On 21 February 2019, the FCA decided that 3 asset management firms, Hargreave Hale Ltd, Newton Investment Management Limited and River and Mercantile Asset Management LLP (RAMAM), breached competition law. They shared strategic information during a placing and an initial public offering in 2015. We fined Hargreave Hale £306,300 and RAMAM £108,600. We gave Newton immunity under the competition leniency programme and did not fine it.
This case study is aimed at firms and relevant employees. It sets out the key findings from our decision.
A company can raise money in several ways. One is to allow a broad population of investors to buy its shares and to allow those shares to be traded on a stock market. When a company does this for the first time, this is known as an initial public offering or IPO. If a company’s shares are already traded, it can issue more shares to raise further money. This is known as a secondary issue. Where a company offers shares to only a small number of selected investors, this is known as a placing.
One of the processes of an IPO or placing is book-building, a process where the company, through an intermediary, invites bids for the new shares from investors. The book-building process aims to work out the level of demand for shares at different price points. This enables the company’s owners to see if they can raise the money they want in return for a proportion of the company they are willing to give up.
What happened in this case
The firms’ illegal conduct took place during the book-building process for the Market Tech placing in July 2015 and during the On the Beach IPO in September 2015. In both cases, this conduct took place shortly before the share price was set.
On a bilateral basis (ie one to one), the firms in question disclosed to and/or accepted from each other their otherwise confidential bidding intentions. This consisted of the price they were willing to pay and, in some cases, the volume of shares they wished to acquire.
How this broke the law
In bidding for shares in a book-building process, asset managers compete against each other. If rivals share information about what they intend to do on a market, for example, their prices, this can reduce uncertainty about how they will behave. This means they do not have to compete so hard. Information which reduces this competitive uncertainty is called strategic information.
In this particular case, the detailed and otherwise confidential information the asset managers shared about their bids meant that one firm knew another's plans during the IPO or placing process. This breached competition law. Sharing of otherwise confidential bidding intentions can lead to (among other things):
- Asset managers placing lower bids than they might otherwise have done and so the company achieving a lower price for its shares (and either raising less money, or possibly having to give up more shares).
- A failed book-building process. If investors share information which leads to lower bids and significantly reduces the expected price, the company may decide to significantly reduce the size of the issue or to call it off.
This can make companies’ investments either more expensive (since in effect they have to pay more for their capital) or even impossible. Such anticompetitive conduct can also reduce the attractiveness of coming to market to raise capital, and entrepreneurs' incentives to build companies with a view to listing them.
Some of the same facts led us to take enforcement action under the Financial Services and Markets Act 2000 against a fund manager at Newton.
On 5 February 2019, we published a Final Notice which found that, as an approved person, one individual involved failed to observe proper standards of market conduct. We also found he acted without due skill, care and diligence by failing to give proper consideration to the risks of engaging in these communications. He was fined £32,000.
Sharing information with your competitors may be illegal in certain cases. In this case, the conduct led to competition law fines against the firms, and against an individual under financial services regulation.
Firms must ensure they comply with competition law and the relevant regulatory obligations. This also means they should assure themselves that their relevant employees know about competition law and understand that disclosing information to and/or accepting it from competitors could be illegal. Firms should ensure that they have appropriate training and compliance procedures so that employees can identify strategic information and know how to handle it in line with competition and other legal requirements.
Individuals also need to ensure that they comply with any applicable obligations under FSMA.
What you can do
Learn to recognise the kinds of behaviour that are illegal. For competition law, a good place to start is the CMA’s introductory competition law guides, their video on information you shouldn’t share with other businesses, as well as other short videos on competition law.
Regulated firms should notify us of their own actual and possible contraventions of competition law, which they are obliged to do under Principle 11 of the Principles for Businesses and rules in the FCA’s Supervision manual.
Under competition law, your firm may benefit from lenient treatment by being the first to come forward.