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Government U-turn on FCA competition powers

The Government has made a u-turn by agreeing to the Financial Conduct Authority’s (“FCA”) latest request that it should be given competition law powers equivalent to those exercised by other UK sectoral regulators. The FCA wrote to the Chancellor to ask again for its new ‘competition’ objective[1] to be supported by the power to investigate and enforce competition law under the Competition Act 1998 and Enterprise Act 2002.   

The Financial Services Act 2012 gave the FCA responsibility to promote effective competition in the interests of consumers in the markets for financial services.  However, at that time, the Government held back from giving the FCA concurrent jurisdiction with the OFT (which will become the Competition and Markets Authority, or “CMA[2]).  Instead, the OFT retained the lead in enforcing competition law in financial services markets and investigating suspected competition law breaches (e.g. alleged cartels or abuse of dominance cases). 

Amendments to the Financial Services (Banking Reform) Bill[3] – currently before the House of Lords[4] - would give the FCA the power to apply competition law directly, unlike its predecessor, the FSA.

Why was the FCA not given these powers originally?

When the future FCA’s remit was being debated, the then-FSA had argued that its replacement should have some direct competition powers, such as the ability to make market investigation references to the Competition Commission, without involving the OFT.   

However, there was concern that sharing competition enforcement with the FCA would reduce or compromise the ability of the OFT (or CMA) to intervene in financial markets, thereby weakening the competition regime.  In particular the OFT cautioned against FCA concurrency, pointing to:

  • the risk of inconsistent use (as it felt some businesses might seek “special treatment” from the FCA) and resulting legal uncertainty;
  • the FCA’s lack of skills in making competition assessments relative to the OFT’s extensive experience in this area; and
  • a fragmentation of roles, leading to overlapping action or gaps in action, and thus less ability to tackle industry problems effectively, in the face of ‘strong vested interests’. 

Of particular concern to the OFT was the potential for reduced independent scrutiny of the FCA rulebook from a competition perspective e.g. as part of a market study: would the FCA itself manage thorough independent analysis of this to consider impartially whether it operates as a barrier to entry?  FCA concurrency also seemed at odds with the whole rationale behind streamlining the existing OFT and Competition Commission into a unified competition regulator in order to achieve faster, more efficient and legally robust management of cases within a single, integrated and co-ordinated authority.

Why has the Government changed its stance? 

The Government explains[5] that it has been persuaded that concurrent competition powers would strengthen the FCA’s ability to ensure competitive banking markets, enhance the credibility of the FCA and make it easier to persuade firms to alter their behaviour voluntarily; and would enable the FCA to join the network of European competition regulators (the “ECN”) so that it is better placed to engage with regulatory issues at an EU level.  However, the FCA’s additional powers will not be implemented until April 2015, to allow time for the FCA to build the necessary expertise. 

What is this likely to mean in practice?

The amendments would give the FCA a more active role in competition law enforcement in the financial sector.  Originally it was envisaged [6] that the FCA would take the lead where regulatory solutions were most appropriate.  However, the OFT (and then the CMA) would retain jurisdiction to act where the issue was best dealt with through enforcement of competition law, or in situations where a Competition Commission investigation (and industry wide competition remedies) were necessary.  However, in summary, the plan is as set out below[7].

  • The FCA will also be empowered to investigate and enforce directly the competition rules in the Competition Act 1998 (against anti-competitive agreements and abusive conduct by dominant companies) but only in relation to financial sector activities.  In fact, before using its powers under FSMA, the FCA will be obliged to consider first whether it would be more appropriate for it to take action under the Competition Act 1998.  However, the FCA will not take responsibility for publishing guidance or statements of policy.
  • The FCA will also have the power to carry out market studies and make market investigation references under the Enterprise Act 2002; previously, these powers were reserved to the OFT and the FCA had to ask the OFT to look at those markets where it had concerns that competition was being prevented, restricted or distorted. FCA will have a positive duty to keep under the review the markets in financial services. 
  • The FCA will remain able to receive and respond to super complaints from designated organisations [8], as is currently the case.
  • There is a procedure to ensure consultation between the FCA and CMA before either of them exercises any concurrent functions and to ensure that neither acts if the other is already doing so.  The FCA will be required to share information with and provide assistance to the CMA in carrying out any financial sector market investigation referred to it, and the CMA will be obliged to take that information into account.   In the case of any disagreement as to which organisation should act, the question will be determined by the Treasury.  
  • The FCA will be able to charge fees to cover the cost of exercising its new competition functions. 

Are there are any other changes to how competition will be enforced in financial services?

The Government has also accepted the recommendation of the Parliamentary Commission on Banking Standards by giving the Prudential Regulation Authority (“PRA”) a secondary competition objective. 

This requires the PRA to take a more proactive approach on competition than implied by its existing duty just to “have regard” to the need to minimise the adverse effects on competition when exercising its general functions.  The PRA’s new positive duty to promote competition will be subordinate to its general objective (i.e. to ensure the safety and soundness of the firms that it regulates) and to its insurance objective.   Nonetheless, it will be expected to act in a way that promotes competition, and to consider how the prudential regime might need to change in order to help further this new competition objective, without undermining its other areas of responsibility.  


The Parliamentary Commission on Banking Standards emphasised “the role that competition can, and should, play to bring about higher standards in the banking sector”[9] in its report published on 19 June.

The FCA is already ramping up its activity in the area of competition.  Last month it announced its first review into competition for financial services, starting with a study into cash savings[10].  The FCA has indicated that this is likely to be just the first in a number of studies into the financial services markets where it considers pricing trends, low switching and consumer behaviour point to a lack of effective competition.   In this regard, the FCA has summarised[11] its key areas of work in the coming 12 months as follows:

  1. the market study into cash savings (due to start October 2013);
  2. retirement products - the FCA has started some thematic work into annuities and, in parallel, the OFT is looking at defined contribution; and
  3. wholesale markets such as asset management for major institutional clients, and equity underwriting by investment banks. From next spring, before it decides whether a full-blown market study is needed, the FCA will invite evidence as part of its Wholesale Strategic Review.  This will help it understand where competition problems may be occurring and if interventions to promote competition could benefit both wholesale and retail consumers of financial services.

A lot is changing in terms of how financial markets are regulated.  One thing is clear, however: the conclusions of the Banking Review have only heightened the Government’s view that it is essential to put competition at the heart of any reform of financial regulation in the UK. 

If you would like to know any more, please contact Rachel Iley or Paul Hinton.

[i] On which we reported previously at http://www.kemplittle.com/Publications/item8066.html?ListName=KL Bytes&ID=130#.UZtMosoatI0

[ii] The CMA has been established following a major reform of the UK's competition regime. The CMA will be responsible for promoting effective competition in markets across the UK economy and have a crucial and complementary consumer protection role. It will have strengthened responsibilities and powers, and take on the work of the Competition Commission (CC) and a number of responsibilities of the OFT. CMA was established in October 2013 and becomes fully operational in April 2014.

[iii] Published October 2012 as draft legislation to implement key elements of the Independent Commission on Banking's recommendations.

[iv] For updates on progress of the Bill, please refer to http://services.parliament.uk/bills/2013-14/financialservicesbankingreform.html

[v] See the HM Treasury briefing at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/245760/HoL_Policy_Brief_-_FCA_Concurrent_Powers.pdf

[vi] See Memorandum of Understanding between the Office of Fair Trading and the Financial Conduct Authority, 2 April 2013

[vii] For a full list of the amendments relevant to the FCA’s concurrency please refer to https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/245783/Annotated_Clause_-_FCA_Concurrent_Powers.pdf

[viii] Citizens Advice Bureaux, the Consumers Association (Which?), the Consumer Council Northern Ireland and the Federation of Small Businesses have all sought designation; see https://www.gov.uk/government/publications/guidance-for-bodies-seeking-designation-as-super-complainants-to-the-financial-conduct-authority

[ix] For a summary of the Commission’s conclusions on this see http://www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/2704.htm at paragraph 49 onwards.  

[x] The FCA press release: http://www.fca.org.uk/news/fca-to-carry-out-market-study-into-cash-savings.

[xi] A speech by Christopher Woolard, FCA Director of Policy, Risk and Research (published 9 September at http://www.fca.org.uk/news/firms/competition-and-conduct-regulation-in-financial-services )