UK: Competition Law powers of the Financial Conduct Authority

04 October 2013

Richard Eccles, Martin Sandler, Michael Brown

The government has proposed the grant of concurrent competition law powers to the FCA in relation to financial sector activities, specifically for anti-trust matters under the Competition Act 1998 and for the conduct of market studies and market investigation references to the Competition and Markets Authority (CMA) under the Enterprise Act 2002, by means of an amendment to the Financial Services (Banking Reform) Bill.  Under the same Bill, the government also proposes to impose a secondary objective on the Prudential Regulation Authority of facilitating effective competition.
 
The competition law powers to be granted to the FCA will be held concurrently with the CMA which will take over the combined roles of the Office of Fair Trading (OFT) and the Competition Commission as from 1st April 2014.  The FCA will be required to consider whether it would be more appropriate to use its Competition Act powers before using its regulatory powers under the Financial Services and Markets Act 2000 (FSMA), and if it decides it is more appropriate to use its Competition Act powers, it will be prevented from proceeding under the FSMA.  Where the FCA uses its Competition Act powers, it will no longer be under a duty to exercise its regulatory objectives under section 1B of the FSMA (but will still have the discretion to take such matters into account).  The FCA will have the responsibility of keeping under review the markets for which it has concurrent competition law functions.
 
The FCA is meanwhile actively implementing its responsibilities in relation to competition in the financial services sector. The FCA already has a statutory objective and duty to promote competition, and the FCA's Director of Policy (Christopher Woolard) has recently announced (last month) three workstreams for the next 12 months: first, a market study into the cash savings market; second, a study of retirement products; and third, examining effective competition between firms in wholesale markets (and how this can lead to better quality and cost effectiveness for retail consumers).  
 
Regulated firms which receive FCA enquiries should beware that such enquiries could lead to competition law investigations and that the FCA's information gathering powers are less constrained than those of the OFT under the Competition Act.  The FCA's powers currently include referring to the OFT a feature of the market in the UK for financial services that may prevent, restrict or distort competition, though this power will be superseded by the new concurrent competition law powers that will be granted to the FCA.  Following such a reference under the present system, the OFT can launch a formal market investigation reference. Such investigations are very intensive and can result in substantial regulatory changes for affected operators.  The OFT could also take enforcement action under the Competition Act 1998.  The consequences of Competition Act enforcement action can be serious, including the nullity of agreements (or of infringing provisions in agreements), prohibition orders or undertakings, and fines on infringing parties.  Some of the more serious types of competition law infringement can result in criminal prosecution of relevant individuals and imprisonment. 
 
The OFT and FCA published a Memorandum of Understanding in April 2013 including a Concordat on competition issues.  This sets out a framework for co-operation between the two authorities and deals with such matters as case allocation and exchange of information between them.  The Concordat reflects the new role and responsibilities of the FCA in promoting competition (but may require amendment following implementation of the proposal to grant concurrent competition law powers to the FCA).
 
Any firm investigated by the FCA in relation to a competition issue should therefore proceed carefully.  In Competition Act investigations, the OFT is required to give notice at the outset of the subject matter and purpose of the investigation and must confine its information requests and any inspection (of a firm's premises) accordingly. The same will apply to the FCA once it has concurrent powers with the OFT under the Competition Act.  Firms can then ensure that only relevant information and documents are provided and that legally privileged documents and correspondence are withheld. 
 
Prior to the implementation of the concurrent competition law powers, the FCA is under slightly less onerous duties under the FSMA to give notice of the nature of the investigation, but must specify the provisions under which the inspector is appointed and the reasons for the appointment.  The FCA may also issue a direction limiting the scope of any such investigation.  Firms facing an investigation, especially where competition issues are raised, may wish to seek to limit their active co-operation to the scope of the original notice concerning the basis and reasons for the inspection/investigation and also wish to claim protection of legally privileged communications. (The FCA cannot require the production, disclosure or inspection of "protected items" (broadly speaking, these are communications which are subject to legal advice and/or litigation privilege).  However, the FCA may well exert pressure on a firm to make voluntary disclosure of protected items.)  Preferably also, companies may wish or may be well advised to request a direction to be given specifying the scope of the enquiry more clearly.  This will be consistent with the way in which the Competition Act investigations are conducted, where "fishing expeditions" are not permitted, and may assist the affected firm in safeguarding its (and potentially its employees') rights in the event of subsequent competition law enforcement action.  
 
Full co-operation is of course advisable within the defined scope of the investigation, but care should if possible be taken to ensure this is clarified as early as possible.  However, regulated firms receiving enquiries from the FCA may be well advised to beware of the risk of indirect exposure to competition law investigations and accordingly ensure that the information required of them is as far as possible provided with a specified purpose and focus.
 
Our Banking and Financial Services team is working closely with our EU & Competition team in this area.