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FCA outlines implementation of new competition powers
On 15 July the UK’s Financial Conduct Authority (‘FCA’) published its final guidance (‘Final Guidance’) and policy statement (PS 15/18) in relation to its approach to the enforcement of competition law. These publications set out how the FCA will implement its newly acquired competition powers as well as addressing concerns raised by the industry during the consultation process, which started in January 2015. Lucy Frew, Head of Financial Regulatory, looks at some of the major issues and themes that arose from the consultation and how the FCA addressed those issues in its Final Guidance.
On 19 December 2013, the Financial Services (Banking Reform) Act 2013 (the ‘Banking Reform Act’) was published. This contains provisions to give the FCA concurrent competition powers under Part 1 of the Competition Act 1998 (‘CA 1998’) and Part 4 of the Enterprise Act 2002 (‘EA 2002’) in relation to financial sector activities. These powers came into force on 1 April 2015, enabling the FCA to enforce both UK and EU legislative prohibitions on anti-competitive behaviour in relation to the provision of financial services. These competition powers may also be exercised by the Competition and Markets Authority (‘CMA’) with regard to financial services and other sectors of the economy. This means that, for financial services, the CMA and the FCA have concurrent powers and the FCA is a concurrent regulator. These competition powers are additional to the FCA’s ability to use powers under the Financial Services and Markets Act 2000 (‘FSMA’) in pursuit of its competition objective. In January 2015 the FCA published a consultation paper (‘CP 15/1’) containing draft guidance on the use of its new powers. The Consultation Paper also contains a draft amendment to the FCA’s supervision manual (‘SUP’) at SUP 15.3 in relation to proposed disclosures that firms are expected to make to the FCA in relation to competition law infringements.
Significant issues arising from the consultation paper
The most significant issue that arose from the FCA’s CP 15/1 was as regards the proposed amendment of the FCA handbook at SUP 15. In CP 15/1 the proposed amendment would see firms under an obligation to report to the FCA immediately where the firm becomes aware of a breach of competition law that has occurred, may have occurred or may occur in the future. The FCA stated in CP15/1 that this was simply a reflection of existing disclosure obligations under Principle 11 of the FCA handbook, which requires regulated firms to disclose anything of which the FCA would reasonably expect notice. Another significant issue that arose was in relation to the settlement procedure the FCA stated that it intended to pursue under its CA 1998 guidance. The FCA proposed that firms which settle investigations for a reduction in the penalty applied will be required to waive their rights to appeal to the Competition Appeal Tribunal (‘CAT’). This is in stark contrast to the position adopted by the CMA, where a firm can settle the investigation but retains a right of appeal should it be aggrieved at the subsequent judgment.
FCA response to comments from industry and Final Guidance
According to the FCA, most of the responses received supported its proposed guidance as set out in CP 15/1. The FCA states that more substantive comments related primarily to the proposed duty to report breaches and the proposed settlement procedure of CA 1998 investigations.
- Rules on disclosure of competition law infringements to the FCA
There were serious concerns raised by respondents as to the scope of the reporting obligation. The FCA acknowledges this and has decided to amend the wording accordingly. The FCA has now in the Final Guidance introduced the qualification that only ‘significant’ infringements need be reported. As a result a firm must report to the FCA ‘if it has or may have committed a significant infringement of any applicable competition law.’ This will be viewed as a major concession to the responses to the consultation. However, the FCA states that it is simply clarification that these type of breaches are breaches that the FCA would expect firms to report as part of their Principle 11 obligations. The FCA hopes that this clarification will prevent firms making ‘fail-safe’ notifications. The definition of ‘significant’ provided by the FCA does not include any specific materiality thresholds. The FCA states that in determining whether a matter is significant, a firm should have regard to ‘the actual or potential effect on competition, any customer detriment, and the duration of any infringement and implications for the firm’s systems and controls.’ This change to the FCA Handbook at SUP 15 came into force on 1 August 2015.
- Settlement procedures
In response to a request for further clarity on the settlement procedure, the FCA has amended the guidance to make it clear that it would expect to hold any settlement discussions on the basis that neither FCA staff nor the person concerned would seek to rely against the other on any admissions or statements made if the matter is considered subsequently by the Competition Decisions Committee (‘CDC’) or in other proceedings. It has also clarified that the CDC would not be involved in the settlement discussions other than in exceptional circumstances where the FCA considers it appropriate or the CDC to oversee the settlement discussions and remain as decision-makers. In relation to firms waiving their rights to appeal to the CAT, the FCA has decided to retain in the Final Guidance its original position as set out in CP 15/1. The FCA points out that settlement is voluntary, so that parties are free not to settle. The FCA also states that the objective of settlement is to achieve procedural efficiency and finality, with waiver of the right to appeal being proportionate to this aim. The FCA further notes that there is no legal requirement that settling parties can always appeal. Article 6 of the European Convention on Human Rights (‘ECHR’), which guarantees a right to a fair trial, does not preclude a free and informed waiver of rights. The FCA acknowledges that the CMA does not require settling parties to waive their rights of appeal and recognises that there is an argument that consistency between concurrent regulators can be beneficial. Ultimately, however, the FCA makes the point that there is no legal obligation on the FCA to follow the same approach as the CMA. It is that the FCA intends to follow its own course in exercising its powers.
- FSMA or Enterprise Act market studies
The FCA has acquired powers to conduct market studies under EA2002 to consider whether aspects of the supply of financial services will prevent, restrict or distort competition. Prior to 1 April 2015, the FCA had been able to conduct its own market studies under FSMA in order for it to investigate competition issues and it already has a range of tools to remedy any issues uncovered. Indeed, the FCA states in the Final Guidance that it intends to continue to use ‘FSMA market studies as one of [its] principal tools’ to promote effective competition in financial services. The FCA has now modified the Final Guidance to clarify that the announcement of any market study will expressly state the power under which it will be conducted. While acknowledging that it is not prohibited from switching between its FSMA and EA 2002 powers when conducting market studies, the FCA has stated that it will aim to clarify the powers to be used at the outset of a market study.
The FCA’s powers have been hugely increased in the area of competition law by the Banking Reform Act, and the Final Guidelines offer a helpful insight into how it intends to apply them to the financial services industry. This article focuses on key issues that arose during the consultation process. However, all regulated firms should familiarise themselves with the guidance in full. While much of the guidance provided remains to be tested, firms will need to ensure that they are up to speed with the guidance and are aware of their enhanced obligations thereunder.