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Regtech as an antitrust enforcement tool Rob Nicholls * ABSTRACT Financial technology (Fintech) has been applied to business models in the financial services sector. Associated with this has been the rise of regulatory technology (Regtech) in that sector. However, the major application of Regtech in financial services is as a tool for regulatory compliance, rather than for regulatory enforcement. This article explores an approach to applying Regtech techniques to antitrust enforcement. It does this by applying those techniques to the detection of resale price maintenance (vertical price fixing). The exploration is limited to pricing on e-commerce platforms such as AliExpress, eBay, and Amazon Marketplace. The Regtech application is effected by presenting the literature and cases on resale price maintenance and the application of the law in Australia, the US, and the EU. The arti- cle examines the application of machine learning in the Regtech environment and the ways in which application programming interfaces could be used. The article proposes approaches to machine learning solutions for the detection of potentially infringing re- sale price maintenance conduct. It also presents the basis of an algorithm for detecting that conduct. KEYWORDS: antitrust, competition law, Fintech, Regtech, resale price maintenance, vertical price fixing JEL CLASSIFICATIONS: K21, K24, L40, L42 I. INTRODUCTION There has been significant discussion of the application of financial technology (Fintech) to business models in the financial services sector. Associated with this has been the rise of regulatory technology (Regtech) in that sector. However, the major * Rob Nicholls, Associate Professor in School of Taxation and Business Law, UNSW Business School, UNSW Sydney. Tel: 61 412 646 477; Email: r.nichollsunsw.edu.au The author would like to thank two anonymous reviewers for their helpful comments and Deniz Kayis, Michael Gvozdenovic, Nayan Bhathela, and Trent Wilson for research assistance on this article. The UNSW School of Computer Science assisted in a review of the machine learning element of the work. The usual disclaimer applies. This work was supported by the UNSW Business School Cybersecurity and Data Governance Research Network. VC The Author(s) 2020. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: C15 1 Journal of Antitrust Enforcement, 2020, 0, 117 doi: 10.1093/jaenfo/jnaa011 Downloaded from by Serials Department user on 01 July 2020 application of Regtech in financial services is as a tool for regulatory compliance, rather than for regulatory enforcement. Following the Global Financial Crisis, there has been an increasing focus on the regulation of financial institutions and services. Fintech and Regtech tend to be asso- ciated with one another. However, this association understates the potential of Regtech. Where Fintech provides financial solutions, Regtech goes one step further in using technology to provide regulatory bodies the opportunity to access a level of granularity in risk assessments that previously did not exist. 1 Regtech can be used to great effect within the regulatory context and has the potential to provide significant cost savings; this applies to both financial regulators and competition authorities. Regtech in its simplest form can be described as the use of technology, particu- larly information technology, in the context of regulatory monitoring, reporting and compliance enabling it to provide technological solutions to regulatory processes. 2 This technology is especially useful in a sector with increasing complexity and com- pliance demands set out by regulators and policy-makers. 3 In the financial services sector, prescriptive and complex regulations have caused an increase in costs for both the regulated and the regulators. Financial reporting is required to respond to complex regulations which necessitate increased precision and frequency in reporting and analysis. 4 By automating these processes there should, in theory, be fewer errors made, and so regulatory actions and fines should be more limited. However, to define Regtech as a sub-set of Fintech fails to properly explain its ca- pabilities. It does not merely facilitate the delivery of regulatory requirements more efficiently and effectively. Instead, it is a pivotal change leading to a paradigm shift in regulations where it is the next logical evolution of financial services regulation and should develop into a foundational base underpinning the entire financial services sector. 5 Since Regtech has the potential for continuous monitoring capacity with close to real-time insights of domestic and global markets through artificial intelli- gence filters, it can be proactive rather than reactive, looking to identify problems in advance rather than after the fact. 6 In the financial services sector, 7 Regtechs focus has been on digitizing manual reporting and compliance processes, creating a regulatory regime that both identifies and addresses risks and facilitates efficient regulatory compliance. 8 The end goal of Regtech in this case is to enable a compliance by design framework enabling 1 Douglas W Arner, Janos Barberis and Ross P Buckley, The Evolution of Fintech: A New Post-Crisis Paradigm (2016) 62 University of New South Wales Law Research Series 38. 2 Douglas W Arner, Janos Barberis and Ross P Buckley, FinTech, RegTech and the Reconceptualization of Financial Regulation (2017) 37 Northwestern Journal of International Law human error which could otherwise result in administrative fines. It also enables the integration of big data in improved compliance and monitoring pro- cesses, and promotes cost-saving. However, there are other costs associated with the creation and maintenance of Regtech systems. 11 Regtech is not without its risks and challenges. 12 Furthermore, Regtech should not be viewed as a mechanism to eliminate policy considerations, nor does it make regulatory decisions non-controversial. 13 It requires constant adjustments to models or decisions and poorly performing algorithms. Research on Regtech has thus far considered how it is implemented and used by both regulated bodies and regulators, including its benefits and limitations. How Regtech could be used by competition authorities to monitor compliance with rele- vant laws and regulations has been explored using statistical approaches (particularly in respect of cartels) 14 andto a more limited extentusing machine learning. 15 In competition law (also known as antitrust law) there is a potential to use machine learning, which is a branch of artificial intelligence, to look for patterns in pricing. This article considers applying machine learning to the investigation of resale price maintenance, which is also known as vertical price fixing. This article is exploratory and considers ways in which Regtech could be applied in this field. It initially examines the law and application of resale price maintenance prohibitions in Australia, the US and the EU. The next section examines some of the 9 ibid. 10 Eva Micheler and Anna Whaley, Regulatory Technology: Replacing Law with Computer Code (2018) No 14/2018 4. 11 Veerle Colaert, RegTech as a Response to Regulatory Expansion in the Financial Sector (2015) 1. 12 ibid. 13 LG Baxter, Adaptive Financial Regulation and Regtech: A Concept Article on Realistic Protection for Victims of Bank Failures (2016) 66 Duke Law Journal 567, 567. 14 Sanchez-Graells A, “Screening for Cartels” in Public Procurement: Cheating at Solitaire to Sell Fools Gold? (2019) 10 Journal of European Competition Law Patrick Bajari and Garrett Summers, Detecting Collusion in Procurement Auctions (2002) 70 Antitrust LJ 143; Lilian Petit, The Economic Detection Instrument of the Netherlands Competition Authority, NMa Working Paper No 6, January 2012; Margaret C Levenstein and Valerie Y Suslow, What Determines Cartel Success? (2006) 44 Journal of Economic Literature 43. 15 But see Martin Huber and David Imhof, Machine Learning with Screens for Detecting Bid-Rigging Cartels (2019) 65 International Journal of Industrial Organization 277. Regtech As An Antitrust Enforcement Tool C15 3 Downloaded from by Serials Department user on 01 July 2020 approaches to the implementation of Regtech and some approaches of machine learning as a subset of artificial intelligence. Following this, the article considers the mechanisms for detecting resale price maintenance conduct. It does this by proposing approaches to machine learning sol- utions for the detection of potentially infringing conduct and presenting the basis of an algorithm for detecting that conduct. It ends by drawing conclusions. II. APPLICATION OF RPM PROHIBITIONS Introduction Resale price maintenance (RPM), also known as vertical price fixing (VPF), is one of the longest standing prohibitions in competition law internationally. 16 This article proposes an approach to the detection of RPM in online sales as part of the applica- tion of Regtech to competition law enforcement. In order to construct an approach to detecting RPM, the core legal issues need to be identified. This article addresses this issue by examining the way in which RPM is prohibited in each of Australia, the EU, and the US. At its core, RPM refers to vertical restraints on price setting between a supplier and an acquirer of goods and services. 17 It is commonly viewed as a supplier specify- ing the minimum price at which its goods or services may be resold. 18 RPM laws do not prohibit a supplier specifying the maximum price for the on-selling of goods or services. 19 The object of RPM prohibitions is to ensure that competition is unfet- tered by price restraints imposed by suppliers on re-suppliers of goods or services. 20 Legislative approaches In Australia, RPM is prohibited by section 48 of the Competition and Consumer Act 2010 (Cth) (CCA). Section 48(1) states that a corporation or other person shall not engage in the practice of RPM. Section 48(2) states that the prohibition does not ap- ply if: (i) the corporation or other person has given the Australian Competition and Consumer Commission (ACCC) a notice under subsection 93(1) of the CCA de- scribing the conduct; and (ii) the notice is in force under section 93. That is, there is a mechanism for the ACCC to authorize RPM. This means that any RegTech model designed for the RPM context will need to check for authorization. In the EU, agreements that impose upon distributors and retailers a minimum or fixed resale price may be an infringement of Article 101(1) of the Consolidated Versions of the Treaty on European Union and the Treaty on the Functioning of the European Union 2016 OJ C 202/01 (TFEU). Article 101(1) states that all 16 J Roland Pennock, Resale Price Maintainance: A Comparative American-European Perspective (Routledge 2017); Howard P Marvel, Leegin and the Economics of Resale Price Maintenance (2017) 50 Review of Industrial Organization 221; John S Heywood, Shiqiang Wang and Guangliang Ye, Resale Price Maintenance and Spatial Price Discrimination (2018) 57 International Journal of Industrial Organization 147; Russell V Miller, Millers Australian Competition and Consumer Law Annotated (40th edn, LawBook Co 2018). 17 Stephen G Corones, Competition Law in Australia (6th edn, Lawbook 2014). 18 ibid. 19 ibid. 20 Miller (n 16). 4 C15 Journal of Antitrust Enforcement Downloaded from by Serials Department user on 01 July 2020 agreements between undertakings (entities) and concerted practices which may affect trade between EU Member States and which have as their object or effect the preven- tion, restriction, or distortion of competition within the EU market shall be prohib- ited. Article 101(1) is supported by the Block Exemption Regulation 21 and the European Commissions Vertical Guidelines. 22 RPM is regarded as a hard-core and Article 4 of the Block Exemption Regulation contains a list of hard-core restrictions that gives rise to a presumption that the relevant agreement falls within Article 101(1) of the TFEU and is therefore prohibited. Setting recommended and maxi- mum resale prices is block exempted, 23 provided that the market share of each of the parties does not exceed the cap of 30 per cent. 24 However, the European Court of Justice has held that a maximum resale price will amount to a fixed or minimum resale price (and hence fall foul of the law) if it is not genuinely possible for the reseller to lower that sale price. 25 The effect of the EU rules is that any RegTech model will need to adequately differentiate between a recommended retail price and RPM. In the US, RPM is prohibited by section 1 of the Sherman Act. 26 Section 1 prohib- its every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade which captures vertical restraints including RPM, exclusive dealing, tying, and certain customer or territorial restraints on the resale of goods. RPM as a per se offence The rationale behind consideration of whether RPM is a per se issue in all jurisdic- tions is the level of evidence that would be required in an algorithmic-driven enforce- ment scenario. If RPM is a per se offence in all jurisdictions, then the evidence threshold is lower than if a form of the rule of reason applies. In Australia, RPM is a per se contravention: 27 the provision prohibits RPM con- duct irrespective of its effect on competition or its impact on the market. 28 The per se nature reflects strong legislative condemnation of this conduct, 29 with Stephen Corones stating that one of the reasons for adopting such a policy stance is that RPM may facilitate cartel conduct amongst distributors. 30 21 European Commission, Regulation on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices 2010 OJ C 102/1 (Block Exemption Regulation). 22 European Commission, Guidelines on Vertical Restraints 2010 OJ C 130/01, 13 57 (Vertical Guidelines). 23 The Vertical Block Exemption Regulation is Commission Regulation (EU) No 330/2010 which will ex- pire on 31 May 2022. The vertical block exemptions apply only between undertakings. That is, on a business-to-business, rather than business-to-consumer basis. 24 Vertical Guidelines para 226. 25 CEPSA Estaciones de Servicio SA v LV Tobar e Hijos SL (C-279/06) 2008 ECR I-6681 71. 26 Sherman Antitrust Act of 1890, 15 USC ss 138 (2012) (Sherman Act). 27 Ian Harper and others, Competition Policy Review Final Report, Treasury Department of the Australian Government (2015). 28 See, eg ACCC v Mitsubishi Electric Australia Pty Ltd (2013) ATPR 42-456; 2013 FCA 1413. 29 See, eg Trade Practices Commission v Malleys Ltd (1979) 25 ALR 250, 254. A previous government- appointed committee considered the appropriateness of per se treatment for RPM and concluded that there was not convinc
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