Report to the Minister of Finance Regarding the Proposed Acquisition of HSBC Bank Canada by Royal Bank of Canada

September 1, 2023

Table of Contents

Executive Summary

This report is being provided further to the Minister of Finance’s ongoing review of the proposed acquisition of HSBC Bank Canada (“HSBC Canada”) by Royal Bank of Canada (“RBC”) (the “Proposed Transaction”) (each of HSBC Canada and RBC will be referred to individually as a “Party” and collectively as “the Parties”). The purpose of this correspondence is to outline the Commissioner of Competition’s independent assessment of the potential competitive effects of the Proposed Transaction under section 92 of the Competition Act.

The Competition Bureau’s (the “Bureau”) mandate is to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace. Protecting and promoting competition in financial services markets is particularly vital to the interests of Canadians given the importance of the sector to the overall economy and Canadians’ reliance on financial institutions to enable everyday transactions and safeguard their financial security. The Proposed Transaction would combine Canada’s largest and seventh-largest banks, and is of particular interest to Canadian consumers, as evidenced by the over 1500 submissions received in response to a public request for information issued by the Bureau.

The Commissioner has conducted a comprehensive review of the likely competitive effects of the Proposed Transaction, pursuant to his mandate under the Competition Act. Based upon an assessment of the available evidence, the Commissioner has concluded that the Proposed Transaction is not likely to result in a substantial lessening or prevention of competition under section 92 of the Competition Act. Nonetheless, the Bureau’s review found that the merger would result in a loss of rivalry between RBC and HSBC Canada. The Bureau also found that relevant financial services markets are concentrated, that there are by high barriers to entry and expansion in many of the relevant markets, and that conditions in certain of the relevant markets may facilitate coordinated behaviour among competitors.

The Commissioner assesses the potential competitive effects of a merger transaction by applying the test set out in section 92 of the Competition Act. The sections below provide a summary of the Bureau’s approach and conclusions in this case.

Approach

In assessing the potential competitive effects of a merger under the Competition Act, the Commissioner evaluates whether a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially. The Bureau’s analytical approach to merger review is set out in its Merger Enforcement Guidelines. The Commissioner assesses the potential competitive effects of a merger transaction by applying the test set out in section 92 of the Competition Act, having regard to the factors identified under section 93 of the Competition Act. Under section 92 of the Competition Act, if the Bureau determines that a merger is likely to substantially lessen or prevent competition, it may apply to the Tribunal for an order to prevent, dissolve or alter the merger.

Section 96 of the Competition Act provides an efficiency exception to the provisions of section 92, such that if the efficiency gains brought about by the merger are greater than, and offset, the anti-competitive effects of the merger, the Competition Tribunal will not make an order under section 92 of the Competition Act. Section 96 of the Competition Act was not engaged during the present review. Accordingly, this letter does not provide an assessment of efficiencies claims under section 96 of the Competition Act.

The Bureau’s assessment of the Proposed Transaction involved the consideration of a broad range of sources of information, including:

  • hundreds of thousands of records that include the Parties’ strategic, marketing, and business planning documents;
  • submissions, supporting information and expert analysis provided by the Parties;
  • detailed data and financial information received from the Parties and competitors;
  • over 1500 submissions received from Canadians in response to a request for information issued on May 1, 2023; and
  • interviews with various stakeholders in the relevant markets, including competing financial institutions, financial intermediaries (such as mortgage brokers), customers, and regulators.

The Bureau also retained an independent economic expert, who provided views and analysis regarding the competitive effects likely to result from the Proposed Transaction.

Conclusions of Competitive Analysis

The Proposed Transaction would result in the acquisition of Canada’s seventh-largest bank, based on a measure of total assets, by the country’s largest. The financial services sector is a crucial pillar in the Canadian economy, such that protecting and promoting vigorous competition in the concerned markets is critical to the interests of Canadians. The proposed merger itself has received significant attention from Canadian consumers, with over 1500 submissions having been provided in response to the Bureau’s public request for information issued May 1, 2023. Many of these submissions emphasized the attractive offerings of HSBC Canada and the importance of effective competition in the sector.

In this context, the Bureau has conducted an extensive and detailed review of evidence and expert analysis regarding the potential competitive effects of RBC’s proposed acquisition of HSBC Canada. The Commissioner has assessed the Proposed Transaction by applying the test set out in section 92 of the Competition Act, as informed by relevant jurisprudence. This letter attempts to fully explain the basis for this assessment, while taking into account the confidentiality provisions of the Competition Act.

While certain evidence indicated that HSBC Canada was a vigorous competitor and a material rival to RBC in the offer of particular financial services, the Bureau found that HSBC Canada’s competitive impact was limited when compared to other financial institutions. The Bureau assessed measures of market concentration and found that post-merger market shares would, in most cases, remain at levels at which the Commissioner generally will not challenge a merger on the basis of a competition concern related to the unilateral exercise of market power. The Bureau’s analysis also indicated that HSBC Canada had achieved limited market penetration in most financial services. The Bureau considered the impact of the Proposed Transaction on product features offered by HSBC Canada which are particularly valued by Canadians and serve to differentiate the bank’s offering. The Bureau also assessed evidence regarding competitive dynamics in each of the relevant markets, and found that effective competitors would remain post-transaction, including Canada’s other major domestic banks.

The Bureau also considered an analysis of potential competitive effects provided by an independent economic expert, and found that the results, when considered with the other available evidence, did not support a finding of substantial lessening or prevention of competition.

The Commissioner assesses mergers by applying the test set out in section 92 of the Competition Act. Based on the results of the assessment described herein, the Commissioner has concluded that the Proposed Transaction is not likely to result in a substantial lessening or prevention of competition under section 92 of the Competition Act.

Nonetheless, the Bureau found that the Proposed Transaction would result in the loss of rivalry between RBC and HSBC Canada. In assessing the relevant markets, the Bureau also found that:

  • relevant financial services markets remain concentrated, with Canada’s five largest banks accounting for the vast majority of services provided to Canadians;
  • there are high barriers to entry and expansion in many of the relevant financial services markets; and
  • conditions in certain of the relevant financial services markets may facilitate coordinated behaviour among firms.

1. Introduction

This report outlines the Commissioner’s assessment of the proposed acquisition of HSBC Bank Canada (“HSBC Canada”) by Royal Bank of Canada (“RBC”) (the “Proposed Transaction”) (each of HSBC Canada and RBC will be referred to individually as a “Party” and collectively as “the Parties”), further to a review by the Minister of Finance (the “Minister”). The Commissioner assesses the potential competitive effects of merger transactions by applying the test set out in section 92 of the Competition Act, and may seek an order from the Competition Tribunal where he determines that a merger is likely to substantially lessen or prevent competition. This report describing the Commissioner’s competitive assessment of the Proposed Transaction is being provided given the Minister’s ongoing review of the merger.

This report represents the fourth time that the Commissioner has provided the Minister with such an assessment of a transaction in the financial services sector. In December 1998, the Commissioner delivered letters to the Minister and to the merging parties regarding the respective proposed mergers of RBC with the Bank of Montreal, and of the Canadian Imperial Bank of Commerce with the Toronto-Dominion Bank. The Commissioner concluded that each of these proposed transactions was likely to lead to a substantial lessening or prevention of competition and the mergers ultimately were not completed. In January 2000, the Commissioner also provided a letter to the merging parties, with a copy to the Minister, assessing the proposed merger of Toronto-Dominion Bank and Canada Trust, which concluded that the remedies proposed by the parties would address the anti-competitive effects likely to result from that transaction.

The Competition Bureau is an independent law enforcement agency that is responsible for, among other things, the administration and enforcement of the Competition Act. The Bureau’s mandate is to ensure that Canadian consumers and businesses prosper in a competitive and innovative marketplace. The financial sector has been a key focus of the Bureau’s recent competition promotion efforts, in light of its crucial importance to the Canadian economy. Financial services accounted for approximately 7% of Canadian GDP in 2022Footnote 1 and banks such as the Parties indirectly support a much more substantial share of economic activity. Furthermore, Canadians rely on key players in the financial services sector to safeguard their financial security and complete essential daily tasks such as receiving or making payments, borrowing, spending, saving or investing. Given this context, protecting and promoting competition in financial services is particularly vital to the interests of Canadians.

The Proposed Transaction would result in the acquisition of Canada’s seventh-largest bank, based on a measure of total assets, by the country’s largest. RBC and HSBC Canada compete to provide a broad range of key financial services to individuals and commercial customers in markets across Canada. The proposed merger is of significant interest to Canadians, as evidenced by the over 1500 submissions received by the Bureau in response to a public request for information, many of which expressed competitive concerns. The Bureau conducted a detailed and comprehensive review of the Proposed Transaction, based on a wide variety of sources of information, including:

  • information, including data and documents, gathered from the Parties, competitors, and other market participants;
  • interviews with various participants in the relevant markets;
  • over 1500 submissions received from stakeholders, including Canadian consumers, in response to a public request for information issued May 1, 2023; and
  • analysis received from the independent economic expert retained by the Bureau.

When reviewing a merger, the Bureau assesses the likely effects of the transaction on price, output, and other dimensions of competition, such as quality, product choice, and service, in accordance with its Merger Enforcement GuidelinesFootnote 2, as informed by jurisprudence from the Competition Tribunal and the Courts and accepted approaches in economic theory and practice related to the review of merger transactions. Ultimately, the Bureau assesses whether mergers are likely to result in a substantial prevention or lessening of competition by applying the test set out in Section 92 of the Competition Act.

In conducting its review, the Bureau has considered recent technological changes in the relevant markets, as well as ongoing innovation in the offer of financial services. The Bureau conducted an updated assessment of the role of retail bank branches, the impact of digital and branchless competitors, and the breadth of the relevant geographic markets. The Bureau extensively analyzed evidence regarding the competitive impact of HSBC Canada, and the extent of its rivalry with major banks such as RBC. The Bureau considered any possible effects of the Proposed Transaction on HSBC Canada’s current offerings, including its sustainability-focused products and internationally-focused services involving integration with HSBC Group. The Bureau also assessed wide-ranging evidence regarding the effectiveness of remaining competitors, barriers to entry and expansion, and potential anti-competitive effects, among other factors. This included review of competitive effects analyses provided by an independent economic expert.

Based upon analysis of facts and information from a wide variety of sources, as discussed in detail below, the Commissioner has concluded that the Proposed Transaction is not likely to result in a substantial lessening or prevention of competition under section 92 of the Competition Act.

Nonetheless, the Bureau found that the Proposed Transaction would result in the loss of rivalry between RBC and HSBC Canada. In assessing the relevant markets, the Bureau also found that:

  • relevant financial services markets remain concentrated, with Canada’s five largest banks accounting for the vast majority of services provided to Canadians;
  • there are high barriers to entry and expansion in many of the relevant financial services markets; and
  • conditions in certain of the relevant financial services markets may facilitate coordinated behaviour among firms.

The following sections describe the Bureau’s analytical framework, provide background information on the relevant financial services, and summarize the Commissioner’s assessment of the Proposed Transaction between RBC and HSBC Canada.

2. Review of Mergers in the Financial Sector

Under the Competition Act, the Commissioner has jurisdiction to review merger transactions of any size and in any industry to determine whether they have, or are likely to have, the effect of preventing or lessening competition substantially. During the past three fiscal years, the Commissioner has conducted a review of an average of 216 transactions per year across all industries in Canada. Pursuant to Part IX of the Competition Act, parties to proposed transactions that exceed certain statutory and regulatory thresholds (and are not subject to any exemptions) are required to notify the Bureau and provide prescribed information prior to completing their transaction. After analysing a proposed transaction, the Commissioner may:

  1. Decline to apply to the Competition Tribunal in respect of the proposed transaction;
  2. Apply to the Competition Tribunal seeking an order to prohibit all or part of a merger or a remedy to address the competition concerns arising from the merger; or
  3. Enter into a consensual resolution with the parties to address competition concerns that is registered with the Competition Tribunal and has the force of a Competition Tribunal order.

Mergers in the financial sector may be subject to concurrent review by the Minister. Under sections 373 and 377 of the Bank Act, for example, certain acquisitions and investments are not permitted without the prior approval of the Minister. Section 396 of the Bank Act provides that the Minister shall, in considering whether to grant such approval, take into account all matters that he or she considers relevant, including:

  • the nature and sufficiency of the financial resources of the applicant or applicants as a source of continuing financial support for the bank;
  • the soundness and feasibility of the plans of the applicant or applicants for the future conduct and development of the business of the bank;
  • the business record and experience of the applicant or applicants;
  • the character and integrity of the applicant or applicants or, if the applicant or any of the applicants is a body corporate, its reputation for being operated in a manner that is consistent with the standards of good character and integrity;
  • whether the bank will be operated responsibly by persons with the competence and experience suitable for involvement in the operation of a financial institution;
  • the impact of any integration of the businesses and operations of the applicant or applicants with those of the bank on the conduct of those businesses and operations;
  • the opinion of the Superintendent regarding the extent to which the proposed corporate structure of the applicant or applicants and their affiliates may affect the supervision and regulation of the bank, having regard to
    • the nature and extent of the proposed financial services activities to be carried out by the bank and its affiliates, and
    • the nature and degree of supervision and regulation applying to the proposed financial services activities to be carried out by the affiliates of the bank; and the best interests of the financial system in Canada, including, if the bank is a federal credit union, the best interests of the cooperative financial system in Canada.

Section 94 of the Competition Act provides that the Competition Tribunal cannot make an order under section 92 in respect of a transaction that has been deemed to be in the public interest by the Minister.Footnote 3 In cases where a merger in the financial sector is subject to Ministerial approval, the Bureau has previously been requested, as a matter of policy, to provide a competitive assessment to inform the Minister’s decision regarding the transaction. The Office of the Superintendent of Financial Institutions (“OSFI”) is generally responsible for assessing prudential matters.

The Commissioner assesses the potential competitive effects of a merger transaction by applying the test set out in section 92 of the Competition Act, having regard to the factors identified under section 93 of the Competition Act. Efficiencies assessments, where relevant, are conducted consistent with section 96 of the Competition Act, which provides that an order under section 92 of the Act will not be made if the efficiency gains brought about by the merger are greater than, and offset, the anti-competitive effects of the merger.

Under section 92 of the Competition Act, the Bureau assesses whether a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially. A substantial prevention or lessening of competition results only from mergers that are likely to create, maintain, or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power. Section 93 includes an assessment of acceptable product substitutes, barriers to entry, effective remaining competition, or any other factor that is relevant to competition in a market. The Bureau’s analytical approach to merger review, including its assessment of the section 93 factors, is set out in its Merger Enforcement Guidelines and informed by jurisprudence from the Competition Tribunal and the Courts and may include the following considerations:

  1. Market definition, including definition of both the relevant product and geographic markets. The Bureau defines markets in order to identify the set of products that customers consider to be substitutes for those offered by the merging parties, and the set or sets of buyers that could potentially face increased market power owing to the merger;
  2. Calculation of market shares and concentration in the relevant markets. The Commissioner generally is not concerned about the unilateral exercise of market power when the post-merger market share of a merged firm would be less than 35 percent;
  3. Analysis of anti-competitive effects based on quantitative techniques and evaluation of various factors including: the effectiveness of remaining competitors, countervailing power held by buyers, whether the business of a party to the proposed merger (or a part thereof) is likely to fail, and the likelihood that the transaction will result in the removal of a vigorous and effective competitor; and
  4. Analysis of barriers to entry and of the likelihood that timely entry by potential competitors would occur on a sufficient scale and with sufficient scope to constrain a material price increase (or other exercise of market power) in the relevant market.

In preparing the Commissioner’s assessment as set out in this report, the Bureau conducted an analysis consistent with this approach.

3. Sources of information on which this report is based

The Bureau’s assessment of the Proposed Transaction included review of the following:

  • Statutory merger notifications provided by the Parties under the Competition Act;
  • Hundreds of thousands of documents provided by the Parties in response to a supplementary information request (“SIR”) issued by the Bureau, including strategic, marketing, and business planning documents relating to a wide variety of banking services and the determination of fees, interest rates, service levels, product features and other dimensions of competition;
  • Submissions, supporting information and expert analysis provided by the Parties, relating both to the Proposed Transaction overall and to key aspects of the Bureau’s competitive analysis;
  • Data received from the Parties or competitors, such as financial statements and detailed data related to fees and interest rates, and customer opportunities; and
  • Interviews with a wide variety of stakeholders in the relevant markets, including personal, commercial and institutional customers, regulatory authorities, banks, credit unions, companies focused on financial technology (“FinTech”), specialized lenders and non-bank financial intermediaries (“NBFIs”), and other market participants.

On May 1, 2023, the Bureau issued a request for information (“RFI”) to help gather facts related to the Proposed Transaction, and invited Canadians to provide submissions to assist the investigation.Footnote 4 The Bureau received more than 1500 replies which aided and informed its review.

The Bureau also retained an independent economic expert, who provided views and analysis regarding the competitive effects likely to result from the Proposed Transaction.

Information obtained by or provided to the Bureau in the course of its review is protected by section 29 of the Competition Act. The Bureau has the discretion to communicate such information only in limited circumstances as provided in section 29 and, even when permitted, minimizes the extent to which confidential information is communicated. The Bureau recognizes that maintaining the confidentiality of information is essential to its ability to pursue its responsibilities and to its integrity as a law enforcement agency.

3.1 Expert analysis of anti-competitive effects

The independent economic expert retained by the Bureau conducted an empirical analysis of anonymized account-level data in order to assess and quantify the likely anti-competitive effects of the Proposed Transaction. This analysis included the estimation of effects on interest rates, the amount of certain financial products purchased and other dimensions of competition for the principal financial services offered by the Parties, as well as assessments of the scope of the relevant markets.

The economic expert’s analysis incorporated extensive and detailed data pertaining to the primary savings and loan products offered by RBC and HSBC Canada, and collected directly from the Parties and competing financial institutions. Data assessed by the expert included account-level information on product characteristics, fees, interest rates, and other aspects of pricing, as well as financial information and macro-economic data, as well as publicly-available local demographic and wealth data. Using these data, the expert conducted a merger simulation analysis, which included developing a model of competition between financial institutions, estimating and calibrating key parameters, and simulating the effects of the Proposed Transaction on interest rates, the amount of certain financial products purchased and other dimensions of competition. The expert’s analysis considered key features of competition for financial services, such as the potential for price discrimination (and resulting effects on particular customer groups) and relationships between deposit and loan product interest rates. The expert also empirically conducted a hypothetical monopolist test in local areas containing RBC and HSBC Canada branches, in order to identify the relevant markets for the purposes of the Bureau's analysis. The expert’s assessment included extensive verifications of robustness and sensitivity analyses, including the consideration of alternate geographic market scenarios, price setting mechanisms and demand characteristics.

On the basis of this analysis, the expert provided estimates of competitive effects in the principal markets of overlap between the Parties. The results of the economic expert's assessment are described in sections 7.3.3 and 7.3.4 of this report.

4. Parties to the propsoed transaction

RBC is a banking and financial services company serving more than 17 million clients through operations in 29 countries. RBC is the largest Canadian-based bank by revenues, market capitalization and total assets.Footnote 5 RBC operates a network of 1,162 branches in Canada, and earns 60% of its approximately $50 billion in revenues domestically.

RBC offers a full suite of financial services across five main segments:

  • Personal and Commercial Banking including day-to-day banking, investing and financing services;
  • RBC Wealth Management which offers investment, trust, banking, credit and other advice-based wealth management solutions for high net-worth and ultra-high net-worth individuals and institutional clients;
  • RBC Capital Markets which provides global investment banking and capital markets services for corporations, institutional investors, asset managers, private equity firms and governments;
  • Insurance including solutions for individual and business clients such as life, health, wealth, home, auto, travel, annuities and reinsurance; and
  • Investor and Treasury Services which offers asset, payment and treasury services to financial institutions and asset owners.

RBC is a Schedule I bank under the Bank Act. Major Schedule I banks such as RBC, Toronto-Dominion Bank (“TD Bank”), Bank of Nova Scotia (“Scotiabank”), Bank of Montreal (“BMO”), and the Canadian Imperial Bank of Commerce (“CIBC”) (sometimes collectively known as the “Big Five Banks”) account for the vast majority of banking transactions in Canada.

HSBC Canada, which RBC proposes to acquire, is a subsidiary of the multinational bank HSBC Group. HSBC Canada is classified as a Schedule II foreign subsidiary bank under the Bank Act and is headquartered in Vancouver, British Columbia. HSBC Canada provides financial services to customers in Canada and globally through four business units:

  • Wealth and Personal Banking which offers savings, lending and wealth management products for individuals, including global investment products and specialized services for clients with international needs;
  • Commercial Banking which includes financial services and solutions for businesses ranging from small enterprises to global companies;
  • Global Banking which provides financial services for governments, as well as corporate and institutional clients, including debt capital, global trade and receivables finance, global liquidity and cash management; and
  • Markets and Securities Services including financing solutions, sales and trading, research, clearing and settlement for corporate and institutional clients.

HSBC Canada is Canada’s seventh-largest bank based on its approximately $120 billion in assets, and earned revenues approaching $2.2 billion in fiscal 2021. HSBC Canada operates a network of 128 retail branches across Canada.

HSBC Canada describes itself as Canada’s “leading international bank,” with a broader international reach than is offered by any domestic Canadian competitor. Numerous HSBC Canada business documents reviewed by the Bureau described a pre-transaction strategy focused, in part, on capturing value from integration with the HSBC Group's broader international network. The Proposed Transaction will end this integration and result in the exit from Canada of HSBC Group, which currently operates in 62 countries and holds approximately $3 trillion in global assets. In conducting its competitive assessment, the Bureau considered this effect of the Proposed Transaction, and the potential impact on the financial products and services offered to Canadians.

5. The proposed transaction

On November 29, 2022, RBC announced that it had entered into an agreement to acquire 100% of the common shares of HSBC Canada for an all-cash purchase price of $13.5 billion.

Though the Proposed Transaction will generally separate HSBC Canada from the broader international HSBC Group, RBC describes the merger as an opportunity to add a complementary business and expand its international product capabilities. RBC also seeks to become the bank of choice for commercial clients with international needs, newcomers to Canada, and affluent clients who need global capabilities.

6. Background: Competition in the financial services sector

A wide variety of financial institutions and other market participants are active in providing financial products and services in Canada. In general, the potential suppliers available to Canadians may include, depending on the service, the following:

  • Domestic banks, classified as Schedule I banks under the Bank Act, including RBC and its major rivals such as Bank of Montreal, Scotiabank, CIBC and TD Bank;
  • Foreign bank subsidiaries, classified as Schedule II banks under the Bank Act, such as HSBC Canada;
  • Foreign bank branches, which are limited in their ability to accept Canadian deposits, but may face fewer regulatory requirements in terms of capitalization;
  • Credit unions, which offer certain services comparable to those of Canada’s banks; and
  • A variety of non-bank financial intermediaries (“NBFIs”), including, depending on the service, dedicated mortgage finance competitors, independent stock brokerage firms, investment and wealth management firms, consumer lending firms, FinTech enterprises providing lending, payment processing or other services, and many other players operating outside the traditional banking system.

RBC is Canada’s largest Schedule I bank, while HSBC Canada is a prominent foreign bank subsidiary operating in a number of markets throughout Canada. The Parties compete to offer a wide variety of financial products and services, and across a number of dimensions of competition which may include product features, interest rates, service fees, service levels, terms or conditions and other factors. The potential effects of the Proposed Transaction on these aspects of competition was assessed by the Bureau using a combination of quantitative and qualitative evidence.

The Bureau has conducted numerous competitive assessments of proposed mergers among suppliers in the financial sector. These include reviews of the most significant prior transactions among Canadian institutions, such as the proposed respective mergers of RBC with Bank of Montreal, and CIBC with TD Bank, in 1998. In December 1998, the Bureau issued letters to the Chairpersons of these four banks, with copies to the Minister, outlining its conclusions that the transactions were likely to result in a substantial lessening or prevention of competition. The Bureau’s findings included that, for example, one or both mergers would result in a substantial lessening of competition in:

  1. a variety of local branch banking markets;
  2. services for mid-market businesses with operating loans between $1 million and $5 million in certain provinces and territories;
  3. certain credit card-related markets;
  4. a number of local markets for full-service brokerage services; and
  5. potentially, the national market for underwriting of large equity issues. Ultimately, the transactions were not permitted following a review by the Minister.

The Bureau also reviewed a significant banking matter in 2000, when it assessed the competitive implications of the acquisition of Canada Trust by TD Bank. In a letter provided to the merging parties with a copy to the Minister, the Bureau outlined its conclusions that the transaction would lead to higher prices and lower levels of service and choice in three local branch banking markets in Ontario, as well as substantially lessen or prevent competition in the general-purpose credit card networks market in Canada. The Bureau also advised that remedies proposed by the merging parties, including the sale of bank branches, and the sale or conversion of aspects of their credit card portfolios, would address the anti-competitive impact of the merger.

In the years since these major bank mergers, the Bureau has reviewed hundreds of proposed transactions within the financial sector involving market participants such as banks, credit unions, insurance companies, mortgage specialists, investment brokers and various other NBFIs. In all such cases, analyses are conducted as described in the Merger Enforcement Guidelines and are informed by relevant jurisprudence under the Competition Act.

In conducting the present review of RBC’s proposed acquisition of HSBC Canada, the Bureau noted that the financial services sector overall has undergone significant technological change that has the potential to impact the services offered to Canadians and, potentially, the competitive landscape in specific markets. The role of online banking has continued to evolve and innovative business models have appeared, for example, in the provision of payment services, the offer of new financing methods, and investment dealing and advice. Certain studies by the Bank of Canada and Statistics Canada have suggested that the NBFI sector overall experienced significant growth in the years leading up to the COVID-19 pandemic, though its share of overall financial assets, as compared with those of traditional institutions, has remained relatively stable. Similarly, with respect to lending in particular, data suggests NBFIs are a significant and growing source of credit for Canadians, though their issuance of credit has been out-paced by other players such as traditional banks in recent years.Footnote 6

In December 2017, the Bureau also released a market study (Technology-led innovation and emerging services in the Canadian financial services sectorFootnote 7) discussing the impact of FinTech innovation in particular on the competitive landscape in Canada, and examining potential barriers to entry, innovation, competition and growth faced by FinTech firms. The study found that Canada lagged behind its international peers when it comes to FinTech adoption, and provided certain recommendations to promote competition and innovation in the sector. Despite certain barriers, the Bureau noted that FinTech had the potential to dramatically change the way financial products and services are accessed and used by Canadians.

In this context, the Bureau assessed a variety of updated evidence regarding recent innovations in financial services in arriving at the conclusions presented in this report. This included review of data, stakeholder views and documentary sources regarding, for example, the role of retail branch banking and online services, the impact and presence of branchless competitors and FinTech firms, as well as potential competitive constraints imposed by other NBFIs.

6.1 Regulatory considerations in the financial services sector

The Parties and their primary competitors operate within an extensive regulatory framework that serves to protect the Canadian financial systems and govern the behaviour of market participants. While these regulations often aim to address systemic, prudential and governance-related risks, and otherwise protect consumers and investors, they may also have implications for entry conditions, competitor expansion, and other aspects of competition in financial services markets. The Bureau remains cognizant of this regulatory context, and its effects, when assessing proposed transactions in the financial sector.

Bank activities are regulated by legislation including the Bank Act, Canada Deposit Insurance Act, Canadian Payments Act, and Financial Consumer Agency of Canada Act. Various aspects of the regulatory regime can impose requirements on potential competitors in the markets affected by the Proposed Transaction. Competitively-relevant aspects of this regime include, for example:

  • Classification of market participants under the Bank Act as Schedule I banks (such as RBC), Schedule II banks (such as HSBC Canada) or full-service or lending foreign bank branches, where full-service branches may access Canadian wholesale deposit and financial markets for funding, while lending branches must rely on foreign funding or funds borrowed from other institutions.
  • Various capital adequacy and liquidity requirements, including as outlined by OSFI, which broadly differ for banks designated as domestic systemically important banks (“DSIBs”), global systemically-important banks (“GSIBs”, such as RBC), and small and medium-sized deposit-taking institutions (“SMSBs”). For example, DSIBs and GSIBs are required to hold higher additional capital buffers as compared to SMSBs. Additional requirements and guidelines also apply with regard to the initial capital of a new bank.
  • Various ownership restrictions under legislation, including the Bank Act, such as requirements that large and medium banks be widely-held or have a public float of 35% of voting shares.
  • Monitoring, reporting and compliance requirements, and associated costs, which may be more significant, relative to revenues, for smaller competitors.
  • Regulatory uncertainty, and potential regulatory barriers, present for emerging FinTech players in areas such as lending and investment dealing.

The regulatory context in which market participants, including the Parties, compete to offer financial services continues to evolve. As mentioned above, the Bureau recently conducted a market study relating to regulatory (and other) considerations relevant to FinTech innovationFootnote 8, and has also, for example, provided competition-focused submissions to the Minister relating to consultations on open bankingFootnote 9 and broader policy measures in the financial sector.Footnote 10 In conducting the transaction-specific analysis described in this report, the Bureau reviewed information regarding the impacts of various aspects of existing regulation on competition in the relevant markets.

7. Competitive Analysis

7.1 Relevant Markets

The Bureau defines markets in order to identify the set of products that customers consider to be close substitutes for those offered by the merging parties. Defining markets allows the Bureau to identify participants in a relevant market to determine market shares and concentration levels. Where the Bureau finds that a merger may raise competition concerns, it will typically identify one or more relevant markets in which competition is likely to be prevented or lessened.

For the purposes of this analysis, a relevant market is defined as the smallest group of products, including at least one product of the merging parties, and the smallest geographic area, in which a sole profit–maximizing seller (a “hypothetical monopolist”) would impose and sustain a small but significant and non–transitory increase in price. In most cases, the Bureau considers a five percent price increase to be significant and a one-year period to be non-transitory. Identifying the smallest set of products in which a hypothetical monopolist would impose and sustain such a price increase, without buyers switching their purchases to other products in sufficient quantity to render the price increase unprofitable, is often referred to as the “hypothetical monopolist test.” The hypothetical monopolist test may be conducted empirically where the data allows. The Bureau may also consider other evidence relevant to defining markets, including information on the views, strategies, and behaviour of buyers and documents prepared by the merging parties in the ordinary course of business.

The Bureau may also examine or describe multiple relevant products, or markets, in aggregate where they share common competitive dynamics and the same competitors are present in each.

RBC and HSBC Canada offer a wide variety of financial products and services to individuals, commercial clients and investors. Ultimately, the Bureau identified the following relevant products (or product groupings) for which there was overlap between the Parties’ offerings:

  • Personal Financial Services:
    • Personal transaction accounts, including chequing and savings accounts;
    • Personal short-term savings, including investment products such as guaranteed investment certificates (“GICs”), term deposits, money market mutual funds, savings bonds and treasury bills;
    • Consumer lending, such as auto loans, personal loans, lines of credit and other secured or unsecured credit products;
    • Residential mortgages;
    • Online/discount brokerage services, which allow individuals to trade securities without advice from a dedicated financial advisor (e.g. self-directed investing);
    • Private investment counselling services, including portfolio management services and the investing of client assets in securities, but excluding full service brokerage services; and
    • Personal long-term investment services, including the management of long-term investment products such as mutual funds and exchange-traded funds.
  • Business Financial Services:
    • Business accounts, which allow businesses to make payments, collect receivables and manage working capital needs; and
    • Business lending, such as operating loans, lines of credit and term loans.
  • Capital Markets Services:
    • Mergers and acquisition advice, which includes providing strategic, valuation and integration-related advice to corporate clients, as well as advice regarding debt and equity financing of mergers and acquisitions;
    • Underwriting, which involves assuming the risk of a new issue of debt or equity securities and reselling those securities to investors; and
    • Sales and trading, which includes buying and selling financial instruments on behalf of institutional investors.
  • Credit Card Services:
    • General purpose credit card issuing to businesses; and
    • General purpose credit card issuing to individuals.

In identifying these relevant products, the Bureau considered various information and evidence, including submissions made by the merging parties, stakeholder views, data collected from market participants, and internal strategic documents produced by market participants. The Bureau also assessed information indicating that customers may purchase subsets of these products and services as a bundle, and that, in certain cases, competitors may offer incentives for customers to make multi-product purchases. The Bureau therefore considered the competitive dynamics for the sale of bundles of multiple financial products where appropriate, including when assessing the likelihood of entry by competitors.

7.1.1 Branch banking and geographic market analysis

In previous assessments of major bank mergersFootnote 11, the Bureau’s analysis has focused, in large part, on the offer of branch banking services. At the time of these prior reviews, the services found to be branch-based included many of the financial services now offered by both RBC and HSBC Canada, and the relevant geographic market for their sale to individuals and small and medium-sized enterprises (“SMEs”) was deemed to be local based on available evidence and expert advice. The Bureau has therefore historically examined competition for branch banking services within specific urban census agglomerations and census metropolitan areas (“CMAs”), as well as in local rural areas where branches of the merging parties are located within a short distance of one another.

A major focus of the Bureau’s analysis in this case was examining the continued role of branch locations in competition for financial services, and assessing the extent of the relevant geographic market for each of the overlapping products offered by the Parties. In conducting this analysis, the Bureau sought to confirm the extent to which competitors operating more distant branches, or those with no retail branch network, may effectively compete with the Parties given available technology. The Bureau’s geographic market assessment was informed by data analysis, internal strategic and business documents produced by the Parties, and interviews with market participants. The Bureau also considered expert analysis of the breadth of the relevant markets, including an empirical application of the hypothetical monopolist test.

The Parties argue that a branch presence is no longer required to effectively compete for personal financial services, and cite survey data indicating that a declining minority of Canadians use branches or automatic banking machines as their most common method of banking. The Parties also suggest that a growing number of competitors serve customers solely through digital distribution channels. With respect to business services offered to SMEs, the Parties submit that customers can secure services from local and national providers given their increased reliance on digital tools.

The Bureau reviewed documentary evidence relating to overall trends towards digital solutions in financial services, and describing a growing role for FinTech firms and digital platforms. On the whole, however, the Bureau found that retail branches have continued importance and remain the primary (or a significant) mode of banking for a subset of Canadians. While branch closures have occurred in substantial numbers since the advent of online services, data suggests that the rate of closures has declined, and RBC and HSBC Canada continue to operate extensive branch networks. Information received from stakeholders suggested that branch services may be best viewed as a complement to online banking, with branches still serving an important role in key transactions, the provision of advice or certain steps in customer origination.

The Bureau reviewed internal documents detailing the Parties’ plans for their branch networks, both absent and following the Proposed Transaction, and the strategic and competitive considerations that informed such plans. While these documents described instances of branch consolidations or restructuring (including reductions in overall branch size, or scope of services, in favor of digital offerings), they generally reinforced the competitive importance of local branch networks overall. Evidence suggested that the Parties viewed local branches as the predominant means of new client origination and growth, and that they remained the preferred channel for certain customer segments with very high utilization rates. RBC’s extensive branch network, the largest in the country, was also cited as a competitive advantage. Even when considering approaches that promoted digital offerings, internal documents demonstrated that the Parties viewed branch closures as a notable risk to competitiveness and market growth, and as a factor which could lead to material customer attrition. These factors appear to have led to the adoption of strategies that involve continued investment in local branches, largely maintaining overall branch footprints, and the opening of new branches in key growth markets. Certain documents suggested, for example, that the Parties considered local branch competition and assessed their market coverage within short customer driving distances in suburban and urban areas.

The Bureau also focused on considering evidence relating to pricing for each of the overlapping products offered by the Parties. With respect to personal and business financial services, the Bureau found that, despite nationally-advertised rates, the Parties made local, regional, or customer-specific offers for many of the overlapping products on a frequent basis. These varied by product and included specially-determined or negotiated interest rates, fees, cash offers, and other terms. Documentary evidence supported that these prices and terms were most affected by nearby alternatives. The Bureau reviewed the Parties’ organizational structures and the assignment of pricing decisions within each business, including the pricing discretion provided to locally-assigned personnel (such as mortgage specialists). These practices were consistent with pricing influenced by local competition.

In addition to this qualitative evidence, the Bureau considered the views of the economic expert, who developed a model of competition for the primary overlap products. Using extensive historical data on sales to Canadians collected from the Parties and competitors, as well as data regarding the branch locations of competitors, the expert conducted a hypothetical monopolist test in each of the local areas of overlap between the Parties’ branches. Given the nature of HSBC Canada’s branch network, this assessment focused on urban areas and involved an iterative, data-driven exercise evaluating clusters of competitor locations situated in close proximity to one another. On the basis of this analysis, which included an empirical assessment of the hypothetical monopolist test, the expert concluded that the appropriate relevant markets for the purpose of analyzing the potential competitive effects of the Proposed Transaction were local.

As a result, based on the qualitative and quantitative evidence collected, as well as the economic expert’s views, the Bureau concluded that the relevant markets for many of the overlapping personal and business financial services are local.Footnote 12 The Bureau therefore assessed competition within local areas in which each of the Parties operated a retail branch, and considered groupings of competitors informed by the experts’ analysis, as well as by other evidence and specific local conditions. While the Bureau considered various specific local market scenarios (and ultimately found its conclusions were not sensitive to the particular scenario considered), this generally resulted in a competitive analysis of over 60 local areas around RBC or HSBC Canada branch locations. The Bureau also assessed information regarding competition across CMAs in which both Parties operate, and found that this broader approach would not change its conclusions.

7.2 Removal of a vigorous and effective competitor

The Proposed Transaction would result in the acquisition of Canada’s seventh-largest bank, based on a measure of Canadian assets, by the country’s largest. While the five largest banks in Canada, namely RBC, BMO, Scotiabank, TD Bank and CIBC, account for the vast majority of the country’s banking assets and transactions, HSBC Canada represents one of the primary alternative national institutions available to Canadians. HSBC Canada operates a nation-wide branch network particularly focused on urban areas and in Ontario and British Columbia. Stakeholders described HSBC Canada as a supplier with particular strengths in internationally-focused services, and as an aggressive competitor in specific product segments.

On May 1, 2023, the Bureau issued a request for information inviting market participants and all Canadians to provide submissions in order to assist the Bureau with its investigation. Ultimately, over 1500 responses relating to a variety of financial services were received from stakeholders. Many of these responses provided information regarding HSBC Canada’s particularly competitive service offerings, and expressed concern that the Proposed Transaction may affect the fees, interest rates, terms or products features available to Canadians. The advantageous HSBC Canada offers outlined by these submissions included, for example, low or flexible mortgage and home equity line of credit rates, transaction account fee waivers for a variety of customers, flexible terms and high interest rates for savings products such as GICs, green investment options, affordable banking suites for small businesses, as well as internationally-focused offerings such as multi-currency accounts and free or lower-cost international wire transfers, among others. The Bureau considered this information together with its review of other factors affecting competition.

When determining whether a transaction is likely to result in a substantial lessening or prevention of competition, the Bureau may assess the competitive attributes of the target business to determine whether the merger will likely result in the removal of a vigorous and effective competitor. This assessment may involve a review of evidence of rivalry between the merging parties, as well as consideration of whether one or both parties has led price reductions, provided unique service or terms, or made market share gains (or is positioned to do so), among other factors. Evaluating the competitive impact of HSBC Canada in the relevant financial services markets, and the extent of rivalry between HSBC Canada and RBC, was a primary focus of the Bureau’s review in this case.

The Parties argue that HSBC Canada is a small competitor with limited market shares in most of the overlap markets. They further suggest that HSBC Canada is generally focused on high-net-worth and internationally-minded customers, and is not a disruptive competitor for the relevant personal and business financial services. The Parties submit that HSBC Canada’s reliance on the global HSBC Group for funding and strategic direction has limited or constrained its competitiveness in Canada, and resulted in underinvestment or delays in product development, more limited product offerings, and a lag in digital offerings as compared to the major domestic banks. Given these factors and HSBC Canada’s limited overall presence, the Parties indicate that it typically responds to rates that have been set by Canadian Schedule I banks, and that RBC does not routinely price in anticipation of HSBC Canada’s prices, nor consider, or respond to, HSBC Canada rates when settings its own.

In order to assess HSBC Canada’s effectiveness and competitive impact, the Bureau reviewed a variety of documentary evidence relating to the determination of pricing, rates, product features and other dimensions of competition across the relevant financial services. Contrary to the submissions described above, the Bureau found evidence of instances where HSBC Canada had materially affected RBC offers for a number of the products examined, including mortgages, high interest savings accounts, GICs and business loans and accounts. RBC reports regarding certain personal financial services indicated, for example, that HSBC Canada was among a set of financial institutions for which competitive rates were routinely monitored, along with the remaining Big Five Banks and other major institutions. The Bureau found numerous examples of the use of HSBC Canada mortgage rates as a reference in customers’ negotiations with RBC, or in internal RBC considerations of special rate proposals. Similarly, the Bureau noted cases where HSBC Canada competed effectively to attract large corporate clients from RBC for business lending products. The Bureau also found that RBC strategic documents cited certain HSBC Canada product features, such as GIC redemption terms, transaction limits, features of foreign currency accounts, and international services, among others, as historically effective in drawing RBC clients to HSBC Canada.

Stakeholders and documentary evidence also supported that HSBC Canada offered particularly attractive and competitive products in specific segments of personal and business financial services. The Bureau found certain evidence that HSBC Canada personnel viewed their own mortgage business as a “rate disruptor” in the Canadian market, and pursued a strategy focused on low publicly-posted rates. While some documents also suggested that HSBC Canada negotiated offers below these posted mortgage rates less frequently than competitors, certain RBC documents indicated that HSBC Canada mortgages were nonetheless often issued below market rates. Stakeholders and certain internal plans also reported instances of HSBC Canada offering very advantageous rates in other products such as GICs, as well as beneficial terms and product features unmatched by competitors such as transaction fee waivers, early mortgage repayment options, and higher transaction limits. The Bureau considered whether HSBC Canada customers may be harmed by a reduction in these benefits due to the Proposed Transaction, an analysis which is described in further detail in Sections 7.3.3 and 7.3.4 below.

Despite these findings regarding HSBC Canada’s often advantageous offers, the Bureau also reviewed various evidence that highlighted limitations in the bank’s competitive impact and a lack of close competition between the Parties. The Bureau found that HSBC Canada had achieved only modest market penetration in most products, despite its often competitive pricing. A review of evidence collected from RBC (as well as other competitors) confirmed that its rate setting, monitoring, pricing reactions, and overall competitive strategies for the overlap services were mainly focused on the other Big Five Banks, even in geographic areas of relative strength for HSBC Canada. As is further discussed in Sections 7.3.3 and 7.3.4, the Bureau assessed documentary evidence regarding the rationale for hundreds of individual RBC pricing decisions, and found that they were primarily driven by competition from other financial institutions, and seldom by HSBC Canada offers. The Bureau also found substantial evidence of major competitors such as RBC directly declining to match HSBC Canada rates, or developing strategies which reacted less directly to HSBC Canada offers, consistent with the bank’s more limited market presence.

The Bureau found indications that HSBC Canada was frequently not a price leader, and may not routinely prompt reactions from rivals even when competing particularly vigorously. The Bureau also uncovered some evidence that HSBC Canada adopted an explicit “price follower” strategy, or directly characterized itself as a price taker, in certain financial service product markets. Evidence suggested that HSBC Canada lagged its Canadian competitors in certain product features, particularly relating to digital services, such as debit card compatibility, mobile self-service capabilities, and other offerings. In certain cases, documents supported that HSBC Canada’s competitiveness had been affected by a lack of funding for product initiatives that were not prioritized by HSBC Group. Even in cases where HSBC Canada appeared to be a leader in product development or product features, there was limited evidence that this had influenced the offerings of Canadian institutions.

Beyond analyses of effects on prices or rates likely to be offered to Canadians, the Bureau also considers potential impacts on service, quality, product choice and other dimensions of competition. In this respect, the Bureau noted that HSBC Canada’s internationally-focused product offerings were of particular value to certain customers, and included products dependent on integration with the global HSBC group. Stakeholders and documentary evidence highlighted the competitive importance of specific features of HSBC Canada products such as multi-currency accounts, international trading, and international money movement and management, as well as certain products still under development, and confirmed that these offerings differentiated HSBC Canada from its competitors such as RBC. The Bureau reviewed integration plans, strategic documents and other evidence in order to assess RBC’s competitive incentives and the likelihood that it would continue to offer key products in Canada. Ultimately, the Bureau found the evidence supported that RBC intended to continue to prioritize many of the relevant products, had developed plans to address key product gaps, and sought to maintain important offerings and avoid customer attrition.

Based on this analysis, the Bureau generally concluded that there was material rivalry between HSBC Canada and RBC across many financial services markets, but that HSBC Canada’s competitive impact was limited when compared to other financial institutions (particularly large domestic banks). The Bureau found that the loss of rivalry between the Parties may be more pronounced for certain customer groups, including HSBC Canada customers for products such as mortgages and internationally-focused accounts.

When assessing the likelihood that a merger will substantially lessen or prevent competition, the Bureau also examines the effectiveness of remaining competitors, the likelihood of timely and sufficient entry or expansion, and other factors that may constrain a potential exercise of market power. In order to fully assess the likely competitive effects of the Proposed Transaction, the Bureau considered additional evidence regarding competitive dynamics and remaining competition in each of the overlap markets, including measures of market concentration, strategic and business documents, and expert economic analysis. The Bureau’s economic expert estimated demand and performed a merger simulation in order to evaluate the competitive effects of the Proposed Transaction in the relevant markets. The results of these analyses are discussed in sections 7.3.3 and 7.3.4 below.

7.2.1 Sustainable finance

Both RBC and HSBC Canada offer a variety of sustainable finance products, and have made public commitments related to promoting, or transitioning towards, environmentally-sustainable lending practices. Stakeholder submissions and internal documents received from market participants confirmed that consumers significantly and increasingly value these offerings, and that demand for such products is expected to continue to grow. During its review, the Bureau further found that, in some respects, HSBC Canada has been a particularly vigorous competitor in sustainable finance, and a leader in the development of certain products in the sector. As is noted in the Merger Enforcement Guidelines, when evaluating the competitive effects of a merger, the Bureau assesses various dimensions of competition beyond price and output, such as quality, product choice and innovation. As a result, the Bureau conducted a separate and detailed assessment of the likelihood that the Proposed Transaction would substantially affect the quality or scope of sustainable products offered by the Parties, or innovation with regard to sustainable finance. The Bureau’s examination of this issue was particularly informed by strategic documents and business plans collected from the Parties, as well as by evidence regarding the competitive impact of other financial institutions in the area of sustainability.

Financial institutions in Canada promote a number of sustainable finance products to attract customers and support broader environmental commitments, including advisory solutions, green or sustainability-linked loans, green deposits, green or sustainability-linked bonds, or other similar products which commit capital to defined sustainability standards. Evidence collected by the Bureau confirmed that HSBC Canada was viewed as a market leader and innovator within this product space, as evidenced by its early introduction of green loans in 2019 and its offering a full suite of sustainable finance products by 2021. Strategic documents reviewed by the Bureau confirmed HSBC Canada’s plans for continued investments in sustainable product innovation, and indicated it offered a broader portfolio of sustainability-focused products than many of its competitors, including RBC. A focus of the Bureau’s analysis was therefore assessing whether the Proposed Transaction would provide substantial incentives for RBC to reduce this product offering, or would otherwise affect innovation or product quality by lessening competition in the sector.

The evidence reviewed by the Bureau, including internal planning documents, supported that the Parties face significant external pressures to develop robust sustainable finance offerings which would be unaffected by the transaction. Documentary evidence suggested that the Parties, much like other competitors, had prepared plans for significant growth in sustainable finance, a strategy reinforced by mounting consumer demand, the nascent and growing nature of the relevant markets, and increasing regulatory pressures. The evidence reviewed by the Bureau did not indicate that existing rivalry between RBC and HSBC Canada significantly drove sustainable product development. The Bureau also extensively reviewed RBC’s strategic plans relating to the Proposed Transaction, and found that they described integration of HSBC Canada’s broader sustainable finance portfolio as a means to accelerate this growth. Internal documents detailed RBC’s intentions, through the Proposed Transaction, to improve its capabilities in the sector, integrate new HSBC Canada offerings, and expand the suite of solutions offered to all of its clients. The Bureau did not find evidence that RBC intended to discontinue, or limit investments in, HSBC Canada’s sustainable portfolio.

The Bureau further found evidence that RBC would continue to face significant pressure from specific competitors to develop its sustainable finance offerings after the merger. Documentary evidence demonstrated that, in assessing their respective sustainability strategies, each of the Parties viewed insufficient development of such products as a significant risk to market shares, customer growth and attrition rates, estimated capital losses, and overall profitability. The Bureau reviewed evidence regarding the capabilities of competitors, which indicated that major competing institutions in Canada, such as BMO, National Bank, ScotiaBank and others had substantial sustainable finance capabilities, or were positioned to develop solutions with significant impact in these nascent markets. The Bureau also noted that each of RBC’s major competitors (including ScotiaBank, TD, CIBC, and BMO) have made significant sustainable lending commitments.

Ultimately, the Bureau found that, based on available evidence, RBC would likely have the incentive and intention to continue to offer HSBC Canada’s sustainable finance products post-transaction, and would be incentivized to continue development in this space given increasing demand, the dynamic nature of the relevant markets, and significant competitive pressures. Given these findings, as well as the presence of effective remaining competitors for the relevant products, the Bureau concluded that the acquisition of HSBC Canada’s sustainable finance portfolio by RBC was not likely to result in a substantial lessening or prevention of competition.

7.3 Competitive effects and remaining competition

7.3.1 Competition in capital markets services

Capital markets services broadly include the raising of capital in exchange for financial instruments (primarily equity or debt), the trade of such financial instruments, and the sale and supply of certain other financial instruments such as foreign currencies. Customers for capital markets services typically include corporations, institutional investors, asset managers, private equity firms and governments. As was noted in section 7.1, the Bureau identified three primary capital markets services offered by both RBC and HSBC Canada, namely:

  1. mergers and acquisitions advice,
  2. underwriting, and
  3. sales and trading. The Bureau assessed competition for each of these services, including through evaluation of market concentration and the effectiveness of remaining competitors, based on documentary evidence, stakeholder interviews, and other sources of information.

The Bureau found that competitive dynamics in capital markets services are, in many respects, distinct from those in other financial services markets. Evidence indicated that while capital markets customers prefer to use competitors familiar with the jurisdictions in which they operate, they typically do not require that a potential supplier have a local office, such that the relevant markets are likely national or global in scope. The information collected by the Bureau supported that the Parties therefore faced competition from a number of large, sophisticated, and often internationally-based players, particularly with respect to underwriting services.

The Bureau assessed available data on market concentration, and found that the Parties’ market shares were low for each of the relevant capital markets products. Information collected by the Bureau further indicated that HSBC Canada had a minimal presence in capital market services, and limited competitive impact. The Bureau evaluated the effectiveness of remaining competitors, and found that RBC would continue to face significant competitive constraints from the other Big Five Banks, other Canadian financial institutions such as National Bank and Desjardins, as well as major international players including Bank of America, Deutsche Bank, BNP Paribas, JP Morgan and a number of others (particularly for underwriting services). Large international competitors are especially present in underwriting transactions where significant capital is required.

Based on these findings, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in capital markets services given the Parties’ limited market shares, HSBC Canada’s modest competitive impact, and the presence of effective remaining competitors. Given this determination, it was not necessary to pursue further investigation, including expert analyses of competitive effects, relating to capital markets services.

7.3.2 Competition in credit card issuance

As was noted in section 7.1, the Bureau identified two categories of credit card services offered by both RBC and HSBC Canada:

  1. general purpose credit card issuance to businesses; and
  2. general purpose credit card issuance to individuals. RBC is an issuer of both Visa and Mastercard credit cards, while HSBC Canada is an issuer of Mastercard credit cards.

Financial institutions compete to attract credit card customers based on interest rates, annual fees, sign up incentives, embedded benefits, features, and the terms of associated rewards programs, among other dimensions of competition. The Bureau received a number of submissions in response to its public request for information that described competitively-significant features of HSBC Canada’s credit card offerings, such as attractive travel insurance and a lack of international transaction fees, and expressed concern that these may be affected by the Proposed Transaction.

The Bureau reviewed the credit card offerings of the Parties and their major competitors, and assessed the extent of remaining competition post-transaction. The Bureau found that available data suggested the Parties had low shares of the relevant credit card markets, and that HSBC Canada had a very limited market presence. The Bureau also determined that RBC would continue to face effective competition from major banks such as TD Bank, CIBC, BMO, Scotiabank and National Bank, as well as competition from certain other credit card issuers such as smaller financial institutions and retailers following the Proposed Transaction.

As a result, based on the limited presence of the Parties and extent of remaining competition, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in the issuance of credit cards. Given this determination, it was not necessary to pursue further investigation, including expert analyses of competitive effects, relating to credit card issuance services.

7.3.3 Competition in personal financial services

As was noted in section 7.1, the Bureau identified a variety of personal financial services that are offered to individuals by both RBC and HSBC Canada. The relevant overlapping products and services include:

  1. personal transaction accounts,
  2. personal short-term savings,
  3. consumer lending products,
  4. residential mortgages,
  5. online/discount brokerage services,
  6. private investment counselling services; and
  7. personal long-term investment services. In each case, the Bureau evaluated the potential for competitive effects through review of available evidence, including documents and data, and by conducting interviews with market participants. The Bureau also assessed market shares and concentration, and considered the analyses of the independent economic expert.

The Bureau assessed market concentration for personal financial services offered by the Parties in over 60 local markets of branch overlap. The Bureau’s market share analyses were informed by detailed data collected directly from the Parties and other market participants. Local geographic markets for the purposes of this analysis were informed by a hypothetical monopolist test conducted by the independent economic expert, as well as other evidence, and considered alternative scenarios as described in section 7.1.1. The Bureau found that the Parties’ market shares were below 35 percent in the majority of the relevant local markets, largely due to competition from large domestic banks. The Commissioner generally will not challenge a merger on the basis of a concern related to the unilateral exercise of market power when the post-merger market share of the merged firm would be less than 35 percent.

The Bureau also directly examined the effectiveness of remaining competitors in each of the overlapping personal financial services. When determining the ability and effectiveness of remaining competitors to constrain an exercise of market power by the merged firm, the Bureau may examine evidence of existing rivalry, such as discounting and other pricing strategies, distribution methods and product positioning, and service offerings. In order to conduct this analysis, the Bureau reviewed internal business records relating to multiple dimensions of competition including the determination of pricing, fees, interest rates, product features and service quality.

On the whole, the Bureau found that each of BMO, TD Bank, Scotiabank, and CIBC generally offered comparable and competitive products across the overlapping personal financial services and in the relevant local markets under review. Documentary evidence strongly supported that the Big Five Banks were the Parties’ closest competitors for the relevant services in areas where they operated local branches. Strategic plans confirmed that these were the banks most systematically monitored and benchmarked by the Parties, and those that most affected the Parties’ competitive offers. The Bureau also assessed business plans relating to areas of reported competitive strength for HSBC Canada, such as services for newcomers to Canada, and continued to find evidence of close competition, and high market penetration, from these large banks.

The Bureau also examined information relating to the constraint offered by smaller financial institutions and non-bank competitors. The Bureau found evidence indicating, for example, that National Bank and Desjardins were highly effective and aggressive competitors across numerous product markets in the province of Quebec. A variety of internal business records also supported the presence of sporadic and more limited constraints imposed by credit unions and regional banks in local areas where they had a significant presence.

The Bureau further examined evidence regarding competitive dynamics in specific product markets. The Bureau extensively reviewed, for example, documents relating to the determination of residential mortgage rates in the relevant areas. This evidence included internal documentation of changes to posted mortgage rates, as well as requests for rate exceptions or special offers for particular customers in response to competitor activity. The Bureau found that changes to the Parties’ mortgage offers were most frequently driven by competition from Big Five Banks such as BMO, TD Bank, Scotiabank, or CIBC. Documents also provided examples of systematic tracking of these firms’ mortgage offers which did not include other competitors. The Bureau also examined evidence regarding sales through mortgage brokers, which account for a growing proportion of Canadian mortgages. The Bureau’s review found that competition from other mortgage providers, such as monoline lenders, private lenders, or branchless or digital competitors, influenced the Parties’ mortgage pricing and offerings to a more limited extent. Evidence suggested that the ability to offer multiple financial services, and leverage a customer’s existing account relationships, may be significant factors in the effectiveness of competitors.

The Bureau also found evidence that the Parties benchmarked the features and fee structures of their personal transaction accounts against competitors such as BMO, TD Bank, Scotiabank and CIBC. While competitive monitoring also sometimes included certain branchless or digital banks, these included firms were often affiliated with, or owned by, Canada’s large institutions. Documents relating to personal lending and savings products (particularly GICs) similarly described instances of close competition and monitoring among Canada’s five largest institutions, while also confirming that HSBC Canada offered market leading rates during certain periods, and suggesting that regional banks held larger shares of GICs than other personal financial products. Documents suggested that major financial institutions’ investments in digital innovation and their extensive distribution networks contributed to their effectiveness as a competitive threat overall. Nonetheless, the Bureau found certain evidence that products such as investment counselling and brokerage services, which do not involve capital reserve requirements, were more affected by competition from monoline and digital-only competitors.

In order to further assess the potential effects of the merger on the overlapping financial services, the Bureau also considered the analyses of the independent economic expert. The Bureau’s economic expert estimated demand and performed a merger simulation in order to evaluate the likely competitive effects of the Proposed Transaction in the relevant markets. The Bureau does not base its conclusions regarding whether a transaction is likely to result in a substantial lessening of competition on a specific numerical threshold for price increases, but considers such analyses together with its assessment of factors likely to constrain an exercise of market power post transaction.

The expert’s analysis included a variety of sensitivity analyses, and considered key features of the assessed personal financial services. The expert’s assessment also included consideration of potential non-price effects associated with the merger. Ultimately, the economic expert’s analysis indicated a range of competitive effects, including specific price increases, that may result from the Proposed Transaction. The Bureau concluded that, when assessed with all other available evidence, these predicted effects did not support a finding of substantial lessening of competition within the meaning of section 92 of the Competition Act.

Given the above, the Bureau’s findings included that:

  1. the post-merger market shares of the merged firm would, in most cases, be below 35% in the assessed personal financial services markets;
  2. while the Proposed Transaction would likely result in the loss of material rivalry between HSBC Canada and RBC, evidence indicated that remaining competitors were likely effective and had a much more substantial impact in the relevant personal financial services markets; and
  3. expert assessment of competitive effects did not support a finding that the Proposed Transaction would result in a substantial lessening of competition.

Ultimately, then, based on the totality of its review, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in the overlapping personal financial services markets, as defined under section 92 of the Competition Act. The Bureau’s conclusions are further discussed in section 8 below.

7.3.4 Competition in business financial services

Both RBC and HSBC Canada offer a variety of financial services to businesses, which can broadly be grouped within:

  1. business accounts, and
  2. business lending services. The Bureau found that the Parties’ offers and negotiated terms for these products, as well as competitive processes and conditions, frequently differed according to a customer’s size. Certain evidence supported that the Parties’ broadly categorized clients, and developed distinct strategies, among:
    1. small and medium-sized enterprises (“SMEs”),
    2. mid-market enterprises (“MMEs”), and
    3. large corporate customers. The Bureau therefore assessed competition for each relevant service across the local markets of overlap between the Parties, and considered evidence regarding the offer of such services to businesses of different sizes.

As with the personal financial services discussed in section 7.3.3., the Bureau evaluated the potential for competitive effects in business services through review of available evidence, including documents and data, and by conducting interviews with market participants. The Bureau again assessed market shares and concentration, and considered the analyses of the independent economic expert.

The Bureau assessed market concentration for business financial services offered by the Parties in over 60 local markets of branch overlap. The Bureau’s market share analyses were again informed by detailed data collected directly from market participants, and local geographic markets were informed by a hypothetical monopolist test conducted by the independent economic expert, as well as other evidence. The Bureau found that the Parties’ market shares were generally low, in many cases below 35 percent, largely due to competition from the largest domestic banks. The Commissioner generally will not challenge a merger on the basis of a concern related to the unilateral exercise of market power when the post-merger market share of the merged firm would be less than 35 percent.

Local market analyses may be most relevant for services provided to SMEs, as evidence showed that these customers had the greatest reliance on service from local branches. The Bureau found that larger business customers, including those with operations or offices spanning a wide geography, often purchased financial services through competitive tenders, or sought syndicated loans, with little consideration of a supplier’s local presence. As a result, given evidence that the relevant geographic markets for the provision of accounts or lending to certain larger corporate customers may be broader than local, the Bureau also considered competition in potential regional markets, as further described below.

The Bureau examined the effectiveness of remaining competitors in each of the overlapping business financial services. The Bureau reviewed internal business records relating to multiple dimensions of competition and negotiations with customers of various sizes. The Bureau also reviewed evidence regarding the Parties’ strategic plans and respective strengths in their business service offerings, with a view to assessing competitive dynamics in each relevant market.

Internal strategic and business planning documents indicated that HSBC Canada had a limited overall presence in business financial services, even when accounting for certain projections of near-term growth, but had particular strengths in services for clients with international needs. The Bureau found that HSBC Canada had a limited share of services to SMEs, for example, and that even its plans for growth in that segment emphasized targeting customers with international needs and highlighted international offerings in competitive benchmarking.

The Bureau found, with respect to accounts and loans supplied to SMEs, that the Parties regularly and closely monitored the offerings of each of TD Bank, Scotiabank, BMO and CIBC. Evidence suggested that each of these firms were generally similarly cost competitive, and had a comparable breadth of SME product offering to the Parties (though they may vary in their international offerings). The Bureau found evidence of significant expansion plans among certain of these large banks in products such as small business loans. On the whole, the evidence supported that these firms were effective competitors for services to SMEs in local markets where they operated a branch.

Evidence regarding the constraint imposed by other competitors was much more limited. Certain strategic and business plans supported, for example, that regional banks and credit unions may be suitable competitive alternatives for SMEs with a local focus. Other evidence indicated that FinTechs were viewed as a notable threat for services such as deposit taking and lending should there be changes in Canadian banking regulations. Ultimately, there was limited evidence of a direct effect of competition from online banks or NBFIs on the Parties’ offerings for business financial services.

The Bureau also reviewed considerable evidence regarding competition for services provided to MMEs and large corporate customers. This included direct evidence of the negotiation and pricing of large loans, syndicated loans, and business accounts. These documents confirmed that major banks such as BMO, TD Bank, Scotiabank, and CIBC were the Parties’ closest competitors for high-value business lending, and provided numerous examples of the loss of significant customer accounts to these institutions based on competing offers. Strategic documents also confirmed that aggressive campaigns by certain of these competitors were closely tracked in internal planning. Evidence regarding negotiation of large, syndicated loans suggested that RBC competed more closely with the largest Canadian banks for such products than with HSBC Canada.

The Bureau found that the constraint imposed by other lenders likely varied significantly according to transaction size. Certain evidence highlighted aggressive competition from credit unions in mid-market loans in particular, including in British Columbia, where HSBC Canada’s presence is significant. In contrast, documents indicated that credit unions, Schedule II banks and other non-traditional competitors were much less effective in competing for large corporate loans, in part due to a higher underlying cost of funds.

The Bureau’s economic expert estimated demand and performed a merger simulation in order to evaluate the likely competitive effects of the Proposed Transaction for the primary overlapping financial services. The expert’s analysis included a variety of sensitivity analyses, and considered key features of the assessed business financial services. The expert’s assessment also included consideration of potential non-price effects associated with the merger. Ultimately, the economic expert’s analysis indicated a range of competitive effects, including specific price increases, that may result from the Proposed Transaction. The Bureau concluded that, when assessed with all other available evidence, these predicted effects did not support a finding of substantial lessening of competition within the meaning of section 92 of the Competition Act.

Given the above, the Bureau’s findings included that:

  1. the Parties’ market shares were generally low, in many cases below 35 percent, in the assessed business financial services markets;
  2. while the Proposed Transaction would likely result in the loss of material rivalry between HSBC Canada and RBC in certain sectors, such as services for large internationally-minded customers, evidence supported that remaining competitors were likely effective; and
  3. expert assessment of competitive effects did not support a finding that the Proposed Transaction would result in a substantial lessening of competition.

Ultimately, then, based on the totality of its review, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in the overlapping business financial services markets, as defined under section 92 of the Competition Act. The Bureau’s conclusions are further discussed in section 8 below.

7.4 Entry and expansion

When conducting a competitive effects analysis, the Bureau examines barriers to entry and expansion in the relevant markets, in order to assess whether timely entry or expansion by competitors would likely be sufficient to constrain an exercise of market power post-transaction. The Bureau also frequently studies the entry or expansion prospects of specific potential competitors, and seeks to identify any firm poised to enter the relevant markets or expand its operations therein. During its review of the Proposed Transaction, the Bureau conducted these assessments through stakeholder interviews, examination of regulatory considerations, review of documents relating to entry conditions and investments by existing competitors, and examination of documentary evidence relating to competitor capabilities, among other analyses.

Based on this evidence, the Bureau found that there are high barriers to entry in many of the relevant financial services markets. The Bureau’s analysis did not uncover any poised entrant capable of entering with sufficient scale to have a competitive impact comparable to that of HSBC Canada. Ultimately, however, it was not necessary for the Bureau to conclusively determine whether entry or expansion was likely to constrain an exercise of market power in the relevant markets, given its findings described elsewhere in this report.

The Bureau found that barriers to expansion into adjacent product lines by competitors already established in a given financial service are likely lower, but that no such competitor or group of competitors is poised to replace HSBC Canada’s market presence. The Bureau also found that barriers to entry into certain product areas, such as capital markets services, may be lower than for personal and business financial services, and that existing major competitors such as Canada’s largest banks may have capacity to substantially expand their offerings in the relevant markets. Ultimately, the Bureau found that significant entry or expansion in the relevant markets in Canada most often occurred through acquisition, or via partnership with existing large competitors, in light of the barriers to entry and expansion present in the industry.

7.4.1 Barriers to entry and expansion

Previous Bureau reviews of financial sector mergers have concluded that barriers to entry into branch banking were high and that existing competitors also faced impediments to expansion.Footnote 13 These barriers included sunk costs related to establishing a branch network, the presence of economies of scale and scope, customer loyalty and reputational challenges, and regulatory requirements, among others. During its review of the Proposed Transaction, the Bureau conducted an assessment of the barriers faced by potential entrants into the relevant markets based on current evidence, while taking into account recent technological or regulatory changes which may have affected entry conditions.

The Bureau’s review confirmed that a variety of barriers may be faced by both de novo entrants into relevant financial services markets and, to a lesser degree, existing competitors seeking to expand. These include the following:

  • Impediments to customer switching: Both documentary evidence and stakeholder interviews emphasized that there were significant impediments to customer switching in many of the relevant markets. Stakeholders noted that Canadians are highly reliant on their primary banking relationship for everyday transactions and their overall financial security, such that there are significant costs and risks associated with potential disruptions upon switching providers. There are also frequently direct costs associated with customer switching, such as break fees on mortgages or term loans, lost interest on term deposits, fees for transferring investment accounts, and possible missed payments when moving transaction accounts. The result is that available evidence supported that entrants would face substantial acquisition costs, and significant overall challenges, when attempting to attract new customers.

    The Bureau reviewed extensive documentary evidence relating to customer switching for each of the overlapping products or services. Business plans indicated, for example, that competitors closely tracked and promoted multi-product sales as a means of “anchoring” customers, or encouraging “customer stickiness”. Personal transaction and credit card accounts in particular were cited as critical to lowering customer attrition as a whole. The Bureau reviewed strategic plans that indicated competitors closely tracked customer retention rates across many of the relevant products, as well as for different customer profiles, and demonstrated that such rates were extremely high for most products. The Bureau also examined competitive offers provided by rivals and found that these included significant up-front incentives designed to compensate for switching costs. Similar or greater investments and incentives would be required of an entrant seeking to establish a customer base.

    Impediments to customer switching may contribute to high barriers to entry when they limit an entrant’s ability to attract a sufficient customer base to operate profitably in the relevant markets. This effect may be particularly pronounced in many of the relevant financial services markets, given the economies of scope and scale, and overall capital requirements, discussed in the remainder of this section.

  • Regulatory considerations: As was noted in section 6.1 above, the relevant markets are subject to an extensive framework of regulation which was considered by the Bureau in conducting its review. In meeting policy goals such as the stability of the financial system, these regulations may have the consequence of affecting entry and expansion by certain competitors, for example by:

    1. limiting the market participants, stakeholders or sources of capital which may enter and compete in the relevant markets,
    2. increasing the time and resources required to enter the relevant markets, and
    3. imposing compliance, reporting or other costs, conditions and requirements, which may be more impactful, relative to revenues, for entrants or smaller-scale competitors (resulting, for example, in greater economies of scale or scope). Competitors may also face differing costs of, or access to, funding depending on their perceived risk and systemic importance, and regulatory restrictions, designation or oversight, in addition to their overall market position.

    As is discussed in section 6.1., for example, the Bank Act provides for certain specific ownership restrictions (e.g. requirements that large banks be widely held by the public). Legislation also restricts the funding sources available to foreign bank branches operating in Canada, in particular by limiting their access to Canadian retail deposits. Entrants seeking to establish banks classified as Schedule I (domestic) or Schedule II (foreign bank subsidiaries) under the Bank Act, meanwhile, face licensing processes which may affect the timeliness and cost of entry. Similarly, provincially-regulated credit unions (or other financial institutions) may face significant regulatory processes before expanding their operations to other provinces.

    Most potential entrants must secure sufficient initial capital to meet guidelines established by the Office of the Superintendent of Financial Institutions, and ensure that reserves meet required ratios prior to achieving profitability and according to stress-test scenarios. Even for existing competitors, Canadian regulations establish significant capital reserve requirements, as well as various ongoing supervisory, reporting and compliance processes. Stakeholders suggested that the significant costs associated with regulatory compliance are proportionately higher, relative to revenues, for smaller entrants and are a significant factor in the likelihood of profitable entry.

  • Reputational Barriers and Brand Presence: As was noted above, Canadians are highly dependent on financial services for essential transactions, and stakeholders and documentary evidence indicated that trust, reputation, and brand awareness are important factors in competition in the relevant markets. In many of the relevant business and personal financial services markets, a reputation for financial stability may be important to attracting clients and deposits. Internal documents confirmed the substantial spending and efforts deployed by even established incumbents in marketing and mitigation of reputational risk. The Bureau found that these considerations motivated significant environmental, social and governance initiatives, investments in physical infrastructure and expenditures associated with, for example, cybersecurity initiatives. Proportionally more significant investments would likely be required of an entrant seeking to compete with the major incumbents in the relevant markets, who have established a reputation and brand equity over many decades of operation. Various evidence, as well as stakeholder views, confirmed that reputational challenges may therefore present a significant barrier for prospective entrants.

  • Capital Requirements and Investments in Branch Networks and Technology: As was noted above, the Bureau considered evidence relating to the capital reserves required of new entrants by existing regulations, and more generally, stakeholders indicated that securing sufficient capital to enable growth was a significant barrier to entry and expansion. The Bureau also found, however, that potential competitors in many of the relevant financial services markets would likely be required to fund a variety of other sunk investments prior to entry, such as the establishment of a sufficient branch network, and development of suitable technology solutions.

    As is discussed in section 7.1.1, evidence reviewed by the Bureau supports the overall competitive importance of local branch networks, despite the growing role of digital solutions. Strategic documents suggested that branch networks are important in reinforcing a bank’s overall brand awareness, and information suggests that competitors operating without local branches have achieved limited shares in many of the relevant markets. The Bureau found that establishing a branch network comparable to that of incumbents would likely involve very substantial expenditures and years of development. Similarly, the Bureau found that many entrants would require significant investments in digital infrastructure in order to compete effectively in the relevant markets. This is particularly the case given the sensitivity of information collected by financial institutions, associated regulatory requirements, and the reputational and security-related risks faced by entrants. Entrants may also be forced to devote resources to features already offered by incumbents, such as payment systems and mobile apps.

Based on the totality of the evidence, the Bureau therefore concluded that there are high barriers to entry in many of the relevant markets. The entry factors described above, as well as other features of the relevant markets, may result in economies of scale and scope, and smaller or potential competitors may face higher funding and capital costs, and fewer opportunities to diversify risk, than larger and more efficient incumbents. The Bureau did find information indicating, however, that barriers to entry may be lower for capital markets, wealth management and advisory services, or other services distinct from deposit and loan operations. The Bureau also found that barriers to expansion by existing competitors in the relevant markets were lower, and that, for example, incumbents such as the five largest Canadian banks may have sufficient capital reserves to expand their capacity.

The Bureau also conducted an assessment of any potential competitors poised to offer the relevant personal and business financial services, and considered prior entry events in the relevant markets. The Bureau found that, given the considerations described above, competitors entering the relevant markets had frequently offered only fringe competition, or partnered with incumbent banks as an alternative to overcome entry barriers. In most such cases, recent entrants had therefore offered a limited competitive constraint. Ultimately, however, it was not necessary for the Bureau to conclusively determine whether entry or expansion was likely to constrain an exercise of market power in the relevant markets, given its findings described elsewhere in this report.

7.5 Coordinated effects

In addition to assessing the likelihood of a unilateral exercise of market power following the merger, the Bureau also examined whether the Proposed Transaction would be likely to prevent or lessen competition substantially by facilitating coordinated behaviour among firms. Prior Bureau analyses of the banking sector have noted that factors that may facilitate interdependent behaviour appeared, to a large degree, to be present in the industry.Footnote 14

In assessing whether a merger raises competition concerns related to coordinated effects, the Bureau is concerned not only with evaluating these facilitating factors, but also with determining whether the merger impacts them in such a way that coordination, or more effective coordination, becomes more likely. To conduct this assessment, the Bureau reviewed a variety of evidence, including the market structure for the relevant products and internal strategic documents relating to the setting of prices, interest rates, terms and other dimensions of competition. While the Bureau considered evidence relating to all products and services affected by the merger, its analysis particularly focused on high-interest savings accounts, savings products such as GICs, and the Parties’ mortgage offerings.

As a preliminary matter, the Bureau noted that relevant markets are highly concentrated, as discussed elsewhere in this report. Data suggests that the four-firm concentration ratio (or “CR4”) for many of the overlapping products may exceed 65% in a variety of Canadian markets, and that the six largest banks may account for as much as 90% of personal transaction accounts in the country. Market concentration is generally a necessary, but not sufficient, condition for a merger to raise concerns relating to coordinated effects. The Bureau also found, as discussed in section 7.4 above, that there are high barriers to entry in many of the relevant markets such that effective entry may not make coordinated behaviour unsustainable.

Coordinated behaviour is likely to be sustainable only when:

  1. firms are able to individually recognize mutually beneficial terms of coordination;
  2. firms are able to monitor one another’s conduct and detect deviations from the terms of coordination;
  3. firms are able to respond to any deviations through credible deterrent mechanisms; and
  4. coordination will not be threatened by external factors. The Bureau assessed these factors through the review of internal documents, especially relating to the Parties’ pricing strategies, as well as other evidence.

The Bureau found evidence strongly suggesting that competitors in relevant markets were able to separately recognize mutually beneficial terms of coordination. The Bureau’s review focused, in part, on documents detailing the Parties’ pricing strategies at the time of changes in policy interest rates, such as the Bank of Canada overnight rate. Changes in this rate, as well as in other indicators such as swap rates or bond yields, result in significant transparency and symmetry among competitors with regard to their cost of funds. It is typically the case that recognizing terms of coordination is easier when products are less differentiated and when firms have similar cost structures. Documentary evidence confirmed that, both at the time of rate changes and at other competitive decision points, financial institutions recognized potential terms of coordination, and directly considered the signals that price changes in mortgages, savings accounts, and other products would provide to competitors when setting their own rates.

The Bureau also assessed the degree of transparency that exists in relevant markets, in order to consider whether firms can monitor and detect deviations from coordinated behaviour. While certain products, such as mortgages, are characterized by rate negotiation which may be less than fully transparent, the Bureau found evidence that banks extensively and effectively monitored each other’s pricing and internally considered whether rate changes represented a deviation from expected pricing trends. The Bureau further found that both demand and firms’ underlying costs were generally predictable and well-studied, which may also enable firms to more effectively detect whether a competitor’s rate change represents an expected price deviation.

Documentary evidence also supported that firms considered temporary and intentional changes in their own pricing practices, including specially-targeted rate offerings below their posted rates, as a credible punishment in reaction to unexpected pricing from competitors. The majority of Canada’s large banking institutions compete in a significant number of local markets and for a vast array of products and services, resulting in a high degree of multi-market exposure among firms. This generally provides greater opportunities to discourage deviation from coordinated behaviour, because there is broader scope for punishing deviations.

Based on this review, then, the Bureau determined that there was evidence that conditions in relevant markets generally facilitate coordinated behaviour. Ultimately, however, the Bureau’s assessment of the Proposed Transaction centered on the effect of the merger itself on the likelihood or effectiveness of potential coordination. In this respect, the Bureau was focused on determining whether HSBC Canada’s presence as an independent competitor served as a significant constraint on effective coordination, or whether other such constraints may be affected by the merger. This analysis often includes consideration of whether a merging party is a particularly vigorous and effective competitor (a “maverick”) that plays a disruptive role at times when coordination may otherwise occur.

Based on its extensive review of internal strategic documents and other information, the Bureau did not find evidence that HSBC Canada acted as such a constraint. As is noted elsewhere in this report, while HSBC Canada offers attractive pricing and services in several product categories, its overall competitive impact is limited as compared to Canada’s other major financial institutions. This dynamic is reflected in rivals’ strategic documents, which demonstrated, for example, that HSBC Canada was generally not considered when determining price reactions, evaluating the signals price changes may provide the market, or anticipating future price changes from competitors (e.g. in response to changes in reference rates or other costs). The Bureau’s review did not uncover instances of disruptive, or particularly vigorous, competitive behaviour from HSBC Canada that impacted the potential for coordinated behaviour. Ultimately, the Bureau did not find that the Proposed Transaction was likely to impact the likelihood or effectiveness of potential coordination in the relevant markets, whether through the removal of a maverick competitor, or other means.

As a result, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition relating to coordinated behaviour among competitors. The available evidence did support, however, that conditions in relevant markets more generally facilitate coordinated behaviour among firms.

8. Conclusions regarding substantial lessening or prevention of competition

The Commissioner of Competition has conducted an assessment of the proposed acquisition of HSBC Canada by RBC by applying the test set out in section 92 of the Competition Act. Based on the analysis above, the Commissioner has concluded that the Proposed Transaction is not likely to result in a substantial lessening or prevention of competition under section 92 of the Competition Act.

Nonetheless, the Bureau found that the Proposed Transaction would result in the loss of rivalry between RBC and HSBC Canada. In assessing the relevant markets, the Bureau also concluded that:

  • relevant financial services markets remain concentrated, with Canada’s five largest banks accounting for the vast majority of services provided to Canadians;
  • there are high barriers to entry and expansion in many of the relevant financial services markets; and
  • conditions in certain of the relevant financial services markets may facilitate coordinated behaviour.

This report is being provided to describe the results of the Commissioner’s review further to the Minister’s ongoing assessment of the Proposed Transaction. The Bureau has attempted to fully explain the basis for its conclusions in the foregoing, while taking into account the confidentiality provisions of the Competition Act, and the Commissioner’s mandate thereunder.

Appendix A: Relevant provisions of the Competition Act

Competition Act (R.S.C., 1985, c. C-34)

Order

92 (1) Where, on application by the Commissioner, the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially

  1. in a trade, industry or profession,
  2. among the sources from which a trade, industry or profession obtains a product,
  3. among the outlets through which a trade, industry or profession disposes of a product, or
  4. otherwise than as described in paragraphs (a) to (c), the Tribunal may, subject to sections 94 to 96,
  5. in the case of a completed merger, order any party to the merger or any other person
    1. to dissolve the merger in such manner as the Tribunal directs,
    2. to dispose of assets or shares designated by the Tribunal in such manner as the Tribunal directs, or
    3. in addition to or in lieu of the action referred to in subparagraph (i) or (ii), with the consent of the person against whom the order is directed and the Commissioner, to take any other action, or
  6. in the case of a proposed merger, make an order directed against any party to the proposed merger or any other person
    1. ordering the person against whom the order is directed not to proceed with the merger,
    2. ordering the person against whom the order is directed not to proceed with a part of the merger, or
    3. in addition to or in lieu of the order referred to in subparagraph (ii), either or both
      1. prohibiting the person against whom the order is directed, should the merger or part thereof be completed, from doing any act or thing the prohibition of which the Tribunal determines to be necessary to ensure that the merger or part thereof does not prevent or lessen competition substantially, or
      2. with the consent of the person against whom the order is directed and the Commissioner, ordering the person to take any other action.

Evidence

(2) For the purpose of this section, the Tribunal shall not find that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially solely on the basis of evidence of concentration or market share.

Factors to be considered regarding prevention or lessening of competition

93 In determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal may have regard to the following factors:

  1. the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or proposed merger;
  2. whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail;
  3. the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available;
  4. any barriers to entry into a market, including
    1. tariff and non-tariff barriers to international trade,
    2. interprovincial barriers to trade, and
    3. regulatory control over entry, and any effect of the merger or proposed merger on such barriers;
  5. the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger;
  6. any likelihood that the merger or proposed merger will or would result in the removal of a vigorous and effective competitor;
  7. the nature and extent of change and innovation in a relevant market;
    • (g.1) network effects within the market;
    • (g.2) whether the merger or proposed merger would contribute to the entrenchment of the market position of leading incumbents;
    • (g.3) any effect of the merger or proposed merger on price or non-price competition, including quality, choice or consumer privacy; and
  8. any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.

Exception

94 The Tribunal shall not make an order under section 92 in respect of

  1. a merger substantially completed before the coming into force of this section;
  2. a merger or proposed merger under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act in respect of which the Minister of Finance has certified to the Commissioner the names of the parties and that the merger is in the public interest — or that it would be in the public interest, taking into account any terms and conditions that may be imposed under those Acts;
  3. a merger or proposed merger approved under subsection 53.2(7) of the Canada Transportation Act and in respect of which the Minister of Transport has certified to the Commissioner the names of the parties; or
  4. a merger or proposed merger that constitutes an existing or proposed arrangement, as defined in section 53.7 of the Canada Transportation Act, that has been authorized by the Minister of Transport under subsection 53.73(8) of that Act and for which the authorization has not been revoked.

Exception where gains in efficiency

96 (1) The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.

Factors to be considered

(2) In considering whether a merger or proposed merger is likely to bring about gains in efficiency described in subsection (1), the Tribunal shall consider whether such gains will result in

  1. a significant increase in the real value of exports; or
  2. a significant substitution of domestic products for imported products.

Restriction

(3) For the purposes of this section, the Tribunal shall not find that a merger or proposed merger has brought about or is likely to bring about gains in efficiency by reason only of a redistribution of income between two or more persons.

 

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