From 1 April 2015, the FCA will gain concurrent competition enforcement powers, gaining the power to enforce EU and UK competition law within the UK financial sector. Until the LIBOR investigations, competition law (especially in the UK) had largely left the financial sector alone. Now, with a dedicated competition regulator, this will no longer be the case.
However, as we go into full concurrency, there are a number of issues which remain unclear. Here are our burning unanswered questions.
1. If a regulated firm applies for and gets full immunity from the FCA for a competition law infringement, will it be fined in any event for breaching FSMA?
Competition enforcement runs on immunity and leniency: a sliding sale of discounts from full immunity downwards designed to create a prisoner's dilemma for cartelists, which rewards early and thorough disclosure of anticompetitive behaviour. The perverse incentives that this creates (an undertaking at the centre of a cartel often has the best overview of it and is therefore best able to gain immunity) are justified on the basis of increased detection. However, with competition enforcement and financial regulation powers, there is technically nothing to stop the competition enforcement arm of the FCA granting immunity and the financial regulation arm of the FCA coming back and imposing fines. Indeed, with the FCA unable to grant total immunity for breaches of FSMA, it may have no other choice but to do so. This seems absurd, but it has already happened (albeit spread across two authorities). In EURIBOR Barclays received full immunity from the European Commission in its cartel investigation, but was given a £59.5 million fine from the FCA for breaching FSMA as a result of the same activity. Similarly, part of ICAP's appeal against its EURIBOR fine rests on exactly this point.
2. Will exemption arguments be resurrected in order to excuse indispensable coordination?
Many of the arguments justifying certain joint selling arrangements in the financial sector (for example trading platforms made up of several banks coming together to trade specialised products) hinge on so-called exemption arguments under Article 101(3) TFEU. This permits otherwise unlawfully anticompetitive agreements on the basis that they are indispensable to technical or economic progress, do not eliminate competition and give consumers a "fair share" of the resulting benefit. Unfortunately, a national competition authority's (like the FCA's) ability to apply these arguments has been curtailed to the point where it has been suggested that such an authority cannot exempt an agreement which is restrictive of competition. Furthermore, even the European Court and European Commission, which certainly do have the power to make these exemption decisions, have shied away from doing so in recent years. While this problem affects the entire economy, it appears particularly pronounced in financial services, where institutions routinely cooperate with competitors to bring new and innovative products to the market. Quite how the FCA will manage to close cases satisfactorily in these circumstances where exemption arguments are convincing, and how it might give guidance to financial institutions on how to comply with a doctrine that may be beyond its reach to apply, are anyone's guess.
3. How will the positive obligation for regulated entities to self-report breaches of competition law impact enforcement?
The FCA has amended the supervision manual to prepare for its competition powers. The most striking of these amendments is that a firm "must notify the FCA if it has or may have infringed any applicable competition law", and do so as soon as it becomes aware of it. Given that it is often very difficult to determine whether or not competition law has been breached, this is a very hard requirement to comply with. Does an unfounded accusation by a competitor trigger the obligation? This also sits awkwardly with the leniency regime described above. The notification may be made orally if the firm applies for leniency. However, without a thorough internal investigation, the firm may not know whether it wants to apply for leniency at all, especially given that all applications must be made with a genuine intention to confess. Also, a major reason why leniency is so effective is because a thorough internal investigation by an immunity/leniency applicant largely does the job of the competition authority for them. However, these investigations take time: how long will the FCA allow an undertaking that has self-reported a suspected breach to carry out an internal investigation before it loses patience and embarks upon a dawn raid?
4. Is the priority for the FCA going to be more on the retail or the wholesale side?
As a result of the European Commission's EU-wide jurisdiction, the big FS competition enforcement cases of the last few years have been in the wholesale area. Additionally, while certain specialised areas of wholesale banking are highly concentrated (a review was recently announced), retail banking has a relatively large number of players (and is currently under review by the CMA). However, weighed against this is the FCA's historic focus on consumers over sophisticated investors, and the often-made assumption that retail competition does not work well (whether or not this is actually borne out by the evidence).
5. Who's first?
The FCA will start 1 April with a large and capable team of competition enforcement personnel. It is inconceivable that they will be paid to do nothing and more than likely they will hit the ground running. While we would not go so far as to suggest FS in-house counsel clear their diaries on 1 April, it might be sensible not to schedule anything too far from the office. In-house counsel will need to ensure their compliance systems are robust enough to deal with the new regime before they have to deal with it first hand.