Analysis of the business reputation of banks. What the Federal Antimonopoly Service will be guided by?
Competition and Law, № 1, 2013
In the banking world with an immense number of options to choose from, reputation of a credit organization is becoming a real and one of the key factors in competition. This factor is especially significant in the area of banking services, since the success of the “bank-client” partnership primarily depends on the degree of the client’s trust…”
(A. E. Binetsky. Public Relations: Protection of Business Interests and Reputation: Workbook. – M. IKF EKMOS, 2003. – 218 p)
Order No.433 of the Federal Antitrust Service (the FAS of Russia) dated 28.06.2012 approved the Procedure for conducting analysis of the state of competition in order to establish dominant position of a credit organization (hereinafter the “Procedure”). This Procedure was developed pursuant to Clause 7 Article 5 of Federal Law No.135-FZ “On protection of competition” and is also applied when cases on violation of antitrust legislation are examined, as well as in the course of control over economic concentration exercised by the antitrust authority.
While conducting analysis under the Procedure, the antitrust authority, in addition to other circumstances and factors, examines the features of the banking service that determine the consumer’s choice, including the goodwill of the credit organization (Clause 2.4 of the Procedure). And this is quite justified. At present, it goes without saying that goodwill is the most important intangible asset of a credit organization and that its monetary value can be assessed. A flawless goodwill makes a credit organization more attractive for investors and consumers, increases its capitalization, allows increasing revenues and, therefore, ensuring a stable share on a particular product market when carrying out banking operations.
At the same time, it is also obvious that the “goodwill” notion is quite a subjective factor.
Assessment criteria – What to rely on?
Since the analysis of a bank’s goodwill when revealing the features of the banking service may have a significant impact on defining the product market product boundaries, a reasonable question is raised: what will the antitrust authority rely on when conducting such analysis?
A literal interpretation of the Procedure shows that the document contains no answer to this question.
In the Civil Code of the Russian Federation (hereinafter the “Civil Code”), the “goodwill” term is generally used to describe an inalienable intangible asset – personal goodwill. At the same time, it does not contain a single article dedicated to protection of a legal entity’s goodwill. The Civil Code limits itself to a reference that in the protection of a legal entity’s goodwill the same regulations are applied as to protection of personal goodwill.
According to various social surveys, the main factor for a consumer when choosing a bank is its reliability and its history. By ‘reliability’ consumers may mean various aspects, including a respectable office, advertising, positive feedback from their acquaintances. Furthermore, for many consumers it is the financial stability that is primarily an important factor, and not the interest rates offered by the bank. All this may well represent the goodwill of the bank.
The Central Bank of the Russian Federation in its letter No.92-T “On arranging management of legal risk and goodwill loss risk at credit organizations and banking groups” dated 30.06.2005 defines the notion of “credit organization goodwill” as a qualitative assessment of a credit organization’s activities, as well as the activities of its actual owners, affiliated entities, subsidiary and related entities, as made by participants of civil law relations.
Pursuant to the indicated letter, emergence of goodwill loss risk may be due to the following factors:
Failure of a credit organization (affiliated entities of the credit organization, subsidiary and related organizations, actual owners of the credit organization) to comply with the legislation of the Russian Federation, constituent and internal documents of the credit organization, business conduct, professional ethics principles, failure to perform contract obligations before creditors, investors and other clients and contractors, absence in internal documents of mechanisms that permit to efficiently govern conflict of interests of the clients and contractors, founders (participants), management bodies and/or employees, as well as to minimize negative consequences of conflict of interests, including prevention of complaints and court claims on behalf of the clients and contractors and/or applying enforcement measures by regulatory and supervisory bodies;
Failure of a credit organization, its affiliated entities, as well as actual owners to efficiently counteract money laundering, and terrorism financing, as well as any other unlawful activities conducted by unreliable clients and contractors and/or employees of the credit organization;
Defects in managing banking risks of a credit organization, resulting in potential damage to the goodwill. Credit organization carrying out a risky credit, investment and market policy, high level of operational risk, defects in arranging the internal control system, including for purposes of preventing money laundering, and financing terrorism;
Shortcomings of the human resources policy within the procedure of staff selection and deployment;
Conflict of interests between a credit organization and founders (participants), clients and contractors, as well as other stakeholders;
Negative information being published in the mass media about the credit organization and its employees, founders (participants), members of management bodies, affiliated entities, subsidiary and related organizations.
According to the given list, the Central Bank of the Russian Federation also classifies actual activities of affiliated entities of a credit organization among the factors that directly impact its goodwill.
It must be pointed out that it is not clear from the content of the Procedure whether the goodwill of owners, shareholders, management and other affiliated entities of a credit organization will be taken into account by the antitrust authority.
“Statute of limitations”
Goodwill of a credit organization, as well as of any other legal entity has a dynamic nature and can at different times be either positive or negative.
Therefore, another question comes up – from the perspective of the antitrust authority, how much time will a credit organization need to restore its goodwill? Under what conditions will the past negative goodwill of the bank not be taken into account by the antitrust authority?
Based on the foregoing, it appears that when conducting analysis of the state of competition for purposes of establishing a dominant position of a credit organization under the effective Procedure, the antitrust authority needs to conduct quite a large-scale research that is based not only on surveys of consumers of banking services, but, possibly, on expert evaluations regarding the state of goodwill of a particular credit organization.
But in this case there still remains some probability of subjective assessment of such fine, unique and surely important intangible asset of a credit organization, as goodwill.