FCA’s new competition powers in the financial services market The Financial Conduct Authority (“FCA”) is the sectoral regulator of financial services firms in the UK. From 1 April 2015, the FCA will obtain competition powers to promote effective competition in the interest of consumers in the markets for regulated financial services. These competition functions will be exercised concurrently with the Competition and Markets Authority (“CMA”), the lead competition authority in the UK having jurisdiction in all sectors of the economy. The FCA will be given the following competition powers: ■ Market study powers under the Enterprise Act 2002 The FCA will have the power to carry out market studies to consider the extent to which any aspect of the provision of financial services in the UK has or may have an adverse effect on competition and, therefore, on the interests of consumers. After conducting a market study, the FCA can refer the relevant market to the CMA for a detailed review. The CMA has the power to conduct an in-depth market investigation and, if necessary, use its powers in Part 4 of the Enterprise Act to remedy adverse effect on competition that it finds in the market. The FCA will not have the concurrent function of conducting market investigations, which will remain solely that of the CMA. The CMA and the FCA must consult each other before exercising any of their concurrent functions to ensure they do not both exercise the same functions in relation to the same matter. ■ Enforcement powers under Part 1 of the Competition Act 1998 The FCA will be able to enforce breaches of the prohibitions on anti-competitive behaviour (prohibitions on anti-competitive agreements and abuse of dominance) set out in the Competition Act 1998 and the Treaty on the Functioning of the European Union in the context of financial sector activities. The FCA is required to consider the use of these Competition Act powers before exercising certain regulatory powers including cancellations and variations of permission. This is known as the primacy obligation by which the FCA has a duty to consider whether it would be more appropriate to use their competition powers rather than their regulatory powers. For example, if the FCA believed a firm was engaging in anti-competitive information exchange, the FCA would consider first, before using its regulatory powers to require that firm to stop, whether it would be more appropriate to investigate under the Competition Act.The FCA has already taken steps to acquire the necessary expertise to implement its new powers effectively by recruiting competition lawyers, training its current staff and building up a new specialist division known as the Competition Department. These new powers will put the FCA in a better position to engage at a European level to address cross-border competition issues and in the UK, allow it to become a full member of the UK Competition Network which was created to help deliver the UK government’s desire to deliver stronger competition across the whole economy. In addition to the FCA’s new powers, regulated firms are obliged to inform the FCA if they have infringed any applicable laws under Principle 11 (principles for business) and that obligation will extend to the infringement of any of the prohibitions contained in the Competition Act. This obligation and its new powers will enable the FCA to detect competition law breaches more easily and be able to step in and take action more quickly. Regulated firms should be aware of the potential risk that while they are engaging with the FCA on regulatory issues, they may expose themselves to competition law investigations. www.dlapiper.com | 2526 | Antitrust Matters Following the recent scandals related to the financial services industry ranging from LIBOR/EURIBOR to Payment Protection Insurance (PPI) and more recently interest rate hedging products, the spotlight will continue to be put on the financial services sector and an influx in the number of competition law cases in the financial services industry is to be expected. Fabienne Dony Associate T +44 20 7153 7971 email@example.com On 7 January 2015, the Competition and Markets Authority (“CMA”) announced that it had referred the acquisition of K-Y by Reckitt Benckiser (“RB”) for Phase 2 investigation. The CMA found that the acquisition gave rise to a the realistic possibility of a substantial lessening of competition in the supply of personal lubricants to grocery retailers and national pharmacy chains and was not satisfied with the undertakings offered to address the competition concerns. This case is the first Phase 2 referral made by the CMA after rejecting undertakings in lieu offered by the parties since it took over from the OFT on 1 April 2014. This case highlights the particular importance of offering undertakings in lieu that will be acceptable to the CMA in order to clear the transaction at Phase 1. BACKGROUND RB and Johnson & Johnson (“J&J”) through its subsidiary McNeil-PPC Inc. supply personal lubricants to grocery retailers and national pharmacy chains in the UK under the well-known Durex and K-Y brands respectively. Over the past two years RB has been growing its English consumer-health sales through various acquisitions and this segment now represent about 28% of the company’s revenue. On 10 March 2014, RB decided to purchase the global rights of the K-Y brand which in 2013 had net global sales of over US$100 million. The transaction does not involve any transfer of fixed assets or employees and the consideration offered remains unknown. PHASE 1 Given the fact that the transaction involved a highly concentrated horizontal overlap in the supply of personal lubricants in the UK, the CMA was responsible for reviewing the acquisition. Following its Phase 1 investigation, the CMA found that as a result of the transaction, the merged entity would have the highest combined share of supply on the market and would in effect combine the two best known brands. The principle issue for the CMA is that Durex and K-Y products are widely sold in grocery stores and other national pharmacy chains where other brands are barely The Cma Refers To Phase II Reckitt Benckiser’s Purchase Of K-Y By Louisa Mottaz if at all available. The CMA also found that competition concerns were not sufficiently constrained by own label products from the supermarkets and pharmacies where Durex and K-Y are sold in the UK. Sheldon Mills the Senior Director of Mergers Division at the CMA commented that: “While these personal lubricants are differentiated to an extent, we found that retailers and consumers perceive them as competitors”. K-Y was created in 1917 and initially only available with a prescription until 1980. Nevertheless, both K-Y and Durex are considered to be in the intimate lubricant category and are now both sold over the counter. PHASE 2 Although, RB offered undertakings in lieu to address the competition issues arising of the acquisition, these were ultimately rejected by the CMA. Under the indepth Phase 2 investigation, a decision on the merger will be made by a group of independent panel members supported by a case team of the CMA staff. www.dlapiper.com | 2728 | Antitrust Matters Under section 73(3) of the Enterprise 2002 Act, the CMA must consider the need to achieve a comprehensive solution which is reasonable and practicable to avoid the lessening of competition. Therefore, undertakings in lieu must be effective and capable of being implemented in practice. The commitments offered by RB are not publicly available but in practice, the process of agreeing undertakings in lieu is usually consensual; suggesting that in the present case, RB was unable to offer realistic propositions that would comfort the CMA to a sufficient degree. It should also be noted that the products involved in this transaction are very similar in nature and often are the only options available for customers who regard them as competitors. Consequently, offering plausible commitments was likely to have been further complicated by the nature of the product in this case. Although this is the first referral for an in-depth Phase 2 investigation made by the CMA after rejecting undertakings in lieu offered by the merging parties, six other transactions are currently under Phase 2 referral after not offering any undertakings at the conclusion of the Phase 1 investigation. These transactions include: Sonoco Products Company/Weidenhammer inquiry (13 January 2015); Pork Farms Caspian Limited/ Kerry Foods Limited merger inquiry (5 January 2015); Xchanging/Agencyport Software Europe merger inquiry (8 December 2014); Pure Gym/The Gym (26 June 2014); Ryanair/Aer Lingus merger inquiry (14 July 2014); and Anglo American PLC/Lafarge S.A. merger inquiry (11 July 2014). The number of mergers under Phase II review demonstrates the CMA’s statutory obligation to refer to Phase II any mergers where there is a realistic prospect of a substantial lessening of competition. By not offering any undertakings at all or by offering inadequate ones, parties should beware that they are setting themselves up to an almost certain Phase 2 investigation by the CMA.On 26 November 2014, the Court of Appeal (“CAT”) handed down a ruling in connection with an application for costs by Skyscanner for its successful appeal against the decision of the Office of Fair Trade (“OFT”) to accept binding commitments in the hotel online booking case. The CAT ordered the Competition and Markets Authority (“CMA”) to pay a total of £186,096.81 in respect of Skyscanner’s costs; a 5% reduction for partial success from the recoverable costs claimed by Skyscanner. Interestingly, Skyscanner and its solicitors had a capped fee agreement whereby the company would only be responsible for 50% of the total fees, yet this did not deter the CAT from awarding costs in this case. The present award demonstrates that the CAT is highly sensitive to failures by the competition authority (first the OFT and now the CMA) to properly investigate and consider cases and that the financial burden of appealing such improper decisions should be on the authority itself and not on the successful parties. The CAT decided by a judgment handed down on 26 September 2014 that the appeal by Skyscanner against the decision by the OFT of 31 January 2014 to accept commitments, pursuant to section 31A(2) of the Competition Act 1998 (“the Act”) was successful. Skyscanner sought an order from the CAT that the CMA pay its costs of the appeal amounting to a total of £258,642.01. The CAT found in favour of Skyscanner on two of its three grounds of appeal: 1. The CAT found that the OFT had failed to properly consider Skyscanner’s objections to the proposed commitments and failed to properly investigate. Instead, the OFT continuously insisted on more evidence or supporting material from Skyscanner. The CAT found that relying on Skyscanner so heavily for information was unfair on the company as it was up to the authority to examine the issues further and carry out an analysis of the economic effects on a given market. Therefore, the process by which it reached its decision was procedurally improper. 2. Further, by failing to thoroughly examine the possible impact of the points raised by Skyscanner, the OFT acted unreasonably as it should have given a proper level of attention to these arguments. Skyscanner had claimed that the commitments would lead to a market with a lack of transparency and would harm interbrand competition by damaging price comparison The Cat Rules That Cma Should Pay Skyscanner’s Costs Of Successful Appeal By Louisa Mottaz websites. Indeed, the commitments would have made discounted prices visible only to consumers who logged on to a specific travel agent’s website directly rather than being readily visible on price comparison websites such as Skyscanner. Under Rule 55 of the CAT Rules, the CAT has a broad discretion to award costs by making “any order it thinks fit in relation to the payment of costs”. This allows the CAT to be flexible for example by taking into account the conduct of the parties in relation to the proceedings. Overall, the CAT regarded Skyscanner as having been substantially successful in its appeal and awarded costs to be paid by the CMA for: solicitor’s costs, counsel’s costs, part of the economist’s costs, other disbursements and the costs related to the efforts for obtaining the disclosure of the statement of objections from the OFT. However, the CAT concluded that a reduction of 5% from the recoverable costs was appropriate given that Skyscanner was only partially successful on its appeal as the CAT rejected the argument that the OFT acted ultra vires in accepting commitments that had an effect on third parties such as price comparison websites like Skyscanner. www.dlapiper.com | 2930 | Antitrust Matters The most striking element of the CAT’s ruling is the fact that it awarded Skyscanner almost 72% of the costs sought under the order and that Skyscanner was in any case subject to a capped fee arrangement with its solicitors meaning that the financial burden was already greatly alleviated for the company. This however, should not be seen as a guarantee by the CAT that it will compensate to such a high extent all successful applicants. For example, in a previous decision handed down on 16 January 2014, in the successful appeal by BMI against the Competition Commission (1218/6/8/13 BMI Healthcare Limited v Competition and Markets Authority (No. 1),  CAT 1), the CAT found that the amounts claimed by BMI were disproportionate given the nature and complexity of the case. The CAT therefore ordered the Competition Commission to pay less than half the amount claimed by BMI only. This highlights the fact that in the Skyscanner appeal, the CAT considered the failings of the OFT to be so important that it should bear responsibility to Skyscanner for having to appeal the decision.