On 21 February 2019, the FCA issued its first competition law infringement decision since it was given competition law powers on 1 April 2015. Three asset management firms were found to have shared strategic information during an initial public offering (“IPO”) and a placing in 2015. One firm was granted immunity from fines under the competition law leniency programme. The other two firms were fined £306,300 and £108,600 respectively. The FCA’s decision follows the announcement on 5 February 2019 that it had fined a senior employee of the leniency applicant £32,200 for breach of personal regulatory conduct rules related to some of the same facts.
In this article, Nathan Willmott, Sarah Ward and Samantha Paul consider the FCA’s recent decisions, highlighting what firms can learn from them and what the future may hold for competition law enforcement by the FCA.
The infringing conduct
Full details of the FCA’s findings regarding the competition law infringements are awaited, in the form of a non-confidential version of the FCA’s decision. However, the FCA’s press release explains that it found that the three asset management firms breached competition law by:
The information exchanged included the price they were willing to pay for the shares and, in some instances, the volume they wished to acquire. The exchanges took place on a bilateral basis, shortly before the share prices were set. There is no suggestion that the firms agreed the price at which they would each bid for the shares, or the volumes for which they would bid. In fact, in relation to the IPO, none of the recipients of their competitor’s bidding intentions subsequently changed their own bids to that firm’s suggested price limit.
The law on information exchange
Under EU and UK competition law, information exchanges between competitors of their intended future prices or quantities are considered a restriction of competition “by object”. Where conduct amounts to a restriction of competition by object, a negative effect on competition does not need to be proven.
Even a one-off or one-way exchange of strategic information between competitors can constitute an infringement. A firm will be presumed to have accepted the information received and adapted its market conduct accordingly unless it responds with a clear statement that it does not wish to receive such data.
The UK competition authorities (including the CMA and the FCA) can impose fines on firms which engage in information exchange in breach of UK and/or EU competition law of up to 10% of their worldwide group turnover. In this respect, the fines imposed by the FCA appear to be relatively low.
Interaction with the FCA’s regulatory powers
As mentioned above, the FCA had also fined an individual portfolio fund manager at the leniency applicant £32,200 for:
The FCA's Final Notice makes clear that the FCA did not consider that it was required to undertake an analysis of competition law when assessing the case against the individual fund manager. It held that any behaviour whereby one market participant seeks to influence other market participants to cap their orders at the same price limit as his own, in an attempt to get them to use their collective power, undermines the proper price formation process and is behaviour that is below proper standards of market conduct. Further, the FCA found that the individual failed to demonstrate the required level of due skill, care and diligence, by failing to adequately consider the risks associated with his communications with individuals at competitor firms or seeking appropriate internal guidance.
Given the low threshold for a finding that an exchange of information with a competitor amounts to a competition law breach, it can be an area of considerable competition law risk for firms. This can be exacerbated in the financial services sector where the line between “strategic information” and “market colour” is not always clear and firms who compete in one context often have legitimate reasons for exchanging information in others. The law on information exchange and how it may apply in specific circumstances in which staff will find themselves should therefore be a key focus of any financial services firm’s competition law compliance programme.
This case also highlights the potential benefit to firms of “blowing the whistle” on anti-competitive behaviour under a competition authority’s leniency programme. As in this case, a firm can obtain absolute immunity from competition law fines in the UK if it is the first to come forward with sufficient information to allow the FCA to take forward a “credible investigation”. Immunity in the UK also protects a firm’s staff and officers from prosecution under the cartel offence and from director disqualification.
In the financial services context, the decision whether to apply for leniency may be complicated by the firm’s potential notification obligations to the FCA and/or PRA. A breach of competition law may trigger various notification obligations such as:
These proactive notification obligations will of course preclude a strategy of containment through hoping that an infringement goes undetected (which may well be the approach of some corporates outside the financial services sector).
A financial services firm may also have to take into account the fact that competition law immunity will not protect either the firm or its staff and officers from enforcement action for breach of their parallel regulatory duties. It is not clear in this case whether the FCA decided not to take parallel regulatory action against the three firms because one of them was a successful immunity applicant or, if that was the case, whether this is a policy it will adopt going forward. What is clear is that, in order to be in a position to decide whether to apply for leniency, a firm needs to have strong procedures in place to identify promptly when it may have been involved in a potential competition law breach.
What next for competition law enforcement by the FCA?
Now that it has its first competition law decision under its belt, our expectations are that the FCA will now seek to increase its use of its competition law powers.
As already mentioned, the nature of the financial services sector means that unlawful information exchange is a particular risk for firms. The notification obligations described above provide a major source of information to the FCA regarding potential competition law breaches. Financial services firms facing potential fines of up to 10% of their worldwide group turnover are also likely to continue to self-report infringements under the competition law leniency regime.
Brexit may also encourage a trend towards greater competition law enforcement by the FCA. Whilst at present the UK competition authorities are prohibited from applying competition law to cases over which the European Commission has chosen to exercise its jurisdiction, this will change once the UK ceases to be an EU Member State. From that point onwards, the CMA and the FCA will be free to investigate any perceived anti-competitive practice affecting the UK, irrespective of whether the Commission is also conducting its own investigation in respect of conduct affecting trade in the EU. Where conduct affects both the UK and EU, firms may therefore be subject to parallel EU and UK investigations, and could be fined up to 10% of worldwide group turnover by the authorities in both jurisdictions.