Amendments to the FCA Handbook SUP 15 now mean that a regulated firm is now under the express obligation to notify the regulator if it "has or may have committed a significant infringement of any applicable competition law".
The problem is that the meaning of the word "significant" is heavily dependent on context (for example, a significant amount of dirt on the sole of a shoe and on a surgical scalpel are two very different things), but such context is in short supply. The wording of the obligation mirrors a previous obligation to report breaches of the Handbook's principles that pre-dates the FCA's competition law competence, but competition law has its own, separate, body of jurisprudence. And while the Handbook notes that actual & potential effects on competition, customer detriment, duration and implications for the firm's systems and controls are all relevant to the determination of significance, it does not provide firm guidance on the quantity in which any of these elements must be present in order to ensure significance. Further context can, however, be found elsewhere in the publications and decisions of the longer-established competition authorities, as well as from previous regulatory decisions of the FCA and FSA, allowing regulated firms to come to a pragmatic view.
Who must report and for what?
First, it is worth noting that a "significant infringement" of competition law is not restricted to regulated activity. A much-discussed aspect of the FCA's concurrent competition powers is that they apply beyond regulated activity, to an undefined "financial services" sector. The reporting obligation will have the same issue: while being bound by the Handbook's rules arises from being regulated, the competition issue triggering the obligation does not have to arise from a regulated activity. Only regulated members of a cartel are obliged to report it: the notification obligation is all about who you are, rather than whether the infringing activity is regulated or not.
Competition law infringements also apply to the undertaking (i.e. the economic entity, usually the corporate group) rather than to particular legal persons. This means that, technically, regulated entities appear to be bound to report the breaches of their affiliates (whether regulated or not), given their joint liability for those affiliates' behaviour.
Conduct of minor significance and "accidental" breaches
Failures to abide by the Handbook's pre-existing reporting obligations have tended to be punished alongside the breach that was not reported, making the failure to report more of an aggravating factor than a separate cause of action. Decisions such as Sun Life Assurance Company in 2012 have invoked the reporting obligations of SUP 15 as previously drafted, but alongside the main cause of action. There is no reason to suspect that the FCA's modus operandi in competition cases will not be the same: the bulk of the decision will deal with the breach of competition law and the fact that the breach was not reported at the time will be added to the charge sheet as an ancillary infringement. There are certain limited cases where the UK and EU competition authorities have stated that they will not normally impose a fine, essentially owing to the insignificance of the breach of competition law. It therefore appears reasonable to suggest that the boundary between significant and insignificant conduct should turn on whether or not the behaviour is subject to a fine.
The UK's Competition Act grants limited (and revokable) immunity for anticompetitive agreements where the relevant turnover of the businesses involved does not exceed £20 million. This exception does not include price fixing agreements. A similar regime is in place for abuses of dominance in markets where the dominant undertaking has turnover of less than £50 million. In the financial sector, these thresholds are likely to be exceeded by all but the most niche markets and/or boutique firms, although it is worth noting that special rules apply to calculating the turnover of credit institutions for competition purposes. This exception does not apply to breaches of EU competition law, and so to apply, trade between Member States must not have been affected.
The European Commission's De Minimis Notice exempts agreements which restrict competition "by effect" where the parties have low market shares. The precise market share under which the Notice grants an exemption varies from five to 15 per cent. depending on factors such as whether the parties are competitors and whether there are other, similar, arrangements in the market place. The Notice also states that fines will not be imposed where the parties have erroneously assumed that their market shares are beneath these thresholds but did so "in good faith". In practice, the UK authorities are highly unlikely to impose a fine where the Notice applies.
Additionally, competition authorities can only impose fines where the breach of competition law has taken place "deliberately or negligently". In practice, this is a very low bar: compliance programmes and explicit instructions not to breach competition law are insufficient to deflect liability for the behaviour of rogue employees. The way in which this exception to the rule has tended to manifest itself is on the cutting edge of competition law (a recent example being the abuse of dominance finding against Motorola for its refusal to license standards essential patents), where the infringing entity has been able to draw on no case law in order to determine that its behaviour was unlawful.
"Object box" and information exchanges
The Notice does not exempt any restrictions of competition "by object". These are a set of anticompetitive restrictions agreed between undertakings which EU competition law (as well as UK competition law and the competition law of several Member States) regards as being so anticompetitive that an authority does not need to demonstrate an actual measurable impact on a market. As well as price fixing, market sharing and what are referred to as "hardcore" restrictions in Block Exemption Regulations, anticompetitive information exchange is also regarded as a by object restriction of competition law. The UK "price fixing" exception to the exemption has been taken by the UK authorities to carry over to all "by object" breaches, including information exchanges (see for example the CMA's 2015 Ophthalmology decision).
Information exchange is a particular concern of financial institutions (see my earlier article).The OFT's finding against Barclays and RBS in 2011 highlights the dangers. In this case, the infringing activity is said to have begun with some loose talk at a bowling event organised by an accountancy firm and escalated from there (incidentally, the decision is sufficiently detailed to be an excellent case study of how information exchange can happen). RBS was fined while Barclays, which discovered and reported the infringement, was granted immunity.
Duration is stated by the FCA as a key consideration in whether or not a competition infringement is significant. Duration is usually calculated as the length of time that competition has been distorted, rather than the actual duration of the infringing activity: so if a price list valid for the next year is exchanged at a single meeting lasting for an hour, the duration of the infringement is a year. Prices in the financial sector often move more rapidly than this and vary on a deal-to-deal basis, which is likely to shorten the duration of an infringement.
That being said, the T-Mobile case demonstrates that a competition authority will regard a single anticompetitive information exchange as being sufficient to breach European competition law. The judgment suggests that the receiver of the anticompetitive information cannot help but take account of it (suggesting that the exchange might not be anticompetitive only if the receiver leaves the industry immediately).
This does, potentially, imply that receiving a single email attachment containing illicit information, which can be shown to have remained unopened is not an infringement. While the safe approach is to notify in such cases, provided the email is unsolicited (suggesting that the behaviour was not negligently or deliberately committed- see above), the infringing material is not read and immediately isolated, receiving anticompetitive information does not appear to be a significant infringement. Even here, not reporting is not without risk.
Giving with one hand, taking away with the other
One welcome aspect of the FCA's Guidance on its competition is the statement (added after consultation) that it will "take into account" the fines imposed by authorities in connected cases. This takes the potential "double jeopardy" (whereby a firm is fined twice for the same behaviour: first for breaching competition law and then for breaching financial regulation) sting out of having a concurrent financial/competition regulator. Double jeopardy (as ICAP's pending appeal against its competition LIBOR fine) is a live and evolving issue. While this acknowledgement is brief, it is important.
A separate failure to report infringement does however allow the FCA to skirt around the issue of double jeopardy. It creates a separate rule which, although intimately connected with the breach of competition law, is ultimately freestanding. Given that there is no general reporting obligation for breaches of competition law for non-regulated entities, fines imposed for non-disclosure can be seen as separate causes of action to fines imposed by competition authorities. This avoids both double jeopardy and the commitment to take other fines into account, meaning the FCA is free to impose its own fine. Furthermore, the evidence that the FCA will be given access to by virtue of its role as a competition authority (thanks to information disclosure rules within the European Competition Network) will make such cases easy to prove. It is worth noting that this information sharing flows both ways, and that there seems to be little point in disclosing a breach of competition law to the FCA without applying for leniency (either from the FCA or from another competition authority), as the SUP 15 disclosure will find its way to the appropriate competition authority in any event. Given the section 398 FSMA offence of knowingly or recklessly providing misleading information, once the decision has been made to notify, the notification must be made in full.
The conclusion that must be drawn from all of this is that the significance threshold does not add much, engaging only where notional or technical breaches of competition law are committed. Given the low bar, all but the most frivolous accusations must be investigated and personnel at risk of breaching competition law must be trained and supervised (given that undertakings will be held responsible for employees who breach the law on a frolic of their own). Training should focus especially on what constitutes a "by object" infringement and what to do if unsolicited pricing information is provided. Market definition and market shares should also be investigated in order to determine whether by effect infringements are plausible.
The reporting obligation will only become a "freestanding" cause for concern in competition causes which are not ultimately brought before the FCA (although it will doubtlessly be rolled up into the FCA's own competition cases). The obligation to self report also sharpens the existing prisoners' dilemma which the competition leniency procedure has created (under which those who confess their anticompetitive agreements are rewarded with immunity and then steep discounts from fine, granted in the order in which they confessed), both for regulated entities and those in anticompetitive arrangements with them.
This article was originally published by Compliance Complete.