Since 1 April 2015, the FCA has had the power to enforce against infringements of competition law regarding the provision of financial services. These competition enforcement powers are in addition to the FCA's non-competition enforcement powers, such as the enforcement powers that the FCA has under the Financial Services and Markets Act 2000 ("FSMA") regarding, amongst other things, misconduct and market abuse.
On 21 February 2019, the FCA issued its first formal decision using its competition enforcement powers. The FCA found that three asset management firms (Hargreave Hale Ltd, Newton Investment Management Limited and River and Mercantile Asset Management LLP) breached competition law by sharing strategic information, on a bilateral basis, during one initial public offering ("IPO") and one placing, shortly before prices were set.
A non-confidential version of the decision is yet to be published, although the FCA's press release makes clear that the decision relates to the same facts as its 4 February 2019 decision to take enforcement action against Paul Stephany, a fund manager at Newton, using its FSMA powers.
The two decisions provide important insight into how the FCA will use its competition enforcement powers. The decisions also serve as a warning to those who share information with competitors, whether in relation to a regulated or unregulated market, to make sure that they do so in a manner which is compliant with regulatory requirements and competition law.
The FCA's findings
After conducting an investigation using its FSMA powers, the FCA found that Mr Stephany breached Statement of Principle 3 (the requirement to observe proper standard of market conduct) by attempting to influence fund managers at competitor firms so that they would cap their orders for an allocation of shares at the same price limit as his order, thereby using their collective power to undermine the proper price formation process.
In July 2015, Mr Stephany had telephone conversations with two fund managers at competitor firms regarding a placing. In one of those exchanges he stated: "…I think push them for it to kind of 220 price rather than 230 plus they're talking about…[I] will be submitting a chunky order at the 220 level".
In September 2015 and in relation to an IPO, Mr Stephany contacted fund managers at competitor firms and attempted to influence them so that they would cap their orders at the same price limit as his order. This included sending an email to himself, blind copied to 14 fund managers at 11 competitor firms, stating: "I wanted to urge those considering or in for the [IPO] to think about moving to a 260m pre money valuation limit. I have done that first thing this morning with my 14m order".
The FCA also found that Mr Stephany breached Statement of Principle 2 (the requirement to act with due skill, care and diligence) by failing to give adequate consideration to the risks associated with engaging in such communication with fund managers at competitor firms.
Using its FSMA powers to impose fines for misconduct, the FCA fined Mr Stephany £32,200.
The asset management firms
After conducting an investigation using its powers under the Competition Act 1998 (the "CA"), the FCA found that the firms disclosed and/or accepted otherwise confidential bidding intentions, in the form of the price they were willing to pay and sometimes the volume they wished to acquire. This allowed one firm to know another’s plans during the IPO or placing process when they should have been competing for shares.
Using its CA powers to impose fines for breaches of competition law, the FCA fined Hargreave Hale £306,300 and River and Mercantile Asset Management £108,600. Newton did not receive a fine because it was given immunity under the competition leniency programme.
Information sharing can constitute a failure to observe proper standards of market conduct without also being a breach of competition law or market manipulation
Market participants who share information with competitors, for example as part of the bookbuilding process, should take particular care to make sure that their conduct is that of acceptable information sharing and is not that of seeking to influence others. The FCA considers the latter to be a failure to observe proper standards of market conduct, even if it does not amount to a breach of competition law or market manipulation.
In the Final Notice issued to Mr Stephany the FCA makes clear that it did not consider that it was required to undertake an analysis of competition law when deciding whether Mr Stephany had breached his regulatory obligations. Instead, the FCA relied on its conclusion that market participants know, or ought to know, that one fund manager seeking to persuade other fund managers at competitor firms to bid at the same price, in an attempt to use their collective power to lower prices in a capital raising, is improper.
Further, the FCA made no finding that Mr Stephany breached the Market Abuse Regulation and committed market manipulation by behaving in a way that was likely to give false or misleading signals as to the demand for or price of a financial instrument.
The relevance of the decisions to information sharing in unregulated markets
These decisions concerned information sharing in regulated financial services markets. However, there is no requirement for the financial services market to be regulated in order for enforcement action to be taken in relation to anti-competitive behaviour. Whereas the FCA’s powers to take action under FSMA typically only apply to securities traded on a regulated exchange or trading platform, the competition powers arguably go wider.
When the FCA will use its competition enforcement powers and non-competition enforcement powers concurrently
When the FCA uses its competition enforcement powers this does not prevent it from also using its other enforcement powers. In this case, the FCA could have considered using its non-competition enforcement powers to find that the firms breached Principle 2 (the requirement to conduct business with due skill, care and diligence) and Principle 5 (the requirement to observe proper standards of market conduct). The FCA chose not to.
In its published guidance the FCA makes clear that there may be instances where it takes enforcement action in the same case under its non-competition enforcement powers as well as its competition enforcement powers. In this case, the FCA took the view that the enforcement action taken under its competition enforcement powers was sufficient. There is a strong argument that it would have been inappropriate for the FCA to have taken two separate enforcement actions in relation to the same conduct.
The FCA's decision only to take action under its competition enforcement powers meant that Newton received no fine at all, as it was given immunity under the competition leniency programme. Had the FCA decided: (i) only to take action under its non-competition enforcement powers; or (ii) additionally to take action under its non-competition enforcement powers, then it is unlikely that Newton would have escaped without receiving a fine. As more cases take place, it will be interesting to see in what circumstances the FCA decides to use which enforcement powers and whether that will be influenced by whether a firm has been given immunity under the competition leniency programme.
What the future holds for the FCA's use of its competition enforcement powers
It is dangerous to try and draw too many conclusions from a single case. However, it is clear that the way that market participants share information with competitors is on the FCA's radar. Individuals who share information with competitors need to make sure that they give adequate consideration to the risks associated with doing so and firms need to make sure that they have appropriate policies and procedures and systems and controls in place.
Currently, the FCA cannot use its enforcement powers in cases where the European Commission has chosen to exercise its jurisdiction. This will not be the case after Brexit. There will therefore be increased scope for the FCA to involve itself in competition cases.
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