[Federal Register Volume 59, Number 206 (Wednesday, October 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26478]
[[Page Unknown]]
[Federal Register: October 26, 1994]
VOL. 59, NO. 206
Wednesday, October 26, 1994
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0851]
Revisions Regarding Tying Restrictions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Board is seeking public comment on a proposed exception to
the anti-tying restrictions of section 106 of the Bank Holding Company
Act Amendments of 1970 and the Board's Regulation Y. The proposed
amendment would establish a ``safe harbor'' permitting a bank to offer
a discount on any product or package of products if a customer
maintains a combined minimum balance in deposits and other products
specified by the bank.
DATES: Comments must be submitted on or before December 9, 1994.
ADDRESSES: Comments should refer to Docket No. R-0851, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. Comments also may be delivered to room B-2222
of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to
the guard station in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays,
except as provided in 12 CFR 261.8 of the Board's rules regarding
availability of information.
FOR FURTHER INFORMATION CONTACT: Gregory A. Baer, Managing Senior
Counsel (202/452-3236), or David S. Simon, Attorney (202/452-3611),
Legal Division; or Anthony Cyrnak, Economist, (202/452-2917), Division
of Research and Statistics, Board of Governors of the Federal Reserve
System. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
Section 106(b) of the Bank Holding Company Act Amendments of 1970
(12 U.S.C. 1972) generally prohibits a bank from tying a product or
service to another product or service offered by the bank or by any of
its affiliates.\1\ A bank engages in a tie for purposes of section 106
by: (1) offering a discount on a product or service (the ``tying
product'') on the condition that the customer obtain some additional
product or service (the ``tied product'') from the bank or from any of
its affiliates; or (2) allowing the purchase of a product or service
only if the customer purchases another product or service from the bank
or from any of its affiliates. Violations of section 106 can be
addressed by the Board through an enforcement action, by the Department
of Justice through a request for an injunction, or by a customer or
other party through an action for damages. 12 U.S.C. 1972, 1973, and
1975.
---------------------------------------------------------------------------
\1\Although section 106 applies only when a bank offers the
tying product, the Board in 1971 extended the same restrictions to
bank holding companies and their nonbank subsidiaries. See 12 CFR
225.7(a).
---------------------------------------------------------------------------
Section 106 contains an explicit exception (the ``statutory
traditional bank product exception'') that permits a bank to tie a
product or service to a loan, discount, deposit, or trust service
offered by that bank. The Board has recently extended this exception by
providing that a bank or any of its affiliates also may vary the
consideration for a traditional bank product on condition that the
customer obtain another traditional bank product from an affiliate (the
``regulatory traditional bank product exception'').\2\
---------------------------------------------------------------------------
\2\See 12 CFR 225.7(b)(2).
---------------------------------------------------------------------------
Section 106 authorizes the Board to grant exceptions to its
restrictions by regulation or order. On October 19, 1994, the Board
granted an exemption permitting the subsidiary banks of Fleet Financial
Group, Inc., Providence, Rhode Island (Fleet) to offer a discount on
the monthly service fee charged for the ``Fleet One Account'' to a
customer who maintains a combined minimum balance of $10,000 in one or
more products selected by the customer from a menu of eligible Fleet
products. The Board decided that, to the extent that Fleet's combined-
balance discount was prohibited by section 106, an exemption was
warranted given the public benefits and absence of anti-competitive
concerns generated by the arrangement.
The Fleet One Account provides a customer, for a $14 monthly fee,
discounts and premiums on various Fleet services, such as free checking
and lower installment loan rates. Under the Board's order, Fleet may
waive the $14 fee for any customer who maintains a $10,000 combined
balance among the following eligible products: (1) deposits and certain
loans at the Fleet bank at which the customer establishes the Fleet One
Account;\3\ (2) credit card balances at a Fleet bank; (3) investment
securities held at Fleet's brokerage subsidiary and (4) shares held in
a family of mutual funds advised by a Fleet subsidiary. All products
offered as part of these arrangements are separately available to
customers at competitive prices.
---------------------------------------------------------------------------
\3\These products include: checking, savings, cash reserve and
sweep accounts; certificates of deposit; installment and home equity
lines of credit and certain loans.
---------------------------------------------------------------------------
Proposed Rule
The Board is proposing to use its statutory authority to grant a
regulatory exception to section 106 for combined-balance discount
arrangements akin to that offered by Fleet. The Board is proposing the
exception in order to provide certainty as to the general
permissibility of combined-balance discounts, and because it believes
that such discounts are pro-consumer and not anti-competitive.
Applicability of Section 106
The combined-balance discount offered by Fleet appears to be
covered by section 106, which prohibits a bank from offering a discount
on a product or service on the condition that the customer obtain some
additional product or service from the bank or from any of its
affiliates. Although the discount on the Fleet One Account fee is not
conditioned on any particular product being purchased, the customer is
required to purchase some product or products from the menu of eligible
products in order to receive the discount.\4\ Furthermore, the
packaging of some of those products in the form proposed by Fleet does
not appear to qualify for the statutory or regulatory traditional bank
product exception.\5\
---------------------------------------------------------------------------
\4\Coverage of combined-balance discounts also appears to be
consistent with the purposes of section 106. Section 106 was enacted
because of Congress's concern that banks would use their power over
credit to gain a competitive advantage in other markets. Ordinarily,
a tying arrangement involves an attempt to gain a competitive
advantage in one product market, but the fact that a bank is
attempting to gain a smaller advantage in a larger number of product
markets raises similar concerns.
\5\Under the Board's regulations, a bank or nonbank could offer
a discount on brokerage services on condition that a customer
purchase a traditional bank product from the bank or company
offering the brokerage services or from an affiliate. However, no
exception allows the reverse case, where discounts on bank products
are being used to induce customers to purchase brokerage services.
---------------------------------------------------------------------------
In addition, although the discount plan offered by Fleet is
structured so as to avoid any anti-competitive effects, the Board notes
that in other cases the number and attractiveness of traditional bank
products offered in such an arrangement could be substantially less
than those offered by Fleet, and the effect of the tie to non-
traditional products that much stronger. In addition, there is the
potential for such discount plans to be manipulated in order to have
the same effect as a classic tie--that is, structured so that the
customer is effectively required to purchase one product in order to
receive, or to receive a discount on, another product.
Exception
In deciding to permit Fleet to offer the Fleet One Account, the
Board concluded that the combined-balance discount on the Fleet One
Account was consistent with the type of banking relationships that
section 106 recognized were important to preserve.\6\ Section 106
preserves such relationships through the statutory traditional bank
product exception, which permits a bank to tie a product or service to
a loan, discount, deposit, or trust service offered by that bank. The
legislative history of section 106 notes that this exception was
intended to preserve a customer's ability to negotiate the price of
multiple banking services with the bank on the basis of the customer's
entire relationship with the bank. The proposed exception serves the
same purpose.
---------------------------------------------------------------------------
\6\The Board also granted Fleet an exemption allowing Fleet
banks to condition the Fleet One Account on a customer's obtaining
two products from Fleet, but the Board is not proposing to make this
exemption broadly available through regulation. Rather, the Board
has concluded that such exemptions should be granted on a case-by-
case basis.
---------------------------------------------------------------------------
Moreover, under the statutory and regulatory traditional bank
product exceptions, a bank already could offer a combined-balance
discount on an account where all the products in the arrangement were
traditional bank products (loans, discounts, deposits, and trust
services). Granting an exception for a combined-balance discount would
simply permit the bank to increase customer choice by adding a
customer's securities brokerage account or other non-traditional
products to the menu of traditional products that count toward the
minimum balance.
For these reasons, the Board is proposing to establish, through a
regulatory exception, a safe harbor for arrangements offering benefits
similar to those in Fleet. The proposed safe harbor is not only
consistent with the statute's goal of preserving traditional banking
relationships, but also its concerns about anti-competitive behavior.
The proposal requires that the offering bank offer deposits and that
all such deposits be considered in determining whether the customer has
reached the minimum balance required to waive the relevant fee.
Furthermore, all products offered as part of the arrangement would be
required to be separately available for purchase at competitive
prices.\7\ Because a customer could qualify for a combined-balance
discount based solely on deposit balances and because the bank would be
required to offer customers all products involved in the arrangement
separately and at competitive prices, a customer would not have an
incentive to establish a brokerage account, or obtain any other
product, that the customer did not want in order to obtain the
discount. For this reason, the Board does not believe that the proposed
rule would allow coercive or anticompetitive practices, or otherwise
contravene the purposes of section 106.\8\
---------------------------------------------------------------------------
\7\The Board's anti-tying regulation currently conditions all
regulatory exceptions on all products involved in the tying
arrangement being separately available for purchase, and that
condition would apply to the proposed exception. The Board has
sought comment on an amendment to this condition providing that
products be separately available for purchase ``at competitive
prices.'' 59 FR 39709 (August 4, 1994).
\8\Under antitrust precedent, concerns over tying arrangements
are substantially reduced where the buyer is free to take either
product by itself even though the seller also may offer the two
items as a unit at a single price.
---------------------------------------------------------------------------
Finally, the Board believes that the proposed rule would benefit
the public. Bank customers would be presented with lower costs.
Paperwork Reduction Act
No collections of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the
proposed rule.
Regulatory Flexibility Act
It is hereby certified that this proposed rule, if adopted as a
final rule, will not have a significant economic impact on a
substantial number of small entities that would be subject to the
regulation.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Holding
companies, Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR Part 225 as set forth below:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for 12 CFR part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3907, 3909, 3310, and
3331-3351.
2. In section 225.7, as proposed to be amended at 59 FR 39711,
August 4, 1994, a new paragraph (b)(4) is added to read as follows:
Sec. 225.7 Tying restrictions.
* * * * *
(b) * * *
(4) Safe harbor for combined-balance discounts. A bank may vary the
consideration for any product or package of products offered by the
bank or its affiliates based on a customer maintaining a combined
minimum balance in certain products specified by the bank (``eligible
products''), provided that:
(i) The bank offers deposits, and all such deposits are eligible
products; and
(ii) Balances in all eligible products count equally toward the
minimum balance.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, October 20, 1994.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 94-26478 Filed 10-25-94; 8:45 am]
BILLING CODE 6210-01-P