Introduction and procedure
The Financial Conduct Authority (FCA) has issued Statement of Objections to the asset management firms: Artemis Investment Management LLP, Hargreave Hale Ltd, and River and Mercantile Asset Management LLP (the Firms).
A Statement of Objections is a document that sets out why and how the FCA thinks the relevant firms have infringed applicable competition law. It outlines the facts on which the FCA relies, the objections it raises, the actions it proposes and its reasons for its proposed actions. It is a provisional finding and does not necessarily lead to an infringement decision. It simply gives notice to firms that the FCA suspects they have infringed competition law, allowing the parties to respond by making written and oral representations. The final decision regarding any infringement is taken by a three-member Competition Decision Committee unconnected to the case investigating team and not involved in the decision to issue the Statement of Objections. Firms that are found to have breached competition law face a fine of up to 10 per cent of annual worldwide group turnover.
The facts of the current investigation
The FCA publicly announced it had begun conducting the ongoing investigation in April 2016. The FCA alleges that the Firms shared information by disclosing the price they intended to pay, or accepting such information, or both, in relation to one or more of two Initial Public Offerings (IPOs) and one placing, shortly before the share prices were set. This sharing of information allegedly occurred, for the most part, on a bilateral basis and allowed the Firms to know each other’s pricing strategy during the IPO or placing process, when they should have been competing for shares.
More specifically the FCA’s main allegations may be outlined as follows:
- In 2015, Hargreave Hale Ltd, River and Mercantile Asset Management LLP and others disclosed and/or accepted information about the price they intended to pay for shares in relation to one IPO and a placing.
- In 2014, Artemis Investment Management LLP and others shared information about the price they intended or were willing to pay for shares in relation to another IPO.
By allegedly colluding rather than competing on price, the Firms may have reduced the value at which the companies would have been listed, a matter of great concern for the FCA.
The significance of the case
The FCA inherited competition powers in 2015 and concurrently enforces competition law along with the Competition and Markets Authority (CMA). It is, in fact, one of the only financial regulators in the world to have both financial regulatory and antitrust powers. Furthermore, this is the first case the FCA has brought using its competition enforcement powers. It also shows that the FCA may use its ‘soft’ enforcement powers and mechanisms, such as ‘on notice’ procedures, to intervene and investigate asset management and other potential financial sectors.
At first instance, this investigation may be difficult to grasp as the issuers of the IPOs (usually banks) will be talking to possible investors, trying to get a feel for successful pricing and may even inform investment managers of the general market view, including other individual investment managers’ views, when trying to drum up support.
The alleged breach of competition rules by the investment management funds relates to the exchange of information about IPOs that they might invest in. As would-be purchasers, this is a different situation from information sharing by competitors selling their services.
Investment consultancy and fiduciary management firms
This investigation comes at the same time as the CMA launches an investigation into investment consultancy and fiduciary management services, following an initial investigation by the FCA.
The key concern identified by the FCA, and now referred for investigation by the CMA, is that the following features of the industry may distort competition between suppliers of investment consultancy and fiduciary management services:
- A weak demand side due to the limited experience of trustees, evidenced by low rates of switching by trustees between consultants
- An inability to assess the quality of advice provided by consultants, exacerbated by the limited availability of relevant data
- Persistent levels of market concentration and relatively stable market shares among investment consultants, with the three largest consultancy firms (Aon Hewitt, Mercer and Willis Towers Watson) estimated by the FCA to control around 60 per cent of the market, with little variation in shares over time
- High barriers to entry and expansion, particularly the inability of smaller or newer consultants to develop their business outside of niche, specialist areas, with trustees attaching considerable importance to brand and preferring well-known, established firms
- Vertically integrated business models creating conflicts of interest where in-house fiduciary management and master trust services are recommended by investment consultants, and where investment consultants also provide services to asset managers that they might recommend to trustees1
The financial services sector is in the spotlight with respect to competition compliance and this will continue for the foreseeable future. The sector would be well advised to take note of the findings in the FCA’s Final Report on Asset Management Market Study, published in 2017. One of the main findings of this Report is that the sector needs to improve its understanding of competition laws, and this should include a review of compliance procedure and training modules. Therefore, it is important to maintain an open dialogue with the competition authorities and regulators as well as have a constant review of industrial norms and strategies in light of the ever-changing and evolving paradigm of competition law enforcement.