The Financial Services Authority (FSA) and Ofgem are investigating allegations of suspicious trading which occurred on 28 September 2012 in gas contracts at the National Balancing Point (NBP). The main whistleblower, Seth Freedman, formerly of ICIS Heren, is also reportedly seeing Maria-Teresa Fabregas-Fernandez, the acting head of securities at DG Markt of the European Commission, to explain his allegations.
It is interesting to note that the tip-off came from a price source provider. These entities currently fall outside the scope of FSA regulation. Under proposals recently inserted into the Financial Services Bill to deal with the LIBOR fixing issues, criminal offences would be introduced to deal with manipulation of benchmarks (not just LIBOR) and direct regulation would be introduced for those involved in the setting of benchmarks, including those involved in publishing information connected to benchmarks.
Direct regulation for these market participants would bring with it increased obligations to report to the FSA (or its successor), as well as extending criminal offences applicable to regulated and unregulated entities. As is often the case, it seems that ICIS Heren is taking its (impending) regulatory responsibilities seriously.
Given the widespread use of the index, any undertaking found to have manipulated the NBP is likely to face large fines as well as follow-on damages actions from third parties that have lost money from the index being priced incorrectly. Because the index affects the pricing of gas across the EU, the European Commission has jurisdiction to investigation as well as the UK authorities.
Formal arrangements are in place between the FSA and Ofgem and the FSA and the Office of Fair Trading (OFT) for information to be shared where it relates to the receivers’ enforcement powers.
Some possible grounds on which action could be taken are set out below.
Competition law concerns
European and UK law prohibits arrangements between undertakings which have as their object or effect to restrict competition, unless an exception applies. Certain infringements (e.g. bid rigging) may result in criminal prosecutions in the UK.
As the investigation proceeds, it may be possible to draw some conclusions from the identity of the authorities investigating the alleged infringement. The investigation is currently being undertaken by Ofgem which has concurrent power with the OFT to apply UK competition law and investigate breaches in the energy industry. Dawn raids on undertakings alleged to be in breach of competition law are likely to be carried out jointly by the UK regulators and the European Commission, not least because of the differing and complementary powers the national and international regulators enjoy.
Failing to cooperate with the UK regulators can result in criminal charges and the UK regulators are able to use force during dawn raids. The European Commission on the other hand is bound by European, not English, law on legal privilege, which among other things does not regard advice given by in-house counsel to be privileged.
It is worth noting that, unlike the OFT, Ofgem does not have any powers of its own to investigate on behalf of the European Commission (although it may assist), nor to launch criminal investigations. The involvement of the OFT will therefore likely be an indicator that the European Commission may be launching an investigation of its own or that criminal cartel charges are being contemplated.
Fines for violations of competition law can be extremely large. Regulators can also order behavioural remedies, such as divestment. In addition there are large fines for failing to cooperate with investigations.
Private competition damages by aggrieved third parties are also a possibility.
Market abuse issues
While the European Commission has taken an interest in proceedings, the only department that has taken a public interest so far is DG Markt, not DG Comp, the body of the European Commission responsible for enforcing European competition law. It is perhaps felt that DG Markt is in the best position to assess whether the Commission should regard the allegations as principally ones of market abuse or of infringement of competition law.
EU law prohibits certain activities which it regards to be market abuse, including engaging in market manipulation. Manipulation of the wholesale physical gas markets comes within the scope of the Financial Services and Markets Act 2000 (FSMA) market abuse regime – policed by the FSA, which has powers to impose unlimited fines based on the civil standard of proof (that is, on the balance of probabilities). The most likely market abuses which could be relevant in this particular case appear to be (a) disseminating misleading information and/or (b) distorting the market. The FSA has the power to fine any person for market abuse, not just those who it regulates.
The current investigation underlines the importance of the so-called market abuse "sunset provisions". These provisions catch physical markets and make the UK market abuse regime wider than the current European regime under the Market Abuse Directive (MAD). Unlike the MAD-derived provisions, they extend to behaviour which occurs in relation to anything which is the subject matter of qualifying investments. NBP trading does not normally involve qualifying investments, but it can be the subject matter of trading on ICE, hence the FSA's jurisdiction.
The days of cogently arguing that physical trading should be wholly outside the scope of financial regulation seem to be over. Although the sunset provisions go further than the current MAD regime, the proposals for revision of MAD cater for similar "offences" to be introduced Europe-wide. It is likely the current UK requirements will remain in force until replaced by similar offences when the MAD revisions take effect, which will, at the earliest, be early 2015.
What should affected parties be doing?
Potential claimants and defendants should take steps to preserve all relevant documents and to make sure that relevant information cannot be deleted. An internal audit to determine which contracts are priced by reference to an index relating the NBP would also be a prudent step.
Dawn raids should be expected and prepared for. Personnel should be reminded of what is expected of them during a raid and a refresher training session considered.
Immunity and leniency is available for whistleblowing undertakings. If you suspect that your employees may have been involved in any bid rigging, an internal investigation and leniency application may be the best course of action.