UK: Competition Law Developments In The Financial Sector

Summary and implications

The financial sector has long been a focal point for UK competition law enforcement. The last year has seen a strengthening of this trend. In this article we explore the major recent and ongoing developments, namely the following:

1. Institutional developments – not only is the Financial Conduct Authority (FCA) set to gain "concurrent" competition law enforcement powers (meaning it will have the power to enforce competition law in the financial sector), but the new payments regulator will have these too.

2. Ongoing market investigations – three out of five ongoing UK market investigations are in the financial sector.

3. Recent and ongoing FCA and Office of Fair Trading (OFT) work, and how the FCA will work with the new UK Competition and Markets Authority.

4. Political developments.

5. Awaiting the European interchange fees judgment in Mastercard.

1. Institutional developments

In December 2013 the Financial Services (Banking Reform) Act 2013 received Royal Assent. This Act gives the FCA concurrent competition powers within the financial sector. This means the FCA can enforce competition law in the financial sector in the same way, and with the same sanctions and decision-making powers, as the OFT can today. In fact there is an in-built preference for using the competition powers, with a requirement on the regulator to consider whether these are more appropriate before exercising its regulatory powers.

As well as enforcing competition law in individual cases the FCA will be obliged to keep financial markets under review to ensure that competition is functioning effectively.

The Act also provides for the new payment systems regulator, to be set up under the FCA – and for this new regulator likewise to have concurrent competition powers. Both regulators will gain these powers from 2015.

Bearing in mind that there are only six regulators currently with concurrent powers (all in the utility and TMT sectors), the singling out of the financial sector in this way demonstrates both the importance the Government attaches to competition in this sector and the industry-specific nature of the issues arising.

2. Ongoing market investigations

On 1 April of this year the OFT and the Competition Commission (CC) will merge to form a new single UK competition regulator, the Competition and Markets Authority (CMA). In the meantime the CC remains responsible for market inquiries. These are inquiries into the way competition is working across a sector. They are wide ranging and last up to two years, and can lead to wide-ranging regulatory or structural reforms where competition is found not to be working properly.

Given how far-reaching they are, there are never very many market inquiries going on at any one time. Currently there are five. What is striking is that three of those five are in the financial sector:

• In Statutory audit services the CC found there were barriers to switching auditor and barriers to entry of new auditing firms in the FTSE 350 auditing market. The CC ordered, among other things, tendering at least every 10 years. This remedy now appears set to be overtaken by EU legislation on the same topic.
• In Payday lending, the CC is investigating potential concerns about concentration in the payday lending market combined with barriers to entry, as well as barriers to switching and difficulties of accessing information about best offers. This inquiry has some way to run and will transfer to the CMA – although recent political developments somewhat undermine the basis of the investigation (see below).
• In December 2013 the CC reached its provisional findings in the Private motor insurance investigation. The CC has identified a number of problems including that the separation of control of replacement and repair from liability for those things results in higher cost and reduced quality; limited consumer information about "add-on" insurance products; and concerns about most favoured nation clauses in insurers' contracts with price comparison websites.

3. Recent/ongoing FCA/OFT work

The OFT continues to carry out a very substantial programme of work in the banking sector. In particular it has been working closely with the FCA on SME banking. Meanwhile the FCA is conducting market studies into general insurance add-on products, cash savings and a payday loan cap (see below). As the OFT merges into the new CMA the FCA will continue to work closely with the main competition authority, working out which authority is best placed to take any individual case. The FCA will not be gaining powers under the criminal provisions of the Enterprise Act so it is likely that the CMA will remain involved in cartel work at least.

The main tool the FCA seems likely to use is set to remain market studies, and the CMA will have an important role as the second phase authority where markets require detailed investigation.

4. Political developments

Overlaid onto this programme of technical work there is a political dimension. In November 2013, in response to political pressure, the Government announced that it was going to legislate to cap payday loans and has asked the FCA to report on how best to design this. The Government's intervention somewhat pulls the rug from underneath the CC's feet. Nonetheless it is clear from the CC's revised issues statement of 31 January 2014 that the CC is pressing on with its work, considering that its analysis may inform the FCA's cap design work and by the same token that the CC will need, in analysing the market, to take into account that legislation now requires it to be price regulated from January 2015.

Ed Miliband's announcement on 17 January 2014 that if Labour win the next General Election he will instruct the CMA to report on a limit on banks' market share of personal current accounts and small business lending raises the possibility of further political intervention. And it should not be forgotten that it was political intervention which actually helped Lloyds grow its market share through the HBOS merger, when a new public interest financial stability justification was introduced by the Secretary of State. (What goes around comes around....)

These developments are a reminder that this is a sector that attracts intense public scrutiny, and where political risk needs to be considered alongside competition risk.

5. Credit card interchange fees

Finally, lest we forget, domestic regulators are not the only forum in which competition law battles are fought. There is a long saga, stretching back more than 10 years, of regulatory objections to the level of interchange fees charged between banks in four-party credit card systems. The OFT has cases pending which are stayed pending a judgment of the European Court in Mastercard. Meanwhile the European Commission is pursuing a separate case against Visa and published last year a legislative proposal to cap cross-border interchange fees and domestic fees after a two-year delay. The proposal would also provide retailers with more flexibility by removing, for example, the "honour all cards" obligation. Clearly a case of "watch this space...".

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