FCA Consultation on Concurrent Competition Powers Response of Norton Rose Fulbright LLP We welcome the opportunity to comment on the FCA Consultation Paper (CP15/1) and the associated guidance, explaining how the FCA will approach matters after it obtains concurrent competition powers on 1 April 2015. We recognise the policy imperative for the FCA to approach potential breaches of competition law in a manner consistent with how it currently handles matters under FSMA. Notwithstanding this, we consider that there are two important limits that the FCA should have regard to when finalising its guidance as a concurrent competition regulator: first, to ensure that in enforcing competition law, the FCA does not apply standards that are more onerous or otherwise go further than when it is applying its powers under FSMA; and second, to recognise that to the extent possible, the FCA should approach the enforcement of competition law in a manner that is consistent with the CMA and other concurrent regulators. We believe that there are three areas where there is a material risk that the FCA's proposed approach will exceed either or both of these limits, which are as follows: 1 the proposed obligation to report all potential competition law infringements as soon as the firm becomes aware that an infringement may have occurred; 2 the proposed obligation to require a firm that intends to settle an investigation to waive its right to appeal any infringement decision; and 3 the ability for the FCA to choose between two market study regimes to take advantage of their different processes. We have limited our response to addressing these three areas, where we set out how the guidance might be changed to achieve a more appropriate balance between the two policy imperatives described above. 1 The proposed obligation to report all potential competition infringements 1.1 This section is responsive to Question 5 in CP15/1, Do you have any comments on the draft legal instrument set out in Appendix 3, including the scope of the disclosure obligation? 1.2 Under Principle 11 it is already the case that a regulated firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator anything relating to the firm of which that regulator would reasonably expect notice. This Principle applies to competition law infringements as well as other issues. 1.3 The proposed amendment to SUP 15 sets out reporting rules expressly for competition law infringements, but in a way that in our view imposes a more onerous burden on firms than is currently the case under FSMA, as well as giving rise to material concerns stemming from the disparity between the FCA s approach and the approach of the CMA, other concurrent regulators and the European Commission. We address these dual concerns below. The proposals exceed the current approach under FSMA 1.4 Notwithstanding the view at paragraphs 4.6-4.10 of CP15/1 that the obligation at 15.3.32 is not new, and is simply a reflection of the existing disclosure obligations under Principle 11, we consider that the proposed approach goes further than the existing regime in the following ways. 1
A significance threshold 1.5 The current proposals suggest a firm is under an obligation to report immediately when it becomes aware of any competition law breach which has occurred, may have occurred or may occur in the foreseeable future. 1 It is unclear how this threshold should be applied in the context of competition law infringements, which are often uncertain until an infringement decision has been reached (and subsequent appeals resolved). 1.6 In particular, it is unclear why competition law breaches should be treated more strictly than requirements under, for example, the FCA rules or the Consumer Credit Act (CCA). We consider that a materiality threshold should be introduced in respect of all competition law breaches in order to align with existing FCA reporting requirements in a number of other areas including: (a) (b) (c) 15.3.1R (2): matters which could have a significant adverse impact on the firm s reputation; 15.3.8G (2): a significant failure in the firm s systems or controls; and 15.3.11R (1): significant breaches of rules (a) and significant breaches of the CCA (aa). 1.7 We would suggest that significant competition law breaches could be identified based on potential harm to customers or a significant detrimental effect to the operation of relevant markets. 1.8 In this context, we note that in the recent consultation on how the reporting requirement would apply to the CCA, the FCA noted that: [A respondent] questioned the proposed requirement in SUP 15.3 to notify a breach of any CCA requirement. In particular, it was pointed out that firms only have to notify a significant breach of FCA rules. We have amended the SUP 15 requirement accordingly. 2 1.9 In addition, unlike certain other compliance issues, it may not be a straightforward matter for a firm to determine whether or not it may have infringed competition law. While cartel and other hard core conduct is clearly anti-competitive - and would fall to be reported under the current regime - in many cases a full competition law assessment is required to reach a view. Indeed, a detailed review of the effects of the arrangement in the context of the relevant market conditions, potentially with the assistance of expert economists, might be required to selfassess whether or not arrangements breach competition law. We would suggest that the FCA at least gives guidance that it is acceptable to carry out an initial assessment before reaching a decision on whether a particular matter should be reported. 1.10 However, even once the assessment has been completed, the view may be on balance or nuanced. Examples of situations that might require this type of detailed assessment could include vertical arrangements (such as distribution or reseller arrangements) which are outside the scope of the Vertical Agreements Block Exemption, horizontal co-operation agreements such as syndication or information sharing, and activities undertaken by a potentially dominant company which might involve, for example, exclusivity obligations. 1.11 In any of these cases, it is possible that the outcome of the assessment will be that the better view is that the arrangement is not anti-competitive. However, arguably such an assessment does not rule out the possibility that an arrangement may be anti-competitive or have anticompetitive aspects and so may require notification under the new SUP 15. This approach could lead to a burden on business and the FCA from a large volume of notifications of 1 2 SUP 15.3.11 R(1) Paragraph 13.4 of PS14/3, Detailed rules for the FCA regime for consumer credit, February 2014, http://www.fca.org.uk/static/documents/policy-statements/ps14-03.pdf. 2
potentially minor or technical competition law issues. There is therefore a strong argument that a materiality threshold is required to make clear that such reporting is not required. Treatment of criminal conduct 1.12 A further issue to consider is the quasi-criminal nature of certain serious infringements of competition law. In these cases, there is a strong case for the reporting obligation to only apply when an infringement case is issued by the regulator against the firm or a criminal charge brought against an individual. This approach would be consistent with the way other breaches of the criminal law are treated under the FCA s reporting regime. 1.13 For example, pursuant to 15.3.11R1(c), read with (aa) and (b), it is apparent that criminal breaches of the Consumer Credit Act (CCA) or of FSMA are to be notified to the FCA when the bringing of a prosecution or a conviction either has occurred, may have occurred or may occur in the foreseeable future. 1.14 The European Courts recognition that competition law penalties are quasi-criminal in nature means they benefit from enhanced protection under the European Convention on Human Rights. 3 Further, certain breaches of competition law can lead to prosecutions for cartel offenders under the Enterprise Act. As such, there is a case for treating all serious competition law breaches in the same manner that other criminal offences are dealt with under the current reporting regime. No scope limitation 1.15 To the extent that the proposed reporting regime applies to all potential competition infringements, whether or not within the scope of the regulated activities of the business, this could lead to the reporting of potential competition law infringements in unrelated sectors and other jurisdictions. Given that we understand that the purpose of the reporting obligation is to monitor the fitness of firms to carry on regulated activities and for consistency with the FCA s approach to self-reporting in FSMA matters we suggest that the guidance should make clear that such issues should only be reported where they could have a material effect on the UK financial services business of the company. 1.16 When combined with the absence of any materiality threshold, coverage of non-regulated business and a global reach, we consider that 15.3.32R goes beyond a proportional approach. 1.17 Our view is that these requirements as drafted appear to be more onerous than the way they have been addressed by firms to date. The proposals appear to be an extension, not a reflection, of the existing obligation, and as such the FCA should carry out a full cost benefit analysis before implementing any changes. The proposed reporting regime departs from the approach of the CMA (and other concurrent regulators) and the European Commission 1.18 In requiring firms to report any potential breach of competition law as soon as possible, the FCA's approach risks undermining the leniency regime that is applied by the CMA, other concurrent regulators and the European Commission. It also undermines the recognised privilege against self-incrimination and creates a disclosure risk in respect of damages claims which have been mitigated in the context of leniency applications. We address these three concerns below. 3 Namely, the additional rights articulated in Article 6(2) and (3) of the European Convention on Human Rights and those elucidated in the ECHR s Guide on Article 6: Right to a fair trial (criminal limb). For application in the European Court of First Instance, see for example JFE v Commission (Case T-67/00) [2004] ECR 11-2501, in which the Court of First Instance stated that given the nature of the infringements in question and thenature and degree of severity of the ensuing penalties, the principle of the presumption of innocence applies in particular to the procedures relating to infringements of the competition rules applicable to undertakings that may result in the imposition of fines or periodic penalty payments (paragraph 178). This demonstrates the Court s awareness of the nature of competition proceedings falling within the concept of a criminal charge explained in the ECHR guidance mentioned above. 3
Leniency 1.19 The leniency regime is a cornerstone of the ability of the competition authorities to detect and investigate cartels, by creating an incentive for companies to report infringing behaviour in exchange for reduced exposure or immunity from penalties. In practice, the process of approaching a competition authority to seek leniency is complex. The CMA has published detailed guidance on this process, including on issues such as how to conduct an internal investigation so as to obtain evidence required for the application without risking compromising the confidentiality of the leniency application. 4 The leniency applicant may also have to consider approaching other national competition authorities or the European Commission in order to ensure they are protected in all jurisdictions potentially affected by infringing conduct and in that context, comply with the required procedures of those authorities. 1.20 Any additional disclosure obligation (i.e. to the FCA) at this particularly sensitive stage adds complexity to an already difficult process. There is an inherent contradiction in a firm being required to report conduct which may have or may in the foreseeable future lead to competition law breaches, when a successful leniency application requires an admission of liability in relation to conduct which at that point in time has not been disclosed to any other party the fact of a prior report to the FCA of possible infringement would appear to compromise firms ability to apply for leniency from a competition authority. These issues are particularly acute in cases where there may be an element of criminal liability and so the CMA will need to ensure that evidence gathering and investigatory processes meet the higher criminal threshold from the beginning of the case. 1.21 An example of this issue arises from 15.3.32R(4)(c), which requires the party to give information on steps it has taken or will take to remedy the infringement. In certain cases, the CMA s guidance on leniency suggests that a party could be asked to continue with an infringement in order to assist with gathering evidence a potentially inconsistent obligation. 5 1.22 Recognising that should a firm uncover hardcore anti-competitive conduct it would be required to report that conduct to the FCA under the current regime, to avoid the problems outlined above, we would suggest that the guidance makes clear that the FCA should be notified immediately after the firm has made a leniency application for example, when a marker has been awarded. 1.23 At the very least, we recommend that the FCA liaise closely with the CMA regarding the approach to this issue. Recognising the privilege against self-incrimination 1.24 During an investigation, the FCA (as with the CMA) cannot require a firm to provide answers that would require an admission that it has infringed the law (CP15/1 Appendix 1, 4.9). This sits neatly with the leniency and settlement regimes, where admissions made can result in immunity or reduced fines. This procedural protection would be undermined by an absolute requirement that firms must make notifications as soon as they become aware of possible infringements. If a firm sought to exercise the procedural protection against self-incrimination, they would still be caught by the obligations at 15.3.32R, and so need to report whatever infringement the procedural protection covered. Risk of disclosure in subsequent litigation 1.25 We are concerned that written notification or preparatory documents relating to notifications (particularly where a notification is made orally) made under Principle 11 or 15.3.32R would be disclosable in civil litigation. In the context of private enforcement of competition law, and the growing levels of follow on claims for damages, it is now clear that leniency material should not 4 5 See 3.8, Conducting internal investigations in Applications for leniency and no-action in cartel cases (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284417/oft1495.pdf) See 4.44 Directions to continue cartel activity in Applications for leniency and no-action in cartel cases. 4
be disclosed to claimants. It would be necessary to ensure the same status was awarded to any report to the FCA. We would suggest that the FCA should have regard to this concern when considering guidance on the scope and form of the reporting requirement. Method of notification 1.26 Finally, there is no requirement in the equivalent disclosure rules (e.g. 15.3.11R) to make notifications in writing. The guidance at 15.3.10G allows for oral notifications, with the caveat that the FCA may ask for written confirmation of a matter, and guidance that complex issues may merit written notifications. We consider that there is no reason to apply a different and more onerous requirement in respect of competition law breaches, as suggested by the draft obligation at 15.3.32.R (3) a, which requires a written notification other than where an application for leniency has been or will be made. 2 The proposed obligation to require a settling firm to waive its right to appeal any infringement decision 2.1 The comments in this section are responsive to Question 2 of CP15/1, Do you have any comments on the scope or content of the draft guidance provided in Appendix 1? They apply equally to the same question in the PSR CP15/1 (also Question 2). 2.2 Although the guidance concerning settlement largely mirrors the CMA s guidance, 6 the FCA guidance states: The settling party may be required to confirm that they will not appeal a subsequent infringement decision to the Competition Appeal Tribunal at paragraph 6.9 of the draft guidance in Annex 1 and omits the following sentence unless the settling party itself successfully appeals the infringement decision" in the third bullet of paragraph 14.8 of the CMA s guidance but is omitted from the third bullet of paragraph 6.8 of the proposed FCA guidance. 7 2.3 In our view, it is not appropriate for the FCA to adopt a different approach to settlement than both the CMA and the European Commission, which permit a settling party to appeal an infringement decision for the following reasons: (a) (b) (c) As mentioned above, competition law penalties are quasi-criminal in nature and therefore benefit from enhanced protection under the European Convention on Human Rights. The mischief that the ability of a settling party to appeal an infringement decision is designed to remedy is that the (later) infringement decision may not properly reflect the basis on which the (earlier) settlement was made. Our view is that removing a right to appeal a settlement decision would be inconsistent with this approach to competition law infringements. This is not merely a technical point: the FCA will be aware that there has been at least one case where a settling party subsequently successfully appealed an infringement decision. 8 Such cases are likely to be rare, but the possibility should exist, particularly because otherwise a settling party is committing to accept a decision it has not yet seen, and which may not reflect the evidence presented at the point of settlement (where the party may have taken a decision based on a risk assessment of the information available at the time). Further, if the draft guidance was adopted, regulated firms could suffer from a real choice of regulator bias in a CA98 investigation. On the same facts, following the same process, a settling party may be required to waive its right to appeal by one regulator; a process not contemplated, or hitherto used, by the other. 6 7 8 CMA 8 - Competition Act 1998: Guidance on the CMA's investigation procedures in Competition Act 1998 cases. We note that the draft guidance seems to leave open the question of when or how often the FCA will require firms to forego their right of appeal. We are concerned that it would become the norm for the FCA to require firms to waive their right of appeal, but in any event, the comments here apply broadly; there should not be any requirement for any party to waive their appeal rights. See the CAT decision in Tobacco - Imperial Tobacco Group v OFT [2011] CAT 41. 5
2.4 We note that these appeal rights are only likely to be of practical relevance where the infringement decision diverges from the settlement agreement. Appeals can be avoided by maintaining consistency between the basis of the settlement and the basis of the decision. 3 Market Studies 3.1 This section is responsive to Question 4 in CP15/1, Do you have any comments on the scope or content of the draft guidance provided in Appendix 2? They apply equally to the same question in the PSR CP15/1 (also Question 4). 3.2 We consider that the FCA should provide further guidance at paragraphs 2.7-2.10 of Market studies and market investigations references: A guide to the FCA s powers and procedures. In particular, we consider the appropriate considerations in deciding whether to use a FSMA market study or an EA02 market study should be grounded in the purposes of the market study. For example, where a market study is concerned with consumer protection matters or the integrity of the financial system, a FSMA study should be used. In our view, the FCA should not choose a tool because it has beneficial time limits or information gathering powers, as indicated at paragraph 2.10. 3.3 We also consider that it would be helpful for the FCA to clarify its position on changing track. We would be concerned, for example, if the FCA switched from a FSMA market study to a EA02 market study to take advantage of information gathering powers. Please contact any of those listed below should you wish to discuss any aspect of this response further: Peter Scott Partner, Competition and Antitrust 020 7444 3834 peter.scott@nortonrosefulbright.com Elisabeth Bremner Partner, Regulatory Investigations 020 7444 2540 elisabeth.bremner@nortonrosefulbright.com Caroline Thomas Senior Associate, Competition and Antitrust 020 7444 5112 caroline.thomas@nortonrosefulbright.com Ian Giles Partner, Competition and Antitrust 020 7444 3930 ian.giles@nortonrosefulbright.com Katie Stephen Consultant, Regulatory Investigations 020 7444 2431 katie.stephen@nortonrosefulbright.com Jamie Cooke Associate, Competition and Antitrust 020 7444 5749 jamie.cooke@nortonrosefulbright.com 6