Fail to prepare…and prepare to face the FCA: Considering the implications of the FCA’s first statement of objections

23 / 04 / 2018

On 10 November 2017, the Financial Conduct Authority (FCA) published a final notice against a fund management company in relation to the collapse of a fund that it had operated.

Three weeks later, the FCA issued a statement of objections against four asset management firms in relation to information sharing arrangements.

While these decisions are close in time, they are miles apart in terms of content and implications. Can you spot the key difference?

The first decision was a final one against a single company, Capita Financial Managers Limited, and came with a hefty fine of £66 million. It was found to have breached Principle 2 of the FCA’s Principles for Businesses by failing to conduct adequate due diligence on a fund, monitor it and rectify inadequate processes.

The second decision was only preliminary with no consequences at that stage, and yet it’s this decision which should be raising eyebrows. The four companies involved – Artemis Investment Management, Hargreave Hale, Newton Investment Management and River & Mercantile Asset Management – are accused of disclosing and/or accepting information about the price that they intended to pay for shares in relation to an Initial Public Offering and a placing, not in breach of financial conduct rules but of competition law. This was a milestone, as it was the first competition law statement of objections that the FCA has ever issued.

What is competition law?

Broadly speaking, the purpose of competition law is to encourage perfect competition in all markets and prohibit businesses from disrupting such competition by unlawful means. It can be infringed in either or both of two ways: by collusive behaviour whose object or effect is appreciably to prevent, restrict or distort competition, or by abuse of a dominant position in the market. The FCA’s decision against Artemis Investment Management et al related to an alleged infringement of the first of these prohibitions, known as the Chapter 1 Prohibition because the relevant legislation is Chapter 1 of the Competition Act 1998.

The intention of Chapter 1 is to prevent businesses from working together to engineer a desired outcome to the detriment of other players and/or consumers in the market. The classic example is a cartel wherein a group of businesses join together to fix prices.

However, an infringement of the Chapter 1 Prohibition can take a number of different forms. A pertinent example is bid rigging which has been the subject of increased scrutiny by the Competitions and Markets Authority (CMA) in recent years. This is where businesses agree in advance of a tender what their bid will be. The traditional scenario is public procurement, but this type of infringement could just as easily take place when bidding for mandates from pension or insurance companies; or where bidding to buy a company in an auction.

In this case, the infringement was collusive behaviour in the form of information sharing prior to an IPO. What is interesting about this infringement is not just how it took place, but also that it is being investigated at all.

The FCA’s competition powers

Having assumed competition enforcement powers as a sectoral regulator in April 2015, this is the first time the FCA has used them. For many in the financial sector this will come as a shock, but there have been a number of warning signs that the FCA might begin taking competition enforcement more seriously.

The mood within competition regulation is one of slimming down and sharpening up. The CMA, generally seen to be leaner and meaner than its predecessor, the OFT, has re-doubled its enforcement efforts in recent years, and this new focus has clearly filtered through to the FCA.

It made its first Market Investigation Reference to the CMA in September 2017 in relation to services for investment consultancy and fiduciary management, after concluding that there was weak price competition in the market. It also conducted a market study into the asset management sector, culminating in a final report published in June 2017 with remedies aimed at improving competition.

These developments suggest that this competition investigation will not be the last. But why should financial businesses care?

Consequences of a final infringement decision

Put simply, a final infringement decision could cost a lot of money. Where such a decision is made, the FCA can impose fines of up to 10% of worldwide turnover, and, moreover, the business in question opens itself up to the risk of a third party claim for damages. Even if a final decision is not made, the business will have to incur the costs of engaging with the investigation process, not to mention the reputational damage.

It is therefore vital for financial companies to protect themselves against such an investigation. In that respect, there are several points to note about the FCA’s decision in November against Artemis Investment Management et al, including:

  1. it was caused by individuals’ behaviour;
  2. the infringing behaviour was constituted by both giving and accepting information; and
  3. the companies may be found to have infringed competition law even if they had no intention of preventing or distorting competition.

As mentioned above, this is not the only way in which competition law can be infringed. In any scenario where a business is in competition with another business(/es) and it shares information, or works together with a competitor, there can be a risk of infringement.

This means that businesses must ensure that individuals involved in high risk transactions such as share sales, auctions, IPOs, or any kind of bidding process understand the law and how they might fall afoul of it. In particular businesses need to impose stringent policies on what information can be shared externally and with whom, and what to do if an employee is approached by an individual from another firm.

Businesses involved in setting up tender or bidding processes, auctions or flotations should ensure that the process is designed to avoid such competition issues and would be wise to seek legal advice on the best way to do this.

It is not yet clear what the outcome of this particular investigation will be, but what does seem clear is the direction of travel at the FCA. It is focusing on infringements of competition law, and financial businesses should be careful to protect themselves against a potential investigation by ensuring that proper procedures and training are in place. As this decision demonstrates, the actions of one individual, however inadvertent, might have disastrous consequences.