The Financial Conduct Authority ("FCA") issued its first formal decision earlier this year using the competition enforcement powers which were granted to it back in April 2015. The FCA is now able to issue a fine of up to 10% of the annual worldwide group turnover of any company infringing the relevant UK competition regulations.
The competition legislative framework in the UK is broadly governed by two statutes:
- Under English law, the Competition Act 1998 prohibits agreements, practices and conduct that may damage competition in the UK and is more specifically set out in the Chapter 1 prohibition. This covers agreements and concerted practices between businesses which have as their object or effect the prevention, restriction or distortion of competition within the UK; and
- Under European law, Article 101 of the Treaty on the Functioning of the European Union which provides the equivalent prohibition under the UK Competition Act, but which cover practices which may have an effect on trade between EU member states.
Through such legislative provisions, the UK seeks to prevent and restrict all anti-competitive agreements and the abuse of dominant positions.
In the FCA's decision, each of Newton Investment Management Limited ("Newton"), Hargreave Hale Ltd ("Hargreave") and River and Mercantile Asset Management LLP ("River and Mercantile") were investigated for having exchanged strategic information on a bilateral basis in respect of an IPO. Such information included: (i) bidding intentions; (ii) the price at which they were willing to pay for shares; (iii) the volume they were willing to acquire; and (iv) general confidential information. Shortly after the exchanges occurred, the share issue price for the IPO was then set.
The FCA determined that these exchanges amounted to an infringement of competition law in the UK. As a result of the discussions and information shared, the FCA thought it was highly probably that the issue price achieved by the IPO had have been affected and that this would have raised the cost of equity capital for the issuing company as a result. The asset managers should have been competing for shares but, as a result of the complicit communications, the parties were aware of the intentions of their counterparts. This in turn reduced the pressure on the asset managers to make bids for shares that reflected what they thought the companies were actually worth and therefore undermined the price setting process.
In exercising its enforcement powers, the FCA fined Hargreave 306,300 and River and Mercantile 108,600. It was decided that the firms were equally at fault and therefore each received a fine of an equal percentage of their respective worldwide group turnovers. Newton managed to avoid a fine altogether by virtue of adhering to the competition leniency policy, which provides that a business that has been involved in a cartel may be granted immunity from penalties or a significant reduction in penalty in return for reporting cartel activity and assisting the FCA with its investigation.
Interestingly, despite Newton securing immunity, its fund manager, Mr Stephany, was not able to benefit in his personal capacity from the grant of immunity. Through seeking to influence external fund managers, he was found to have breached his obligations to demonstrate due skill, care and diligence and observe proper standards of market conduct and was fined 32,200 and dismissed from Newton.
This matter highlights the care that market participants must take when discussing IPOs and that firms must refrain from sharing strategic information with competitors. This sentiment is echoed by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, who noted the importance of 'asset management firms taking care to avoid undermining how prices are properly set for shares in both IPOs and placings [as] failure to do so risks them acting illegally.'
There are three key takeaway points from this case. First, as the threshold for determining what constitutes an information exchange as being anti-competitive has been set relatively low, this heightens the risk of potential competition law breaches by firms. This is particularly true for asset management firms where the distinction between market colour and strategic information is not always obvious. As such, firms should take particular care in training staff to be aware of how to avoid falling foul of anti-competitive practices.
Second, if a firm believes it may have been caught up in anti-competitive practices, particularly in the context of an IPO, this case demonstrates that if the firm takes appropriate actions early on, there is a genuine possibility the FCA will grant immunity. Steps include: whistle blowing; assisting in the following investigation; and submitting an application to be granted immunity by the FCA.
Third, the UK competition authorities may currently only apply competition law in instances where the European Commission has not exercised its jurisdiction. However this case demonstrates that the FCA will investigate and exercise its enforcement powers where possible. Brexit may further encourage a trend towards greater competition law enforcement by the FCA as, following Brexit, the FCA may investigate all cases affecting the UK regardless of the European Commission's intent.