The FCA’s new competition powers: what do they mean for the financial services industry?

Speech by Deb Jones, director of competition at the FCA, at a Scottish Financial Enterprise lunch, hosted by Maclay Murray & Spens LLP, Edinburgh. This is the text of the speech as drafted, which may differ from the delivered version.

The changes will put us on the best possible footing to promote effective competition in financial services markets, with the ultimate winners being consumers.

Introduction

I want to thank Scottish Financial Enterprise for inviting me here to speak today and Maclay and Murray & Spens for their hospitality. I’m here as Director of Competition at the Financial Conduct Authority. Although I’m based down in London in the Competition Department, I work just as closely with colleagues in Edinburgh as those in Canary Wharf.

My focus today is to give you an insight into the new competition functions the FCA will have from April 2015. These new powers will give us the ability to enforce against breaches of the Competition Act and to refer markets to the Competition and Markets Authority for in-depth investigation, and I’ll go into some detail about what that means for us and for the firms we regulate shortly.

However, I wanted to start with a little bit of background about competition at the FCA, to set the context. You are all familiar with the role of the FCA as the conduct regulator of financial services firms in the UK, and prudential regulator too, for those firms not regulated by the Prudential Regulatory Authority. Some of you may be less familiar with our competition objective, which our predecessor, the FSA, did not have. This objective is about promoting effective competition in the interests of consumers.

Starting almost from scratch last summer, we have built a new Competition Department, and, as our Chief Executive Martin Wheatley said just a few weeks ago, ‘we haven’t simply tinkered around the edges.’ So far this year, we have made significant progress in a number of areas, including:

  • completing a market study into general insurance add-on products
  • issuing an interim report in our cash savings market study
  • launching studies into retirement income and credit cards
  • publishing a call for inputs on the wholesale sector

This programme of work has been going on alongside work to offer competition advice on new and existing regulatory policies, and more generally to embed competition in all divisions across the FCA. Competition does not sit as a discrete function within the FCA. Instead we have to bring competition thinking, as it relates to our objectives and remit, into every decision, rule, and action we take. To do that successfully, we need to adopt a new approach.

One example of that change is our commitment to support innovation and a few weeks ago, as part of Project Innovate, the FCA opened a new Innovation Hub which allowed us to open our doors to firms, regulated or not, who will bring new innovative ideas about how to deliver financial services. Our Innovation Hub will help to level the playing field by giving all firms who are eager to innovate access to us so that the process of joining the financial markets or introducing new products does not seem so daunting.

New competition law powers

Alongside our programme of market studies, one of the things that has been keeping the Competition Department busy in recent months is our preparations for our new competition powers. We will get these powers on 1 April next year.

We have been given these powers to bring us into line with other sector regulators, and strengthen our ability to ensure competitive markets for financial services that deliver good consumer outcomes. For a while, we’ve been out of line with other sector regulators, who not only have objectives to promote competition but also have the specific enforcement tools to tackle those competition failures brought about by firms’ behaviour. It was an anomaly. The FCA actively sought these powers last summer and Government agreed that equipping us with a greater range of powers enhances our credibility when engaging with firms.

These powers also put us in a better position to engage at a European level to address cross-border competition issues effectively, and here in the UK, allow us to become a full member of the UK Competition Network (but more of that later). As you’ve heard, we’ve been able to do a lot already with our existing powers, but the changes will put us on the best possible footing to promote effective competition in financial services markets, with the ultimate winners being consumers.

So, what are these new powers? We are getting functions under two different sets of legislation:

  • we will be able to conduct market studies and make market investigation references under the Enterprise Act 2002
  • we will be able to enforce against breaches of the prohibitions on anti-competitive behaviour set out in the Competition Act 1998 and Treaty on the Functioning of the European Union.

It’s worth noting that we will be able to exercise these functions in relation to the provision of financial services; that is, they are not defined by reference to the activities that we regulate, or firms we authorise.

The substance of competition law is worthy of a lunchtime seminar in itself, so I won’t try to do more than give a very brief overview of what it relates to. In broad terms, the prohibitions relate to anti-competitive agreements between businesses, and to abusive conduct by firms which have a dominant position on the market. Anti-competitive agreements could include, in the most flagrant form, agreements between competitors to fix prices, rig bids, or share markets.

Before joining the FCA, I spent nearly ten years at the Office of Fair Trading, which was the central competition authority in the UK before the Competition and Markets Authority took over its functions. A very large part of that was working Competition Act cases, including cartels. Some that hit the headlines involved collusion on fuel surcharges between British Airways and Virgin, and tackling widespread bid-rigging practices in the construction sector, culminating in fining over 100 companies.

But prohibited anti-competitive practices span more broadly than classic cartel behaviour: they also include any other arrangements where the object or effect is to restrict competition. While it’s possible for an agreement to be exempted from the prohibition, there are strict conditions that must be met to demonstrate that any restriction of competition is justified. Recent high-profile cases include the European Commission’s fines imposed on a number of banks for cartels in various interest rate derivatives industries.

Abuse of a dominant position, on the other hand, relates to conduct by a firm which has substantial market power. It is not the holding of a dominant position that is prohibited, but rather an abuse of that privileged position in the market, whether exploitative or exclusionary. Typically, competition authorities will intervene if a dominant firm is making entry or expansion by competitors difficult.

In some of these cases, such as price-fixing, the harm to customers is so obvious that the behaviour is outlawed outright. In other cases, authorities need to use detailed economic analysis to assess market power or the impact of the conduct.

‘Concurrency’

Of course, competition law already applies to all businesses in the UK, including financial services firms, so the main changes in April are institutional. The FCA will be able to exercise its functions ‘concurrently’ with the Competition and Markets Authority (CMA). There is also relevant European law and so for cases with a cross-border dimension, our new powers will also overlap with the antitrust remit of the European Commission.

When we get our concurrent competition functions, we will be joining a growing list of regulators who have such powers. Some, such as Ofcom and Ofgem, have had these powers for well over a decade. Others are newer, like Monitor. And the Payment Systems Regulator, which was set up as an autonomous subsidiary of the FCA and becomes fully operational in April next year, already has market investigation reference powers and will obtain competition enforcement powers from April, like the FCA.  

Concurrency – that is, two or more authorities having the power to exercise certain functions – has been a feature of the competition landscape in the UK for a long time, but the number of Competition Act decisions issued by concurrent regulators has been limited, and some concurrent regulators have been more active than others.

However, there has been renewed focus on the regime, with changes that came into effect earlier this year. The intention is to enhance competition and make markets work more effectively, in the interests of consumers. Alongside changes in the law, a UK Competition Network (UKCN) has been set up, with regular meetings to encourage discussions between the concurrent regulators. The UKCN’s mission is to promote competition for consumers’ benefit and prevent anti-competitive behaviour. The aim is that we can work together to ensure consistent and effective use of competition powers across regulated sectors.

There are also so-called ‘primacy’ obligations, meaning that concurrent regulators have a duty to consider whether it would be more appropriate to use their Competition Act powers rather than their regulatory powers. If so, they must not exercise those regulatory powers. Our primacy obligations apply to some of our regulatory functions, including our powers to vary or cancel firms’ permissions, and to impose or vary requirements on firms. By way of example, if we thought a firm was engaging in anti-competitive information exchange, we would consider first, before using our regulatory powers to require that firm to stop, whether it would be more appropriate to investigate under the Competition Act, in which case we could issue interim and final directions ordering the behaviour to cease.

Using our new Competition Act powers

Looking ahead to the advent of our new powers, these are exciting times for the FCA.

As a result of our broader regulatory functions, we will be in an excellent position to detect competition law breaches where they arise, and be able to step in quickly to take action. Not only do we supervise many tens of thousands of firms, but we conduct thematic reviews and market studies into various sectors to get an in-depth understanding of markets. We have a Markets division that monitors activities in the financial markets. We expect that the existing framework for firms to report relevant matters to their FCA supervisors will also assist early detection of potential infringements. As an aside, it might be worth reminding you that any regulated firm is obliged to tell us if it has infringed any applicable laws under Principle 11 – and those include the prohibitions contained in the Competition Act!

All in all, then, we think we are in a really good place to be able to identify potentially anti-competitive features of markets or behaviour by firms. We will have a full suite of tools to be able to tackle issues, given that we can use all of our FSMA tools to pursue our competition objective as well as having our new concurrent competition law functions.

In order to capitalise on this, we are doing a lot of work to embed competition across our organisation. This will help colleagues spot potential issues and then work together with the competition specialists to assess the most appropriate way of taking them forward. We are also gearing up to be able to be in the best position possible to use our new powers when the need arises, by developing the procedures we’ll follow, and we’ll be consulting on our draft guidance in due course.

Market studies and market investigation references

Moving on to look at the other set of powers we’ll be getting on 1 April, we will have additional tools to look at markets. As I said earlier, we are already conducting market studies. We won’t lose our FSMA powers that we are already using, but the Enterprise Act gives us some additional options. In particular, we’ll be able to refer markets to the Competition and Markets Authority (CMA) for in-depth investigation if we have reasonable grounds for suspecting that any feature, or combination of features, of a market is adversely affecting competition. The CMA has extensive powers to investigate and to impose remedies.

We do have our own remedial powers which we can use to promote effective competition, but they extend to regulated firms only and the CMA has more experience in certain types of remedies. Any such referral to the CMA would only be made after consultation, of course

Working with the CMA

I wanted to move on to discuss our cooperation with the CMA, which is the lead competition authority in the UK, having jurisdiction in all sectors of the economy. We are already working closely with the CMA and we entered into a memorandum of understanding with the CMA after it was created (to replace our MOU with the OFT, which previously had some of the competition law functions now exercised by the CMA). This will be updated to reflect our new powers and the even closer cooperation that the concurrency regime involves.

We liaise regularly with the CMA on a number of issues - most importantly in the context of my speech today, in relation to our concurrent competition powers and the procedures we’re developing to investigate against potential breaches of the competition rules. The CMA has the ultimate say in who takes forward a particular Competition Act case. This will however be a collaborative decision, based on who is best placed to be responsible for a case. Relevant factors in making this assessment will include, for example, the sectoral knowledge of the regulator, whether the issue affects more than one sector, and experience in dealing with any of the parties or issues.  It’s too soon to say how it will work in practice, as we don’t yet have the Competition Act powers, but we all have an interest in collaborative working, and having worked at the OFT myself previously, it’s supported by our existing good relationships.  

Earlier this month, the CMA decided to open an in-depth investigation into the supply of retail banking services to personal current account customers and to small and medium-sized enterprises, having consulted on its provisional decision to do so this summer. We undertook a joint market study on banking services for small and medium-sized businesses with the CMA, which was a forerunner to the CMA’s investigation. The investigation will take 18 months and could potentially result in significant measures being taken. However, in the meantime we will continue to cooperate and coordinate with the CMA to make these markets work well for consumers.

Conclusion

So, looking ahead again to the advent of our new powers, these are exciting times for the FCA. There is, we know, significant interest among other regulators in our competition work not just here in the UK, but around the world.

I also know from personal experience that there are many challenges to successfully enforcing competition law. The challenges will vary from case to case, but at a minimum we will need to be smart at spotting competition issues in amongst all the other issues that come to the FCA. We will need to combine legal, economic and investigatory skills with our financial services knowledge. And we will need to maintain our strong working relationship with the CMA to ensure efficient case allocation and learning from each other on case work.

How successful a role model we become to those regulators depends on all those things. Get it right, and the benefits that flow through to consumers and firms (new entrants as well as incumbents) are potentially enormous.