competition and competitive pressure .................................... 18
1.7
Concentration and profitability in the banking
sector.............................................................................................. 25
1.8
Market players' strategies and business models ..................... 33
2
Deposits ........................................................................................ 39
2.1
General information on deposits ............................................... 39
2.2
Comparison between transaction and savings
accounts......................................................................................... 41
2.3
Conclusions .................................................................................. 47
3
Mortgage market......................................................................... 49
3.1
Players and concentration on the Swedish mortgage
market ........................................................................................... 49
3.2
Demand for mortgages ............................................................... 50
3.3
Mortgages for private individuals as a product ...................... 52
3.4
Banks' funding costs – sources of funds and risks .................. 57
3.5
New regulations that may affect the banks' funding
costs and strategies ...................................................................... 62
3.6
Discount on listed interest as a competitive device ................ 65
3.7
Price competition on the mortgage market.............................. 68
3.8
Banks' mortgage margins ........................................................... 73
3.9
Conclusions .................................................................................. 88
4
The fund market ......................................................................... 90
4.1
Swedish fund investment savings............................................. 90
4.2
The fund as a form of saving ................................................... 101
4.3
Adaptable fund activities ......................................................... 119
4.4
The importance of market conditions in
competition on the fund market .............................................. 128
4.5
Stable administration fees since 2001...................................... 139
4.6
Conclusions ................................................................................ 144
5
Measures to improve competition on the financial
services market .......................................................................... 154
5.1
Limit the banks' right to interest differential
compensation ............................................................................. 155
5.2
Investigate the possibility of limiting or banning
banks from offering certain package deals ............................ 159
5.3
Investigate the right to freely move capital from
fund accounts to an ISK and the possibility for fund
companies to offer ISKs ............................................................ 165
5.4
Introduce regulations which stipulate that banks
must report their funding costs for mortgages in a
uniform manner ......................................................................... 168
5.5
Analyse the possibility of introducing more
obligatory means of comparison in the fund sector ............. 170
5.6
Introduce simple cost statements for banking
services ........................................................................................ 174
5.7
Investigate the possibility of tightening regulations
concerning financial advice to consumers ............................. 178
5.8
Investigate responsibility for the Stockholm
Interbank Offered Rate (STIBOR) ............................................ 181
5.9
Look into the sale of SBAB or clarify its role ......................... 185
5.10
Investigate the possibility of introducing a ban on
price signalling ........................................................................... 190
References ............................................................................................... 193
Appendices ............................................................................................. 204
7
Introduction
1.1
Background
The financial service sector is of vital importance to Swedish
households' finances. The cost of these services constitutes a
substantial proportion of Swedish household expenditure. Over the
last few years there has been intense debate regarding the high fees,
margins and profitability of the banks and fund companies, which
could be an indication that competition is not working as effectively
as it could. For this reason, the Swedish Competition Authority
took the initiative to examine the market and competition
conditions more closely with regard to a number of financial
services that are crucial for personal finances: deposits, mortgages
and funds. This was done as part of the Competition Authority's
work to promote the development of healthy competition in the
Swedish economy and to suggest measures to achieve this.
The financial services sector is under constant change on both the
supply and demand sides. This is a result of the development of
information and communication technology, cross merchandising,
internationalisation and new regulations. This leads to the
development of new services, business models and production and
distribution systems, which changes market and competition
conditions. The banks play a very important role in the economy as
they create the possibility to spread consumption over time by
matching saving and borrowing, and provide payment systems and
risk management. It is therefore crucial that the financial services
sector is effective, and that functioning competition between the
market players acts as a driving force for efficiency increases and
innovation that can help to produce high quality services at low
prices. Whilst the financial services sector must be effective, it is
important that the banks are stable so that the customers can
8
depend on the banks and other financial players to meet their
obligations. This means that there are situations in which there may
be a conflict between effective competition and financial stability.
Effective competition leads to reduced margins and surplus for the
banks, to the benefit of consumers. At the same time, effective
competition reduces the capacity to accumulate profits in order to
improve solidity and make the banks more stable in future crises.
Despite cross merchandising between banking, insurance and retail
operations and the entrance of new international and specialised
market players (such as niche banks), there are indicators that
competition is limited. Market concentration is still very high. The
major banks, i.e. Skandinaviska Enskilda Banken AB (SEB), Svenska
Handelsbanken AB (SHB), Swedbank AB (Swedbank) and
Nordea AB (Nordea), still have market shares on deposits and loans
of 66–70 per cent (80 per cent on the mortgage market). At the same
time, their net interest income, product margins and profitability
have increased considerably in recent years. On the fund market,
the major banks have a market share of around 60 per cent. It is
certainly a downward trend, yet still a significant market share.
Whilst customers are using more banks and fund companies, it is
still uncommon to move an existing commitment to another bank or
fund company. This means customer mobility is relatively low.1 The
lack of customer mobility can be explained by a number of factors.
Customers have, for example, little interest in or knowledge of
complex financial services. This makes it difficult for them to make
rational choices. They are also affected by direct and indirect
See the Competition Authority's report (2009c), which shows that 16 per cent of consumers
have moved one or more bank commitments over the past three years. In comparison, the
switching frequency on the insurance market is nearly double (29 per cent) that of the
banking market.
1
9
switching costs in the form of complex systems for charging, the
need for necessary additional equipment and learning costs.
1.2
Debate on banks' financial services
In recent years, competition in the financial services sector has been
the subject of debate. Several stakeholders have questioned the
banks' and fund companies' profitability compared with that of
other sectors. This has been considered a result of high margins on
mortgages, high administration fees and low deposit interest rates.
The main focus of discussions was how the banks determine their
mortgage rates and how high their margins are on mortgages. It has
been noted in particular that the rates customers pay on their
mortgages do not always decrease in line with the Riksbank
lowering the repo rate, and that the difference between the listed
interest rates and STIBOR2 is considerably higher than when the
financial crisis broke out in 2008. This difference is not accounted
for by increased funding costs and stricter capital and liquidity
coverage requirements from supervisory authorities alone; it is also
a result of the banks having raised their margins on mortgages.
This, combined with the major banks offering relatively low interest
rates on deposits, has resulted in an increase in the major banks'
collective net interest income in recent years. The fund market has
also been debated, and criticism has focused on the size of
administration fees and the lack of information regarding the effect
that the fees have on returns.
2
Stockholm Interbank Offered Rate (STIBOR).
10
Consumer perceptions of banks' services
In its report The Swedish Consumer Report 2013 – Consumer Conditions
in Sweden (2013a), the Swedish Consumer Agency highlights
markets that create problems for consumers and describes the most
important conditions that enable consumers to act. According to the
Swedish Consumer Agency's overall assessment, banking and
financial services (investments/pensions, personal loans/credit,
mortgages and current accounts) is one of the three most
problematic consumer markets3.
The Swedish Consumer Agency's Consumer Markets Index 2013
describes banking and financial services as one of the markets that
consumers lacks confidence in, investments/private pensions
services as one of the least transparent markets, current accounts as
a market with a lack of choice and personal loans/credit as a market
which the consumer is unable to influence through conscious and
active choices. According to the Swedish Consumer Agency,
banking and financial services is also a market characterised by a
combination of a high share of household expenditure and less
favourable conditions for the consumer.
The Swedish Bankers' Association's annual survey Allmänhetens syn
på banker [Public Perception of Banks] (2011) reveals that 74 per cent
have great confidence in the banks, and that 30 per cent are very
satisfied and 50 per cent quite satisfied with their bank. The
proportion of people using several banks or financial companies
has risen somewhat, to 43 per cent. According to the survey, the
Telecommunications services (subscriptions for internet, television and fixed and mobile
services) and Insurance (life, home and vehicle insurance) are deemed by the Swedish
Consumer Agency to be the most problematic.
3
11
internet (60 per cent) is by far the most common channel used by
customers to contact the bank.
1.3
Market players in the financial services sector
The banks play a very central role in the Swedish financial services
sector. Traditionally, banks can be divided into major banks (SHB,
SEB, Nordea and Swedbank), independent savings banks, foreign
branch offices and smaller players that focus on a more limited
choice of services but have in several cases expanded their range of
banking services. Though there are many different banks in
Sweden, the four major banks dominate. The market therefore has
an oligopolistic structure. At the same time, their total market share
in terms of deposits, loans and fund activities has decreased over
the past ten years, partly as a result of cross merchandising between
banking, insurance and retail business activities. Many banks are
active in the area of life insurance and many of the large insurance
companies have their own banks. Many retail chains such as IKEA
(Ikanobanken) and ICA (ICA Banken) offer financial services to
private individuals. In the fund area, technological development
and the opening of the European market have created new
opportunities for fund companies to expand.
12
1.4
Method
The Swedish Competition Authority's report is intended as a study
of competition and market conditions for financial services which
are of great importance to private individuals. The report is limited
to three of the banks' core services to consumers: deposits, housing
loans and funds. There are a number of reasons as to why the
Swedish Competition Authority has chosen to study the market and
competition conditions for these services. Bank deposits are
increasing, despite a low interest rate on deposits on a number of
deposit accounts. Mortgages have a very large impact on household
finances, and thereby on the economy as a whole. The same is true
for the extensive Swedish fund savings investment, where fund
companies' levying of administration fees can have a large impact
on the scope of private individuals' future consumption.
In order to study market and competition conditions, the Swedish
Competition Authority has been in contact with various market
players and stakeholders and requested both quantitative and
qualitative information from banks and fund companies. Another
point of departure in the work was the Swedish Competition
Authority's own experience and previous surveys, as well as
studies of literature on the banking market. The Swedish
Competition Authority's study started with initial contacts with the
Swedish Bankers' Association and the Swedish Investment Fund
Association in order to inform them about the study and to clarify
the scope and slant of the questions in focus.
The Swedish Competition Authority then requested information on
the banks' mortgage rates and funding costs, with support of the
Act (2010:1350) on disclosure obligations in matters of market and
competition conditions. The request was made in order to study
banks' mortgage margins and flexibility between the banks in terms
of interest rates. Information was requested from Danske Bank A/S,
13
Denmark, Swedish branch (Danske Bank), SHB, Länsförsäkringar
Bank AB (Länsförsäkringar), Nordea, SBAB Bank AB (SBAB),
Skandiabanken AB (Skandiabanken), SEB and Swedbank on
mortgage rates and funding costs for mortgages with the terms:
3 months (“variable”), 2 years and 5 years for the period 2001–2011.
The Competition Authority's request also covered information and
written reports on deposit interest rates from Danske Bank, SHB,
Länsförsäkringar, Nordea, SBAB, Skandiabanken, SEB, Swedbank
and Bluestep Finans AB (Bluestep), ForexBank AB (Forex),
SevenDay Finans AB (SevenDay) and Ålandsbanken Abp, Finland,
Swedish branch (Ålandsbanken). This was done in order to analyse
the impact that interest rate on deposits can have on the
attractiveness of savings accounts. The choice was made with
consideration for the fact that accounts can have different
conditions that make them difficult to compare, based on the
accounts that the customer uses most as transaction and savings
accounts.
Finally, the Swedish Competition Authority requested information
and written reports on administration fees from AMF Fonder AB,
Handelsbanken Fonder AB, Länsförsäkringar Fondförvaltning AB,
Nordea Fonder AB, SEB Investment Management AB, Skandia
Fonder AB, SPP Fonder AB and Swedbank Robur Fonder AB, in
order to compare the administration fees levied by different market
players within a fund category. Fund categories looked at in the
survey were Sverigefond [Sweden fund], Sverige Indexfond
[Sweden Index fund], Europafond [Europe fund] and Globalfond
[Global fund].
The survey has been supplemented with viewpoints from a number
of players on the banking and fund market. The Competition
Authority has met the following market players within the context
of the study: The Riksbank, the Swedish Financial Supervisory
14
Authority, the Swedish Pensions Agency, the Swedish Bankers'
Association, the Swedish Investment Fund Association, MFEX, SPP,
Morningstar, Avanza, AMF, Villaägarnas Riksförbund (the Swedish
Homeowners Association) and the Swedish Shareholders'
Association.
1.5
The Competition Authority's Role, previous
challenges and proposals
The Swedish Competition Authority is a state authority working to
safeguard and increase competition and supervise public
procurement in Sweden. The authority’s task is to work for effective
competition in the private and public sectors for the benefit of the
consumers as well as for the efficient public procurement for the
benefit of the society and the participants in the markets. The
Competition Authority applies the Swedish Competition Act
(2008:579) and is thereby able to intervene in matters of anticompetitive cooperation and companies' abuse of a dominant
position. In accordance with the Swedish Competition Act, the
Competition Authority can also ban harmful concentrations.
Another element of the Competition Authority's work involves
studying market and competition conditions for promoting the
development of and proposing measures for functioning
competition in Swedish economy.
The Competition Authority has in several previous reports studied
and provided proposals for improved competition on the financial
markets.
In the Competition Authority's report Konsumentrörligheten på de
finansiella marknaderna [Consumer mobility on the financial
markets] (2001), a number of proposals were made for ways of
increasing customer mobility on the financial markets. These
15
included an expansion and development of consumer information,
and a liability for banks to provide information on costs relating to
early redemption of loans. In addition, an overhaul of the rules on
taxation of capital gain from the sale of shares in securities funds.
An inquiry into the possibility of open interfaces in the banks'
online services was also proposed. Out of these proposals, the one
concerning consumer information and the taxation of capital gain
from the sale of shares in securities funds was partly implemented
on 01 January 2012 via the introduction of the Investment Savings
Account (ISK). However, ISK only covers new savings in funds.
In the Nordic Competition Authorities' report Competition in Nordic
Retail Banking (2006), the Nordic Competition Authorities proposed
a couple of measures in order to improve competition, primarily
within payment services and consumer mobility in the banking sector. The proposed measures involved increasing the transparency of
the financial markets for consumers. This would also facilitate
switching banks and harmonise and integrate the regulations in the
Nordic countries in order to create a common Nordic market.
In the Swedish Competition Authority's report Tillträdesvillkor för
betalsystem – skillnader för små och stora banker [Entry terms for
payment systems – differences for small and large banks.] (2006),
which was commissioned by the Government, the Competition
Authority highlighted the importance of newly established banks
being allowed access to payment systems on reasonable terms. The
report proposed that the payment system's infrastructure should be
streamlined. It was also proposed that rules should be developed in
order to ensure the terms of access to payment systems are
objective, proportional and non-discriminative. In addition, the
Competition Authority proposed simplified procedures for the
consumer's administrative work when changing bank, in order to
increase customer mobility on the banking market.
16
The Competition Authority's report Action for better competition
(2009c), which was also produced in the context of a government
instruction, identified a number of anti-competitive obstacles on the
financial markets. One barrier to entry that was identified was
payment service providers' access to general payment systems. The
Swedish Competition Authority's proposed action was to secure the
payment service providers' ability to access general payment
systems by legislating objective, proportional and non-discriminative access terms for the systems. Through legislation of the right
of access to general payment systems, market access is facilitated
for smaller and new players on the banking market, which
stimulates development towards increased competition.
The Competition Authority also identified barriers to consumer
mobility within the banking market. One barrier to increased
customer mobility was the difficulty of changing bank. The
Competition Authority wished to facilitate private individual's
change of bank by introducing requirements for a switching service
in the regulations for financial services. The Competition Authority
assessed that increased consumer mobility could be stimulated by
introducing simple procedures around the consumers'
administrative handling of bank switching. One example of this
type of simplification was to develop a switching service function in
the form of a web-based step-for-step guide, which provides purely
practical information about how the customer should go about
changing bank. One effect of developing a neutral and simplified
change service is increased consumer mobility, and thereby greater
opportunities for smaller and new players to take customers from
established market players on the banking market.
Together with its member banks, the Swedish Bankers’ Association
(Svenska Bankföreningen) has also developed an improved
17
procedure for changing bank.4 The procedure has been adapted to a
European code for bank changes, which was produced by the
organisation European Banking Industry Committee (EBIC).
According to the procedure, changing bank should as a rule not take
more than three banking days. The general banking procedures
apply to deposit accounts with associated banking services such as
autogiro, card, giro and internet services. The e-Invoicing service is
discontinued and invoices are instead sent out in paper form until
the person registers with the new bank. The new bank shall also
assist with the change of trust account or transferral of loans, even if
such changes can take longer to implement. For this purpose,
common forms and procedures have been developed in order to
facilitate the administration of a change of bank.
Another obstacle to customer mobility was noted within the fund
market. One measure proposed by the Swedish Competition
Authority was to increase customer mobility by introducing
Investment Savings Accounts (ISK) for fund investment savings,
etc. Large accumulated stocks of fund investment savings tended to
remain with fund companies owned by the four major banks, which
has a lock-in effect on the market. One lock-in effect is that the
consumers do not switch funds to the extent they would if they
were not required to make immediate payment of capital gains tax
on their sale when making the switch.
The Competition Authority also identified that the low consumer
mobility on the private market was a result of insufficient
information on costs associated with various bank services.
According to the Competition Authority, better knowledge among
consumers on the size of the fees they pay for all bank services
would facilitate rational choices and potentially create better
4
Svenska Bankföreningen (2013b).
18
dynamics and competition. This could be achieved through
legislation of a requirement for banks to produce simple cost
statements for consumers. A simple cost statement, in which the
banks inform customers about how much they have paid in fees to
the bank, could in accordance with the Competition Authority
potentially increase competition and reduce switching barriers. A
cost statement can also act as a solid foundation for the consumer in
their dealings with the bank, such as negotiations concerning
various fees, interest rate levels and discounts. As far as the
Competition Authority is able to ascertain, it has not yet been
possible to implement any measures for this purpose.
The Nordic Competition Authorities' report Competition Policy and
Financial Crisis (2009) emphasises the importance of safeguarding
competition rules, especially in times of financial crisis. Short-term
support measures could prove to have a negative impact on
competition in the long-term. The report also recommended that all
potential support measures, which were implemented in order to
alleviate the effects of the financial crisis, should be clearly assigned
to a specific period and be clearly defined in other respects.5 No
Nordic country had acted contrary to the recommendation. Today,
the Competition Authority can establish that the financial systems
in the Nordic countries have enabled them to withstand the
financial crisis better than many other EU countries.
1.6
Competition and competitive pressure
The competition on a market is affected by many factors such as
regulations, the entry and exit of new companies, increased
productivity and changes in demand and the composition of
consumption. Competition tends to be more effective the more
5
Almunia (2013).
19
companies are on the market and the lower the barriers to entry are.
Well informed consumers who are in a position to evaluate and
compare products and services and reach well-reasoned purchasing
decisions help to promote effective competition. There is no
unequivocal method for measuring competitive pressure on a
market; there are a number of different competition indicators.
Market concentration and high profitability over a long period
within a sector can be a result of less effective competition and
substantial barriers to entry that make market entry difficult for
new companies.
High market concentration and profitability may indicate
less effective competition
The cause of less effective competition is that markets with a high
concentration entail that just a few companies have better
opportunities to exercise market power, which can be reflected in
prices that exceed production costs to a considerable extent. On
markets with a small number of strong market players, it is also
easier for companies to become involved in, supervise and maintain
anti-competitive cooperation. High market concentration can also
emerge from competition where companies with a low-cost
structure increase profits by reducing prices and expanding their
market share. This is then seen as an effective market on which
competition is healthy. The profitability of companies or an
industry can also be used as a competition indicator. The fact that
companies within an industry or market show high profitability
may indicate that one or more companies are exploiting their
market power. However, high profitability for only certain
companies is not necessarily a clear indication of weak competition.
It may simply be a matter of efficient companies having a high
profitability and less efficient companies having a lower
profitability. What is problematic is when all companies on a
20
market boast high profitability. This may be an indication of explicit
or implicit cooperation and coordination, which is limiting
competition. High profitability may also be caused by fluctuations
in demand and the demand periodically exceeding supply. This is
however seldom of importance in the financial industries.
Barriers to entry and the opportunity for expansion
The possibility to enter and exit a market and the opportunities for
new companies to expand have a large impact on competition, and
on whether established companies are able to exercise market
power. Barriers to entry affect profitability in a sector for the
companies active in that sector. In principle there are barriers to
entry on most markets, though the size of these varies. Barriers to
entry may be the result of established companies' strategies and
development and can be identified as strategic advantages for
established companies on both supply and demand sides. The
possibility for a company to expand on a market can be further
limited by different types of lock-in effects – e.g., in the form of the
“interest differential compensation” for early redemption of a
mortgage – which mean that consumers have difficulties changing
service suppliers.
Learning, cost advantages and economies of scale
Established companies on a market can develop resources and
capacities that make it difficult for new companies to enter and
compete on the same market. Established companies have therefore
developed unique assets and resources which make it possible for
them to produce goods and services of a certain quality at lower
costs than potential competitors would incur. This can be a result of
lower raw material costs (financing, for example) or access to a
21
specific product or process technology. It may also be a result of
experience and learning, which provides established companies
with cost advantages, irrespective of their size. Another factor
which can lead to barriers to entry is economies of scale, which
leads to a reduction of costs per unit produced via the production of
a product or service in large volumes. In some sectors, considerable
investments in technology and personnel are required in order to
achieve competitiveness. To what extent an investment constitutes
an irreversible cost, i.e., a cost which cannot yield a benefit if the
company is forced to leave the market, also affects interest in
entering a market.
Product differentiation and access to customers
Marketing can lead to economic gains in that it can reduce
consumers' scouting costs. At the same time, marketing established
companies can pose a significant barrier to entry. By establishing a
brand, established companies can differentiate their products and
gain greater customer loyalty. To be able to compete with
established market players, new players may be required to
develop an entirely new product or process technology, which
changes competitive conditions. Often, established companies have
also developed a customer base. For new companies, considerable
marketing initiatives may be required in order to solicit new
customers. Marketing costs are partly irreversible costs, which
limits the incentive for new players to enter the market. Linked to
the customer base is customer mobility that can be limited by
conversion costs. These are direct and indirect costs that the
customer incurs when changing supplier. No market can function
well without active customers. It is therefore important that the
customers have sufficient information on the characteristics and
prices of different products and that they are aware that large
conversion costs when changing supplier are unreasonable. If the
22
consumer's ability to make free and rational choices is limited or
hindered, there is a risk that the efficiency of markets and
competition will suffer. Facilitating access to information and
enabling customers to more easily switch supplier are therefore
hugely important factors in improving competition on a market.
Infrastructure
In a number of sectors, access to infrastructure is required for
establishment. The terms for access to infrastructure are crucial to
how well competition functions. It is vital for competition that those
who control and/or own the infrastructure provide access to this
infrastructure on equal terms. They may not discriminate against
other market players by levying high fees or imposing unreasonable
contractual terms.6 The banking market is characterised by different
types of cooperation on infrastructures for e.g., payment processing
services. Examples of cooperation on infrastructure services can be
found in Dataclearing (DCL) and Bankgirocentralen AB's (BGC)
work with payment processing on commission from the banks.
BDB Bankernas Depå AB's and newly formed BAB Bankernas
Automatbolag AB's cooperation on infrastructure for deposits and
ATMs and on international card cooperation such as Visa and
MasterCard are also examples. The internal banking interest rate
STIBOR is another example of cooperation between banks.
Regulatory barriers to entry
Regulatory barriers may be grounded in legislation and regulations.
They may be a matter of licences and patents, but essentially,
6
The Swedish Competition Authority (2006).
23
different kinds of permits may be required to conduct activities on a
market. Much of the regulation of the financial sector is intended to
secure financial stability and consumer protection. The regulation is
naturally a consequence of the financial sector's great significance
for the national economy. Banking and finance operations are
regulated in the Banking and Finance Business Act (2004:297). In
order to conduct banking operations, permission from the Swedish
Financial Supervisory Authority is required, and the operation in
question must be able to process payments via general payment
systems and receive deposits. Other regulations which are also
intended to maintain a stable financial market can be found in the
Capital Adequacy and Large Exposures Act (2006:1371). This act
regulates how large credit reserves a credit institute must have (the
Basel Accords). The Act (1995:1571) on the Deposit Guarantee
Scheme is intended to assure bank customers that they can recoup
their savings (up to EUR 100,000 per customer and institute).
Other acts, such as the Financial Advisory Services to Consumers
Act (2003:862) and the Consumer Credit Act (2010:1846), prescribe
the type and formulation of credit information for customers.
Regulations designed to protect consumers can help to raise
consumer mobility. But they should be formulated in a way which
allows consumers to better understand the products and thereby
compare competing banks' products on a larger scale.7
Within the EU, a common market for payment services in Euro –
the Single Euro Payment Area (SEPA) – is being created. SEPA will
enable customers and companies to send and receive Euro
payments on the same terms and at the same prices throughout
Europe. SEPA is opening up new opportunities and will likely
increase competition in the area if properly designed.
7
Copenhagen Economics (2009).
24
Implementation of the EU directive on payment services and their
providers (the Payment Service Directive, PSD) will be of
significance to and facilitate customer mobility on the banking
market in that it will remove obstacles such as account closure fees
and make it possible to open bank accounts in other countries. Via
the (Markets in Financial Instruments Directive, MiFID),
competition on the European securities markets has increased by
way of new establishment and more competitive pricing between
exchanges and different Multilateral Trading Facilities (MTFs). The
European Commission has also put forward a proposal, on 08 May
2013, for a Directive on the transparency and comparability of
payment account fees, payment account switching and access to a
basic payment account. The idea behind this is to increase customer
mobility and competition on the single market.8
It is therefore important that regulations are formulated so as not to
limit competition. Where the financial services sector is concerned,
however, there must be a balance between financial stability and
competition. This means regulations may benefit established
market players who are considered important to the economy. The
term “too big to fail” is sometimes used on the financial services
market when describing market players which are so crucial to
financial stability that they cannot be allowed to go into
bankruptcy. They are assumed to enjoy an implicit government
guarantee which can also affect their strategic actions on the
market. This can also affect competition on the market.9
8
The European Commission (2013).
9
The Danish Competition and Consumer Authority (2013).
25
1.7
Concentration and profitability in the banking sector
As previously stated, the banks play a very central role in the
Swedish financial services sector. The number of banks has
remained relatively constant since 2004, with a certain reduction
after the financial crisis hit in 2008. At the end of 2012, there were a
total 117, 37 of which were Swedish joint-stock banks, 29 foreign
joint-stock companies of which 27 were branches of foreign banks
and 2 were member banks, and 49 savings banks. Whilst the
number of market players is relatively large, the four major banks
still dominate on a number of the submarkets. On the deposit and
loans market, the four major banks have a market share of between
66 and 70 per cent in accordance with the Competition Authority's
estimates. High market concentration in the financial services sector
is not unique to Sweden. It can also be observed in several other
Nordic and European countries.10
When competitive pressure is analysed on a market, the market
concentration is often measured. In addition to measuring the
concentration in submarkets in a sector or on a market, different
indicators such as the Hirschman-Herfindahl-Index (HHI) and
concentration ratio (CR) are used.
HHI is calculated by adding together the square of the players'
market shares. The premise is that the higher the HHI, the more
concentrated the market is to a small number of players. It indicates
that competition efficiency is suffering. CR is a measure of how
large a market share the largest players have within a sector or
market. A high value of CR4, i.e., the market share for the four
largest players, most often indicates the market power they have
and that the market structure is oligopolistic.
10
Nordic Competition Authorities (2006).
26
In relation to several other European countries, the concentration in
the banking sector is relatively high. Figure 1 shows a value of CR5
for the total assets for 2005 (prior to the financial crisis of 2008) and
2011 (after the crisis) for a number of European countries. In
Sweden, the concentration for the five largest players is at roughly
the same level for 2005 as for 2011. In some other European
countries, the concentration has increased since the financial crisis
began in 2008, as a result of acquisitions and mergers of banks.11
Figure 1
CR5 total assets for 2005 (grey column) and 2011
(black column)
100
80
60
40
20
0
Source: ECB (2012).
The market concentration varies from one submarket to the next.
Below, the HHI for the Swedish banking market is illustrated based
on players' market shares for all loans and deposits. Over and
above this, there have been no major changes in HHI since the
beginning of the financial crisis in 2008. HHI for deposits and loans
to the Swedish public is at 1557, which could be an indication that
11
OECD(2010).
27
competition is less efficient.12 The total value of HHI in terms of
administered capital on the fund market was 1178 in 2012.
Banks' income and expenses
Banks' profitability depends on a number of factors, such as earning
capacity (which is of course affected by just how attractive the
services the bank can offer the customer are) and the cost of holding
capital and liquidity reserves, credit losses, personnel costs, office
network, IT and personnel. Banks' profitability is also affected by
how much capital has been allocated to the operations.
The banks' primary sources of income are net interest income13
(which consists primarily of the difference between interest on
deposits and loans) and net commission income (which consists of
the net income from commissions, fees, which the bank has
received minus the commissions they themselves have paid in their
operations). Brokerage fees for stock trading, asset management
commissions and card fees are examples of income from
commissions. In addition to this there is the net result of financial
income and expenses at fair value and other income.
The size of net interest and net commission income is determined
by both the volume and the gross margin. Thus, in the event of a
margin squeeze, the banks can increase net interest via greater
volumes and, in the event of slower growth, via higher gross
margins. In order to increase net interest, the banks must work with
One premise says that a HHI below 1,000 indicates a low level of concentration, a HHI
between 1,000 and 1,800 a medium-high concentration and over 1,800 a high level of
concentration on the market.
12
Net interest income also includes items from other activities, such as returns from bonds
and other fixed-income securities.
13
28
both volume growth and margins via higher rates/lower funding
costs or a combination of the two. In the Swedish banks' retail
banking/operations in Sweden, net commission income and net
interest constitute around 90 per cent of all income14. Where the
general operation of Swedish banks' branches and dealings with
private client are concerned, net interest is definitely the largest
income item and accounts for around 60–80 per cent of major banks'
income15.
Concentration and profitability
As previously stated, high profitability in an industry or sector can
be an indication that competition is less effective. However, high
profitability is not necessarily accounted for solely by a lack of
competition between companies. It may also be a result of barriers
to entry or companies being effective. Profitability often varies from
one company to the next in a sector, as some are more efficient than
others. High profitability for all players in an industry or sector may
indicate that the companies are involved in anti-competitive
activities such as cartels or that there is some form of explicit or
implicit coordination on prices or quantities on the market.
A measurement which can be used to evaluate the profitability of a
company and an industry is return on equity. It is of fundamental
importance for companies that they are able to provide their owners
with returns on the capital they have invested. The most common
measurement of returns is return on owners' equity. Table 1 gives
an overview of deposits and loans to the public, net interest and
return on equity for the eight largest banks in Sweden. The Swedish
14
See SEB, SHB, Swedbank and Nordea's 2012 annual reports for retail banking in Sweden.
15
See SEB, SHB, Swedbank and Nordea's 2012 annual reports for retail banking in Sweden.
29
banks are both well-capitalised and have a high return on equity, in
an international perspective.
Table 1
Comparison of the major players in deposits and loans on
the Swedish market
Bank
Deposits
from the
public (SEK
billions)
Loans to
the public
(SEK
billions)
Net
interest
(SEK
billion)
Return on owners'
equity (per cent)16
Swedbank
558
1,184
13.7
14.4
SEB
862
657
6.1
11.1
SHB
367
1,044
16.8
14.6
Nordea
863
1,326
10.5
11.6
SBAB
28
256
1.9
4.2
Länsförsäkringar
62
150
2.0
6.3
Skandiabanken
77
58
0.6
7.7
Source: The banks' annual report and SCB's deposit and loan statistics (2012).
Profitability varies from one bank to the next and there is a positive
connection between the size of the market share, balance sheet total
and return on equity. Figure 2 below compares seven of the largest
banks' market shares based on deposits and loans for the Swedish
public and their profitability measured in return on equity. Figure 2
reveals that the banks with a higher market share also have a high
return on equity.
16
Return of investments on a group level.
30
Figure 2
Market share of loans and deposits on the Swedish market
(horizontal axis) and return on equity for the seven banks
(vertical axis)
16%
12%
8%
4%
0%
0%
5%
10%
15%
20%
25%
Source: The banks' annual report (2012).
The banks' profitability on the Swedish market
Figure 2 is based on the banks' return on equity for their entire
operations. It thus shows that the major banks are more profitable
than the smaller market players. The major banks' high profitability
can be accounted for by a number of different factors. For example,
they have the advantages of both economies of scale and economies
of scope over minor banks and they have more market power than
smaller players. The Swedish Bankers' Association has made a
comparison between the profitability of the major banks and that of
other large companies. It has established that the banks' return on
equity is not abnormally high for these years, in which several of
the big Swedish companies showed a higher return on equity.17
17
The Swedish Bankers' Association (2012b).
31
It can be problematic, however, to simply analyse major banks'
return on equity on a group level, as profitability varies
considerably from one line of business to the next and between
different geographical markets. Several of the major banks have
operations on foreign markets, where profitability has been lower
than on the Swedish market and, in some cases, has contributed to
significant losses for their operations as a whole. Examples include
SEB's retail banking in Germany, which after several years of nonprofitability was sold at a loss to Banco Santander in 2010 and
Swedbank's investments in the Baltics which led to great losses for
the bank.18 Comparing the group's returns is problematic, especially
when analysing profitability on individual Swedish submarkets
where the major banks have developed strategic resources which
give them market power; examples of this being strong brands,
developed office networks, a customer base built up over time and
a broad range of services.
For several of the major banks, their retail banking in Sweden –
which is responsible for households' deposits, sales, distribution of
funds/shares in a mutual fund and mortgages – has been more
profitable than the banking groups as a whole. The three major
banks SEB, SHB and Swedbank have reported a return on equity in
Swedish retail banking of 19–28 per cent on average for 2010–2012.19
This is considerably higher than the return on equity on a group
level, and provides a more accurate picture of profitability on the
Swedish market.
In 2009, Swedbank had a negative return on equity as a group whilst its Swedish retail
banking had a return on allocated equity of 27.8 %.
18
The banks' annual reports. Nordea does not report return on equity for Swedish retail
banking.
19
32
Competition, concentration and profitability
There are different perspectives on how market concentration can
affect players' strategic behaviour and competition, i.e., the outcome
on the market, which will affect prices, the quality of goods and
services, and companies' profits.20 Traditionally, competition
analyses are based on the Structure Conduct Performance
perspective (SCP), in which the structure of the market, e.g., the
market concentration, is assumed to affect the outcome. This means
that the market concentration will directly affect competition as
companies can exercise their market power and also find it easier to
collaborate on prices, quantities and geographical partitioning of
the market. A high market concentration may therefore result in
higher prices for products and services, lower supply and large
profits for companies and thus reduced consumer benefit. This
perspective of the connection between market concentration and
competition has been criticised as there is a great focus on market
structure and little focus on companies' development of unique
resources and competence. This provides strategic competitive
advantages in the form of higher 'internal and external efficiency.
The Efficiency Structure perspective (ES) of competition is based on
the idea that the market structure, e.g., the market concentration, is
entirely crucial to the outcome on the market. In this perspective, it
is companies' efficiency that ultimately determines their
performance and the outcome on the market. This means that
efficient companies, which can lower their prices, will be able to
retain larger market shares, and that high market concentration and
high profitability can also be a result of a company's efficiency.
20
VanHosse (2010).
33
1.8
Market players' strategies and business models
In the financial services sector there are a number of market players
who have various strategies and business models. If we are to
consider the three studied services in a context, we can establish
that it is the major banks that are still dominating. On the various
submarkets there are both full-service banks and smaller players
that focus on offering a few select products. There are signs that
more and more banks and other market players are endeavouring
to offer more services and become full-service banks. One example
is the state-owned SBAB, which previously focused primarily on
mortgages and has now applied for and been granted permission to
become a full-service bank.21 On the fund market, the fund
companies tend to go in two different directions. Here one group –
smaller niche companies – specialises in fund management and
advice whilst another group acquires branded funds and invests in
their range of services, sales and distribution.
Several of the banks, and above all the major banks, describe their
business strategy or model as a relationship banking model. The
premise is that the banks build strong relationships with their
customers and focus on satisfying the customers' total need of
financial services and not focusing on selling specific services. The
relationship model differs from a more product or transactionrelated strategy, in which each product segment focuses on selling
its product and bases its analysis of profitability on each individual
product. In a relationship model, customer profitability is superior
to product profitability. Of course, a model of this nature places
demands on the banks' management accounting. It rewards a
holistic approach rather than a product approach, which can be
challenging. The premise is therefore that the banks are
21
The Swedish Financial Supervisory Authority (2009).
34
endeavouring to work with relationship marketing and to get consumers to acquire their different banking services in one bank. This
means that there is a desire among banks for the customer to
acquire more services, such as a transactional account, deposit
accounts, mortgages, debit cards, fund and share investments and
pension investments, from them alone and become a “regular
customer”.
In a relationship model, the bank's profitability should not be
calculated on each individual product purchased; it should instead
be based on a lifecycle or relationship perspective. The premise is
that long-term relationships lead to more satisfied customers but
also greater profitability.22 A satisfied customer can be linked to
higher profits, as greater customer loyalty leads to increased income
and even lower costs.23 Keeping existing customers happy rather
than overly investing resources into recruiting new customers is
also an important part of a relationship-based business model.
Several studies indicate that the cost of replacing lost customers is
often a losing transaction in itself.
The relationship perspective is also based on the supplier and
customer generating value in a process together. The more
interactions between the customer and the company, in this case the
bank, the stronger the relationship becomes. A long relationship
between supplier and customer can also reduce transaction costs
and lay the foundations for the development of more effective
processes and service innovation, which generate value for both the
supplier and the customer.
22
Blomqvist et al. (2004).
23
Storbacka et al. (1994).
35
Figure 3
Fundamental differences in approach between the
transaction model and the relationship model
From a relationship perspective, it is not the price of the individual
service that is of importance; it is the total price paid by the
customer. This is governed by how much commitment a customer
has to the bank.
The services studied by the Swedish Competition Authority are
therefore related as together they can affect the total price for the
use of the bank's services. Above all, the customer's total business
with the bank has an effect on the mortgage rate they receive. Banks
such as SEB explicitly state that the price (interest rate on the
mortgage) is affected by the type of object that is to be bought, the
36
consumer's risk profile, and how much business the customer has
with the bank. 24
The importance of customer mobility
Banks focusing on building relationships with their customers can
therefore be of value to consumers; this provides the opportunity
for the creation of effective processes and for service development.
At the same time it can be problematic from a competition
perspective, as building relationships can reduce consumer mobility
on the market. A prerequisite for effective competition is
consumers' willingness and ability to change service supplier. The
possibility for consumers to set a product aside and thus have
access to better alternatives is in many cases the clearest expression
of consumer power in effective competition.
It is often said that consumers on the banking market are very loyal
and less likely to switch service supplier than those on many other
markets. According to various surveys, it can be established that the
direct costs of switching bank are low whilst the more indirect costs
are an obstacle to the switch, i.e., the time it takes to obtain relevant
decision support and the difficulty of comparing different
alternatives an offers.25 It is therefore still uncommon to move an
established bank commitment to another bank. The same applies to
a change of fund manager.
With new players on the banking and finance markets, customer
mobility has increased to such an extent that it has become more
common for one and the same household to be a customer of
24
More information is available on www.seb.se.
25
The Swedish Competition Authority (2009b), Flash Eurobarometer (2009).
37
several different financial companies. Surveys of consumer mobility
also reveal that consumers are now more likely than ever to use
several different banks or financial companies. One survey,
Allmänhetens syn på bankerna (2011), from the Swedish Bankers'
Association, shows that many bank customers (around 43 per cent)
use more than one bank or other type of financial company for
services such as savings, loans and payments. There is a wide range
of banking services, and the consumer can now manage –
preferably online (around 60 per cent use the internet) – a lot of
what was previously managed by the banks. Consumers are
therefore able to manage different parts of the financial services
they have with various market players, such as smaller niche
players, which puts competitive pressure on the full-service banks.
Competition should therefore potentially increase due to consumers
having more than one bank or financial company.
Customer mobility on the financial services market can be limited
in different ways in that fee and contract structures can give rise to
various lock-in effects. It is often difficult for the consumer to gain
an overview of the range of different types of services. Different
types of quantity discounts make price comparisons between
different market players more difficult. Many of the lock-in effects
related to fund investment savings are a matter of capital gains
taxation and difficulties for the consumers to understand, compare
and gain an overview of the offerings on the market. On the other
hand, the lock-in effects on the loan market are to a greater extent a
question of overly complicated rules and costs associated with a
change of creditor. Many credit inquiries entail the risk that the
consumer will have difficulties being approved for a loan. Where a
customer has loans with a fixed interest rate and wishes to
transfer/move these loans prematurely, the interest differential
compensation may result in a certain lock-in effect. Lock-in effects
and low customer mobility give market power to the players on the
financial services market. By applying a relationship-based business
38
model, the banks' market power can thereby increase with higher
profitability as a result. At the same time, we cannot disregard the
fact that bank customers highly value personal relationships with
the bank and often follow family traditions when selecting a bank.
This is a factor which leads to lower customer mobility and
sluggishness on the market. The complexity of the services that
banks offer means that it is in the interest of both the bank and the
customer to create and maintain long-term business relations
between one another. Via these long-term business relationships,
the banks can build up their knowledge of the customers, which can
for example make it easier for the consumer in question to be
approved for a loan. Long-term relationships between bank and
consumer can lead to lock-in effects and lower customer mobility.
But they can also lead to lower transaction costs, which can in turn
lead to more effective development, production and distribution of
financial services.
39
2
Deposits
2.1
General information on deposits
A household's savings in various accounts goes under the heading
of deposits. For Swedish banks, deposits are one of several sources
of funds. Deposits from Swedish households have increased by
around 9 per cent annually since 2004, as illustrated in figure 4.
Figure 4
Deposits from Swedish households 2004–2012
expressed in billions of kronor (SEK bn)
1 400
1 200
1 000
800
600
400
200
0
2004
2005
Source: The Riksbank (2012a).
2006
2007
2008
2009
2010
2011
2012
40
Different forms of deposit accounts
On the whole, two types of products – transaction and savings
accounts – can be distinguished in terms of accounts that a bank
offers a traditional bank customer. Interest on transaction accounts
is as a rule lower than on savings accounts. The transaction account
is also linked to salary transfers from an employer. Savings
accounts are accounts for more long-term saving and the facility to
withdraw or transfer money can be limited. These accounts may
involve the customer undertaking to save money over a long period
of time, often several months or years.
Market players and concentration
Whilst the number of market players is relatively large and a
number of smaller players have had the strategy of attracting
customers by offering high interest rates on both transaction and
savings accounts, the four major banks still dominate on the deposit
market. The four major banks had 70 per cent of deposits from the
public and 66 per cent of deposits from households at the end of
2012.26 The development of deposits from households 2004–2011 is
illustrated in figure 5 and shows that the major banks have a
relatively stable share, if somewhat reduced.27 Other large players
on the deposit market are Danske Bank, Länsförsäkringar,
Skandiabanken, SBAB and the local savings banks. The local
independent savings banks do not have a large share in the total
Swedish deposit or loan market, but they may have a strong
position on local markets.28 The fact that major banks' market share
Deposits from the public consist of deposits from households, non-financial companies, the
public sector and abroad.
26
27
SCB (2013).
One example is Roslagens Sparbank, a bank which is an independent company with its
own board and a head office in Norrtälje, as well as a smaller office network in Roslagen.
28
41
is decreasing is an indication that more customers are choosing to
have more than one bank.
Figure 5
Market shares, deposits from Swedish households for
major banks in comparison with other market players
100%
75%
Smaller banks/players
50%
Major banks
25%
0%
200420052006200720082009201020112012
Source: SCB (2013).
2.2
Comparison between transaction and savings
accounts
The average interest rate on new contracts for households'
combined deposit accounts amounted to 0.82 per cent at the end of
the final quarter of 2012. The average interest rate on deposits for
accounts with special terms, such as withdrawal restrictions, was
Like other savings banks, Roslagens Sparbank has close cooperation with Swedbank and has
their products in its range, whilst at the same time focusing on the local market (Roslagens
Bank's Annual Report 2012).
42
1.62 per cent, i.e., almost double.29 The next two sections report the
listed interest rates on the banks' transaction accounts and various
savings accounts with different durations. Not all banks offer
transaction accounts and the major banks seldom offer interest on
these accounts. Table 2 illustrates interest rates on the banks'
transaction/current accounts. Only Forex, Ålandsbanken and
Skandiabanken offer interest on this type of account. The bank that
stands out is Forex, with an interest rate of 1.8 per cent.
Table 2
Interest in transaction/current accounts, 2013
Bank
Interest rate
FOREX
1.80 %
Ålandsbank
0.35 %
Skandia
0.05 %
Danske Bank
0%
SHB
0%
Nordea
0%
SEB
0%
Länsförsäkringar
0%
Swedbank
0%
Source: Banks' websites May 2013.
Several small market players have for certain periods adopted the
strategy of offering a higher interest rate on transaction accounts.
Figure 6 illustrates the difference between the four major banks'
interest on deposits on transaction accounts and a selection of small
market players including Forex, Skandiabanken, Ålandsbanken and
Länsförsäkringar for the period 2007–2011.
29
The Swedish Financial Supervisory Authority (2013).
43
Figure 6
Average interest rate on transaction accounts, comparison
between the four major banks and a selection of minor
banks (Forex, Ålandsbanken, Skandiabanken and
Länsförsäkringar)
2,50%
2,00%
1,50%
Major banks
1,00%
Minor banks*
0,50%
0,00%
2007
2008
2009
2010
2011
Source: KKV's own calculations.
It should however be noted that Forex brings up the average
interest rate among the other comparable banks. Several of the new
and smaller market players have also chosen not to offer customers
transaction accounts. They only offer different forms of savings
accounts. Something previously mentioned is that terms of interest
for savings accounts are often better than those for transaction
accounts. It can be difficult to compare one bank's interest rates on
savings accounts with those of another, as the contractual terms
differ on the question of the capacity for withdrawals, the lowest
deposited amount for a certain level of interest and commitment
period. In order to compare the interest rate on savings accounts
from one bank to the next, we can take a look at the interest rate
that can be obtained on small and large amounts that are locked
and for which there are no free withdrawals.
44
Table 3
Interest on various savings accounts with different
commitment periods in 2013, amount SEK 100,000 no
free withdrawals.
Bank
3 months
1 year
2 years
5 years
BlueStep
2.55 %
3.05 %
3.45 %
3.75 %
Länsförsäkring
2.25 %
2.30 %
2.00 %
2.80 %
Nordea
2.01 %
2.20 %
2.25 %
Swedbank
2.00 %
1.72 %
2.06 %
2.46 %
Danske
2.00 %
2.20 %
2.30 %
3.00 %
Skandia
1.91 %
2.00 %
2.03 %
2.34 %
SEB
1.80 %
1.18 %
1.51 %
2.38 %
SHB
0.81 %
1.17 %
1.97 %
Sevenday
2.75 %
3.00 %
Source: Banks' websites May 2013.
Today, there are players on the deposit market offering accounts
with higher interest on deposits than others. This applies primarily
to smaller market players. The difference between the banks'
interest on deposits can be considerable. One question is how
interest on deposits influences customers' choice of bank. Based on
the information requested by the Competition Authority and the
deposit interest rates on the websites of the various market players,
it is clear that the interest rate on deposits has only a minor
influence on the choice of bank. The influx of customers to some of
the minor banks and credit market companies with a high deposit
interest rate has increased, but these players still represent a small
share of the market.
45
Figure 7
Average interest rate on savings accounts for different
amounts, comparison between the four major banks and a
selection of smaller market players
2,0%
1,5%
1,0%
Major banks
Other smaller players
0,5%
0,0%
Saving accouts for Savings accounts for
smaller amounts
larger amouts
Source: Banks' websites May 2013.
The major banks consistently have a lower interest rate on smaller
amounts30 deposited in savings accounts than the small market
players, as illustrated in figure 7. Small savers thus benefit from
doing business with the smaller market players. It appears here that
the major banks are discriminating against small savers investing
an amount below a certain threshold, whilst a number of the small
market players often have a higher interest rate for all savers.
Unlike the major banks, the small players likely see small savers as
an opportunity for them to gain access to and expand on the market
by also offering a number of different financial services.
A comparison between small amounts does not provide an entirely accurate picture, but
the principle is the same. The banks' threshold for the higher interest rate on deposits varies
between SEK 50,000 and SEK 250,000.
30
46
Interest on deposits and banks' net interest
Banks' primary sources of income are net interest, net commission
income and other income.
What the Swedish Competition Authority can establish is that the
major banks generally offer less favourable conditions than the
small market players surveyed, in terms of deposits. The fact that
savers accept low interest rates on deposits naturally has a positive
effect on the banks' net interest and profitability as deposits
constitute a relatively cheap source of funds.
Though major banks finance their loans for e.g., mortgages
primarily via market financing, deposits from savers are an
important and, for many banks, cheap source of funds. By having
higher lending rates, not only on mortgages but also personal loans
and business loans and low interest on deposits, the banks' net
interest increases and, provided other costs are kept under control,
so does their profitability. For the four major banks, the annual
growth of net interest in Swedish operations/retail banking has
been around 5 per cent between 2007 and 2012. This has been
driven by both increased volumes and margins. Since 2009, growth
rate has increased for several of the banks. Out of the major banks,
SHB and SEB have had the highest growth at around 8 per cent. In
2011 and 2012, the major banks' average annual net interest
increased by more than 10; significantly higher than the growth in
deposits and loans. State-owned SBAB has had an annual growth of
10.5 in their interest rate from 2007 to 2012, which has been
primarily driven by volume growth. The development of the net
interest for six of the largest players on the mortgage market is
illustrated in figure 8.
47
Irrespective of which financing strategy the banks choose, low
interest rates on deposits is a profitable business for the banks as it
increases their net interest.
Figure 8
Development of the net interest for Swedish retail
banking/operations 2007–2012, in SEK millions
18 000
16 000
14 000
SHB
12 000
Swedbank
10 000
Nordea
8 000
SEB
6 000
SBAB
4 000
Skandia
2 000
0
2007
2008
2009
2010
2011
2012
Source: The banks' annual report and websites (2007–2012).
2.3
Conclusions
Based on the information requested by the Competition Authority
and the deposit interest rates on the websites of the various market
players, it is clear, when looking at the market as a whole, that the
interest rate on deposits has only a minor influence on the
customer's choice of bank. The influx of customers to some of the
minor market players with a high deposit interest rate has
increased, but these players still represent a relatively small share of
the market. Most customers thus still choose to have their
transaction and savings accounts with the major banks, and often
48
with lower interest rates/less favourable terms than those offered by
many of the minor players. As deposits from the public and
households are a relatively cheap source of funds, the banks can
increase their net interest. An explanation for the banks' increase net
income in recent years is that they have increased their gross
margins and volume. This has resulted in a growing net income in
the major banks' Swedish operations.
49
3
Mortgage market
Roughly two thirds of Sweden's population live in houses or
cooperative apartments. Mortgages also constitute around 85 per
cent of banks' lending to households. This means that a large
proportion of households' fees are related to mortgage fees.
3.1
Players and concentration on the Swedish
mortgage market
At the end of 2012, the four major Swedish banks had a total
household mortgage market share of around 80 per cent. This is a
reduction since 2004 as the four major banks had a market share of
around 85 per cent.31 Other players are SBAB, Länsförsäkringar,
Danske Bank and Skandiabanken. There are also a number of niche
players, such as the credit market company BlueStep. They have
chosen to offer mortgages to consumers having difficulties being
approved for mortgages by the major banks on the grounds of e.g.,
a record for non-payment of debt. Despite an increase in the
number of players on the Swedish mortgage market over the past
ten years, the market concentration is relatively high with an HHI
index of around 1800. This could indicate that competition is less
effective. At the same time, it can be established that the market
concentration has reduced as a result of the three largest players –
SHB, Swedbank and Nordea – losing market shares. At the same
time, SEB and new, smaller players such as Länsförsäkringar, SBAB
and Danske Bank have taken market shares on the growing
mortgage market.
31
SCB (2013).
50
State-owned SBAB, which has focused on the mortgage market, has
had a market share of 7–8 per cent over the last few years. Figure 9
illustrates the division of market shares between the eight largest
market players for 2012 and 2004.
Figure 9
Market shares, mortgages to Swedish households per
bank,
2004 and 2012
35%
30%
25%
20%
15%
2004
10%
2012
5%
0%
Source: SCB (2013), 31/12/2004 and 31/12/2012.
3.2
Demand for mortgages
As mortgages have a long duration as a rule, the demand is not
solely dependent on factors that can be observed today. It is also
influenced by households' expectations on the future development
of the economy and housing prices. The demand for mortgages can
thus be expected to vary depending on a number of factors,
including the following:
•
Banks and housing credit institutions' rules for granting credit.
51
•
Households' disposable income and their expectations of the
future development of these.
•
The cost of lending and households' expectations of the future
development of mortgage rates.
•
Prices of small houses and cooperative apartments and
households' expectations of the future development of these.
•
How much of the supply of rental apartments is transformed
into cooperative apartments.
The mortgage market has long been a growing market. The demand
for mortgages has followed the housing price rise.32 Another factor
which has driven the increase in the demand for mortgages is the
fact that many rental apartments, primarily in metropolitan areas,
have been transformed into cooperative apartments in recent years.
A less secure economic situation has caused the housing price rises
to slow down. At the same time, harder regulations such as the
introduced mortgage ceiling have meant that the banks have
limited their lending.33 This has meant that the annual growth rate
for lending to households has slowed from nearly 16 per cent
during the period 2005–2006 to a rate of increase of around 4.5 per
cent in 2012 and early 2013. This is illustrated in figure 10.
32
The Riksbank (2012a).
33
The Swedish Financial Supervisory Authority (2010).
52
Figure 10
Swedish lending to households in SEK billions (columns
in SEK bn) and growth in per cent per year
2 500
20%
2 000
16%
1 500
12%
1 000
8%
500
4%
0
0%
2001
2003
2005
2007
2009
2011
Source: SCB (2013).
3.3
Mortgages for private individuals as a product
In Sweden, loans for private individuals' purchases of housing go
via banks and housing credit institutions. As security for the loan,
mortgage deeds on properties are used primarily. The lending takes
the form of a first mortgage loan, which means that the property is
normally borrowed on for up to 75–85 per cent of its market value.
Additional borrowing on the property can be in the form of a last
mortgage loan, which is often offered by the bank that owns the
housing credit institution. Mortgages often have a relatively low
interest rate compared with other household loans.
Mortgage ceiling – borrowing limitations
In October 2010, the Swedish Financial Supervisory Authority
introduced new rules for mortgages which mean that loans secured
53
on housing may only cover up to 85 per cent of a property's value.34
The reason this rule was introduced is that Swedish households'
indebtedness has increased in line with property prices since 1995.
The intention was to counteract further increases in indebtedness
and unsound lending on the mortgage market.35 It is however still
possible for households to take “unsecured loans”, i.e., loans with
no security. These loans often have a higher interest rate and harder
amortisation requirements.
Variable and fixed interest rates
In general, the consumer is faced with committing to a mortgage
with a choice of different terms (duration). Mortgage providers' listed
interest on mortgages varies depending on the term. Typical interest
rate commitment periods for mortgages are 3 months (which tends to
be characterised as variable interest), 6 months, 1 year, 2 years,
3 years, 5 years and 10 years. It is also common for the consumer to
choose to have several mortgages with different terms. This is in
order to safeguard against potential rises in interest rates. This entails
committing to a loan with a fixed rate so that the interest expense
remains constant during the commitment period, which typically
varies between three months and 10 years.
If we look at the total mortgage loan portfolio, it consists of a little
more than half of loans with a commitment period of 3 months. In
general, the fixed interest rates have been higher than the “variable”
rates as long-term financing is generally more expensive than short-
34
The Swedish Financial Supervisory Authority (2010).
35
The Swedish Financial Supervisory Authority (2010).
54
term. The average commitment period for new mortgages in the
period 2005–2011 was 1.4 years.36
Figure 11
Distribution of interest rate commitment periods for the
total mortgage loan portfolio, in SEK millions
100%
90%
80%
70%
60%
over 5 years
50%
1 - 5 years
40%
1 year or less*
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
* < 1 year: in principle, the entire portfolio has a term of 3 months
Source: SCB (2013).
Interest differential compensation
Consumers' division of mortgages into several housing loans with
different maturity dates facilitates risk diversification. At the same
time, dividing the loan into different commitment periods is
associated with costs as the Consumer Credit Act (2010:1846) gives
the bank the right to charge for interest differential compensation if
the customer prematurely redeems their fixed term loan. Interest
36
The Riksbank (2012b).
55
differential compensation is intended to compensate the creditor for
the loss they incur when the customer is no longer paying the
agreed interest on their fixed-term loan. The interest differential
compensation is calculated using a comparison rate which is
defined in the Consumer Credit Act and in instructions issued by
the Swedish Financial Supervisory Authority.
The interest differential compensation is a lump sum compensation
whereby the residual debt is multiplied by the difference between
the mortgage rate during the remaining term on the fixed-term loan
and a comparison rate. If the loan has a commitment period shorter
than one year, the comparison rate will be an amount correspondding to the treasury bill rate + 1 per cent. If the loan's commitment
period is one year or shorter, the comparison rate is the government
bond rate + 1 per cent. For calculation of the reference rate, we must
use the government bond that corresponds to the remaining
commitment period on the loan. The facility for customers to divide
the mortgage into several loans with different commitment periods is
of course desirable for many customers. At the same time, this
produces lock-in effects as the premature redemption of loans is
associated with the payment of interest differential compensation.
The premise is therefore that the reference rate is based on the
investment opportunities generally at the disposal of the creditor
and which are officially noted, which is therefore calculated as the
treasury and bond rates plus one percentage point. Calculations
show that interest differential compensation can come to large
amounts as the difference between the mortgage rate and the
reference rate has increased. Redeeming a loan of SEK 2m which
was taken out in December 2011 with a term of five years and a
fixed rate of 4.0 per cent, after a 30 point discount on the listed
56
interest, would cost the customer around SEK 140,000 in interest
differential compensation in May 2013.37
Several stakeholders have criticised the current model for
calculating interest differential compensation as they feel that it
means the banks are overcompensated and that it does not
accurately reflect the banks' alternative investment opportunities
and costs associated with the customer redeeming their mortgage
prematurely.38
At present, legislative work is underway in the Government Offices
with the aim of changing the calculation model for interest
differential compensation so that it is simpler and cheaper for the
customer to redeem fixed-term loans and thereby reduce the lock-in
effect that occurs when the customer chooses the term for their
mortgage. In a ministry memorandum from the Ministry of Justice,
Ränteskillnadsersättning m.m. vid bolån [Interest differential
compensation, etc. for mortgages] (Ds. 2013:38) from 14 June 2013, a
change of the calculation method is proposed in order to lay the
foundations for fairer compensation.39
Pricing mortgages – negotiating customer interest rates
Every day, the various banks advertise their current mortgage rates
for loans on houses, cooperative apartments and summer houses.
Information on these can be found on the banks' websites, in papers
and on a number of different online comparison services for
Calculation from the Swedish Consumers' Banking & Finance Bureau, “Konsumenternas
Vägledning om Bank och försäkring” *Consumer Guidance on Banking and Insurance],
based on SEB's and SHB's 10-year (fixed-term) rates, 25 April 2008.
37
38
See e.g., Villaägarnas Riksförbund (2013a), Dagens Industri (2012b).
39
The Ministry of Justice (2013), the Government (2012b), the Government (2013).
57
personal finances. The current rates published are the “listed
interest rates” and are not always the actual rates paid by the
customer following negotiation with the bank. Some banks, SBAB
being one example, do not offer individual negotiation on the
interest rate. The listed rate is the same as the customer rate.40
However, most banks employ individual pricing, which means that
the price of the mortgage is decided based on factors such as
security, the customer's risk profile and the customer's potential
total business with the bank. Customers who are able to have
greater total business with the bank by e.g., opening transaction
accounts and/or savings accounts, using the bank's debit card, or
opening or transferring fund and share investments are also more
likely to receive a greater discount on the listed interest rate and
thereby a lower customer interest rate. The discount received by the
customer is subject to a time limit and needs to be renegotiated with
the bank over time.
3.4
Banks' funding costs – sources of funds and risks
Since the 1970s, Swedish banks have gone from a financing model
based primarily on deposits from the public to a model based on
market financing. Mortgages are primarily financed by means of
the banks issuing covered bonds with various maturities in Swedish
Krona and in foreign currencies such as Euros and US Dollars.
Covered bonds in foreign currency are converted to Swedish Krona
via swap contracts or so-called “currency swaps”. Financing is also
possible via the issuance of a “certificate” with a short term, up to
one year. This is less common.
40
More information is available on www.sbab.se.
58
Covered bonds involve the buyers having future cash flows
(amortisations and interest payments) from disbursed loans as
security. These loans are known as the bond's collateral and the
holder of covered bonds has a special right of preference for capital
and accrued interest in the collateral.
Mortgages have a long term of around 40 years, whilst customers'
interest commitment period is significantly shorter. The majority of
financing is achieved via the issuance of covered bonds in Swedish
Krona. However, a considerable portion of financing comes from
the issuance of covered bonds in foreign currency. Once a credit is
granted, the credit may be included in the collateral, where the
credit is up to 75 per cent of the market value in relation to the
security. This applies to real property, site leasehold rights and
cooperative apartments intended for housing purposes. 41 This
means that the banks cannot solely finance mortgages by issuing
covered bonds. Remaining parts are financed via other sources of
funds such as deposits and senior debt. Some banks rely more on
market financing and others more on deposits from the public.
When banks finance mortgages, they need to manage various risks.
Even if roughly half of the banks' lending volume has short interest
commitment periods, their financing must have significantly longer
terms than this. If all financing was to be achieved via the issuance
of short-term securities, the banks would be forced to regularly turn
to the capital markets for renewed financing. The risk is that the
capital markets will be illiquid at this point in the future, which is
why it can be costly or even impossible for the bank to receive
compensation for a new security. This means that the bank is at risk
of entering a situation in which it cannot meet its obligations to the
holder of the previously issued security. This is known as a
41 Covered
Bonds (Issuance) Act (2003:1223).
59
liquidity risk. When the banks and housing credit institutions
finance a loan with variable interest and more long-term financing,
the bank receives interest payment from customers which follows
the 3-month rate whilst a fixed rate is paid on the long-term
financing. If the variable interest rate sinks to a level below that
prevailing at the time the bond was issued, the bank runs the risk of
entering a situation in which it cannot fulfil its obligations to the
holder of the bond without making losses. This is known as an
interest rate risk. The banks manage risks of this nature by entering
a “swap agreement”. A swap agreement, also known as an interest
rate swap, is in its simplest form an agreement in which two parties
“swap” interest rates with one another.
Stockholm Interbank Offered Rate (STIBOR)
If the banks perceive that they have a liquidity deficit, which can
arise when disbursing mortgages, they can loan from one another
via the interbank market. Loans between banks are governed by the
reference rate STIBOR.42It is calculated as an average of the rates
that the major banks offer one another.43 Similar sets of base interest
rates/reference rates are found all over the world, e.g., LIBOR,
TIBOR.44 STIBOR is determined daily for six different terms. Six
banks are represented on the STIBOR panel.
42
Stockholm Interbank Offered Rate.
43
The Riksbank (2012b).
44
HM Treasury (2012).
60
Problems with STIBOR
The Riksbank's report Riksbankens utredning Stibor45 [The Riksbank's
investigation of STIBOR] established that there were shortcomings
in the STIBOR framework. The shortcomings were primarily related
to management and control, but there were other shortcomings in
terms of the derivation of STIBOR from prevailing market pricing,
incentive structures and an ineffective process for determining
STIBOR. Furthermore, the Riksbank established that there were too
few collaborating banks. The Riksbank also established that there is
an incentive for the banks to influence bidding negatively and that
the bidding process is inefficient. Bidding takes place openly, which
means that the banks can see one another's bids during the bidding
process itself. This in turn opens up for strategic bidding. The
Riksbank realised that this provides incentive for the banks to
influence each other, which in turn leads to the risk of “follow the
leader” behaviour by which the banks place the same or similar
bids.
Another shortcoming pointed out by the Riksbank is that the banks
are not forced to take responsibility for their bids. They are able to
change their bids during the bidding process. One proposal put
forward by the Riksbank is that the banks' bids should be binding,
meaning they are obligated to loan or invest at this rate.
In order to address a number of the problems with how STIBOR is
determined, a new STIBOR framework was drawn up by the
Swedish Bankers' Association together with the four major banks
and Danske Bank. This means that the Swedish Bankers'
Association assumes overall responsibility and is the principal for
STIBOR. The new framework is in use as of 04 March 2013.
45
The Riksbank (2012c).
61
According to the Swedish Bankers' Association, this framework shall
ensure a clearer structure and control, as well as transparency in the
determination of STIBOR. The Riksbank and Nasdaq OMX have
been and are still at present observers in the work. Länsförsäkringar
is also included in the STIBOR panel as of 04 June 2013.46
The banks' internal pricing47
The individual bank's funding costs therefore vary depending on
how large a share of the various sources of funding constitute and
how the banks decide to price funding from deposits internally.
Banks' treasury management departments are often responsible for
financing and managing currencies and interest rate and liquidity
risks. They determine the banks' IRR, which is an internal price for
financing which governs the banking offices' pricing of mortgages,
on a daily basis.48 The IRR not only governs the interest rate that the
bank offers to its customers. It functions as a borrowing cost at
which a banking office can loan money from the head office.
The banks' IRR is therefore governed by its financing strategy.
Based on the interest rates they can pay for their borrowing, they
decide their IRRs. Even the manner in which banks choose to price
deposits affects the IRR. In principle, these can be priced as the
interest rate the bank actually pays or based on the alternative cost,
which in turn can be based on STIBOR. The financing cost also
includes costs for managing various risks associated with financing.
46
The Swedish Bankers' Association (2013c).
47
Different banks use different models to determine the internal rate of return (IRR).
62
3.5
New regulations that may affect the banks' funding
costs and strategies
The Ministry of Finance, the Riksbank (Sweden’s central bank) and
the Swedish Financial Supervisory Authority have determined that
Sweden needs to go further than the Basel Committee's agreement
of 2010 and the European Commission's proposed ordinance on
capital adequacy and liquidity in order to warn about stability in
the Swedish financial system.49 The new capital adequacy
regulations for Swedish banks entail that the banks should have at
least 7 per cent in Common Equity Tier 1 from 2014. In addition to
this, the four major Swedish banking groups SHB, Nordea, SEB and
Swedbank must have a further mark-up so that their Common
Equity Tier 1 amounts to at least 10 per cent of their Risk-Weighted
Assets (RWA) from 2013 and 12 per cent from 2015. According to
the Swedish Financial Supervisory Authority, the major banks
already meet the requirements in terms of the Liquidity Coverage
Ratio (LCR).
Increased risk weights for mortgages
In order to strengthen the financial sector with regard to its credit
exposures, a risk weight floor of 15 per cent will be introduced for
Swedish mortgages in 2013. The risk weight floor will be
introduced in the scope of the Swedish Financial Supervisory
Authority's supervisory measures. In general terms, the measure
means that Swedish banks will need to set aside 15 per cent of every
Krona lent on a mortgage. One question is how the new regulations
affect competition on the mortgage market. According to the
Swedish Financial Supervisory Authority, the measure affects the
49
The Swedish Financial Supervisory Authority (2011b).
63
capital requirements for mortgages in two ways, each of which can
be relevant for competition on the mortgage market. 50 First of all,
the capital requirement will be higher for most players concerned,
which affects competition between companies. Secondly, the
marginal capital requirement for the players who currently have
average risk weights below 15 per cent is the same for each new
mortgage. This can affect competition in different market segments.
Overall, the Swedish Financial Supervisory Authority deems the
impact on competition between companies to be small. The banks
that have not previously used the Swedish Financial Supervisory
Authority's recommended measures and that have not had an
average risk weight floor of 15 per cent in the current situation may
need to increase the capital requirement. This can in turn affect
mortgage pricing for these banks.
How do the new regulations affect banks' mortgage costs?
The Swedish Financial Supervisory Authority writes in its report
Bankernas räntor och utlåning [Bank interest rates and lending]51 that
Swedish credit institutes have already to a large extent adapted to
future requirements for capital adequacy and access to liquidity.
The higher requirements entail a certain cost to the banks, whilst at
the same time contributing to a more stable financial system.
According to the Swedish Financial Supervisory Authority, the new
regulations can affect costs in different ways. If Swedish banks are
seen as well-capitalised and stable, they can gain access to cheaper
financing. More capital should also involve a reduction of
shareholders' required yield. However, the latter has been heavily
challenged by the Swedish Bankers' Association, for example, as
50
The Swedish Financial Supervisory Authority (2012b).
51
The Swedish Financial Supervisory Authority (2012a).
64
higher capital adequacy requirements do not necessarily lead to
increased shareholder value and decreased risk per se.
Gross and net margins for mortgages
Banks' gross margins on mortgages consist of the difference
between the interest they receive on the mortgage from customers
and the funding cost. The banks' net margin is calculated based on
the gross margin, with deductions for capital costs. They are
governed by capital adequacy regulations, costs for maintaining
liquidity, credit losses and costs for running the business, i.e.,
personnel and office costs, IT and overhead.
Customer interest rate – listed interest and negotiation of
discounts
A mortgage is in many respects a homogeneous product. In the
end, it is a matter of the institute paying money to the borrower,
who in return puts up a cooperative apartment or property as
collateral. The borrower commits to paying interest and
amortisations to the banks or housing credit institutions. The banks
and the housing credit institutions advertise their interest rates
daily on their websites, which are published in daily papers and on
a number of online comparison services. The banks' official rates for
various terms tend to be called listed interest rates. The rate paid by
the customer is known as the customer interest rate. It is often lower
than the listed interest rate as the customers negotiate a discount
with the bank.
In Sweden, strategies differ from one bank to the next in terms of
organisation and management, and consequently the pricing model
also varies. Some banks have a more centralised interest rate and
65
discount policy, whilst others work to a decentralised
organisational model. SHB, for example, is a bank which has for a
long time worked to a decentralised model in which each
individual banking office is given a great deal of responsibility for
pricing and discounts.
The mortgage rates that the customer will pay are determined by
the IRR announced by the treasury management department. But it
also depends on the size of the loan in relation to the value of the
property, the customer's risk level and the other commitments the
customer has in the bank. This means that the importance of the
individual customer and the scope of deposits and fund and
pension investments have a direct effect on the mortgage rate when
a new loan is taken out. The advantage for the bank in establishing
a relationship over time with customers is increased revenues. At
the same time, the bank gains a better overview of the customer's
risk profile and needs. It is therefore important for the customer to
understand the impact that negotiation has on the mortgage rate.
3.6
Discount on listed interest as a competitive device
So we see there is a difference between the rate advertised by the
banks and the rate that the customer will actually pay. It is therefore
important to differentiate between these when analysing competetion on the mortgage market. The bank with the lowest listed
interest rate does not necessarily offer the lowest customer interest
rate. Based on information obtained by the Competition Authority
from the banks, it can be established that the banks provide a
discount on the listed interest rate, as illustrated in figure 12.
66
Figure 12
Average listed interest rate and customer interest rate,
3-month term, for the period 2001–201152
6,00
5,00
Lsted
interest
rate
4,00
3,00
Costumer
interest
rate
2,00
1,00
2001
2003
2005
2007
2009
2011
Source: KKV's own calculations of the banks' responses.
Figure 12 shows that the pricing of mortgages has an element of
negotiation between customer and bank as the banks' average
customer interest rate is lower than the average listed interest rate.
The figure shows clearly that there is room for negotiation on
discounts on the banks' listed interest rates. At the same time, the
average discount has remained relatively constant over time,
around 0.15 per cent or 15 points below the average listed interest
rate. The discount on the listed interest has thus been fairly
constant, irrespective of the gross and net margins on mortgages
reported by the banks over time.
See Appendix figure B1 and figure B2 for average listed and customer interest rates for
terms of two and three years.
52
67
The discount on the listed interest is one of the more important
competitive parameters when customers negotiate with the banks
over new mortgages. The negotiated discount is subject to a time
limit. This means that the customer must continuously negotiate the
terms and conditions and the discount on the listed interest with
the bank.53
There are indications that the discount decreases or disappears
altogether if the customer does not actively negotiate with the bank.
A survey carried out by Villaägarnas Riksförbund (Swedish
Homeowners Association) in February 2013 revealed that 36 per
cent of mortgage customers have had previously negotiated
discounts removed by their bank. Of these, 83 per cent said that the
bank in no way informed them that the discount had been
removed.54 The survey also showed that all of 53 per cent of those
who lost their discount regained it following renegotiation. This
does not mean that the banks can be accused of misconduct from a
contractual perspective. But it indicates that customers who are not
active in negotiations risk losing the discount they initially
negotiated.
Information asymmetry when negotiating the mortgage
rate
The element of negotiation means that the mortgage market is not
transparent. As the banks' listed interest rates only constitute a
ceiling in the negotiation, and as the banks do not provide a clear
explanation of their discount policies, it is difficult and timeconsuming for customers to compare different banks' mortgage
53
Villaägarnas Riksförbund (2013a).
54
Villaägarnas Riksförbund (2013a).
68
rates. If negotiations are to lead to a successful result, both parties
are often required to have access to necessary information on each
other's preferences and financial framework and conditions. When
granting credit, however, the distribution of information is often
uneven, which gives rise to information asymmetry. Information
asymmetry leads to an imbalance between the parties. It allows the
party with more information to gain a better result at the expense of
the other party.
If the mortgage customer is to achieve a desirable result, it is
important for them to have access to information on how much
space for negotiation they have. In principle, this consists of the
difference between listed interest rates and the funding cost, and
what discounts are available to the customer with consideration for
their risk profile and total business with the bank. There are
however a number of problems associated with this at present. One
circumstance is that the banks do not have a common way of
reporting their mortgage margins, though a more pressing issue is
the differences between the listed interest rates and the funding
costs. Where the difference between STIBOR and the funding costs
has increased, it has also been more difficult for mortgage customer
to determine the banks' margins on the listed interest rates.
Furthermore, the mortgage customers do not have access to the
banks' discount policies, which makes it difficult to know what
customer interest rates the different banks offer. Overall, this means
it is difficult for mortgage customers to know how much room for
negotiation they have and what the potential bargaining margin is
for the mortgage.
3.7
Price competition on the mortgage market
The Swedish mortgage market is showing signs of weak
competition, as the market concentration is high and the banks'
69
business models reduce consumer mobility and thereby the
consumers' price sensitivity on individual services. As the customer
interest rate for mortgages is linked to the banking customer's entire
business with the bank and as there is an interest differential
compensation, the customers will have limited incentive to switch
mortgage supplier, even where lower mortgage rates are offered.
This means that competition on the mortgage market is often a
matter of attracting new customers. As the pricing of customer
interest rates includes an element of negotiation, consumers will
need more time to identify which market player offers the lowest
customer interest rate. The customer is sometimes required to
become a “regular customer” before mortgages and discounts can
be granted. Packaging services makes it difficult for customers to
compare alternatives, which further contributes to reduced
customer mobility. Low customer mobility provides the established
banks with a certain degree of market power.
From the material analysed by the Competition Authority, it can be
established that the banks have increased their gross margins. There
are several possible explanations for the fact that the banks' have
been able to increase their margins. One explanation is that they
have become more effective and that every bank acts rationally,
based on prevailing market conditions. Another possible
explanation is some form of implicit or explicit coordination on the
mortgage market. In the former case, the market players do not
communicate with one another directly and yet, as a result of
frequent interaction, they still manage to have some level of
coordination which in terms of market outcome resembles a cartel,
which means higher prices and lower bids than would be found in
better competitive conditions. In the latter case, the banks are able
to raise gross margins via direct communication with one another.
70
Potential for implicit coordination on the mortgage market
The border between implicit and explicit coordination is of course
not always clear. Both types require a way for the market players to
monitor the market outcome and a sanction mechanism which
facilitate the penalising of players who do not adhere to the
agreement. The more transparent a market is in terms of prices,
volumes or market shares, the easier it is for players to detect a
deviation from the agreement. One type of sanction mechanism is a
price war, by which all players' margins and profits go down
considerably.
Price trend for listed interest
The transparency of the mortgage market is in some respects very
high - market participants are stable and few in number. The listed
interest rates are posted on the banks' websites. Monthly information on the size of each bank's loan stock – categorised by loans to
private households, loans to companies and loans to non-profit
companies – is available in SCB's statistics on the financial market.
Note that these statistics do not contain individual banks' interest
rates. If we assume that the banks' listed interest rates are definitive,
pricing is transparent and can be followed by third parties.
Though listed interest rates are not the rates paid by the customers
in the end, the listed rates play an important role on the market.
They reflect banks' financing costs, are an important marketing tool
and also constitute a basis for negotiation for the customers. In
order to analyse the players' pricing, margins and actions on the
mortgage market, it is important to take both listed and customer
interest rates and the banks' financing costs into consideration.
71
Table 4 is based on information that the Competition Authority
requested from housing credit institutions. The table illustrates the
banks' average individual listed interest rates and the average
interest rate for the players offering the lowest and highest interest
rates for the period 2001 - 2011.
Table 4
A summary of the average listed interest rate for the
period 2001–2011, 3-month interest (”variable”)
Listed interest rate
Min
Av
Max
2001
4.90 %
5.42 %
5.69 %
2002
5.24 %
5.53 %
5.77 %
2003
4.22 %
4.44 %
4.79 %
2004
3.19 %
3.33 %
3.80 %
2005
2.50 %
2.83 %
2.85 %
2006
3.16 %
3.28 %
3.85 %
2007
4.27 %
4.44 %
4.92 %
2008
5.17 %
5.44 %
5.50 %
2009
1.97 %
2.01 %
2.04 %
2010
2.05 %
2.09 %
2.11 %
2011
3.95 %
4.00 %
4.40 %
STIBOR source: KKV's own calculations of the banks' responses.
What the Competition Authority can establish is that the variation,
measured as standard deviation in the banks' listed interest rate,
has varied over time. One pattern, as illustrated in figure 13, is that
the variation in the listed interest rate was higher between 2002 and
2007 than from 2008 to 2011. At the same time the variation sank,
the growth rate on mortgages decreased during the period, falling
from around 14–16 per cent annually between 2003 and 2005 to
around 4.5 by 2011–2012. There is no single explanation for the
variation in the banks' listed interest rates being lower since 2007
and the pricing pattern changing.
72
Figure 13
Variation (standard deviation) banks' average listed
interest rate, 3-month term
0,30%
0,20%
0,10%
0,00%
2001
2003
2006
2009
Source: KKV's own calculations of the banks' responses.
The listed interest rates reported by the banks have varied over
time, as shown in figure 13. At the same time, it can be proven that
the variation has decreased in recent years, as the various banks'
listed interest rates have been more similar since 2007. This applies
not only to the 3-month interest rate but also the rates for fixed
terms of two and five years (see appendix, figures B3 and B4). A
reasonable explanation is that insecurity on the financial market,
new regulations and a lower growth rate in the demand for
mortgages have led to a less dynamic price competition. The fact
that the banks' listed interest rates are becoming more similar may
be a sign that competition has increased during this period. What
seems to disprove this theory is that, as established later on in the
report, the banks have been able to increase their margins during
the same period. Over and above these explanations, the question
73
can be asked as to whether this may be an indication of some form
of coordination on the pricing of mortgage rates.
Where interest on mortgages is concerned there are, as previously
mentioned, elements of negotiation between institution and
borrower when a new loan is taken out. The incidence of such
negotiations is a factor which makes it difficult to achieve
coordination on prices. As the results of the negotiations are
generally not open to observation for other market players, there is
ample opportunity for deviations from any implicit agreement
without the risk of penalisation. Therefore in order to analyse
whether there are signs of exclusive coordination on the mortgage
market, we cannot work from the listed interest rates. We should
instead work from the banks' customer interest rates, which are not
advertised on the market. It is also the customer interest rate that
determines banks' gross and net margins on mortgages.
3.8
Banks' mortgage margins
As previously discussed, high profitability and high product
margins can be a sign of inadequate competition or significant
barriers to entry on the market. Many stakeholders believe that the
fact that the banks have been able to increase their net interest and
profitability is the result of a lack of competition, and that above all
the major banks have been able to use their market power.
For this reason, the Competition Authority has requested
information on the banks' gross margins on mortgages for the
period 2001–2011, as part of the survey. One phenomenon observed
is a significant increase in the difference between mortgage rates,
the banks' reference rates and the Riksbank's repo rate. At the same
time, it has been noted that the Riksbank's reductions of the repo
74
rate have not been reflected in corresponding reductions of
mortgage rates.
The banks explain that the greater difference between mortgage
rates, STIBOR and the repo rate is a result of the 2008 financial
crisis, which resulted in increased liquidity costs for the banks.
Prior to the crisis, the banks were able to finance their mortgages at
a cost that was more on a level with STIBOR. When the financial
crisis hit, liquidity on the market decreased. This meant that
liquidity costs and long-term financing became more expensive and
that the difference between the banks' financing costs and STIBOR
increased.
Figure 14
3-month difference between the listed interest rate, the
average funding cost, STIBOR 3M and repo rate55
7,00
6,00
5,00
Listed interest rate
4,00
Funding cost
3,00
STIBOR 3M
2,00
Repo
1,00
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2001
0,00
Source: KKV's own calculations of the banks' responses.
See appendix, figures B5 and B6 for mortgages on commitment periods of two and five
years respectively.
55
75
Increased gross margins on mortgages
The Competition Authority has calculated the gross margins on
mortgages for terms of 3 months (“variable”), 2 years and
5 years.- The Competition Authority bases its calculations on the
banks' reported funding costs for the period 2001–2011. As the
banks do not have a common model for calculating funding costs,
there is a degree of uncertainty concerning comparisons of their
gross margins. It should however be emphasised that the
Competition Authority's purpose is primarily to follow the
development of gross margins on the mortgage market over the
studied period, and the flexibility among the banks in terms of
interest rates.
The gross margins are calculated as the difference between the
banks' reported average customer interest rate on mortgages and
the funding costs. As previously emphasised, the banks' models for
calculating funding costs differ. This is because the banks use
different financing strategies and sources of funds, but also because
they make use of different management and calculation models
when calculating funding costs.
The Competition Authority is able to establish that the banks'
average gross margins for both variable and fixed-rate mortgages
have increased between 2009 and 2011. This increase has continued
in 2012 and 2013.56 Figure 15 shows the development of the banks'
average gross margins for mortgages with 3-month (“variable”),
2-year and 5-year commitment periods. As the banks have also
focused on increasing efficiency and reducing their costs during the
same period, the net margins have also increased during this
56
The Swedish Financial Supervisory Authority (2013), The Riksbank (2012a).
76
period. This is in line with the Swedish Financial Supervisory
Authority's assessments.57
Figure 15
Gross margin; 3-month, 2-year and 5-year mortgages
Source: KKV's own calculations of the banks' responses.
The fact that the banks have been able to increase their margins on
mortgages may be a sign that competition could be improved. In
order to analyse the pricing of customer interest rates, the
Competition Authority has performed a study of who offers the
lowest average customer interest rate on a day-to-day basis, and
who is the first to lower or raise the customer rate in the event of
changes in financial costs on the market. This facilitates analysis of
how the prices have changed and the price strategy adopted by
various banks over the years. Part of the analysis is a matter of
determining whether one particular bank has acted as the price
leader, which could enable implicit coordination on the market.
57
The Swedish Financial Supervisory Authority (2013).
77
Price leadership on mortgages
On an oligopolistic market, coordination can be facilitated by one
market player acting as the price leader and others following their
actions, with the purpose of increasing profitability for all players.
The price leader may be a dominant player or the company with the
lowest production costs, or whose prices are reflected well in the
market conditions.
The Competition Authority has focused on analysing price
leadership on 3-month interest rates (variable) as 50–68 per cent of
the value of the mortgage stock since 2005 has had a term of
3 months. Where 3-month mortgages are concerned, all of the banks
studied have at some point acted as the price leader offering the
lowest customer interest rate on the market. There is however a
significant difference in when and how often the different banks act
as price leader. Figure 16 illustrates how often (percentage of the
number of days) various banks have acted as the price leader for
3-month interest rates during the period 2001–2011. It is clear that
some banks have been more active when it comes to offering the
lowest customer interest rates. Even though several banks have
acted as the price leader, their actions have varied throughout this
period.
78
Figure 16
Price leadership, customer interest rate 3-month interest as
a per cent of the number of days 2001–201158
30%
20%
10%
0%
Bank A
Bank B
Bank C
Bank D
Bank E
Bank F
Bank G
Source: KKV's own calculations of the banks' responses.
As with listed interest rates, the Competition Authority is able to
establish that the pricing pattern has changed during this period. In
2006, six different banks acted as price leaders at different times.
The bank that was price leader for the most days led for 42 per cent
of the period. In 2011, only two banks acted as price leader, and one
of these was the price leader for 97 per cent of the period. Figure 17
illustrates the percentage of days that various banks acted as price
leader. What can be established is that a change has occurred
following the 2008 financial crisis. It is therefore mostly one bank
that has acted as the price leader (bank B). This bank offered the
lowest customer interest rate 97 per cent of the days in 2011.
See appendix, figures B7 and B8 for mortgages on commitment periods of two and five
years respectively.
58
79
Figure 17
Price leadership, customer interest rate 3-month rate
2005–201159
100%
90%
80%
Bank A
70%
Bank B
60%
Bank C
50%
Bank D
40%
Bank E
30%
Bank F
20%
Bank G
10%
0%
2005
2006
2007
2008
2009
2010
2011
Source: KKV's own calculations of the banks' responses.
The fact that the variation in the listed interest rate has reduced, as
has the number of players acting as price leader in 2010 and 2011
for mortgages with a term of 3 months (which constitutes a larger
share of the market), may be an indication that price competition
has decreased. This may be related to the reduction of the growth
rate on the mortgage market and the fact that there are simply
fewer new customers to compete for. Focus is on profitability rather
than growth. As previously mentioned, smaller differences in price
may be a sign that competition has improved and/or that customers
have become more active. What may seem to disprove this is that
the banks have been able to increase their gross margins on
mortgages. For a number of players with a large market share, there
See appendix, figures B9 and B10 for mortgages on commitment periods of two and five
years respectively.
59
80
should be a lack of incentive to focus on price competition. Growth
cannot compensate for a decrease in profitability if the bank chooses
to lower its prices and margins. This may also be a rational reaction
as capital and liquidity requirements are becoming ever higher.
There are therefore several factors that may have led to a decline in
price competition on the mortgage market and meant that the banks
chose to focus on increasing their margins, instead of competing on
price for new market shares. In figure 18, we see that during
periods of more intensive price competition, where more players
acted as the price leader, and during periods of rapid growth on the
mortgage market, the gross margins have also decreased. During
the 2008 financial crisis, the gross margins dropped considerably as
a result of ever increasing funding costs in the form of higher costs
for liquidity.
On a market where the sellers have market power, buyers will not
generally be able to gain the full benefit of cost savings. This applies
not least on a market where buyer power is weak and where
consumer mobility is limited by indirect and direct switching costs.
The Competition Authority has performed another analysis of the
banks' pricing. This time it looked into how different banks reacted
to changes in financing costs and how this affects customer interest
rates and thereby the banks' gross margins. In order to look into
this, an analysis was made of how banks' customer interest rates
were changed/adjusted following a change of STIBOR 3M (months),
which is a reflection of the banks' financing costs. The premise is
that the more banks follow each other's pricing in the event of a
change in financial costs, the stronger the indication that there is
some form of coordination on the market. This may be implicit or a
market logic that has developed over time on a market
81
characterised by stability, high market concentration and a
homogeneous product.60
Several international studies have revealed that there is a tendency
towards asymmetric price transmission on the mortgage market.
This means that the players quickly raise their prices when
financing costs go up. At the same time, they prefer to wait with
lowering their prices, or avoid it entirely, when financing costs go
down.61 This behaviour is often explained by a lack of competition,
which allows the banks to raise their prices without the risk of
losing demand or revenues.
The Competition Authority has therefore looked into how the
Swedish banks react to a change in financing costs. The premise is
that STIBOR reflects the banks' financing costs and thereby has a
direct impact on customer interest rates. Figure 18 illustrates how
many days pass for various banks before a change in STIBOR has
an impact on their customer interest rates. An interesting point of
study is how the various banks act and if patterns differ from one
bank to the next.
60
See e.g., Hirata & Matsumura (2008).
61
See e.g., Toolsema & Jacobs (2007).
82
Figure 18
Banks' changing of 3-month customer interest rates in the
event of a change in STIBOR – number of days (2001–
2012)
100%
80%
Bank A
Bank B
60%
Bank C
Bank D
40%
Bank E
Bank F
20%
Bank H
0%
-1
1
3
5
7
Source: KKV's own calculations of the banks' responses.
In figure 18 we can see that most banks react quickly to a change in
STIBOR and that the increase in most banks could have a 80–100
per cent impact after around three days. At the same time, it can be
established that Bank B, for example, which was previously
identified as a price leader, reacts more cautiously in the event of a
change in STIBOR. Overall, this shows that Bank B is a player that
distinguishes itself both in terms of pricing and how it reacts to a
change in STIBOR.
This indicates that it is possible to identify players on the market
that compete on price and that have growth as an ambition. There is
however a tendency for the price competition to decrease in
intensity in recent years, which may explain the increased margins.
The causes for this likely include the financial crisis, higher capital
and liquidity requirements and a reduction of the growth rate for
83
mortgages. This may mean that there is an incentive for a number
of the banks to focus on retaining and developing existing customer
relationships instead of competing on price and focusing on growth
on the mortgage markets. Despite the small credit losses, growth is
connected to both a financial and operational risk and requires
investment in additional capacity.
Price and market signalling facilitate coordination
The more transparent a market is, the better the conditions for
monitoring the market outcome. It is thereby easier for the players to
achieve coordination on the market. If deviations from the agreement
are to be detectable, the market's players must be able to monitor
competitors' prices, volumes or market shares. In many respects,
there is a high degree of transparency on the mortgage market. The
market's players are stable and few in number, and a large
proportion of the customer base has low mobility due to indirect and
direct switching costs. This means that the mortgage market is a
market on which coordination between the players could work well.
In several countries, competition authorities have noted the risk of
market and price signalling on a number of markets; not least on the
mortgage and deposit markets. Australia was the first country in the
world to introduce a ban on price signalling in the banking sector, via
an amendment to the Competition and Consumer Act 2010 which
was effective from 6 June 2012.
84
This Australian act contains two bans:
(i)
a per se ban on the practice of privately revealing prices to
consumers outside of normal business activities
(ii)
a general ban on (privately or publicly) revealing information
(e.g., prices, discounts, capacity, commercial strategy) with
the intention of significantly weakening competition on the
market62
The Australian competition authority has issued guidelines for
application of the act.63 The guidelines clarify that the general ban
entails a ban on price signalling. They include the example that a
leading representative for Bank A signals that the bank does not
intend to reduce their interest rates in order to test competitors'
reactions. In another example provided, a leading representative for
a bank announces at a banking sector conference that the bank is
not willing to make greater interest rate increases than those of the
Riksbank, or to introduce new fees. The general ban does not,
however, prevent banks from publishing consumer prices in e.g.,
newspapers.
There are indications that major players have signalled their market
strategies and prices on the Swedish mortgage market. In spring
2012, one of the major players on the mortgage market went to the
daily press and informed them of its future marketing strategy and
pricing.64 The bank announced that it would focus less on growth
and competition for new customers and instead focus on increasing
The new legislation was consolidated by the Australian Competition & Consumer
Commission (2012b).
62
63
Australian Competition & Consumer Commission (2012a).
64
Dagens Industri (2012a).
85
mortgage margins. The bank also signalled that it did not intend to
focus on lower prices, which were earlier an important competitive
parameter, and instead has followed the other banks and increased
margins. This type of information can of course make it easier for
other banks to act. This is particularly true on a market where the
growth rate in terms of demand has decreased and where much of
the customer base has a low mobility due to indirect and direct
switching costs.
Loans with different terms and interest differential
compensation create lock-in effects and can increase
banks' margins
In order to reduce the interest rate risk, customers are often
recommended to divide the mortgage into several mortgages with
different terms at a fixed interest rate. As shown in figure 11, a large
percentage of mortgages have an interest commitment period of one
year or more. The facility for customers to divide the mortgage into
several loans with different terms is of course desirable for many.
With loans divided into different terms, however, it will not be free
for the customer to switch to a bank offering better terms and
conditions. To move the entire loan to a different bank, interest
differential compensation must be paid for the “fixed” part. The
interest differential compensation is a form of compensation for the
bank for the revenue lost as a result of premature termination of the
contract. In the same way, it may often be advantageous in times
where interest rates are low to redeem loans early in favour of new
terms and conditions, whether within the same bank or at a
competing bank. High interest differential compensation reduces the
incentive for the customer to redeem their fixed loan and switch
bank. When the difference between the mortgage rates and the
reference rate increases, so does the interest differential
compensation.
86
The premise is therefore that the reference rate is based on the
investment opportunities generally at the disposal of the creditor and
which are officially noted, which is therefore calculated as the
treasury and bond rates plus one percentage point. Calculations
show that interest differential compensation can come to large
amounts as the difference between the mortgage rate and the
reference rate has increased.
Redeeming a loan of SEK 2m which was taken out in
December 2011 with a term of five years and a fixed rate of 4.0 per
cent, after a 40 point discount on the listed interest, would cost the
customer around SEK 140,000 in interest differential compensation
in May 2013.65
A mortgage customer paying compensation for lost revenue as a
result of a prematurely terminated contract may be considered a
normal part of a mortgage agreement. When there is a clear
flexibility between the government bond rate and the mortgage
rates, the interest differential compensation will not be as high.
Changes on the financial markets in recent years have however led
to a reduction of flexibility between the government bond rate and
the mortgage rates and an increase in the difference (“spread”)
between the mortgage rates and the reference rate. This means that
the comparison rate has during certain periods been significantly
lower than the mortgage rates, which in turn leads to an increase in
the amount of interest differential compensation.
Calculation from the Swedish Consumers' Banking & Finance Bureau, “Konsumenternas
Vägledning om Bank och försäkring” *Consumer Guidance on Banking and Insurance+,
based on SEB's and SHB's 5-year (fixed-term) rates, December 2011.
65
87
Several stakeholders have criticised the current model for
calculating interest differential compensation. It produces lock-in
effects and does not accurately reflect banks' alternative investment
opportunities and costs associated with the customer redeeming
their mortgage prematurely.66 At present, legislative work is
underway in the Government Offices with the aim of changing the
calculation model for interest differential compensation so that it is
simpler and cheaper for the customer to redeem fixed-term loans
and thereby reduce the lock-in effect that occurs when the customer
chooses the term for their mortgage. In a ministry memorandum
from the Ministry of Justice, Ränteskillnadsersättning m.m. vid
bolån [Interest differential compensation, etc. for mortgages] (Ds.
2013:38) from 14 June 2013, a change of the calculation method is
proposed in order to lay the foundations for fairer compensation.67
As lock-in effects limit competition, it is highly important that the
matter is looked into.
It should be noted that the banks may, if they so wish, charge
interest differential compensation in accordance with the
instructions found in the Consumer Credit Act and the Swedish
Financial Supervisory Authority's guidelines, if the customer
redeems a mortgage prematurely. They are not obliged to use this
calculation model; it simply provides a ceiling for interest
differential compensation. This means that the banks could use a
model that is more favourable for the customer in their marketing.
The Competition Authority can establish that none of the banks
seem to take advantage of this opportunity today.
66
See e.g., Villaägarnas Riksförbund (2013b), Dagens Industri (2012a).
67
The Ministry of Justice (2013), the Government (2012b), the Government (2013).
88
3.9
Conclusions
The Competition Authority is able to establish that the gross
margins on mortgages were at their highest during the period 2001–
2003. From 2003 to 2008, the gross margins fell and smaller players
were able to take market shares away from established major banks.
However, since 2009 the gross margins have been increasing.
Increased gross margins and reduced variation in the banks' listed
interest may signal a decreased level of competition on price in
recent years, as well as a weakened bargaining position for the
customers. In a market where banks have market power, customers
will not generally be able to gain the full benefit of cost savings. In
real terms, this means that the decreased funding costs have not
penetrated fully into the mortgage interest rates. However, there
are several factors that the banks must consider when competing
for new mortgage customers. The anxiety in the financial markets,
increased capital and liquidity requirements and the decreased
mortgage growth rate may be the reasons behind the reduction in
dynamic price competition. Instead of focusing on growth in terms
of market shares, there are incentives for several of the banks to
focus on keeping their market shares and developing their existing
customer relationships. Despite the small credit losses on Swedish
mortgages, growth is connected to both a financial and operational
risk, as it may require investment in additional capacity.68
Following the financial crisis of 2008, the difference between
mortgage interest rates and STIBOR and the repo rate has
increased, and the use of various financial instruments has become
increasingly important for the banks when borrowing. This means
that it is more difficult for an individual customer to estimate the
funding costs of the banks and thereby assess the space there is to
68
The Swedish Financial Supervisory Authority (2013), The Riksbank (2012a).
89
negotiate or haggle over the mortgage interest rate. The information
asymmetry between bank and customer can thus be said to have
increased. The fact that the banks do not all use the same method to
report their funding costs does not make a comparison between
them any easier.
Another important question is whether the increased gross margins
can be explained by any form of coordination in the mortgage
market. Coordination does not need to be explicit. It can instead be
a matter of implicit coordination that has developed on the market.
All of the banks in the study have, at some point, acted as the price
leader offering the lowest customer interest rate on the market.
There is however a significant difference in when and how often the
different banks have acted as price leader. It is clear that some
banks have been more active when it comes to offering the lowest
customer interest rates. Even if several banks have been the price
leader, their actions have varied over the period. The banks that
have most frequently acted as the price leader in the mortgage
market have generally also had a more explicit and signalled
growth ambition.
90
4
The fund market
The analysis of the fund market has been performed based on data
relating to the period 2001–2011.69 The Competition Authority's
primary intention with the auditing of the fund market has been to
find out whether measures are required to achieve more effective
competition on the fund market.
4.1
Swedish fund investment savings
The proportion of the Swedish population investing in funds has
seen a great increase over time. In the mid-1990s, the proportion
was around 50 per cent. Today, if we include the premium pension,
everyone in the age group 18–74 invests in funds. The proportion of
people investing in funds excluding the premium pension is 76 per
cent. In addition, six of ten children have fund investment savings.70
Such measures include data on administration fees and costs for a number of funds
(Sverige, Sverige index, Europa and Global), 2001-2011. Fund companies participating in the
study include AMF Fonder AB, Handelsbanken Fonder AB, Länsförsäkringar
Fondförvaltning AB, Nordea Fonder AB, SEB Investment Management AB, Skandia Fonder
AB, SPP Fonder AB and Swedbank Robur Fonder AB.
69
70
The Swedish Investment Fund Association (2012a).
91
Figure 19
Proportion of Swedish people with investment savings,
per cent
100
70
40
2000
2002
2004
2006
2008
2010
2012
Source: The Swedish Investment Fund Association (2012a).
The high proportion of people with investment savings among the
Swedish population is exceptional when put in an international
context. No country in the world beats Sweden in terms of the
proportion of the country investing in funds.71
Each year, TNS Sifo Prospera conducts an extensive poll on fund
investment savings, on the Swedish Investment Fund Association's
commission.72 The 2012 report showed that 62 per cent of those
investing privately in funds are saving to create a buffer of available
capital for future expenses, whilst 46 per cent are saving for their
pension. Over a third see fund investment savings as a supplement
to other savings or as a way of getting a good return. A quarter give
savings for children/grandchildren or for special purposes such as
house, car or travel as a reason for fund investment savings.
71
The Swedish Investment Fund Association (2012a).
72
TNS Sifo Prospera (2012).
92
Swedish fund assets increased during the period 2000–2013 from
around SEK 900 billion to SEK 2,136 billion.73 Pension investments
today constitute around 50 per cent of the total fund assets,
compared with 28 per cent in 2000. Fund investment savings in
Sweden, totalling SEK 2,136 billion in administered capital, can be
compared with Swedish households' total deposits in banks which
in 2012 amounted to SEK 1,269 billion. This form of saving is thus of
great significance in Swedish people's personal finances and
pensions.
Net savings in pension and insurance-related fund investment
savings have remained on a very high level throughout the 2000s
and have constituted at least half of new savings. Of the total net
savings during the period 2000–2011, pension and insurance-related
fund investment savings accounted for around 80 per cent.
Households' direct saving in funds was around zero net during this
period, but it increased somewhat in 2012. 74 The total new savings
in funds amounted to over SEK 74 billion in 2012, compared with
SEK 16 billion in 2011. It is also over SEK 10 billion higher than the
average net savings per year during the 2000s.75
73
MoneyMate (2013).
Direct savings are a form of fund investment saving not linked to pension investments and
endowment insurance. Fund investment savings in Investment Savings Accounts (ISK) are
included in statistics from the Swedish Investment Fund Association to a certain extent.
However, this only applies in cases where fund companies and ISK institutions are in the
same group.
74
The Swedish Investment Fund Association (2013a). Information is gathered on a quarterly
basis and covers all investment funds marketed and sold in Sweden by fund companies that
are members of the Swedish Investment Fund Association. Members include both funds
registered in Sweden and funds registered abroad.
75
93
Figure 20
Net savings in funds, by category
1 000
Swedish enterprises
600
Premium pension
200
Insurance funds
-200
Household direct
savings
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-600
Source: The Swedish Investment Fund Association (2001–2012).
Fund investment savings' strong foothold in Sweden is likely a
result of several factors.76 It was when the tax-friendly Skattespar
(a Swedish fund product) was introduced in Sweden in 1978 that an
interest in funds was sparked and fund investment savings became
a popular movement. When the tax reduction on Skattespar in 1980
was increased to 30 per cent, it resulted in a drastic increase in the
number of tax accounts in the following years. With the subsequent
product Allemansspar (a Swedish fund product) launched in 1984,
which was also tax-subsidised initially, the funds gained a serious
presence among Swedish savers and new groups started investing
in funds. There were also other decisions in the 1990s that
encouraged pension investments via funds such as unit-linked
insurance, individual pension investment and collectively agreed
76
SOU (2002:56).
94
occupational pensions. The new premium pension system in
particular has meant that fund investment savings have become a
product that concerns practically all households in Sweden.
Conditions for the development of fund investment saving have
improved considerably with the arrival of the Investment Funds
Act.77 Other major causes for the increased popularity of funds as a
form of saving have included the extremely positive trend in prices
on the world's stock markets during the 1990s. Funds have enabled
small savers to easily keep track of the trend in market prices.
Product development over the years has also enabled businesses to
attract the public to different forms of fund investment savings. It
also allows fund distributors with fund supermarkets online to
provide a wide and varied range of funds for the consumers to
choose from.
Before the introduction of fund investment savings, savers were
referred to direct ownership of stocks or other securities. When
fund investment savings were introduced, it was initially limited to
direct savings in fund deposits78. In the 1990s, several new ways of
investing in funds were introduced. In 1990, unit-linked insurances
were introduced. Saving via unit-linked insurance is an insurancerelated saving and it allows savings either via endowment
insurance or pension insurance.79 In January 1994, Individual
Pension Saving (IPS) was introduced, which allowed private
individuals to place their pension investments in funds with no
The Investment Funds Act (1990:1114), repealed 2004.
A stock and trust account (deposit) is subject to capital gains tax. The saver pays 30 per cent
in tax on profit from the sale of securities, as well as on dividends and income from interest.
From 01 January 2012, the saver also pays a tax on the actual ownership. Taxation is done via
imputed income corresponding to 0.4 per cent of the fund's value.
79 The saver can transfer their money between funds without tax implications as no capital
gains tax is levied. Taxed on a standardized basis in accordance with the Act on Yield Tax on
Pension Funds.
77
78
95
element of insurance.80 In the late 1990s and early 2000s, several
new agreements for occupational pensions were signed. They
entailed greater opportunities for employees to have their say in the
investment of their occupational pensions. 1994 also saw a decision
made on a new public pension system in Sweden. One new element
was that part of the salary (2.5 per cent) would go towards the
premium pension, where the savers themselves got to choose how
their funds would be invested. In 2000, the first selection of funds
for the premium pension was made. On 01 January 2012 a new
form of saving for investment in stocks and funds, the Investment
Savings Account (ISK), was introduced.81 In terms of their structure,
Investment Savings Accounts are similar to endowment insurances,
where funds, stocks, savings accounts and various financial
instruments are gathered in one deposit. Within this deposit, the
owner can then buy and sell without paying any capital gains tax.
There are a number of crucial differences between an Investment
Savings Account and an endowment insurance. Securities kept in
an Investment Savings Account are directly owned by the account
holder, who has the right to vote in shareholders' meetings for the
stocks on the account.82 The standard return on an investment
savings account can be set off against losses and expenses in capital.
Furthermore, capital on an Investment Savings Account is covered
by the state deposit guarantee scheme and investor protection.
Savings in IPS can be achieved via cash deposits where the institution is ordered to invest
savings in bank accounts, in securities, or in individual stocks. The tax regulations governing
pension insurance also apply here.
80
This form of saving involves the taxation of funds, stocks, savings accounts and other
securities, where a standard tax (in accordance with the Income Tax Act) is levied on the
entire capital instead of on individual profits. ISKs can be provided by credit institutes and
securities firms.
81
Regarding the possession of shares in a mutual trust, the fund is classed as the owner, and
the fund company represents the fund. At shareholders' meetings, the fund is classed as a
regular shareholder and therefore has the right to vote.
82
96
Among those who own funds privately, directly owned funds are
most common (44 per cent), followed by unit-linked insurance/IPS
(31 per cent), endowment insurance (12 per cent) and Investment
Savings Accounts (3 per cent).83 The interest in ISKs has increased in
2013, likely as a result of the increase in fund investment savings
and the positive development on the stock market. ISKs are
primarily used for new savings.
Fund investors' weak bargaining power
For a consumer, fund investment savings can be likened to the
purchase of asset management services. The implication is that the
saver delegates the choice of which financial instrument the funds
are placed in, as well as the constant monitoring of investments and
the implementation of any necessary changes to these, to a fund
company.84 The consumer pays a pre-determined administration fee
for this financial service. The assignment from the saver is not
unlimited; it shall be carried out in accordance with regulations
relevant to the sector. The result of the administrator's work may be
reflected in the value of the shares in the mutual fund. Several
factors affect the return on the fund, such as the movements in the
market, the investment policy and the size of the administration fee.
Knowledge and insight into fund activities is required if the
consumer is to make rational decisions when purchasing shares in a
mutual fund. Purchases of shares in a mutual fund following advice
also require a certain understanding of the fund market, as well as
insight into how advisory services work. The consumer may find
themselves in a weak bargaining position as they sometimes lack
83
The Swedish Investment Fund Association (2012a).
A fund company is either independent or owned by the bank.
There are 76 fund companies registered with the Swedish Financial Supervisory Authority,
January 2013.
84
97
the interest and the knowledge required in order to safeguard their
own interests. Investment fund fact sheets85 are a good means of
getting to grips with a certain type of fund. Despite all of the work
carried out within the EU to develop a framework for investment
fund fact sheets, the obligatory fund information could still be
supplemented and further clarified to some extent in order for it to
be more consumer-friendly. A large proportion of consumers
frequently rely on the financial advice offered by advisory fund
companies.
Every other year, TNS Sifo Prospera conducts an extensive poll on
fund investment savings on the Swedish Investment Fund
Association's commission.86 The poll reveals that recommendations
are a more common reason for choosing a fund today than they were
in the 2010 poll. Recommendations from advisors have the widest
spread, 54 per cent. The advice from friends/relatives is behind 17 per
cent of the choice of fund. In round figures, a total of 15 per cent have
seen information on the internet or in the papers and 8 per cent have
received information via work/union. Very few have acquired
information from blogs/chat sites. Around 40 per cent of both men
and women say that they have received advice in the last two years.
The overwhelming majority of these are satisfied or very satisfied
with the advice.On average, women give a score of 3.8 on a scale of
five, whilst the men's average score for the advice they received
comes to 3.5.
When choosing funds, administration fees and risk level are
considered by far the most important aspects to take into
In accordance with the Investment Funds Act, Chapter 4, Sections 15-16 a, all investment
funds should have an information brochure and a fact sheet.
85
86
TNS Sifo Prospera (2012).
98
consideration. 87 The proportion that feels it is important to take
ethical and environmental aspects into consideration has increased
and now amounts to around 34 per cent. Somewhat fewer feel that
the fund's investment policy is a high priority. Relatively few value
a presentation of the fund companies' investors and analysts. Where
information on the fund's fees is concerned, only three out of ten
fund investors know that the administration fee is always deducted
when the return on the fund is reported. This despite the fact that
fees, together with the fund's risk level, are stated as the important
information when choosing funds. When the savers evaluate funds,
they do so primarily via comparisons of acquisition value and the
fund's previous performance. Every fund investor states this. One
in three savers compares with other funds' development and the
situation on the stock exchange.
A very large proportion has been unable to state which type of fund
they are investing in. Of those asked, 47 per cent of women and 29
per cent of men answered that they did not know. Among men, a
majority (54 per cent) feel that they have sufficient general
knowledge of personal finances and 58 per cent says they have
sufficient knowledge to have a say in their future pension. For
women, the corresponding proportions are 37 and 34 per cent
respectively. Despite the fact that many consumers consider
themselves to have poor knowledge of their fund investment
savings, there does not appear to be a great deal of concern on the
background of the high proportion of fund investor savers in
Sweden.
In a study carried out on SBAB's commission, it was established
that there are 7.5 million people in Sweden between the ages of
87
TNS Sifo Prospera (2012).
99
15 and 80. Among these, seven out of ten own funds that they have
not touched in the last five years.88 54 per cent of these have
retained their funds for reasons other than satisfaction. This likely
means that around 2.7 million people are passive owners of shares
in a mutual fund.
Figure 21
Consumers who have not made changes to their fund
holdings for at least five years - why don't they change
fund?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Satisfied with their Do not find any
Passivity/do not Passivity/market for Passivity/sale of an
choice of
time to review their know what to
investment funds investment fund
investment funds
holdings of
choose instead
seems too
triggers a tax on
investment funds
complicated
profits or a loss
Source: SBAB (2013).
The fact that so many fund investors are passive, some even
dissatisfied with their ownership of shares in a mutual fund,
indicates that the fund companies have to some extent failed to help
fund investors to find their way among the broad range of funds
found on the fund market today. It is possible that the impetus is
weak for banks and other fund companies to attempt to get the
consumer to change to a better and cheaper alternative.
88
SBAB (2013).
100
The work to strengthen the fund investor's position
The interest in consumer protection is rooted in the often great
significance that fund investment savings have for personal
finances, as well as the complexity of the products. This brings with
it conflicts of interest. The fund investor wants as high a return as
possible at as low costs as possible. The fund company, on the other
hand, must generate the highest possible profit for its owners whilst
ensuring the fund investors receive a high return. The fund
company also has the right to vote for the stocks corresponding to
the fund investors' shares. These conflicts of interest, combined
with the fund investors' limited opportunities to protect their
interests in relation to the fund company, are one of the reasons
behind the specific legislation for fund investment savings which is
intended to protect consumer interests.
The funds used for direct savings or pension savings are regulated
in Sweden by the Investment Funds Act (2004:46). Via the
Investment Funds Act, the regulations in the UCITS Directive have
been implemented in Swedish legislation.89 This involves
harmonisation on an EU level. In addition to the Investment Funds
Act, provisions from the Swedish Financial Supervisory Authority
and the sector's own guidelines regulate how fund companies can
act.90 The Swedish Financial Supervisory Authority must be able to
ensure that the organisation in place within a fund company is
capable of managing its task. This means either that special
89
UCITS (Undertakings for Collective Investment in Transferable Securities). UCITS IV has
been adopted and has been incorporated into Swedish legislation from 1 August 2011. A
proposal for changes to the UCITS IV Directive was put forward by the Commission in the
summer of 2012. The proposal for changes is called UCITS V and includes rules on
depositaries' activities, compensation policy and sanctions. The European Commission has
also issued a consultation on further revision on the UCITS Directive, UCITS VI.
The trade association that is the Swedish Investment Fund Association has developed its
own guidelines, which they recommend within the sector, particularly among its members.
90
101
functions must exist within a fund company or that the company
must have access to them via agreements with external
contractors.91
The work to strengthen consumers' position on the financial
services market today is highly prioritised by the Government. It
covers many different areas. The work is illustrated by the
Government's launching of an investigation into consumer
protection when receiving financial advice.92 On an EU level too,
consumer protection is currently a highly prioritised matter.93
4.2
The fund as a form of saving
“Funds” are officially known as “investment funds”. A fund can be
described as a portfolio of different kinds of securities, such as
Swedish and foreign stocks, bonds and other securities. A fund's
assets consist of securities and liquid resources that have not yet
been used to purchase securities and/or money obtained from the
sale of securities. The fund as a form of saving is a product which
Control functions that a fund company must have in order to adhere to the rules that apply
in accordance with the Investment Funds Act are: internal control, compliance and risk
management. Other functions may also be necessary in order to effectively adhere to the
sector's regulations. See FI's Provisions on funds, Chapter 6.
91
92
The Government (2012b).
In October 2011, the Commission put forward proposals for a directive and a regulation on
the securities market. The proposals include rules pertaining to bans on commissions for
independent advisors and discretional portfolio managers. The European Parliament's
proposals won the vote on 26 October 2012. The European Parliament proposes that the
Member States should be able to introduce more extensive bans on commissions.
Negotiations at the Council are underway (MiFID 2/MiFIR). The Commission's proposal for a
regulation (PRIPs) will include requirements for information which must be provided to
consumers looking into investing in “packaged” financial products such as funds and unitlinked insurance. The fact sheet for the UCITS IV Directive is a starting point.
93
102
allows consumers access to a form of asset management that for
many would otherwise be unobtainable.
Variables that may be more or less relevant to the fund investor
when different forms of investment are discussed are investment
horizon, administration fee, investment policy, risk appetite,
historical returns and the level of fund management.94 Information
on a fund's investment policy, risk profile, return and price must be
included in the obligatory fact sheet on the fund.95 The choice of
fund, however, is no simple matter. The fund investor has
difficulties comparing financial products, the content of services,
and costs. The fund investor also has difficulties understanding the
proportions into which the administration fee is divided between
the various sales links involved in the purchase of shares in mutual
funds.
Pricing
In Sweden, there is a wide range of funds with different policies
and price profiles. The pricing is done on an open market, just as
with other goods and services. The pricing of fund products is
biased and there is little room for consumers with direct savings to
negotiate. The variation of administration fees from one fund to the
next may be down to the fund company's administrative costs.
However it may also be due to the fund's investment policy, how
For Swedish funds, the administration fee tends to be on roughly the same level as the
annual fee. The annual fee is a standard measurement for reporting costs associated with
funds. It is used in the fact sheet in order to compare funds from different European
countries. The fee is given as an annual percentage which is taken from the fund capital at a
rate of 1/365 per day.
94
In accordance with the Investment Funds Act (2004:46), all investment funds must have an
up-to-date fact sheet.
95
103
active the management is and what service is offered in the form of
advice, accessibility, etc. Customer structure is also of importance;
whether it is a major customer or many savers with small amounts.
Like other companies, fund companies also endeavour to generate
profits for their shareholders and long-term value for the savers.
The significance of the investment policy
The investment policy is the type of security (e.g., shares, interest,
hedge funds, currencies, properties, raw materials and private
equity) the fund will invest in. The regulations on funds clarify the
investment policy and, where the fund has exposure to various
forms of assets, the proportions by which investments shall be
made. Investment funds (UCITS funds) invested in stocks are
known as unit trusts. Funds invested in fixed-interest securities are
known as bond and money market funds. There are also mixed
funds that invest in both. Specialfonder [special funds] are funds
that deviate from the investment rules that apply in accordance
with the Investment Funds Act. A hedge fund is one example of a
“specialfond”.
A unit trust is a fund that must invest at least 75 per cent96 of the
fund assets in stocks or stocks-related financial instruments such as
derivatives instruments. Unit trusts can have many different
investment policies and risk levels. Large unit trusts invest in
several different sectors and markets with the intention of
spreading the risks. Both fees and risk levels are medium-high as a
rule. Small unit trusts have a small policy within strictly defined
sectors or geographical errors. Here we would wish to make
Normally, more than 75 per cent of fund assets are invested in stocks, and it is rather closer
to 85 – 100 per cent.
96
104
investments where the return is expected to be high, by means of
analysing a well-defined market. Both fees and risk levels are as a
rule on a level that is higher than for a large unit trust.
A bond or money market fund only invests in fixed-income
securities such as bonds and treasury bills. Bond or money market
funds tend to be split into two categories: short-term and long-term.
Short-term bond funds, also known as money market funds, invest
solely in fixed-income securities with a remaining term of less than
one year. Fees and risk level are low as a rule. Long-term bond
funds are also known as bond funds. A fund of this nature buys
fixed-income securities on the bond market with remaining terms of
over a year, such as government bonds. Both fees and risk levels are
as a rule low, but somewhat higher than for short-term bond funds.
A mixed fund is a fund that invests in both stocks and fixed-income
securities. The exact division between stocks and fixed-income
securities differs from one mixed fund to the next. Both fees and
risk levels are as a rule on a level that is somewhat lower than for a
pure unit trust.
An index fund, which is normally a type of unit trust, is a fund that
follows a certain index in its investments. The fund's returns may
for example reflect the OMXS30 index at the Stockholm Stock
Exchange. This flexibility is achieved by means of the fund's
investments having the same composition of stocks as those in the
index. The risk level may vary a great deal and depend on the
investment policy. The fees are low as a rule.
A hedge fund has greater freedom in its investment opportunities
than traditional funds. The investment policy may cover everything
from stocks, currencies and fixed-income securities to different
arbitrage strategies (speculation in changes in interest rates and/or
currencies). Hedge funds are more likely to make use with
105
derivatives, for example, with the purpose of raising or lowering
the fund's risk. The risk level can be anything from very low to
extremely high. Both fees and risk levels vary and depend on the
fund's investment policy.
The administered capital in unit trusts amounted to SEK 1,145
billion in March 2013. The administered capital in bond/money
market funds and mixed funds amounted to SEK 480 bn and SEK
414 bn respectively for the same period. The administered capital in
hedge funds amounted to SEK 96 billion. The total administered
capital in funds amounted to SEK 2,136 billion in March 2013.97
New fund products with the purpose of satisfying various needs
and requirements among investors were constantly being
introduced. Exchange Traded Funds (ETF) is a growing category
among both short and long-term investors. What distinguishes
ETFs from other types of funds is that it is possible to buy and sell
continuously; with other types of funds, their shares can only be
priced at the end of the trading day.
Risk profile
Risk in an investment context
All investment in funds is associated with some form of risk. When
we speak about risk in an investment context, there is an
uncertainty in terms of return. The primary definition of a fund's
risk, which as savers we come across in fact sheets, for example, is
how much the fund has fluctuated in value over time.98 The greater
97
MoneyMate (2013).
98
The Swedish Investment Fund Association (2012c).
106
the fluctuation, the greater the risk of losing money, though risk
and the possibility of a higher return are closely linked. Fund
companies speak about low and high risk in investment contexts.
Savings accounts and money market funds (short-term bond funds)
have a low risk which, in principle, is limited to the possibility that
inflation will erode their value. Stocks generally have a higher risk as
the value can swing up and down quite drastically. Investing in unit
trusts involves risk diversification, as investment funds must as a
rule invest in at least sixteen different companies' stocks. In practice,
funds normally invest in many more. Despite this, there can be a very
large difference in risk between different unit trusts. A large unit
trust that invests across the world, in different currencies and sectors,
has a lower risk than a smaller fund which is limited to a certain
geographical area or sector. A common factor for all types of risk is
uncertainty regarding the future development in a certain area.99
In 2011, the Swedish Consumer Agency audited fund companies'
marketing of funds.100 At that point it was established that most
companies had some form of information on risks for fund
investors in their marketing. But this information was in some cases
printed in such small text or was so hidden away that it could not
be considered to be in line with what was agreed in terms of the
formulation of the risk information.
Normal types of risks involved in fund investment are market risk, investment risk,
business risk, interest rate risk and currency risk. Other types of risks which are less common
and therefore not covered by the normal risk measures are operational risk, counterparty
risk, liquidity risk and inflation risk. Regulations and fund companies' procedures are
intended to minimise these risks.
99
100
The Swedish Consumer Agency (2011).
107
Risk measure - standard deviation
There are different ways of measuring risk. Risk is often defined by
a measure that shows signs of volatility, i.e., fluctuations in value.
More pronounced fluctuations are defined as higher volatility and
risk. The most common measure for risk is standard deviation. This
term can be defined as a risk measure that shows how much the
value of a fund rises and falls over a given period, in relation to the
fund's average value. Put simply, we can say that standard
deviation means the deviation from the mean value. Normally
standard deviation is measured for the last two to five years. The
EU standard for fact sheets is five years. In figure 22, standard
deviation is converted to a risk indicator with a scale of one to
seven. A fund with a standard deviation of 15–25 is given a
risk/return indicator of six.101
101
The Swedish Investment Fund Association (2012c).
108
Figure 22
Risk/return indicator in funds' fact sheets
Risk/return indicator in the fund's fact sheet
Higher risk
Lower risk
Lower potential return
1
Class
1
2
3
4
5
6
7
2
3
Higher potential return
4
5
6
7
Interval (standard deviation, %)
0-0.5
0.5-2
2-5
5-10
10-15
15-25
25-
Source: The Swedish Investment Fund Association (2012).
A common factor for most risk measures is that they are calculated
based on historical information and for a limited period. They quite
simply show the level of risk the fund has previously had, not the
future risk. It is difficult for risk measures to take extreme events
into account. Catastrophes, wars and financial crises do not occur
very often and the risk is therefore that they will not be picked up
by conventional risk measures. Furthermore, there are risks that we
are unaware of even today, and which are therefore impossible to
calculate in principle.
Return
The fund's return shows how much the fund's value has changed
over a given period. The return is given in per cent. Funds' reported
returns are always the value after the deduction of fees. The return
109
is defined as the change in the fund's net asset value per share in a
mutual fund (NAV price102). A fund's historical returns provide
important information on the fund's success to date and may be an
indication of how the administration has been handled.
The Swedish Consumer Agency's marketing survey103 has also
noted that there are fund companies that, when showing the fund's
historical returns, use periods that are too long or too short. This
gives a distorted overall impression of the fund's development. As
an example, the Swedish Consumer Agency explains that at the
beginning of the 2008 financial crisis, when many funds dropped
drastically in value, some fund companies chose in their 2009
marketing to focus on the fund's strong recovery over the past year.
Other fund companies chose instead to present funds' returns over
a very long period, in some cases as long as 24 years. The Swedish
Consumer Agency sees both of these approaches as misleading.
The Swedish Investment Fund Association has attempted to
illustrate the connection between funds' fees and returns, for the
categories of global funds and bond funds on the Swedish market
over the period 2002–2011.104
NAV shows the fund's net assets after deduction of costs such as management and
administration costs, divided by the number of remaining shares.
102
103
The Swedish Consumer Agency (2011).
104
The Swedish Investment Fund Association (2012d).
110
Figure 23
The connection between returns and fees for Global
Funds 2002–2011105
120
100
80
60
40
20
0
-20
-40
0
0,5
1
1,5
2
2,5
3
Source: Morningstar (2013).
In figure 23, funds in the category “global blend equity fund” at
Morningstar have been invested based on returns in the last ten
years (vertical axis) and annual fees (horizontal axis). If there was
an unequivocal connection between fee and return, the “dots” in
the figure would be formed in a manner that clearly confirms this. It
has been established, however, that the majority of global funds
with higher fees (1.5 per cent - 2.0 per cent) provide a return of
roughly the same magnitude as global funds with a lower fee
(below 0.75 per cent).
For the category of bond funds (SEK, long-term), the result is
slightly different; see figure 24. Here we see a certain negative
connection between fee and return; that is to say, the size of the fee
105
Morningstar (2013). Funds with performance fees have been excluded.
111
has a negative impact on the return's average. Furthermore, the
connection is not unequivocal for this fund category.
Figure 24
The connection between returns and fees for Bond Funds
2002–2011106
90
80
70
60
50
40
30
20
10
0
0
0,2
0,4
0,6
0,8
1
1,2
1,4
Source: Morningstar (2013).
One conclusion that can be drawn from the above is that a choice of
fund based exclusively on the size of the administration fee does
not guarantee the best return. What we can establish, however, is
that the administration fee is fixed and predictable (if not
performance-based), whilst the future return is uncertain.
There is some support for the strategy of choosing funds based on
historical returns, something which in financial terms is known as
the momentum strategy. See e.g., Wermers (2003). On the Swedish
market there is a limited amount of literature, but Dahlqvist et al.
106
Morningstar (2013). Funds with performance fees have been excluded.
112
(2011) shows that the most successful savers in the premium
pension system have used some form of momentum strategy107. But
despite extensive research in the area regarding the method of
choosing funds based on historical returns, there is no unequivocal
answer to the question.
To conclude, we can establish that historical returns are relevant,
for the reason that they provide information on the fund's success
to date and because they can be an indication of how the
management has been handled.
The significance of the fee
Funds with high fees likely have higher costs on average than funds
with low fees. A fund's investment policy and risk profile normally
have an effect on how extensive the management of the fund needs
to be. The scope of the fund management in combination with the
managed volume should be relevant variable costs that have a large
impact on the administration fee. Passively managed funds have a
lower fee than actively managed funds. Active management
normally costs several times as much as passive management,
partly due to the need for a considerably higher number of
personnel.108 Passive management of stocks noted on the Stockholm
Stock Exchange means in principle that the share portfolio in
question has the same composition as the Stockholm Stock
Exchange. Active management of Swedish stocks may involve
having just a selection of the stocks on the exchange in order to
exceed the average return on the Stockholm Stock Exchange.
Purchasing shares in mutual funds in line with the momentum strategy means buying
shares in funds that are on an upward trend at that point in time.
107
108
Flam (2007).
113
Furthermore, when actively managing a portfolio with assets on
Swedish and other markets, efforts are made to achieve a higher
return. There are deviations within certain boundaries from the
reference portfolio's division between various assets or different
markets.109 One example of the significance of the scope of
management is that the average administration fee is lower for
index funds and short-term bond funds (money market funds) than
for long-term bond funds. Another example is that the
administration fees are on average lower for bond funds than for
unit trusts (excluding stock index funds).
The majority of studies110 have been carried out, primarily on the
American fund market, in order to determine whether actively
managed funds tend to generate higher returns over longer periods
than a corresponding index. The general results of the study show
that the index has performed better than the actively managed
funds over a period of ten years or more.111 A Finnish paper
demonstrates the difficulties that actively managed funds have in
beating their index over a long period of time, in this case from 1999
to 2009. The author has compared 180 Finnish unit trusts that invest
in Finland, Europe and North America, with their respective
indices. They arrived at the conclusion that only a few of the funds
managed to outperform their index over the given period of time.112
The result is similar for the Swedish fund market, where a study
from 2009 reveals that only one of ten actively managed unit trusts
with investments in Swedish companies outperformed the Swedish
market from a risk-adjusted perspective.113 Overall, the results of a
109
Flam (2007).
110
See e.g., DALBAR (2001).
111
See e.g., Malkiel (2005).
112
Aalto (2009).
113
Lundgren & von Bahr (2009).
114
large number of studies have led many researchers to recommend
index funds. The results of the studies tend to be explained in terms
of the difficulty for actively managed funds to perform better than
the index one year on, but also in terms of the higher administration
fees. These are normally between 1 and 2.5 per cent for actively
managed funds. This can be compared with index funds' fees,
which are normally around 0 to 0.5 per cent. When index
management provides the same expected gross return as actively
managed funds, but at a significantly lower cost, this means a
higher net return for the consumer.
The fees have proven to be a very important factor to take into
consideration when choosing fund, as the interest on the interest
rate effect is significant in the long term. However, it can be
established that a mere 6 per cent or so of the total fund assets in
Sweden in January 2013 were invested in stock index funds.
Around just 10 per cent were invested in short-term bond funds
(money market funds).114
Of the total fund assets in Sweden, around 22 per cent were
invested in bond funds, around 54 per cent in unit trusts (including
stock index funds) and around 19 per cent in mixed funds.115 In a
comparison of the division between fund categories in several
European countries, Sweden and the UK seems to have the lowest
proportions of fund investment savings invested in more passively
managed bond funds.116 Just how large a proportion of European
114The
Swedish Investment Fund Association (2013a). Monthly statistics include the net flow
and fund assets from member companies both for funds registered in Sweden and those
registered abroad, categorised by type of fund. All funds in the premium pension system are
included.
115
MoneyMate (2013).
116
Lipper (2013).
115
investment fund savings are placed in stock index funds is not
shown in the European survey.
Figure 25
Fund assets per European country, by category: bond
funds, unit trusts and mixed funds
60%
50%
40%
30%
Interest fund
20%
Unit trusts
10%
Mixed funds
0%
Source: EFAMA (2011).
In a sample calculation from the Swedish Pensions Agency, we see
that if a consumer chooses a fund with an annual fee of 0.5, for
example, they can expect the pension balance to decrease by 15 per
cent. A fund with the same growth in value, but with an annual fee
of 1.5 per cent, reduces the pension by 39 per cent. The example
assumes that the consumer saves towards their pension for
33 years, which is the average investment period in the premium
pension system.
116
Table 5
The significance of the administration fee for the
premium pension
Fund fees
Reduction of the premium pension
0.05 %
2%
0.15 %
5%
0.25 %
8%
0.50 %
15 %
0.75 %
22 %
1.00 %
28 %
1.50 %
39 %
Source: The Swedish Pensions Agency (2012).
A survey carried out by TNS Sifo117 in 2011 revealed that a majority
of Swedes (54 per cent) underestimate the significance of the
administration fee for the occupational pension. Furthermore, as
many as 34 per cent say that they are unsure or do not know how
much a fee of 1 per cent reduces the pension capital. Only 9 per cent
of respondents made a correct estimate that an annual fee of 1 per
cent reduces the pension capital by SEK 200,000. As many as 54 per
cent believe that a 1 per cent fee reduces the pension capital by
between SEK 25,000 and SEK 100,000. The results of the Sifo survey
show that there is more or less the same degree of ignorance among
people of different ages and levels of education.
In summary, we can establish that the administration fee is an
important factor in the size of the final return from fund or pension
investment savings.
117
Collectum (2013).
117
Active portfolio management
As already established, research in the area shows that index-based
funds have performed better on average than the actively managed
funds over a period of ten years or more. It should be noted,
however, that the same research also shows that a smaller number
of actively managed funds outperform index-based funds. These
often have the common factors of extensive management, a high
degree of specialisation and strong incentive to generate returns.118
The problem for fund investors is partly that it is very difficult to
know in advance which funds will outperform index-based funds,
and partly that it is difficult to identify good value funds that have
the potential to exceed the index performance. There is no
commonly accepted measure today which the fund investor can use
in order to gain an idea of the extent to which a fund is actively
managed. A fund which is to a great extent actively managed
should be more likely to outperform the index than a fund which is
less actively managed. The administration fee for the two actively
managed funds can however be the same. The fact that the fund
which is less actively managed is priced at the same level as the
fund which is more actively managed may be explained by a
number of different factors. It may for example be the result of a
fund merger. A fund merger should mean that the fund company
can make a certain cost saving as it allows greater economies of
scale. When funds get bigger and bigger, it becomes harder to
generate alpha (measure of performance on a risk-adjusted basis),
i.e., returns above index.119 A lower degree of active management
following a merger of funds should provide additional cost savings.
In a fund merger, there is a tendency among fund companies to not
adapt the administration fee based on the new cost factors. An
118
Pensionsnyheterna (2008).
119
Pensionsnyheterna (2008).
118
adaptation of this nature is often unnecessary. A large part of the
existing investment in the merged funds will likely not move due to
lock-in effects and passivity among the fund investors.
It is difficult for an individual fund investor to determine whether
or not the administration fee correlates to the administrator's
efforts. In general it can be established that an actively managed
fund requires greater resources than a passively managed fund, for
analysing markets and which companies the fund shall invest in.
The goal of active management is to raise performance above that of
the index. The fund manager must put together a portfolio that
deviates from the current index. It is difficult, however, for a fund
investor to draw conclusions on the active management model,
other than to say that different unit trusts are more or less
expensive for various reasons. Growth funds, for example, have as
a rule higher administration costs than funds that invest solely in
Swedish companies.
The “active share” is a measure of the deviation from the index,
which means that if the figure is 0 per cent, the fund is identical to
the index, whilst an active share of 100 per cent means in practice
that the fund deviates from the index entirely. In summary, there
are big differences between active shares in different funds. An
American survey from 2010120, in which 1,124 active funds were
audited, revealed that whilst funds during the period 1990–2009 as
a group gave a negative return of 0.41 percentage points per year
after deduction of fees, the 180 funds with the highest active share
actually had excess returns of an average 1.26 percentage points per
year after deduction of fees. For funds with an active share below
60 per cent – referred to as a “silent index manager” in the survey –
the dismal figure was an annual negative return of -0.91 percentage
120
Petajisto (2010).
119
points for the period, after deduction of fees. The active share may
be a simpler measure for the fund investor to keep track of
compared with, or in combination with, other measures of
activity.121
4.3
Adaptable fund activities
Necessary adaptations in the value chain and new extensive
regulation in the fund market have changed the conditions for those
involved in fund activities. The ability to reorganise activities
quickly and effectively in terms of production, administration and
distribution to the market's demand and regulations is of crucial
significance for achieving competitiveness on the market.
Fund companies' activities consist of a number of links and the setup
of the value chain can vary somewhat. Several of the market players
act vertically in the same link. The fund company administers and
manages trust funds, partly by deciding in which assets the fund
shall invest. The fund company reaches out to the investors via its
own or external distribution channels. All fund companies are faced
with the same challenge; namely to adapt their value proposition so
as to be an attractive prospect for the target group in question.
Important productive activities on the part of the fund company in
this process of adaptation include capital management, support and
control functions and the distribution channels.
Active risk measures the extent to which the fund's portfolio deviates from the index,
whilst the turnover rate measures how much business the administrator is doing.
121
120
Capital management – the core of the fund company's
operations
The aim of capital management is to achieve the highest possible
return, taking into consideration the fund's purpose, investment
policy and risk profile. With the help of economies of scale, fund
companies can create portfolios of securities in which the risks on
each individual security can be diversified. There is often a big
difference in different investors' investment strategy. The form of
management tends to be divided into active or passive. The former
means that the fund has a management that aims to perform better
than the index. In real terms, management in this context means
that following analyses of the markets covered by the fund's
investment policy, the fund company buys and sells securities in
order for the fund's assets and return to increase in the long term.
Fund companies levy an administration fee as remuneration for
capital management, administration, depositaries' costs122,
information and distribution. The administration fee is normally
charged as a percentage of the fund assets. It is an annual fee which
is normally charged to the fund at a rate of 1/365 per day with the
same amount for each share. Some fund companies charge a
performance fee (also known as a returns-based fee). The
performance-based fee can sometimes be charged in addition to the
fixed administration fee. This means that the fund company
receives a higher remuneration in the event of a higher return in the
fund. This type of fee is often used in hedge funds or for other
active management, where the fund's results depend more on the
administrator's efforts than in other funds.
The depositary (bank or other credit institution) calculates the value of each share and
keeps track of the fund's assets. In the event of bankruptcy in a fund, the fund's assets will
remain intact in the depositary.
122
121
The fund managers are innovative and the range of funds has
increased rapidly since 2005. In 2012, a net 335 unit trusts, bond
funds and mixed funds were available for Swedish private
investors. The number of unit trusts has gone from 889 in 2005 to
1,804 in 2012, the number of bond funds from 221 to 473, mixed
funds from 112 to 268 and alternative investments from 51 to 179.123
However, one problem which emerges when funds must be
continually launched by the fund company in order to attract new
savers is the costly product development.
Figure 26
Development of the administration fee for new and
closed funds (%) during the period 2005–2012
1,40%
1,20%
1,00%
0,80%
New funds
0,60%
Closed fund
Existing funds
0,40%
0,20%
0,00%
2005 2006 2007 2008 2009 2010 2011 2012
Source: AMF (2012).
123
AMF (2012).
122
Rising administrative costs
Back-office is responsible for reporting, pricing and other similar
tasks in order for the fund to work on a daily basis. In the
Competition Authority's market contacts, it has been discovered
that a large proportion of the purchase and sales orders today are
still made via fax by the fund companies. But new technology is on
the way and the goal is to move away from using fax as soon as
possible. New IT systems, necessary for operations, and conversion
costs involve increases in costs for many fund companies.
Current regulations place high demands on fund companies'
control functions. Functions such as internal audit, compliance and
risk management are obligatory control functions that fund
companies must have by law. The control functions and other fees
that the fund companies have in order to adapt their activities to
official regulations, such as greater legal expertise, entail high costs
that are not easy to absorb, particularly for fund companies who are
unable to benefit from economies of scale.
Fund companies today have increasing administrative costs due to
regulations and technological developments. Technological
development will likely not only contribute to greater safety in
placing orders in the long term. It will also help to increase
efficiency, which can lead to cost reductions. Another development
which may also reduce a fund company's costs is the possibility for
some administration to be carried out by a third party.124 Such
arrangements are still uncommon in Sweden, but may become an
increasingly common solution in the future, even on the Swedish
The Investment Funds Act (2004:46) Chapter 4, Section 4. The contractor must have
satisfactory expertise and competence with regard to the work involved in the assignment
itself.
124
123
fund market. SEB is a fund company that has adopted the
international trend of outsourcing fund administration to a third
party. In Sweden, there is otherwise a strong tradition among
Swedish fund companies to manage their own back-office
operations, despite the fixed costs this entails.
The vital importance of distribution channels
In order to market and sell shares in a mutual fund to a wider circle
of investors, the fund company normally needs to sign several
agreements with different distributors125 and thus enable the fund
to reach as many potential investors as possible. Previously, it was
almost a given that fund companies would market and distribute
solely their own fund products. The banks, with distribution
networks via their offices, had no problems, whilst the small fund
companies were in a more difficult situation. Savers were normally
referred to their own bank's fund products. The investment then
normally remained in the original bank for a long period of time,
for two main reasons. Firstly, changing to another fund at another
bank or fund manager was a lengthy process purely from an
administrative perspective. Secondly, the capital gains taxation was
released upon the sale of a fund if it had increased in value. These
two barriers were contributory factors to fund money being locked
into the major banks, the profits generated by which gave the banks
large shares in the fund market. In 1999 the four largest banks' fund
companies accounted for 85 per cent of the fund assets. Other
players which, like the banks, could easily reach customers and sell
Distributors are retailers, i.e., the parties that the saver purchases shares in trust funds
from (banks, insurance companies, insurance brokers and fund supermarkets), and trading
platforms that can function as an intermediary between the fund company and the
distributor in the form of a retailer to the end customer.
125
124
funds with the power of their already well-developed client base,
included insurance companies and securities companies.
As independent distributors and online brokers have entered the
fund market and offer savers access to most funds via one and the
same platform, the distribution channels have changed. Now savers
can select funds from a broad range and compare them in an
entirely different way than was previously possible. The emergence
of independent distributors and online brokers has led to a great
recovery for small fund companies and newly established players.
In recent years, the banks have also begun distributing funds from
other fund companies. It has also become ever more common for
fund companies to not only sell their own funds but also to supply
others, primarily large international fund companies' funds. The
fund market has opened up with the increase in the number of
distribution channels and greater accessibility for both savers and
small fund companies. It has also become a less lengthy process for
the consumer to transfer their individual fund investment savings
between fund companies. The trade association that is the Swedish
Investment Fund Association is working continuously on this
important issue, which is a prerequisite for customer mobility.126
There are several different ways of distributing funds. The two
most common in Sweden are127 via guided architecture and open
architecture. Guided architecture involves the distributor making a
selection of a relatively small number of funds in a larger range and
offering these to its customers, either via the customer's own choice
or via an advisor. The companies that use this model are often
private banking firms and large insurance companies. They select a
number of funds to include in the range of funds for their wealthy
126
See e.g., the Swedish Investment Fund Association (2011).
127
Aktiespararna (2011).
125
customers' investments and unit-linked insurance customers. Open
architecture involves the distributor developing a trade platform
that the customers can join. There, they can access a wide range of
funds available to the public on the Swedish market. The
distributors sign a distribution agreement with the respective fund
company. In this way, the various fund companies' funds are made
accessible to their customers on one and the same platform. The
customers can then choose to invest in the funds they have a
genuine interest in.
There is also an additional distribution level in the form of larger
trade platforms which, instead of targeting the end customer, tailor
their infrastructure solution to the external distributor. A trade
platform of this nature is primarily intended to handle trade and
fund transfers such as the redistribution of fund information.
Today, the trade platform MFEX dominates the fund market.
Nasdaq OMX has developed an electronic fund trading platform
with the aim of making fund trading between fund companies and
distributors more efficient, and is therefore competing with MFEX.
Large fund companies such as Avanza and Nordnet have their own
platforms and can thus avoid a situation in which the distribution
fee continues down the distribution chain.
Figure 27
Fund
companies
Distribution models
Large-scale
trade
platforms
Trade
platforms
e.g.,
banks,
fund
supermar
End
customer
The actual distribution of funds is an extremely important part of
the fund sector and in the end, the distributor is the nearest end
customer that “owns” the customer. It is therefore the distributor
126
that dictates the terms and conditions – both in terms of price for
the distribution and which funds can be included in their range.
Restructuring and consolidation
Several of the players that the Competition Authority has been in
contact with believe that a consolidation within the fund sector is to
be expected, in order to achieve cost effectiveness and profitability.
This kind of development tends to be associated with stable growth
and an increase in competition.128 The fund sector is a volumedriven sector in which large volumes produce high profitability.
Strong incentives therefore exist for companies to gain access to an
established customer base, special competence or simply the
opportunity to benefit from economies of scale, via cooperation and
consolidation. Operational changes in the form of consolidation or
restructuring may affect the value chain in such a way that they
result in concentration or specialisation.
A concentration, in which fewer players are involved in the value
chain, can make operations more cost effective and bring the end
customer closer to the fund company. A specialisation, in which the
most suitable player constitutes part of the value chain, likely
makes the value chain longer, and the number of intermediaries
thus rises. This can lead to a rise in costs for the fund company,
which is then transferred to the end customer (the consumer).
A development of this nature distances the end customer from the
fund company. Regulations in the area therefore become more and
more important in terms of clarifying transparency and the demand
for control over the value chain in order to avoid what is a negative
development from the saver's perspective.
128
The Swedish Competition Authority (2009c).
127
Today, the Competition Authority can identify two types of
consolidation; company mergers and consolidations of funds.
Examples of company mergers include Swedbank Robur's
acquisition of Folksam Fonder in 2007 and Banco Fonder in 2009,
Folksam LO 2011, Carnegia acquired HQ Fonder in 2010, and
Gustavia merged with Davegårdh Fonder in 2010. Some examples
of consolidations of funds in January 2013 are: Fondbolaget
Swedbank Robur Fonder AB's consolidation of the fund Banco Etisk
Europa with the fund Swedbank Ethica Sverige Global, fund
company Trigon Capital's consolidation of Trigon Balkan Fund
with Trigon New Europe Fund, fund company Nordea Fonder AB's
consolidation of the fund Nordea Nordamerikafond with Nordea
North America Fund and the fund Nordea Japanfond with Nordea
Japan Fund.129
Another way for the fund companies to generate greater cost
efficiency and profitability is to cooperate with an external player
with a suitable specialisation. Examples of this are the newly
established cooperation between ICA Banken and Catella, and
SBAB who enlisted the help of Öhman Fonder. ICA Banken and
SBAB are examples of players that have strong customer
relationships to offer. ICA Banken is a retail company with grocery
stores and ICA is a well-established brand. SBAB has a relatively
well-known brand and a significant customer base in the segment
of mortgages and savings for private individuals and companies.
Fund companies are faced with a challenge in terms of the difficulty
of retaining the relationship with the customer when they are
pushed further and further along the value chain. The model of
cooperation can then be a means for some players to tackle the
129
The Swedish Pensions Agency (2013).
128
challenge by offering tailored management on commission from
other players with strong customer relationships.
4.4
The importance of market conditions in competition
on the fund market
On the supply end, factors that are important for competition, and
which are of interest in this context, are market concentration,
profitability and opportunities for entry to the market in question.
On the demand end, customer mobility, transparency and buyer
power are of interest.
Concentration of market shares - HHI
The competition measure HHI indicates that the fund sector has a
medium-high concentration on the market. The HHI value indicates
that the fund market is relatively concentrated. Swedbank Robur
has a significant share of the market compared with other players.
The HHI value has been raised between 2011 and 2012, from 1159 to
1178, which suggests that competition has diminished somewhat in
the past year.
129
Table 6
Fund assets as of 31 March 2013, in parallel with the size
of the market share
Company
Volume
(SEK m)
Market share (%)
Swedbank Robur
533,079
25.0
SEB Fonder
288,526
13.5
Nordea Fonder
250,036
11.7
Handelsbanken
220,180
10.3
Sjunde AP-fonden
145,068
6.8
Länsförsäkringar Fonder
74,439
3.5
AMF Pension
73,795
3.5
SPP Fonder
70,243
3.3
Brummer & Partners
54,518
2.6
Skandia
48,911
2.3
Other
373,078
17.5
Total
2,136,000
100
Source: Newsletter “Fond & Bank” (2013).
Profitability on the Swedish fund market
The level of profitability within a sector is often used as a
competition indicator, as it shows the company's propensity to set
their prices higher than the costs.
130
Table 7
Compilation of annual reports from Sweden's largest fund
companies (in terms of administered capital) 2011
Administ
ered
capital
Turnover
Costs
Result
Operating
margin
Robur
446
1567
840
697
45 %
SEB
186
2476
2235
241
12 %
Nordea
125
1763
1526
237
14 %
SHB
110
1088
906
182
13 %
Brummer
96
1275
645
630
58 %
LF fonder
67
668
573
98
15 %
AMF
61
222
203
19
18 %
Skandia
59
611
584
27
4%
SPP
57
111
82
29
19 %
Folksam
32
50
32
19
60 %
East
Capital
31
1136
973
163
21 %
Lannebo
26
205
93
113
7%
Carnegie
25
409
338
71
19 %
Danske
22
236
210
26
75 %
Source: Newsletter “Fond & Bank” (2012).
Despite falling volumes and new costs, the 21 largest fund
companies managed to earn almost SEK 3 million, which means an
operating margin of over 21 per cent.130 Swedbank Robur has the
highest operating profit/loss. Together with Brummer, which has
the second highest, the company accounts for half of the total
profits. Note that it is difficult to assess the profitability of banking
groups' fund activities by simply looking at individual fund
activities' profitability.
Fond & Bank (2012). Based on annual reports from the 20 largest Swedish fund companies
(in terms of administered capital). For many of the companies, discretionary management is
also a feature.
130
131
Access to the fund market
Strong opportunities to start up new companies and activities, open
trade, internationalisation and globalisation stimulate competition
and generate conditions for increased efficiency and growth.
Barriers to entry tend to be divided into structural131, legal132 and
strategic133 categories.134
Volume-driven sector
The fund sector is volume-driven. There are significant economies
of scale and economies of scope to be had, which obviously limits
new companies' opportunities to enter the market and effectively
compete with the established companies. A fund with SEK 100
million in administered capital is not proportionally more
expensive to run than one which administers SEK 100 billion. As a
newly established company today, the goal is to as quickly as
possible achieve critical mass with which to absorb the costs. In the
market contacts the Swedish Consumer Agency has had, the critical
mass for a fund company (i.e., the point at which it acquires selfsustaining viability in the sector) is considered to be around
SEK 1,000 million in administered capital. This is an amount which
according to the fund companies has gone up in recent years. These
contacts have also revealed that the media's observations, rating
Structural barriers to entry are related to basic demand and cost conditions such as
economies of scale in production or the incidence of network effects.
131
Legal barriers to entry are both the cases in which regulations themselves constitute a
barrier to entry, such as when the application of regulations involves a barrier to companies'
entry to the market.
132
Strategic barriers to entry, i.e., how established companies can be expected to act when
entering the market. The tougher the competition is expected to be, the less attractive it is to
enter the market.
133
134
The Swedish Competition Authority (2009c).
132
agencies' assessments of funds135 and visibility in the large fund
distributors' selections are important resources in the establishment
process. High start-up costs and low customer mobility make it
difficult to quickly attain necessary volumes for profitability. It is
therefore necessary to accept a longer or shorter period of low
profitability when a company is newly established. Today, a player
which is already established on another market will probably have
more success establishing themselves on the fund market than a
player that is just starting out. This is because of the importance of
having one's own customer base and access to capital in order to get
through the start-up period with low profitability as the fund sector
is so volume-driven and dependent on customer relationships.
The distributor's strong position
As previously discussed, it is important on the fund market that a
fund company that does not have its own distribution capacity to
belong to some form of distribution infrastructure in order to reach
customers. The major banks are incredibly strong as distributors,
with their nation-wide office networks. Fund supermarkets also
have a strong position on the fund market as important distributors.
The distributors not only set the prices for distribution; they also
determine who should be included in their range of funds. Not
being included in major distributors' ranges can be a big blow to
newly established players as they are highly dependent on external
distribution channels.
Many funds are rated by rating agencies based on a number of criteria, primarily historical
growth in value and risk. There are also ratings in which opportunities for future
development are weighed in. There are also rating agencies that evaluate fund managers
instead of funds. Examples of rating agencies include Morningstar, Moneymate, Wassum,
Fondmarknaden.se, Financial times, Standard & Poor.
135
133
Official regulations can impede entry
A number of empirical studies have revealed that irreversible costs
have a significant impact on how sectors develop.136 If the
investments required for entry to a market largely consist of
irreversible costs, the interest in entry may be affected. Examples of
such typical costs are fees that companies have for adapting their
operations to official regulations. Official regulations can constitute
barriers to entry in different ways, in both structural and legal
respects. The cost of adapting operations to the official regulations
not only makes the fund market less interesting for potential new
establishment. It also entails higher costs in practice, which are
difficult for smaller players to absorb as they are unable to benefit
from economies of scale. The requirement for permission to conduct
fund activities is also a legal barrier to entry. But it must be
accepted as long as the permission requirement is not excessive,
taking consumer protection into consideration. A strong consumer
protection naturally leads to greater confidence in the sector. This is
something a number of fund companies expressed appreciation for
in the Competition Authority's market contacts.
Locked capital leads to low customer mobility
A market player that can offer their customers the two different tax
environments of ISKs and trust accounts is of course a more
competitive player and will thus find it easier to enter the fund
market. One proposal previously put forward by the Competition
Authority involved improving competition on the market for
savings products via an ISK. The lock-in effects faced by investors
would thereby diminish and the opportunity for mobility and
136
The Swedish Competition Authority (2009c).
134
competition in the sector would thus increase.137 However, the
design of this form of savings was not in line with the Competition
Authority's proposal. Today, existing savings cannot be transferred
to an ISK. This was a prerequisite for maximising customer
mobility. Furthermore, with today's rules138, only credit institutions
and securities companies can provide their customers with an ISK.
This is to the detriment of fund companies that are unable to offer
an account of this kind. In the Competition Authority's contact with
the market, it has arisen that the credit institutions and securities
companies that are able to offer ISKs seldom have small companies'
funds in their range. Not being able to offer customers an ISK not
only means a lower standard of service; it also results in additional
costs when more intermediaries are involved.
Access to customers
When new companies enter, access to customers is required in
order to act on the market. Often, established companies have a
large customer base. For new companies, considerable marketing
initiatives may be required in order to solicit new customers.
Established companies, on the other hand, do not need to inform
about their products in the same way. Such circumstances entail the
risk of limiting interest among new players to enter the market. It
may also be in existing players' interest to lock in customers by
offering discounts and various types of bonus programme. The
Swedish Investment Fund Association works actively to make it
easier for fund investors to move their fund commitment between
different market players. Something which is very important for
competition is the scope of lock-in effects and conversion costs that
137
The Competition Authority's (2001) proposal was updated in (2009c).
Within an ISK, capital can be placed in savings accounts, funds, stocks and other securities
such as bonds. In accordance with the Investment Funds Act (2011:1268), fund companies
may not offer savings accounts.
138
135
affect the customers' behaviour. Conversion costs can be defined as
costs that make it difficult for customers to switch supplier of goods
or services.
In summary, if new companies can enter the market relatively easily,
or if competitors can expand production, a dominant company does
not have the same opportunities to exercise their market power,
especially not in the long term. 139 New players' opportunities to enter
and establish themselves on markets are therefore of great
importance in the matter of how competition will work.
Customer mobility
As we have already established, the fund market is characterised by
a medium-high degree of concentration. The four major banks
Swedbank, Handelsbanken, Nordea and SEB are still dominating
the market. They account for around 60 per cent of the total fund
assets in Sweden. And of course, consumers use a number of
different fund companies to a greater extent than before. But there
is still low mobility in terms of transferring existing fund
commitments between different fund companies. One contributory
factor to this is various lock-in effects. A lack of interest and
knowledge makes consumers passive and makes it difficult for
them to make rational choices. For more information on customer
mobility, see Chapter 1.8, the importance of customer mobility.
139
The Swedish Competition Authority (2009c).
136
The consumer's buyer power
The consumer's buyer power is linked with applicable market
conditions, particularly where customer mobility, product
knowledge, transparency and openness are concerned, as well as
the volume of the flows in question. In light of the low customer
mobility, lack of product knowledge among a large proportion of
consumers and a lack of transparency in fund activities, the
bargaining power among consumers is generally weak. It does not
constitute true buyer power. Naturally, the larger the flow in
question, the better a position a consumer or representative for a
collective of consumers is in to negotiate. A bank customer
belonging to the private banking segment likely has stronger
bargaining power than a bank customer that falls outside of this
segment. In the same way, a representative for a collective
consisting of companies, institutions or private banking customers
should have greater bargaining power than a representative of a
collective consisting of individual consumers.
Whilst private fund investment saving in Sweden is a widespread
area, an individual consumer's volume of administered capital in
most cases only constitutes a small amount of the total fund capital
administered by a fund manager. A single consumer may be more
likely to be an encumbrance to a fund company; according to
several market players the Competition Authority has been in
contact with, upwards of SEK 50,000 in fund investment savings is
required in order for a single consumer to be a profitable business.
Another reason behind the weak bargaining power of the fund
investor seems to be a lack of interest in the fund product,
ignorance and low customer mobility, partly caused by a lack of
transparency in the fund sector. The lack of knowledge and
transparency is a matter which has been picked up on in several
137
consumer studies.140 They have noted consumers' weaknesses in
comparing financial products, the content of services, costs and the
importance of financial advice. In the fund sector today, we have
indeed come a long way in terms of transparency within
operations, compared with the securities market in general.
However, a number of the relevant costs in the sales links are still
hidden for the fund and pension investment saver, which hinders
them from making rational choices and decisions. Consumers'
weaknesses in comparing products is probably also related to the
broad range of information available to the consumer. Too much
information and too little guidance for the consumer to find their
way is an aggravating circumstance.
One way of supporting the customer when they make decisions on
personal finances is to offer financial advice. Different banks,
securities companies and insurance companies offer advice to their
customers. There are also different forms of mediators that offer this
type of service to individual consumers, insurance brokers being
one example. Financial advice has become more and more common
in line with the increasing importance of individual consumers
taking responsibility for their personal finances and savings.141
There are however potential conflicts of interest inherent in
advisory activities. Financial incentives such as internal sales targets
or sales-related bonuses can be controlling factors. There is
therefore a risk that the advice provided contradicts consumers'
wishes and needs. It is interesting in this context to look at
developments in the United Kingdom. The UK employs RDR (Retail
Distribution Review), which is intended to increase transparency in
the pricing of financial advice by bringing greater clarity to the
service offered and the professional conduct.
140
See e.g., the Swedish Consumer Agency (2013b).
141
The Government (2012b).
138
The new regulations in the fund sector are an improvement from a
consumer perspective. There is better transparency, standardisation
and comparability between different suppliers and fund products.
Fact sheets make it easy to compare European funds with one
another in terms of policy, assessment of risk and returns, and costs.
However, the fact sheets do not appear to be optimal in terms of
information from a consumer perspective. This according to the
Competition Authority. Morningstar has begun using a new price
measure, Normanbeloppet (literally the “Norman” amount142). It is a
form of theoretical calculation intended to help the consumer to
compare the different funds in terms of costs over an extended
period. Morningstar's definition of the price measure: It shows
”a prognosis for the total costs in the fund for savings over a ten-year
period. The key ratio is calculated as the difference between the
result that could be achieved if the investment could grow without
any fees and the actual amount that the saver obtains after 10 years.”
There should however be more to do in the area. As a suggestion, a
measure of returns could complement Normanbeloppet and make it
even more useful. In the Competition Authority's market contacts,
several players have demanded a price tag for each link in the fund
company's value chain. There, the cost should be clearly shown in a
manner that the consumer can easily comprehend. This will improve
understanding of how the cost is distributed among the players in
one and the same value chain. Effective consumer information,
greater transparency in the fund sector and education in personal
finances are important building blocks in the work to strengthen the
individual consumer's bargaining and buyer power.
142
The price measure is named after the Swedish Financial Markets Minister Peter Norman.
139
4.5
Stable administration fees since 2001
In June 2012, the Swedish Competition Authority requested
information on administration fees and costs from AMF Fonder AB,
Handelsbanken Fonder AB, Länsförsäkringar Fondförvaltning AB,
Nordea Fonder AB, SEB Investment Management AB, Skandia
Fonder AB, SPP Fonder AB and Swedbank Robur Fonder AB. Via
its request, the Competition Authority received data on the years
2001–2011 concerning the size of the total cost in per cent (TKA) and
the administration fee in per cent. The development of TKA in per
cent and the administration fee can be seen in figure 28.
The profitability of the fund market varies greatly over time. It
reflects the situation on the securities market, current market
conditions, etc. But despite a highly dynamic securities market and
a competitive pressure on the fund market that has varied over
time, the administration fees appear in principle to have stood still
for a long time; since at least 2001.This is as far back as the
Competition Authority's audit stretches. The Competition
Authority is able to establish that the administration fees targeted at
direct savings customers seem to be insensitive to the movements
on the fund market. The claim that the administration fees have
been stable since 2001 is true for all funds audited by the
Competition Authority.
140
Figure 28
TKA “Sweden funds”
2,5
2
Skandia Sweden
SHB Sweden
1,5
Nordea Sweden
Swedbank Sweden
SPP Sweden
1
SEB Sweden
AMF Sweden
0,5
Länsförsäkring Sweden
0
2001
2003
2005
2008
2010
2012
Source: KKV's own calculations of the fund companies' responses.
AMF – in cooperation with Morningstar – has come to the same
conclusion, i.e., that the administrative fee has in principle stood
still for a long time.143 In AMF's survey, which covers a larger
number of funds than that of the Competition Authority, the
administration fee instead indicates a higher average for certain
types of fund.
143
AMF (2013).
141
Table 8
The trend in fees 2005–2012
Unit trusts
2005
2006
2007
2008
2009
2010
2011
2012
Administration fee (%)
1.52
1.53
1.55
1.56
1.55
1.54
1.55
1.50
Annual fee (%)
1.83
Bond funds
Administration fee (%)
0.7
0.72
0.72
0.75
0.77
0.77
0.81
Annual fee (%)
0.87
1.06
Normanbelopp (SEK)
5429
5817
1.26
1.29
9477
9692
1.39
1.36
Mixed funds
Administration fee (%)
1.09
1.09
1.13
1.14
1.19
1.20
Annual fee (%)
Normanbelopp (SEK)
Total
Administration fee (%)
1.31
1.33
1.37
1.39
1.39
1.38
Annual fee (%)
Source: AMF (2012).
The Competition Authority has identified a number of factors that
could explain, at least in part, the stable price situation for the
individual consumer.
High administrative costs due to regulations
The control functions and other fees that fund companies have in
order to adapt their operation to official regulations entail high
costs.
Costly technological development in the fund sector
Investments in new technology and IT systems are costly for fund
companies.
1.67
142
Expensive product development
The fund sector is characterised by steady product development.
Product development is an important part of a fund company's
work to attract new customers. It is however difficult for fund
investors, who are attracted to the new funds, to gain insight into
how extensive the product development costs are and in what way
they affect the fund company's administration fees. Continuous
product development keeps the administration fee up.
High distribution costs
Access to infrastructure such as distribution channels is especially
important for a fund company that does not have its own channels
with which to reach the end customer. The fund distributor is in a
strong position to negotiate. The cost to the distributor is normally
around 50 per cent of the administration fee. Some fund distributors, such as the Swedish Pensions Agency, have managed to force
down fund companies’ prices considerably – up to 90 per cent of
the administration fee. A large portion of the administration fee
therefore goes to the distributor.
Direct savings in funds are costly for fund companies
The fund company's costs for individual fund investment savings is
high, which in many cases requires a high administration fee to the
individual consumer if this business is to be profitable for the fund
company.
The consumer's weak buyer power
The individual consumer's weak buyer power on the fund market
has a strong link with low customer mobility. The low customer
143
mobility is primarily down to various lock-in effects, ignorance on
the part of the consumer and a lack of transparency.
Active bank customers, for example, are more inclined to negotiate
their mortgage rates, which have an immediate effect on their
wallets, than to negotiate and scrutinise administration fees for
fund investment savings, where the effect of the administration fee
on the return does not kick in until much later. The consumer's
ignorance in the fund sector, concerning for example the long-term
impact of the administration fee on the fund investment savings,
makes their buyer power weak. Furthermore, a considerable
portion of the consumer's capital is locked in funds due to e.g., tax
implications when withdrawing profits. When the fund changes,
for example when it grows due to a consolidation with other funds,
it seems the administration fee is seldom lowered despite the
probable reductions in costs for the fund company due to
economies of scale and a potentially less extensive administration if
in the event of the volume increase the administration becomes
more passive. Lock-in effects make the consumer passive and
weaken their buyer power. Compensation to the advisor in the
form of commission, combined with a lack of transparency and the
consumer's ignorance in the matter of the advisor's commission, can
be an incentive for the advisor to recommend high price products
that give them a higher compensation over low price products that
give them a lower compensation, in cases where this is not justified.
The lack of transparency in terms of the size of the commission
gives the consumer weak buyer power.
High barriers to entry for new market players
The fund sector is a volume-driven sector, where new players must
quickly achieve a critical mass of around SEK 1,000 million in
administered capital. This often means that the newly established
company must run on low profitability for a time. Newly
144
established market players also run into low customer mobility,
where large potential capital is locked in the major banks. New
market players will probably find it difficult to push down the
administration fee due to problems achieving volumes and
profitability in their first business.
Foreign funds keep the administration fee up
The continuously growing range of foreign funds has helped to
increase competition on the Swedish fund market. Foreign funds
with an administration fee higher than the Swedish average in each
fund category may affect the Swedish average price for funds in the
short-term. However, on a market which boasts effective competition, the prices should be adapted in accordance with the prevailing
competition situation within a not overly long period of time.
In summary, a market which for various reasons is not sufficiently
challenged but rather remains stable leads to a deterioration of
welfare for the consumers due to the lack of downward pressure on
prices or even higher prices. Even if the administration fees seem
stable, there is still a positive development that the consumer can
benefit from. The range of funds is wider than ever before and
innovation in the product area is booming.
4.6
Conclusions
The Competition Authority's conclusions are summarised in the
following points:
•
The administration fees are stable despite greater competition.
•
Changed conditions on the market are forcing fund companies
to reorganise and tighten up their operations.
145
•
Competition is weaker on the market for existing savings.
•
Competition leads to a broader range of funds but only
produces downward pressure on prices for certain consumer
groups.
•
A change in market conditions can open up for price
reductions for the individual consumer.
The administration fees are stable despite greater
competition
The competition between players on the Swedish fund market has
increased over the course of the 2000s. The number of funds has
increased from around 1,500 in the early 2000s to over 5,000
today.144 Many foreign fund companies have established themselves
and the banks' dominance on the Swedish fund market has
decreased. In 1999 the four largest banks' fund companies
accounted for 85 per cent of the fund assets.145 Today, that share is
60 per cent.146 Several factors have come into play as competition
increases in the fund sector. The increasing importance of fund
investment savings for pensions has meant that fund companies
with insurance links have gained a larger portion of new savings. In
recent years, technological developments such as the fund
supermarket have opened up the market for newly established fund
companies and smaller existing fund companies that previously
lacked larger distribution channels via which to reach customers.
The work with the single market has also helped to lay the
The Swedish Bankers' Association (2012). On the Swedish market, there are 76 registered
fund companies which together with foreign fund companies offer savings in over 5,000 funds.
144
145
The Swedish Investment Fund Association (2009).
146
The Swedish Bankers' Association (2013).
146
foundations for entrepreneurs to expand and find new clientele in
other countries. This has led companies from countries outside of
the EU to show ever greater interest in becoming established on the
Swedish market.
Despite a, historically speaking, highly dynamic securities market
with shifting market conditions for the fund companies and
increasing competition, the Competition Authority can establish,
after conducting an audit of fund companies' administration fees,
that the administration fee paid by the individual consumers for
their fund investments remained more or less the same between
2001 and 2011.
Changed conditions on the market are forcing fund
companies to reorganise and tighten up their operations
The Competition Authority can establish that the fund sector is
being squeezed by low-price competitors. The media coverage of
the importance of administration fees in more long-term fund
investment may have played a part in the low-price companies' rise
in popularity among consumers. The less expensive index funds
account for SEK 17.5 billion of the net inflow to Swedish unit trusts
last year, corresponding to almost 60 per cent of the deposited
money.147 Fund companies that focus on active management are
faced with tough competition from less costly index funds and
ETFs148. This will likely increase the pressure on actively managed
147
Dagens Industri (2013).
The framework of an ETF is an index fund, the shares in which can be traded in the same
way as a stock can be traded on the exchange. The administration fee is in line with that of an
index fund, and thereby considerably lower than for actively managed funds. Administration
fee of 0.15 and 0.3 per cent.
148
147
funds which over time are unable to deliver significantly higher
value to the customer.
One new player in the ETF area is Blackrock, which will invest in
the Swedish securities market. A company with a range of lowprice products, such as index funds or ETFs, could benefit from the
wave of streamlined regulations now sweeping through Europe
concerning financial advice to consumers. In the United Kingdom,
for example, new legislation has come into force which can be
expected to force many financial advisors to abandon the
commission model and instead begin invoicing customers.149 For
companies that provide low-price products, this type of regulation
can be significant as there will be fewer personal incentives for a
seller/advisor to recommend a more expensive fund over a cheaper
product purely on the grounds that the former gives the seller a
higher commission. If low-price products and high-price products
can compete on the same level, this opens up for better competition
between products. The question is, however, whether a
streamlining of the financial regulations in the form of a ban on
commission in connection with financial advice has the desired
effect and what the consequences of a commission ban could mean
for competition on the Swedish financial services market.
In addition to the pressure from low-price companies, fund
companies are faced with a number of costly challenges in the form
of organisational changes due to tighter supervision and
regulations, technological adaptation and expensive distribution
fees. Changed market conditions are forcing fund companies to
restructure and increase the efficiency of their operations. Low
RDR - Retail Distribution Review - is intended to increase transparency in the pricing of
financial advice; clarity in terms of the service offered and professional conduct. The
legislation was effective as of the turn of the year 2012/2013.
149
148
profitability spurs on structural changes and cooperation. 150 Market
shares may be redistributed. In recent times, the Competition
Authority has seen the fund companies and funds consolidate or
enter cooperation with players in associated sectors to an ever
increasing extent. In a volume-driven sector, scalability is a great
advantage in competition with other fund companies. Investments
in technology are probably beneficial to efficiency in the long term.
Marketing costs may decrease in the same way as in many other
sectors, as marketing in social media and via the internet is
becoming more important. Fund companies that previously had a
weak competitive pressure may be able to enjoy a stronger
competitive pressure following necessary organisational changes.
The Competition Authority can discern a trend in the fund sector in
which fund players become more specialised and go in one of two
different directions; where one group - smaller niche companies specialises in active fund management and financial advice. Here,
the performance in terms of management has a great impact on the
influx of customers, which varies greatly over the course of the
year, and the funds are allowed to deviate from comparable indices.
Another group gathers branded funds and invests in their range,
sales and distribution. Greater pressure from supervisory
authorities, competitors and substitutes for funds (such as ETFs),
combined with greater requirements for openness and
transparency, could well mean that being an expert in a given field
is crucial to being competitive on the “new” fund market.
150
The Swedish Competition Authority (2003).
149
Competition is weaker on the market for existing savings
The competitive situation in the fund sector is not entirely simple.
Indeed, the banks' market shares are on a downward trend, though
their position on the fund market is still very strong. This strong
position is directly related to factors such as access to own
distribution channels and customer base, low customer mobility on
the market and good opportunities to benefit from economies of
scale (both as a result of lock-in effects and consumers' passivity),
which are vital in the fund sector.
The competition measure HHI indicates that the fund sector is
subject to competition over administered capital.151 One problem,
however, is that HHI is measured on the total administered capital
and does not take into account the fact that significant parts of the
capital are inert due to various lock-in effects, among other things.
The competition between fund companies on the market for new
savings is more effective than that on the market for existing
savings. Greater mobility would lead to reduced concentration and
increased competition on an otherwise concentrated market. The
banking market is also strongly vertically integrated. Those who
invested in funds from the beginning have often done so in funds
provided by fund companies that are part of the same banking
group the consumer enlisted for other banking services. A lock-in
effect therefore favours the traditional companies, at the expense of
new banks. Commitments and regular customers allow the
traditional companies a further advantage. Greater mobility on the
fund market would counteract the aforementioned distortion and
reduce consumers' commitments to the major banks.
Swedbank Robur has a significant share of the market compared with other actors. Other
banks such as Nordea, SHB and SEB have relatively high values, though these are not on the
levels as those of Swedbank Robur.
151
150
Competition leads to a broader range of funds but only
produces downward pressure on prices for certain
consumer groups.
Existing competition between fund companies has led to innovation
and a broad range of funds, which is to the customer's advantage.
However, the competition is not effective enough to result in
reduced administration fees from which the individual consumer
can benefit.
Consumers' buyer power varies. When an actor negotiates on
behalf of the consumer as a collective, it is clear that there is room
for downward pressure on prices as a number of actors push fund
companies' prices down. Unfortunately it is only via a small
number of actors that the price reduction reaches the customer.
Under its legal monopoly, the Swedish Pensions Agency has huge
discounts (discount scale 65–90 per cent152) on the administration
fees. This means they have a strong buyer power in relation to the
fund companies.153 The Swedish Pensions Agency pays back the
discount to the pension investors. The consumer's return on savings
in the PPM system will therefore be higher than that of identical
savings in funds outside of the PPM system.
Another example of a player on the fund market with buyer power
is the occupational pension company Collectum which, as
commissioned by the Confederation of Swedish Enterprise (Svenskt
Näringsliv) and PTK, procured managers of the occupational
pension ITP for the period 01 July 2013 – 30 September 2018.154 The
152
The Swedish Pensions Agency (2012).
153
There were 6,419,166 pension investors (in the PPM system) in January 2012.
154
The procurement concerns 1.5 million salaried employees.
151
administration fees in Collectum's most recent occupational pension
procurement are 55 per cent lower on average than the fees for
exactly the same funds on the open market.155 Here too, the
consumer can benefit from the discount negotiated by Collectum.
Fund distributors such as Avanza, Nordnet, Mina Fonder and
Fondmarknaden also have considerable buyer power and can push
fund companies’ prices down. The fund companies' European
representative association EFAMA has produced a report156 which
charts out how funds' fees are distributed among fund companies
and distributors, divided by different distribution channels. In
Europe, roughly half of the administration fee on average goes
towards distribution. In the report, the fund distributors seem to
have somewhat less buyer power in relation to the banks and
insurance companies. The latter have paid a somewhat lower
distribution fee than other fund companies. In the Competition
Authority's market contacts, the information in EFAMA's report on
distribution fees of around 50 per cent of the administration fee has
been confirmed by a number of sources, where the Swedish market
is concerned.
Improved consumer information, greater transparency in the fund
sector and greater customer mobility are important building blocks
in the work to strengthen the individual consumer's bargaining
power.
155
Collectum (2013).
156
EFAMA (2011).
152
A change in market conditions can open up for price
reductions for the individual consumer
In light of what has arisen in the Competition Authority's audit of
the fund market, it can be established that price competition is weak
in terms of the administration fee designed for the individual
consumer. Competition is more effective on the market for new
savings than it is on the market for existing savings. The fact that
the administration fee designed for the individual consumer is and
has been stable for a long period is probably a result of various
obstacles to effective competition on the fund market, such as high
barriers to entry, low customer mobility and weak buyer power
among individual consumers.
The barriers to entry are higher for new players on the fund market.
There are a number of strategic, structural and legal barriers to
entry which are problematic for a player entering the fund market.
One factor that makes it difficult to enter the market, and a strong
contributory factor to the weak buyer power of the consumer, is the
low consumer mobility that prevails in the fund market. This
limited consumer mobility is mainly caused by various lock-in
effects on the consumer's existing fund investments, as well as on
the consumer's passivity. A higher degree of transparency within
the fund activities in relation to the customer could increase the
customer's knowledge of this field and make the passive consumer
more active. There is a risk that an excess of information will make
it difficult for the customer to obtain relevant knowledge, and as a
result, guidance is required for the acquisition of knowledge and
for more consumer-friendly means of comparison. Low customer
mobility, combined with the lack of clarity on the part of the fund
company in terms of the individual consumer's saved capital,
results in weak buyer power for the consumer.
153
Increased costs for the fund companies in combination with
increased competition, primarily from low-price companies in the
market for new savings, has led to organisational changes in the
fund companies in order to streamline and adjust in advance of
future challenges. These changes, in the form of mergers and
collaborations with companies that are already well-established in
other markets, for example, may come to redistribute market share
between the fund companies. A continued increase in competition,
combined with increased consumer awareness and mobility will
clear the way for more effective competition – most likely also in
the market for existing savings.
In a review of the competitive situation on the fund market, the
Competition Authority has identified several obstacles to effective
competition. However, these obstacles can be reduced or eliminated
via various measures and reforms, which could lead to greater
downward pressure on administration fees in the long term, to the
advantage of the individual consumer.
154
5
Measures to improve competition on the
financial services market
It is the assessment of the Competition Authority that a competition
policy that allows for the development of well-functioning markets
should build on the consumers having the conditions to choose, on
not having unnecessary barriers for companies to enter and
challenge established companies in various markets, on companies
competing on equal terms, and on the rules being simple and
effective.
The following measures are deemed to be the most important,
based on their potential long term effects and their importance to
the development of well-functioning markets. The proposals
presented in the report are directed to the Swedish Government.
Some of the proposals have been previously made by the Swedish
Competition Authority (2009c), for example in the report Action for
better competition.
155
5.1
Limit the banks' right to interest differential
compensation
The Competition Authority's proposal
It is important to revise the calculation of the interest differential
compensation in order to increase customer mobility on the
mortgage market. The policy should be to ensure the banks are
unable to make unwarranted profits. It is also important that
customers are provided with clear information on the terms of a
loan before signing.
Reasons for the Competition Authority's proposal
In order to reduce the interest rate risk, customers are often
recommended to divide the mortgage into several mortgages with
different terms at a fixed interest rate. Almost 50 per cent of the
mortgage has an interest commitment period of one year or longer.
The facility for customers to divide the mortgage into several loans
with different terms is of course desirable for many. At the same
time, this produces lock-in effects as the premature redemption of
loans is associated with the payment of interest differential
compensation. Interest differential compensation is a form of
compensation for the bank for the revenue lost as a result of
premature termination of the contract. In the same way, it may
often be advantageous in times where interest rates are low to
redeem loans early in favour of new terms and conditions, whether
within the same bank or at a competing bank. However, high
interest differential compensation can reduce the incentive for the
customer to redeem their fixed loan and switch bank. When the
difference between the mortgage rates and the reference rate
increases, so does the interest differential compensation.
156
The premise is therefore that the reference rate is based on the
investment opportunities generally available to the creditor. The
reference rate is officially noted, and is then calculated as the
treasury and bond rates plus one percentage point. Calculations
show that interest differential compensation can come to large
amounts as the difference between the mortgage rate and the
reference rate has increased. Redeeming a loan of SEK 2m in
May 2013 which was taken out in December 2011 with a term of
five years and a fixed rate of 4.0 per cent, after a 30 point discount
on the listed interest, would cost the customer around SEK 140,000
in interest differential compensation.157
A mortgage customer paying compensation for lost revenue as a
result of a prematurely terminated contract may be considered a
normal part of a mortgage agreement. The problem is the
calculation of this compensation. When there is a clear flexibility
between the government bond rate and the mortgage rates, the
interest differential compensation will not be as high. Changes on
the financial markets in recent years have led to a reduction of
flexibility between the government bond rate and the mortgage
rates and an increase in the difference (“spread”) between the
mortgage rates and the reference rate. This means that the
comparison rate was for certain periods considerably lower than the
mortgage rates. This had caused the interest differential
compensation to increase.
Several stakeholders have criticised the current model for
calculating interest differential compensation. It produces powerful
lock-in effects and does not accurately reflect banks' alternative
Calculation from the Swedish Consumers' Banking & Finance Bureau, “Konsumenternas
Vägledning om Bank och försäkring” *Consumer Guidance on Banking and Insurance+,
based on SEB's and SHB's 10-year (fixed-term) rates, 25 April 2008.
157
157
investment opportunities and costs associated with the customer
redeeming their mortgage prematurely.158 At present, legislative
work is underway in the Government Offices with the aim of
changing the calculation model for interest differential
compensation so that it is simpler and cheaper for the customer to
redeem fixed-term loans and thereby reduce the lock-in effect that
occurs when the customer chooses the term for their mortgage. In a
ministry memorandum from the Ministry of Justice,
Ränteskillnadsersättning m.m. vid bolån [Interest differential
compensation, etc. for mortgages] (Ds. 2013:38) from 14 June 2013, a
change of the calculation method is proposed in order to lay the
foundations for fairer compensation.159 As lock-in effects limit
competition, it is important that the matter is promptly
investigated.
It should be noted that the banks may, if they so wish, charge
interest differential compensation in accordance with the
instructions found in the Consumer Credit Act and the Swedish
Financial Supervisory Authority's guidelines, if the customer
redeems a mortgage prematurely. They are not obliged to use this
calculation model; it simply provides a ceiling for interest
differential compensation. This means that customers, at least in
theory, could negotiate terms other than those stipulated in the
Consumer Credit Act and in the Swedish Financial Supervisory
Authority's instructions regarding the size of interest differential
compensation. The banks could use a model that is more favourable
for the customer in their marketing. The Competition Authority can
establish that none of the banks seem to take advantage of this
opportunity today.
158
See e.g., Villaägarnas Riksförbund (2013a), Dagens Industri (2012b).
159
The Ministry of Justice (2013), the Government (2012b), the Government (2013).
158
Customer mobility on the mortgage market can increase via the
banks informing about and limiting the interest differential
compensation. For many, taking out a loan for a fixed period at a
fixed rate is an element of security in their personal finances. It is
easier to plan their finances, and there is no risk of being affected by
sudden increases in interest rates. The borrower is therefore often
recommended to take out at least part of the loan at a fixed interest
rate. The most common commitment periods for mortgages are
between three months and ten years, with an average commitment
period of 1.4 years. Of course, commitment periods are a form of
lock-in by themselves, but they can also be associated with certain
benefits to the consumer.160 Many consumers do not receive
sufficient information on what interest differential compensation
means when redeeming loans prematurely. It is written in the
contractual terms, but far from everyone reads these. A requirement
for verbal and written information on this – before the loan is
signed for – would be more noticeable to the consumer. They
would thus have a better basis for a decision when considering
commitment periods and profitability assessments for the transfer
of loans. The difficulty of actually assessing the profitability of
transferring the loan to another creditor may have a lock-in effect.
Many consumers believe that the decision they receive from the
bank regarding the sum of the interest differential compensation
also applies to any future redemption of their loan, rather than just
being the sum that applies at that point in time.
160
The Swedish Competition Authority (2009b).
159
5.2
Investigate the possibility of limiting or banning
banks from offering certain package deals
The Competition Authority's proposal
Investigate the possibility of limiting or prohibiting banks from
offering certain package deals, in order to increase the comparability of the terms offered by different banks and to make it easier for
new players to establish themselves in parts of the banking market.
Reasons for the Competition Authority's proposal
The possibility for consumers to set a product aside and thus have
access to better alternatives is in many cases the clearest expression
of consumer power in effective competition. Those who gain better
terms and conditions by changing supplier also help to improve the
situation for all consumers.
Apart from the importance of consumers having information on
prices, they must also have the opportunity to assess the quality of
goods and services and to know the requirements that apply when
signing contracts. The battle for customers can lead companies to
invest in loyalty-inducing contracts, quantity discounts or package
deals, and bonus systems that lock in the consumer. This can make
it difficult to gain an overview of the deals on offer and to make
well-grounded choices.
Various studies show that for a number of reasons there are limited
opportunities to compare information for different financial
services. The biggest reason is the difficulty of finding out the price
for specific services as banks often package the services and offer
different discounts, with the idea that consumers will purchase the
majority of their services from the same supplier. This discount
structure affects consumers' decision-making because, in the
160
consumer's perception, they are receiving an individual discount
and therefore do not evaluate other alternative suppliers. It also
reduces transparency as the package deal the consumer receives is
more difficult to compare than individual services. Another factor
that makes comparison difficult is the customer's bargaining room
when borrowing; they often do not know that there is space for
negotiation and believe that the interest rate presented to them is
the actual cost of the loan.
In addition, several different investigations emphasise that the
complex information about the services, unclear fee structure and
package deals make it difficult for the consumer to perceive the
market as transparent. The consumer who makes rational financial
decisions will have great difficulties obtaining and processing
information. The consumer who makes decisions based on the
situation will find it easier to make decisions, but does so on poor
grounds as large parts of the relevant information are unavailable.
According to the Competition Authority, transparency, i.e., the
opportunity for the customer to compare products, services and
prices, could increase via a reduction of packaging, cross-selling
and Relationship-Based Pricing (RBP) of financial services.
As the mortgage is often the largest bank transaction a person will
undertake in their life, many consumers choose their bank based on
where they will receive the most favourable mortgage rate. For this
reason, banks sometimes use mortgages as a loss leader. In
connection with mortgage negotiations, the bank can offer different
types of total customer solutions that involve providing a lower
mortgage rate in exchange for the consumer having all of their
banking services with them. It is not uncommon for a bank to offer
a lower interest rate on the mortgage if the household signs up for
other services. It is important to keep in mind that these other
services entail costs, in some cases for many years to come. The fact
that the banks present a total customer solution makes it simple for
161
the customers, whilst at the same time it becomes difficult to
distinguish the costs for different services.
In addition, the Swedish Financial Supervisory Authority points out
that focus on savings is positive but that it is important for the fund
investor to be aware that investing in funds entails certain fees. Fees
for fund and pension investments are automatically deducted from
funds' returns or from the deposited amount, meaning it can be
difficult for the customer to assess them. Being aware of the fees
associated with fund investment can have a large impact on the
return. A customer that saves SEK 1,000 per month for ten years in
an average fund portfolio pays around SEK 12,400 in fees.161
According to the Swedish Financial Supervisory Authority, taking
into account the interest rate on deposits that the bank offers on
different accounts is also an important parameter for customers'
personal finances. The interest on deposits plays a major role in the
long-term due to the compound interest effect.162 Passivity on the
part of the customer can therefore cost them money in the form of
missed interest income. A customer who allows their entire salary
to remain on a transaction account without interest, instead of
saving SEK 1,000 every month on a deposit account with interest,
The calculation assumes that the fund portfolio has the same distribution as
Swedish households' total fund assets, which consist of 76 per cent unit trusts, 18
mixed funds, 5 per cent bond funds and 7 per cent “other” funds (source SCB). The
Swedish Financial Supervisory Authority has used average administration fees
obtained from AMF's report “Avgifterna på fondmarknaden 2011” *Fees on the
fund market in 2011], and expected returns can be found at www.amf.se. For
Swedish funds, the difference between the administration fee and TER (Total
Expense Ratio), which is used in Normanbeloppet, is often marginal.
161
As the disbursed interest remains on the deposit account, interest is also accrued
on this. This means that the amount on which interest is calculated will have
increased by the time of the next calculation.
162
162
will miss out on around SEK 6,250 over a ten-year period, even with
the current very low interest rates.163
And finally, according to the Swedish Financial Supervisory
Authority, it is also important to be aware that other services such
as debit cards, securities deposits and payment services are in most
cases associated with a fee. It is therefore also important to
negotiate on or at least look over the terms and prices of services
over and above the mortgage.
In Norway, there is a ban on product packaging. This means that a
financial institution may not offer a financial service if the customer
acquires another financial service at the same time, or offer a
customer particularly favourable terms or discounts if they acquire
several different financial services. There are exceptions to the ban
if the services are linked to one another or if they entail a cost
saving. The financial supervisory authority in Norway regarded a
holistic concept in which the customer must buy fund and
insurance products in the same group in order to receive a 0.30 per
cent discount on the mortgage as being in breach of the ban on
product packaging.164 Experience from Norway is that product
packaging in various forms is widespread on both the banking and
insurance markets.165 One goal of the ban is to prevent financial
institutions with a broad range of products from limiting
competition by introducing their customers to a holistic solution. It
is also intended to make it easier for customers to obtain
information on various financial services.
The average interest rate on a deposit account without terms and conditions was at the end of
the third quarter 1.0 per cent, and the interest on the transaction account is assumed to be 0.
163
164
Finanstilsynet (the Financial Supervisory Authority of Norway), (2011).
165
Kredittilsynet, (2007).
163
In the single market, proposals are being made for the continued
development of competition on the market for financial services.
The European Commission recently put forward a proposal for a
directive on payment accounts, which includes a recommendation
that if payment accounts are provided within the scope of a
package solution, the consumer must be informed by the bank as to
whether or not they can acquire a payment account separately,
including the fee for this separate account.166
Comparing different suppliers' deals can be difficult, particularly
where services are concerned. If the consumers do not have access
to relevant information, there is a risk that competition will be
obstructed and that the suppliers will charge higher prices than
they would otherwise. It can be time-consuming and costly for
consumers to gather the information required to gain an impression
of the deals available on different markets.
The Swedish Consumer Agency's investigation reveals that one of
the largest obstacles to consumer mobility in the banking market is
that consumers have insufficient knowledge of how the market
works. They find it difficult to compare prices and various offers on
the market. It can also be difficult to compare different products
offered by different companies, and knowledge of financial services
is often insufficient due to the complexity of the products.
Furthermore, consumers' lack of knowledge seems to extend to the
banking and financial services markets and their way of operating,
which is a clear obstacle to customer mobility. According to the
Swedish Consumers' Banking & Finance Bureau, this often serves to
limit consumers' bargaining room. Consumers also seem to find it
difficult to gain an overview of the range of different types of
service, and the use of quantity discounts makes price comparisons
166
The European Commission (2013), Article 8.
164
between market players very difficult. A ban on product packaging
would make it easier for the customer to compare different
products offered by different companies and thereby improve
conditions for heightened customer mobility. A ban can also
improve conditions for new players to enter the banking market as
it eliminates lock-in effects on the market.
It is however important to consider that the possibility to offer
packaged solutions with discounts may be a competitive device that
gives the consumer greater choice on the market. For this reason, it
is important that the development in Norway is carefully analysed
and that the advantages and disadvantages of introducing a similar
system in Sweden are evaluated.
165
5.3
Investigate the right to freely move capital from
fund accounts to an ISK and the possibility for fund
companies to offer ISKs
The Competition Authority's proposal
Investigate the possibility to offer consumers the right to freely
move capital from fund accounts to Investment Savings Accounts
(ISKs) in order to increase customer mobility on the fund market.
The most suitable way of achieving this would be by deferring tax
when switching funds.
Investigate the possibility of enabling fund companies to offer ISK
in order to increase customer mobility on the fund market.
Reasons for the Competition Authority's proposal
Fund investors have a wide range of funds to choose from, from a
large number of market players. This is to the consumers'
advantage when selecting a fund. Competition for new savings in
funds is more effective than that for existing savings. There are
lock-in effects in existing savings, partly due to the capital gains
taxation associated with switching funds, which results in low
customer mobility.
Competition on the fund market is obstructed by low mobility
among fund investors. Large accumulated stocks of fund
investments tend to remain with fund companies owned by the
four major banks, and have a preserving effect on these banks' high
market shares. However, the banks' distribution networks have
diminished in recent years, in line with the increase in the use of the
internet and other actors with large customer bases becoming
established in the sector. The market share of the four largest banks'
166
fund companies has become considerably smaller over the course of
the 2000s, as a result of increased competition, but it still constitutes
around 60 per cent.
The lock-in effects are caused by the consumers not switching funds
to the extent they would if they did not need to pay capital gains
tax on their sale when making the switch. The owner of a share in a
mutual fund is taxed once it is sold. The tax is the same as would
apply to direct ownership of securities (30 per cent). As a switch to
a fund (from a deposit) triggers the taxation, the consumer misses
out on the tax credit that long-term investment in one and the same
fund would involve. The fund investors avoid switching funds for
this very reason, which means that competition on the fund market
suffers.
A model in which it is possible to defer tax when switching funds
would be desirable from both a consumer and competition
perspective. Deferred capital gains tax when switching funds
stimulates competition on the fund market by laying the
foundations for greater customer mobility. If fund assets could be
freed up and also made available to other funds, competition on the
fund market would most likely increase. This would ultimately
benefit the fund investor in terms of downward pressure on prices
and good product development. Greater commitment from the
fund investor's side can also lead to better risk diversification and a
higher average return.
State income from capital gains on funds and stocks varies greatly
from one year to the next depending on market developments.
According to information from the Swedish Tax Agency, state
income for the entire securities sector is estimated at around
SEK 25 billion in tax, SEK 10 billion of which is from the sale of
167
funds.167 Naturally, consideration may be given to introducing a
ceiling for the amount that can be deferred when selling a fund, in
order to reduce the impact on state finances. However, this is only a
matter of deferring the tax; i.e., taxation will still come at a later
date. Hopefully, a deferral reform will then have contributed to a
higher return that leads to increased income for the State.
An market player that can offer their customers the two different
tax environments of ISKs and trust accounts is of course a more
competitive player that will find it easier to enter the fund market
and can exercise greater competitive pressure on the more major
players. With today's rules, only credit institutions and securities
companies can offer their customers an ISK. This disadvantages
fund companies, which are unable to offer this type of account due
to legislation that prevents them from offering savings accounts.
Not being able to offer customers an ISK means a lower standard of
service and is likely an inhibiting factor for customer mobility and a
barrier to entry. The problem could be rectified by allowing
customers to have a charge account outside of the ISK.
167
The Swedish Tax Agency (2009).
168
5.4
Introduce regulations which stipulate that banks
must report their funding costs for mortgages in a
uniform manner
The Competition Authority's proposal
Introduce regulations which stipulate that the banks must report
their funding costs for mortgages in a uniform manner in order to
make it easier for consumers to negotiate with the banks.
Reasons for the Competition Authority's proposal
The element of negotiation means that the mortgage market is not
transparent. This means that there is information asymmetry when
negotiating mortgage rates.
Banks' listed interest constitutes only a ceiling in the negotiation
and the banks do not clearly explain their discount policies. It is
therefore difficult and time-consuming for customers to compare
the banks' mortgage rates. If negotiations are to lead to a successful
result, both parties are often required to have access to necessary
information on each other's preferences and financial framework
and conditions. When granting credit, the distribution of information is often uneven, which gives rise to information asymmetry.
Information asymmetry leads to an imbalance between the parties
and allows the party with more information to gain a better result
at the expense of the other party.
If the mortgage customer is to achieve a desirable result, it is
important for them to have access to information on how much
space for negotiation they have. In principle, this consists of the
difference between listed interest rates and the funding cost, and
what discounts are available to the customer given their risk profile
169
and total business with the bank. There are a number of problems
associated with this at present. One circumstance is that there is no
standard method for banks to report their mortgage margins, and
above all the differences between the listed interest rates and the
funding costs. Where the difference between STIBOR and the banks'
funding costs has increased, it has also been more difficult for
mortgage customers to determine the banks' gross margins (the
actual bargaining room) on the listed interest rates. Furthermore,
the mortgage customers do not always have access to the banks'
discount policies, which makes it difficult to know what customer
interest rates the different banks offer. Overall, this means it is
difficult for mortgage customers to know how much room for
negotiation they have and what the potential bargaining margin is
for the mortgage.
Consumers often have poor knowledge of financial services.
Complex financial circumstances make it difficult for the consumer
to make rational choices. In many cases it is difficult to understand
the relationship between price and product, not least where
mortgages are concerned. In order to improve the mortgage
customer's knowledge, and thereby their negotiating position
towards the bank, the information can be distributed more evenly
by means of a requirement for the banks to report their funding
costs for mortgages in a similar manner. This would shed some
light on just how much room the mortgage customer has for
negotiation and haggling. It can also improve the conditions for
increased customer mobility on the mortgage market.
170
5.5
Analyse the possibility of introducing more
obligatory means of comparison in the fund sector
The Competition Authority's proposal
Analyse the possibility of introducing more obligatory means of
comparison for fund companies' closest end customer, to report to
the consumer. This is in order to simplify and clarify matters for the
consumer and increase customer mobility between different funds.
The Competition Authority feels that efforts should be made for
suitable means of comparison to be included in the fund fact sheets
in the long term.
•
A measurement for returns which supplements the “Norman
amount” and clarifies for the customer what effect the fund's
fee will have in the long term.
•
A measurement for active portfolio trading – Active share.
There are big differences between active shares in different
funds.
•
A price index for each fund category. This is best presented
combined with an average administration fee for the fund
category in question.
Reasons for the Competition Authority's proposal
The consumers have an important role to play in order to reach
functioning markets. The consumers' endeavours to seek out the
best alternatives based on factors such as quality and price are an
important factor in healthy competition. Comparing different
171
suppliers' deals is however difficult at present, due to a lack of
transparency in the financial services sector. If the consumers do
not have access to relevant information, there is a risk that
competition will be obstructed and that the suppliers will charge
higher prices than they would otherwise. A number of
standardised, consumer-friendly means of comparison would
enable the consumer to make rational decisions when purchasing
shares in a mutual trust (with or without advice).
A measurement of returns (historical returns) would complement
Normanbeloppet168 and shed light on the effects of the funds' fees in
the long term. A measurement of the return is more concrete and
therefore, for many consumers, easier to understand than the
annual historical return given in per cent or as a diagram. For
example, we could work out a measurement of the return on
savings of SEK 1000 per month over a period of 10 years. The
calculation is based on the fund's average returns over the past five
years.
The “active share” is a measure of the deviation from the index,
which means that if the figure is 0 per cent, the fund is identical to
the index, whilst an active share of 100 per cent means in practice
that the fund deviates from the index entirely. In summary, there
are big differences between active shares in different funds. An
American survey from 2010169, in which 1,124 active funds were
audited, revealed that whilst funds during the period 1990–2009 as
a group gave a negative return of 0.41 percentage points per year
after deduction of fees, the 180 funds with the highest active share
The key ratio is calculated as the difference between the result that could be achieved if the
investment could grow without any fees and the actual amount that the saver obtains after
10 years.
168
Petajisto, Antti. Active Share and Mutual Fund Performance, Stern School of Business,
New York University, Working Paper Series, 2010. Petajisto, A. (2010).
169
172
actually had excess returns of an average 1.26 percentage points per
year after deduction of fees for the same period. For funds with an
active share below 60 per cent, the dismal figure was an annual
negative return of -0.91 percentage points for the period, after
deduction of fees. The active share may be an interesting measure
for the fund investor to keep track of, in combination with risk and
a measurement of returns.
It can be time-consuming and costly for consumers to gather the
information required to gain an impression of the deals available on
the market. A measure which would allow them to quickly
understand which price level a fund is on would be a price index
for each fund category. A price index of this kind (fee index) is best
shown together with an average fee per fund category. One
example is shown in the table as per the following:
Type of fund
Fee index (%)
Swedish stock index funds
0-0.70
Short-term bond funds
0.15-0.90
Long-term bond funds
0-1.20
Global funds
1.50-3.50
Hedge funds
1.50-5.50
By producing more standardised obligatory means of comparison
between different funds, customer mobility can increase on the
fund market. Obligatory means of comparison can be a tool for
increasing consumers' knowledge of the costs associated with
funds. This involves producing a simple, coherent and uniform
report of the customers' costs associated with the fund, in the short
and long term. This can reduce the barriers to changing funds and
potentially achieve better dynamics and competition. Greater
knowledge about the fund as a financial service can also constitute
a better basis for the customer when negotiating various fees,
interest levels and discounts on various services with the bank. If
173
more consumers make demands and evaluate products and
services, the range of products will likely improve, to the consumers' benefit. This in turn leads to a competitive financial market.
If there is a lack of pricing information, one of the most important
controlling mechanisms on a market will not work. This naturally
has direct repercussions on consumers in the form of higher prices,
but it also leads to a weakening of the competition on the market.
In accordance with the Investment Funds Act, all investment funds
must have an up-to-date fact sheet. This should contain the basic
information required for an investor to assess the fund and should be
concise and easy to understand. All customers should be given a fact
sheet before purchasing shares in a mutual fund. It must also be
available on the fund company's website. The Competition Authority
believes that efforts should be made to ensure the fund fact sheet is
more consumer-friendly and useful over time, with more suitable
means of comparison (see the Competition Authority's proposal on
measures) strategically placed – from the consumer's point of view –
on the fund fact sheet.
174
5.6
Introduce simple cost statements for banking
services
The Competition Authority's proposal
Increase the consumers' knowledge of how important these fees are
for banking services, by introducing requirements in the financial
regulations stating that the banks must produce comprehensible
simple cost statements for their customers.
Reasons for the Competition Authority's proposal
The Competition Authority believes that a simple cost statement,
which is a means for banks to inform customers of how much they
have paid them in fees, can increase competition. The cost
statement can also include an overview of e.g., the interest rates that
the customer has paid and received over the course of the year. The
Swedish Financial Supervisory Authority's reports Konsumentskydd
på finansmarknaden [Consumer protection on the financial market]
(2008) and Hushållens ekonomiska förmåga [Households' financial
capacity] (2008) revealed that more than half of consumers were
relatively inactive in the management of their finances. One
explanation given for this was that it was difficult to assess the
immediate benefit of gathering information and evaluating the
alternatives. It was also difficult to compare and understand the
various choices.
Consumers have many options, as the banks' range of services is
ever growing. This puts great demands on structure, knowledge
and competence among individual customers. The range of services
in the banking sector is extremely complex, perhaps more complex
than in any other product area that consumers come into contact
with. According to the Financial Supervisory Authority's report
Action plan for small savers (2007), only a small proportion of
175
households – around 19–21 per cent – gather information on bank
services, whether by themselves or with the help of others, before
buying.
In its report Konsumentrörligheten på de finansiella marknaderna
[Consumer mobility on the financial markets] (2001), the
Competition Authority also established that consumers are
generally unaware of the cost of banking services. This means that
the consumer is unable to evaluate deals from competing banks. As
the customer does not know whether or not it is profitable to switch
bank, it is not of interest to them to do so. Even if many consumers
have become increasingly active, it is clear from the Swedish
Consumer Agency's report Kundrörlighet – exempel på hinder för
konsumenter inom några viktiga marknader [Customer mobility –
examples of obstacles for consumers in some of the more important
markets] (2009) that a lack of involvement is a clear obstacle to
customer mobility on the banking market. We also see that it is
difficult for consumers to gain an overview of the range of services.
Different types of quantity discounts make price comparisons more
difficult. The lack of interest and transparency tend to mean that the
customer do not have a great deal of knowledge on banking
services and the prices of these.
The Danish Competition and Consumer Authority recently, in
April 2013, proposed in a report170 that banks should issue a
standard overview of the most important information on services
available to customers and the bank's costs. Requirements should
be set for information to be presented in a simple and comprehendsible manner. The Danish Competition and Consumer Authority
feels that this type of overview of services available to customers
and the bank's costs will provide a better foundation for actively
170
The Danish Competition and Consumer Authority (2013).
176
questioning and comparing banks' prices and conditions. The
overview could for example be sent out once or twice per year. The
proposal is based on an earlier overview of costs jointly produced
by Denmark's financial supervisory authority and consumer
agency. It includes guidelines for what an overview of costs should
contain and who should receive it. It is an optional policy which
was also introduced by the trade association Finansrådet (the
Danish Bankers' Association). Experience from Denmark shows that
most banks follow the guidelines and issue their customers with an
overview of costs around the turn of the year.
In the single market, proposals are being made for the continued
development of competition on the market for financial services.
The European Commission recently put forward a proposal for a
directive on payment accounts, which includes a recommendation
that the bank informs the consumer, on an annual basis, of the fee
for having a separate payment account.171
A simple cost statement can be a tool for increasing consumers'
knowledge of the costs associated with banking services. This
involves producing a simple, coherent and uniform report of the
customers' costs in the bank. It also acts as a reminder to the
customer of the costs. If every customer were to receive once per
year an overview of the fees they have paid to the bank, and an
overview of the costs over the past three years, it would be easier
for consumers to compare different banks' prices. This can reduce
the barriers to switching banks and potentially improve dynamics
and competition. A cost statement can also act as a solid foundation
for the consumer in their dealings with the bank, such as
negotiations concerning various fees, interest rate levels and
discounts. If more consumers make demands and evaluate products
171
The European Commission (2013), Article 8.
177
and services, the range of products will likely improve, to the
consumers' benefit. This also creates a competitive financial market.
If there is a lack of pricing information, one of the most important
controlling mechanisms on a market will not work. This naturally
has direct repercussions on consumers in the form of higher prices,
but also leads to a weakening of the competition, especially in terms
of prices, on the market.
The Swedish Bankers' Association has a number of objections to the
proposal and has called for a basic impact analysis.172 Before the
proposal is implemented, the costs and administrative burden for
the banks must be reviewed. The cost statement may likely mean
that the banks' costs would be transferred to the consumer.
As the Swedish Bankers' Association has pointed out, there are
already extensive regulations concerning what cost-related
information is to be given to consumers for different types of
banking services. Obviously, a great deal of information on bank
customers' fees and costs is produced for various contexts. The
proposal would therefore not necessarily mean the introduction of
additional information requirements. It would more likely involve
compiling existing information, or gathering the most competitionfriendly and suitable information, which should limit banks'
administration. The banks should also be able to minimise
administrative costs by e.g., integrating the cost statement with the
income statements that the Swedish Tax Agency annually
distributes to customers.
172
The Swedish Bankers' Association (2009).
178
5.7
Investigate the possibility of tightening regulations
concerning financial advice to consumers
The Competition Authority's proposal
Investigate whether a ban on commission when selling funds is the
most appropriate course of action in order to achieve a more
effective consumer protection, and look into how this type of ban
may affect competition on the fund market.
Investigate the possibility of tightening regulations that apply to
financial advice to consumers by making it obligatory for the fund
distributor closest to the end customer to inform the fund investor
of any costs associated with advisory services and distribution for
each product. This is intended to increase transparency in the fund
sector, to the consumer's advantage, and afford the individual
consumer greater bargaining power.
Reasons for the Competition Authority's proposal
Financial advice which does not prioritise the consumer's best
interests, combined with a lack of transparency and ignorance on
the part of the consumer can lead to very negative consequences on
the size of the final return on a fund or pension investment.
Today, a financial advisor/salesperson on the fund market normally
receives compensation for their efforts in relation to attained sales
levels or achieved targets, i.e., commission. A compensatory system
of this nature may give the individual advisor incentive to
recommend a consumer (fund or pension investor) looking for a
low-price product to invest in a fund with a higher administration
fee instead of one with a lower administration fee, purely on the
grounds that the former results in a higher commission for the
advisor. For this reason, a ban on commission has been discussed.
179
This type of ban could probably be formulated in a number of
ways. The primary purpose of a ban on commission should be to
ensure that the advice received by the consumer is adapted to their
individual needs. However, the question is whether a ban on
commission would in reality have the desired effect and thereby
achieve the purpose of such a ban. Even if the advisor's direct
incentive as it stands today – to prioritise high-price products when
providing advice to the consumer – were to cease with the
introduction of a ban on commission, it is probable that other
factors that can give the advisor direct incentive to prioritise highprice products would remain. The advisor's client, for example,
likely receives remuneration from the fund company for
distribution in the form of a percentage (around 50 per cent,
according to common market practices) of the fund's administration
fee. Remuneration paid to the advisor by their client in the form of
e.g., an annual bonus or a stock dividend based on the annual
turnover could therefore be an incentive for the advisor to
recommend high-price products over low price products for the
wrong reasons, despite the existence of a ban on commission. There
are probably more ways of contravening the purpose of a ban on
commission. The ban also entails a risk that the consumer may be
lulled into a false sense of security.
A possible consequence of a ban on commission for financial advice
is that the banks and insurance companies' hold on the fund market
would be tightened as the consumer, who is often in need of advice,
would probably be more likely to forgo financial advice.
Compensation for this is invoiced separately as a fixed cost when
purchasing shares in mutual funds. If more and more consumers
choose to forgo advice, the whole point of consulting a company
specialising in advice on funds or pensions is lost. A development
of this kind would likely result in a number of small and mediumsized fund companies having problems with profitability and, in
the long term, disappearing from the market. Barriers to entry to
180
the market would also become larger. Banks and insurance
companies with strong distribution networks would once more
become stronger and take market shares, just as with fund
supermarkets that have built up their operations around
distribution rather than advice.
A potentially more effective way of tightening regulations
concerning financial advice to consumers is to further increase
transparency in the fund sector. This can be achieved by making it
obligatory for fund distributors closest to the end customer to
report how much of the administration fee remains with the
distributor, as well as how much is paid to the advisor as
commission, in order to strengthen the individual consumer's
bargaining power. The goal is to shed light on all sales links in fund
operations and put a price tag on them. This will increase the
consumer's understanding of and insight into how different actors
may have incentives to recommend fund products based on profit
rather than what is best for the consumer.
If the consumer is able to easily obtain information about the effect
of costs on the administration fee, they can use these facts when
consulting an advisor and thus be more difficult to influence. If a
ban on commission can be avoided, this will likely favour a
continuation of promising developments in terms of transparency
in the fund sector.
The Competition Authority's proposal is best analysed in the scope
of the ongoing investigation into consumer protection in relation to
financial advice.173
173
The Swedish Government (2012c), Ju 2012,14.
181
5.8
Investigate responsibility for the Stockholm
Interbank Offered Rate (STIBOR)
The Competition Authority's proposal
Investigate who should be responsible for the inter-bank interest
rate STIBOR and the framework surrounding it, as well as its effect
on competition in the banking market.
Reasons for the Competition Authority's proposal
The banking market is characterised by different types of cooperation on infrastructure. Examples of cooperation on infrastructure
services can be found in Dataclearing (DCL) and Bankgirocentralen
AB's (BGC) work with payment processing on commission from the
banks. Examples can also be found in BDB Bankernas Depå AB and
newly formed BAB Bankernas Automatbolag AB's cooperation on
infrastructure for deposits and ATMs and in international card
cooperation such as Visa and MasterCard. The internal banking
interest rate STIBOR is another example of cooperation between
banks.
Characteristic of the banking market is that interdependency exists
between the largest market players, which they take into account in
their decisions. This is expressed not least in the existence of
different forms of infrastructure cooperation. When company
representatives meet or in other ways exchange information with
one another, especially within the scope of infrastructure
cooperation, there is a risk that this will lead to a market outcome
resembling a cartel situation. Cooperation agreements must
therefore be given special attention from a competition viewpoint.
It is also underlined in the Commission's guidelines on the
182
application of Article 101 in horizontal cooperation agreements.174
This establishes that the Government and other authorities should
be restrictive with the creation of new platforms for cooperation
between competing players on the financial market.
The “infrastructure club” model has advantages from an efficiency
perspective but also disadvantages. For example, companies that
are part of a club have incentive to keep out new challengers and
the activities within these clubs can be changed in order to
coordinate the pricing in subsequent links.
If the banks perceive that they have a liquidity deficit, which can
arise when disbursing mortgages, they can loan from one another
via the interbank market. Loans between the banks are governed by
a reference rate known as STIBOR (Stockholm Interbank Offered
Rate).175 They are calculated as an average of the interest rates the
major banks offer each other.176 Similar sets of base interest
rates/reference rates are found all over the world, e.g., LIBOR and
TIBOR.177 STIBOR is determined daily for six different terms. Six
banks are represented on the STIBOR panel.
In the Riksbank's report Riksbankens utredning Stibor178 [The
Riksbank's investigation of STIBOR], it was established that there
were no signs that STIBOR was being manipulated. The report did
however reveal a number of shortcomings in the framework
surrounding it. The report pointed out deficiencies in management
and control, as well as in terms of responsibility.
174
The European Commission (2011).
175
The Riksbank (2012a).
176
The Riksbank (2012a).
177
Wheatley (2012).
178
The Riksbank (2012c).
183
It also found other shortcomings in terms of the derivation of
STIBOR from prevailing market pricing, incentive structures and an
ineffective process for determining STIBOR. The Riksbank also
established that there were too few participating banks. The
Riksbank establishes that there is an incentive for the banks to
influence bidding negatively and that the bidding process is
inefficient. The bidding is open. It entails that the banks can see one
another's bids during the bidding process itself, which opens up for
strategic bids. The Riksbank feels that this provides incentive for the
banks to influence each other, which in turn leads to the risk of
“follow the leader” behaviour by which the banks place the same or
similar bids.
Another shortcoming pointed out by the Riksbank is that the banks
are not forced to take responsibility for their bids. They are also able
to change their bids during the bidding process. One proposal put
forward by the Riksbank is that the banks' bids should be binding,
meaning they are obliged to loan or invest in accordance with their
bid. The Riksbank also establishes that there are too few banks
participating in the STIBOR panel. This entails a greater risk for
cooperation between the banks when STIBOR is determined. The
Riksbank also feels that there are banks not on the STIBOR panel
that use STIBOR in their pricing. They should also participate in the
panel.
Concerning responsibility for the work to change STIBOR, the
report upheld that the Swedish Bankers' Association was the
organisation that had the means to initiate the process of change,
but that it was not obvious which actor should have the overall
responsibility for STIBOR in the long term.
In order to address the problems observed by the Riksbank and
other stakeholders, the Swedish Bankers' Association has produced
a new framework for STIBOR in collaboration with the banks in the
184
STIBOR panel, i.e., the four major banks and Danske Bank. This
means that the Swedish Bankers' Association assumes overall
responsibility and is the principal for STIBOR. The new framework
is in use as of 04 March 2013. According to the Swedish Bankers'
Association, the framework shall ensure a clearer structure and
control, as well as transparency in the determination of STIBOR.
The Riksbank and Nasdaq OMX have been observers in the work,
and remain so at this time. Länsförsäkringar is also included in the
STIBOR panel as of 04 June 2013.
The Riksbank has pointed out that the framework related to the
reference rate STIBOR has been largely reformed in accordance
with the recommendation of autumn 2012. However, according to
the Riksbank, there is still a clear and independent structure for
following up and checking that the framework is adhered to. The
Riksbank therefore recommends that the STIBOR framework be
complemented with a requirement for independent follow-up and
control.179
In light of the aforementioned, the Competition Authority proposes
that the Government look into who should be responsible for the
inter-bank interest rate STIBOR and the framework surrounding it, as
well as its effect on competition in the banking market. Considering
that there is an inherent risk with cooperation on infrastructures in
that it could be used for coordination between market players, the
Competition Authority considers it less appropriate to further
consolidate these by transferring responsibility to the Swedish
Bankers' Association, which is the banks' trade association.
179
Riksbanken (2013).
185
5.9
Look into the sale of SBAB or clarify its role
The Competition Authority's proposal
Investigate a sale of SBAB, or clarify how SBAB should contribute
to the diversity and competition in the banking market, and ensure
competition is not distorted.
Reasons for the Competition Authority's proposal
SBAB (the Swedish Housing Finance Corporation) Bank's business
model is based on the distribution of mortgages via telephone and
the internet, as well as granting credit to companies and housing
cooperatives. SBAB also takes care of deposits made by consumers,
companies and housing cooperatives. SBAB Bank's market share on
the private mortgage market for 2012 was around 7–8 per cent.
Having obtained permission in late 2010 to conduct banking
operations, SBAB became a bank in March 2011, changing its name
to SBAB Bank AB (publ.). The company thereby took an important
step in its endeavours to offer customers a broader range of banking
products and services instead of simply being associated with
housing finance.
SBAB Bank is wholly-owned by the State. The company was
founded following a parliament decision in December 1984. The
company's task was to finance the funds required for state
mortgage lending. The purpose was to unburden the state budget
of housing-related borrowing and lending. The premise for the
forming of the company therefore had no grounds in the mortgage
market. The question of whether the State would own the
operations run by SBAB in competition with other lenders has been
186
up for discussion on a number of occasions. The current
government intends to sell SBAB Bank at an appropriate time.180
Banks and housing credit institutions openly advertise list prices for
their mortgages. The given interest rate can be considered a starting
point for an individual credit rating and interest rate. The level of
interest offered to an average customer following negotiations with
the bank is therefore as a rule below the list prices given initially.
Up to and including spring 2008, SBAB had no differential pricing.
The list price given was also the final price the customer was
offered if the mortgage was approved. Before the first quarter of
2005, SBAB marketed itself with prices that were significantly lower
than those of the major banks. This was for mortgages with moth
short and long terms. Since this, margins have sharply decreased.
Since 2008, SBAB's list price has even been higher than that of the
major banks during certain periods. On the other hand, at this point
in time the company introduced differentiated pricing, which
means that SBAB takes into account the size of the loan and loan-tovalue (LTV) ratio when determining prices. This type of pricing
means that a customer can get a lower rate than the listed rate.
In its report SBAB – mervärde, mångfald och konkurrens?181 [SBAB –
added value, diversity and competition?], the Swedish National
Audit Office has audited the efficiency in and accomplishment of
goals for SBAB. According to a parliament decision, SBAB shall
contribute to diversity and competition via a foundation of
conventional company finance targets and an effective organisation.
180
The Swedish National Audit Office (2012).
181
The Swedish National Audit Office (2012).
187
The Government and the Riksdag had two goals with SBAB. The
overall goal was for the company to generate value. Other than this,
it was to contribute to diversity and competition on the mortgage
market.
Over the years following the turn of the millennium, SBAB
contributed to reducing the average margin on mortgages. During
this period, it can be said that SBAB has made an active
contribution to increasing competition on the mortgage market.
However, the task of putting downward pressure on prices played
a role in other banks introducing a “lowest price guarantee”. Since
the ambition to put down prices was abandoned, SBAB's market
share has remained largely unchanged on the private mortgage
market. SBAB was also the first to do away with the difference in
mortgage rates for loans on houses and cooperative apartments.
SBAB has had an effect on the mortgage market's way of operating
during the period examined in the audit. This effect has however
decreased over time. It is difficult to ascertain how much SBAB
contributes to diversity and competition today.
According to the Swedish National Audit Office, the administration
of SBAB has been characterised by the company's board of directors
and management having a great deal of freedom to independently
formulate their strategy. The owner has expressed a desire not to be
involved in business-related decisions. None the less, the owner has
in isolated cases had opinions on what can be considered businessrelated matters.
The Government has never specified what the task of striving for
diversity and competition on the mortgage market involves, nor has
it followed up how the company has achieved this goal. It has been
up to SBAB to interpret the meaning of the task and convert this
into strategies. Since operating in full competition with other
188
mortgage lenders, the company has taken the initiative for all
changes, with one exception.182
The Government should look into the sale of SBAB, or clarify how
SBAB should contribute to the diversity and competition in the
banking market. A clearer mandate from the Government and the
Riksdag to actively endeavour to contribute to diversity and
competition may increase competitive pressure on the banking
market. As in previous business plans for SBAB, SBAB could take
on the role of a challenger of the major banks, which dominate
various submarkets within the banking sector. This could include
an investment in the private market. SBAB would endeavour to
push down prices by offering low prices, simple products and clear
pricing for private customers, with no quantity discounts.
The Competition Authority notes in this context that in the report
2012/13:FiU38 Ägarstyrning av SBAB [Owner control of SBAB], the
Committee on Finance discusses the Government's communication
2012/13:119 Riksrevisionens rapport om effektivitet i och
uppfyllelse av målen för SBAB [The Swedish National Audit
Office's report on efficiency in and accomplishment of goals for
SBAB}. The Riksdag handled and approved the Committee on
Finance's proposal of 05 June 2013.183 The committee notes that in
the most recent shareholders' meeting, following the Government's
communication, SBAB adopted new financial goals and clarified the
company's distribution policy. The committee agrees with the
The exception was, according to the Swedish National Audit Office (2012), in connection
with a discussion on SBAB's future in 1998. At this point, a consultant report was ordered on
the Ministry of Finance's initiative in order to highlight the company's future prospects. In the
discussion that followed, the main alternatives were to sell or develop the company. In the
end, the expansion option was chosen, with an explicit ambition to eventually sell the
company.
182
183
The Riksdag (2013).
189
Government's view that it is important that SBAB, like other players
on the market, does not contribute to an unsound development that
results in socio-economic imbalances. The committee is therefore in
favour of this being underlined by the Government in the ongoing
ownership dialogue with SBAB.
The committee is in favour of the Government's initiative to
evaluate the risks associated with the ownership clause. Like the
Government, the Committee on Finance feels that SBAB does not
have a specific social mandate. The Committee on Finance also
shares the Government's opinion that there is no need for specific
feedback on how SBAB contributes to diversity and competition on
the mortgage market.
However, one factor that has not been taken into account to a
sufficient extent in accordance with the Competition Authority is
how state ownership can affect competition as there is a risk that
official and private companies do not have the same conditions as
they are acting on the same market. Public-owned companies can
have a competitive advantage over privately owned companies as
they can have lower financial and operative risks than private
actors.184
With consideration for the above, the Competition Authority feels
that the sale of SBAB should be investigated or that it should be
clarified in which way SBAB shall contribute to diversity and
competition on the banking market and ensure that competition is
not distorted.
184
The Competition Authority (2009d), the Swedish Government (2008a).
190
5.10 Investigate the possibility of introducing a ban on
price signalling
The Competition Authority's proposal
Investigate the possibility of prohibiting price signalling in order to
reduce the risk of market and price signalling between competitors.
Reasons for the Competition Authority's proposal
In many respects, there is a high degree of transparency on the
mortgage market for banks. The market participants are stable and
few in number, and a large proportion of the customer base has low
mobility due to indirect and direct switching costs. This means that
the mortgage market is a market on which coordination between
the players can work well. In several countries, competition
authorities have noted the risk of market and price signalling on a
number of markets; not least on the mortgage and deposit markets.
Australia was the first country in the world to introduce a ban on
price signalling in the banking sector, via an amendment to the
Competition and Consumer Act 2010 which was effective from
6 June 2012.
This Australian act contains two bans:
a per se ban on the practice of privately revealing prices to
consumers outside of normal business activities,
191
a general ban on (privately or publicly) revealing information (e.g.,
prices, discounts, capacity, commercial strategy) with the intention
of significantly weakening competition on the market.185
Australia's competition authority has issued guidelines.186 The
guidelines clarify that the general ban entails a ban on price
signalling. They include the example that a leading representative
for Bank A signals that the bank does not intend to reduce their
interest rates in order to test competitors' reactions. In another
example provided, a leading representative for a bank announces at
a banking sector conference that the bank is not willing to make
greater interest rate increases than those of the Riksbank, or to
introduce new fees. The general ban does not, however, prevent
banks from publishing consumer prices e.g., in newspapers or on
their websites.
Exchanging market information can lead to a limitation of
competition, where this allows companies to gain information on
competitors' marketing strategies. How the exchange of information
affects competition depends on the characteristics of the market and
the nature of the information.187
The exchange of information can constitute a coordinated
procedure if it reduces the strategic uncertainty on the market and
thereby facilitates collaboration. It requires the exchange of strategic
information between competitors. It narrows competitors'
opportunities to act independently on the market and weakens their
incentive to compete.188 The Commission's guidelines state that if
185
Australian Competition & Consumer Commission (2012b).
186
Australian Competition & Consumer Commission (2012a).
187
The European Commission (2013).
188
The European Commission (2013), p. 61.
192
companies exchange strategic information, they are most likely
covered by 101 FEUF (and Chapter 2, Section 1 KL). Strategic
information is information which reduces the strategic uncertainty
on a market. Strategic information may related to prices, production
costs, marketing plans or technology.189 The strategic benefit of the
information also depends on its level of aggregation, its age, the
market context and how often the information is exchanged. Cases
of this type are complicated to investigate in terms of competition
law, and legal proceedings of this nature often take several years.
In order to rectify improper market influence as effectively as
possible, it is advisable to investigate the possibility of prohibiting
price signalling, with a focus on the financial services sector.
189
The European Commission (2013), p. 86.
193
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Appendices
Figure B1
Average listed interest rate and customer interest rate,
2-year, for the period 2001–2011
7,00
6,00
5,00
4,00
Listränta
3,00
Kundränta
2,00
1,00
2001
2003
2005
2007
2009
2011
Source: The Competition Authority's own calculations of the banks' responses.
Figure B2
Average listed interest rate and customer interest rate,
5-year, for the period 2001–2011
7,00
6,00
Listränta
5,00
Kundränta
4,00
3,00
2001
2003
2005
2007
2009
2011
Source: The Competition Authority's own calculations of the banks' responses.
205
Figure B3
Variation (standard deviation) of banks' average listed
interest rate, 2-year
0,25
0,20
0,15
0,10
0,05
0,00
2001
2003
2005
2007
2009
2011
Source: The Competition Authority's own calculations of the banks' responses.
Figure B4
Variation (standard deviation) of banks' average listed
interest rate, 5-year
0,25
0,20
0,15
0,10
0,05
0,00
2001
2003
2005
2007
2009
2011
Source: The Competition Authority's own calculations of the banks' responses.
206
Figure B5
2-year difference between the listed interest rate, the
average funding cost, STIBOR 3M and repo rate
7,00
6,00
5,00
Listränta
4,00
Upplåningskostnad
3,00
STIBOR 3M
2,00
Repo
1,00
0,00
2001 2003 2005 2007 2009 2011
Source: The Competition Authority's own calculations of the banks' responses.
Figure B6
5-year difference between the listed interest rate, the
average funding cost, STIBOR 3M and repo rate
8,00
6,00
Listränta
4,00
Upplåningskostnad
STIBOR 3M
2,00
Repo
0,00
2001 2003 2005 2007 2009 2011
Source: The Competition Authority's own calculations of the banks' responses.
207
Figure B7
Price leadership, customer interest rate 2-year rate
2001–2011
40%
30%
20%
10%
0%
Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H
Source: The Competition Authority's own calculations of the banks' responses.
Figure B8
Price leadership, customer interest rate 5-year rate
2001–2011
30%
20%
10%
0%
Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H
Source: The Competition Authority's own calculations of the banks' responses.
208
Figure B9
Price leadership, customer interest rate 2-year rate
2005–2011
100%
Bank A
80%
Bank B
60%
Bank C
Bank D
40%
Bank E
20%
Bank F
0%
Bank G
2005 2006 2007 2008 2009 2010 2011
Source: The Competition Authority's own calculations of the banks' responses.
Figure B10
Price leadership, customer interest rate 5-year rate
2005–2011
100%
Bank A
80%
Bank B
60%
Bank C
Bank D
40%
Bank E
20%
Bank F
0%
Bank G
2005 2006 2007 2008 2009 2010 2011
Source: The Competition Authority's own calculations of the banks' responses.
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