On April 1, 2015, the Financial Conduct Authority gained concurrent power to enforce competition law in the financial sector, as opposed to merely in regulated activities. On 15 July 2015, following a consultation, it published the final Guidance on these powers, together with a policy statement reacting to the comments received during the consultation.
This was a novel development both for the financial sector and for competition enforcement, and one which does not have the most promising track record. No other developed economy has given a financial sector regulator competition powers. This is not to say that competition law infringements are not tackled by financial regulators. Indeed, the FCA Handbook's Principles for Businesses have a great deal of overlap with the competition rules, to the point where Libor rigging has been regarded by different regulators as a simultaneously a breach of financial sector regulations and competition law.
Indeed, ICAP Plc's appeal against the fine imposed by the European Commission for alleged Libor activities is based on the idea that the overlap is so great that the principle of double jeopardy has been engaged, and that it has been convicted twice for the same infringement, by regulators and by competition authorities.
A unique regulator
Not only is a financial sector competition regulator unique, but the concurrency model, whereby a sector regulator enforces competition law in its sector, is for the most part a British beast. While there are some scattered sector regulators with competition powers around the world (for example, the Irish and Greek telecoms regulators), there is no other major economy where concurrency is the rule in regulated sectors, rather than the exception.
Even so, the UK's concurrent regulators have had a patchy record in applying competition law. To date, there have been only two competition infringements decisions by UK concurrent regulators, one in the rail sector and the other in the energy sector, both of which involved abuses of dominance. Indeed, the concurrent regulators often take pains to avoid enforcing competition law.
Regulation 1/2003 restricts the findings that national competition authorities (including the concurrent regulators) can make, to ensure that competition law is applied consistently across the EU (or at least in a way that precludes the possibility of a difference of opinion between a member state's authorities and the European Commission and courts) and to ensure the European Commission's primacy as top competition authority. This can be something of a straitjacket, preventing sector regulators from making the rulings they wish to make, unless they make it explicit that they are pursuing regulatory ends, rather than facilitating competition.
The UK government attempted to address this paucity of concurrent competition enforcement in 2013 by imposing a requirement for concurrent regulators to consider using their competition powers where they have a choice between using competition or regulatory powers. There have been very few cases, however, possibly due to a lack of dedicated competition specialists within regulators, as well as the more stringent standard of review to which competition findings are subjected, compared with regulatory decisions. (The Competition Appeal Tribunal can impose its own finding for the former, whereas the latter are subject to the High Court's much weaker judicial review mechanism.)
The FCA may be able to avoid the pitfalls that continue to bedevil the other concurrent regulators because it has more firepower. By the end of 2014, the regulator had recruited 50 competition staff. To put this number into context, the CMA has only 500 staff in total, who must enforce competition law across the entire UK economy, as well as fulfil the CMA's other functions such as consumer protection and merger control.
Enforcing behavioural commitments
The FCA's competition enforcement capacity is likely to be quickly absorbed by behavioural undertakings, however. One way in which a competition authority protects or boosts competition in a market is to extract behavioural commitments from participants. These commitments might be agreed in lieu of a fine in a competition enforcement case, or as a remedy at the end of a market study (a power enjoyed by UK competition authorities, including the FCA). They are often seen as win-win for both participants and authorities: the issues of concern are corrected and no one is fined or forced to sell off assets.
These commitments do come at a price for authorities, however, as they must be policed. Behavioural remedies which follow a competition case or market study, although technically competition enforcement, look and behave much like regulation. Decades of behavioural commitments have meant that the CMA has become something of a miscellaneous sector regulator, spending increasing amounts of its resources on the supervision of behavioural undertakings and orders from historic cases. It has therefore tried to avoid imposing them (and increasing its burden) where possible.
The CMA has already seen the potential for the FCA to lighten the CMA's load in this area. The payday lending market carried out recently by the CMA recommended that the FCA should impose further regulations, which would free the CMA from the follow-up.
Indeed, the FCA may actually welcome the chore of supervising undertakings and orders following an investigation or case. Behavioural remedies offer a mechanism for the FCA to supervise unregulated activities. As noted above, the competition enforcement powers of the FCA go beyond regulated activity into an undefined "financial sector", where there has hitherto been no day-to-day regulation by the FCA. Concurrency opens the door to mission creep.
Competition authorities have sometimes appeared to take a back seat to sector regulators when it came to enforcement in the financial sector, given the relatively low number of competition cases before the Libor scandal. Perhaps reflecting a need for more information on how competition works in financial services, the FCA has not used its competition powers to investigate suspected cartels and abuses of dominance from day one.
Rather, it has launched a series of market studies, a power it can use to establish whether competition is working well in a particular market. If it is not, remedies can be ordered or extracted through voluntary undertakings to rectify the situation (albeit after extensive consultation). This power can be controversial, as behavioural and divestment orders can be extracted in situations where addressees are not breaking any competition laws per se.
For example, the forced divestment of Stansted and Gatwick Airports by BAA in the early 2010s was ordered following a market investigation reference to the former Competition Commission. BAA's ownership of Heathrow, Gatwick and Stansted, and the resulting high market share it enjoyed in the South East, had not broken any laws, nor had it been obtained through bypassing merger control rules. Nevertheless, the airports had to be sold.
BAA fought the divestment order vigorously, and would have taken the case all the way to the UK Supreme Court had it been given permission to appeal it that far. Given their draconian nature (and the resulting resistance put up by those on the receiving end, not least because of the destruction of shareholder value), divestment orders are seen as a last resort, and the FCA may instead choose to agree behavioural undertakings by consensus where it can, even though such undertakings can accumulate and become unwieldy.
More than a pretty face?
Concurrent regulators can behave as two-headed monsters, and the additional competition "head" can sit awkwardly alongside the regulatory, not doing very much. Used effectively, however, competition powers can provide a regulator with the ability to extend considerably their supervision over a sector. The FCA's competition powers, and the resources it has gathered to enforce them, suggest that it intends to buck the trend set by the UK's other concurrent regulators and use its competition head as something other than a pretty face.
This article was originally published by Compliance Complete.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
