Future of money: scrutiny of competition in banking to continue

Out-Law Analysis | 18 May 2018 | 9:52 am | 6 min. read

ANALYSIS: Banks can expect continued scrutiny of competition on top of recent reforms designed to improve customer choice and outcomes.

The prospect of competition law-driven change was a central topic of discussion at the recent Future of Money conference hosted by Pinsent Masons, the law firm behind Out-Law.com.

Change is likely to be shaped by a range of factors, including the central role of competition in how the UK's financial services authorities regulate, the nature of the case work those regulators have recently initiated, and the appointment of a dynamic and vocal new chair of the Competition and Markets Authority (CMA).

The tension between two sets of rules affecting financial services firms relating to the disclosure of competition law breaches by financial services firms was also debated at the workshop.

The role of competition in UK financial services regulation

The way that competition in financial regulation has evolved since the financial crisis 10 years ago leads us to expect competition law and regulatory powers to play a central role in shaping financial services markets in the future.

Although the importance of competition in financial services was identified in a 2000 report on competition in the UK banking industry by businessman Sir Donald Cruickshank, it took a number of post-crisis reviews and recommendations to spur reforms to place competition at the heart of financial regulation.

In 2011, the government-commissioned Independent Commission on Banking said that "one of the reasons for long-standing problems of competition and consumer choice in banking and financial services more generally has been that competition has not been central to financial regulation".

It specifically recommended, among other things, that the Financial Conduct Authority (FCA), which at the time was earmarked to replace the now defunct Financial Services Authority, "should have a clear primary duty to promote effective competition".

In 2013, the Parliamentary Commission on Banking Standards followed up with a report of its own and stressed its view that competition has a role to play in bringing about "higher standards in the banking sector" and recommended that the CMA undertake a market study of the retail and SME banking sector – a study the CMA subsequently undertook.

In 2013, the FCA was formally created with an explicit mandate to promote effective competition in the interests of consumers, protect consumers and enhance market integrity, and in 2015 it acquired concurrent competition powers to enforce the Competition Act and use powers under the Enterprise Act to undertake market studies and refer markets for detailed investigation by the CMA. A competition division was then established within the FCA in 2016, helping to embed competition throughout the range of the FCA's regulatory activities.

In addition, a new Payment Systems Regulator (PSR) – first recommended in the Cruickshank report – has been established with competition powers and has been supervising the way the UK's main payment systems have been operating since 2015.

The competition objectives and powers of the FCA and PSR complement the regulatory powers the FCA has under the Financial Services and Markets Act (FSMA). Allied to the powers of the CMA, the authorities together have a broad toolkit at their disposal to scrutinise or intervene in markets.

The regulators' use of competition powers is constantly evolving too, as exampled by the FCA's recent consultation on its approach to competition. It has said that it is currently analysing the responses it received and intends to publish its findings later this year.

Recent case work

Some of the recent regulatory action taken by the CMA, FCA and PSR has the potential to shape future market reform.

For example, current antitrust investigations in the sector include the CMA's investigation into the use of 'most favoured nation' clauses by price comparison website comparethemarket.com, while the FCA has been looking into alleged collusion by firms in the asset management sector over the price paid for shares being made available for purchase through 'initial public offerings'.

The alleged sharing of commercially sensitive data between businesses in the aviation reinsurance market was also subject to scrutiny from the FCA before the case was taken on by the European Commission, the EU's overarching competition authority.

Earlier this year, the PSR confirmed that it had carried out dawn raids at a number of sites in the UK, although further detail of what prompted the action has yet to be made public.

The regulators have also utilised 'softer' tools at their disposal. For example, the FCA issued private 'on notice' letters to some companies during its part of its retirement income market study to put the companies on notice of potential infringement, and further 'advisory' letters to others.

The FCA also opened a review last year into the business models in the UK's retail banking market to assess the impact those models are having on competition and conduct of market participants.

We can also expect continued scrutiny of the effectiveness of the open banking reforms.

Andrew Tyrie's appointment at the CMA

As the UK's main competition authority across all sectors, the CMA also plays a central role in the regulation of competition in financial services. Its most significant intervention in the market to-date was perhaps its retail banking market investigation, which concluded in 2016 and spurred a raft of reforms, most notably in respect of open banking.

The recent appointment of Andrew Tyrie as the new chair of the CMA is likely to ensure the authority retains a sharp eye on competition in the banking market.

Tyrie is a former MP who chaired the Treasury Select Committee in the UK parliament where he pushed hard for closer scrutiny of banks and regulations in the wake of 2008 financial crisis. Tyrie has previously expressed concern that the several inquiries, investigations and reviews conducted in the banking sector have failed to improve competition and retail services for consumers.

In evidence given at a pre-appointment hearing before a parliamentary committee in April, Tyrie bemoaned the fact that problems identified in the Cruickshank report still "bedevil" the retail banking market today, and admitted he was sceptical whether open banking will do the "heavy lifting" of improving competition and consumer outcomes.

Tyrie backed more "vigorous" action on interest rates and overdrafts, but also, perhaps to the relief of industry, said he is not in favour of "a continuous revolution" and another market investigation in retail banking. He also suggested recent reforms need some time to take effect before an assessment of the need for further change is made.

While Tyrie and the CMA are likely to continue their focus on competition in banking markets, the prospect of broader competition law reforms has also arisen.

Next year, the CMA is due to undertake a statutory review into the effectiveness of the 2014 reforms the Enterprise and Regulatory Reform Act (ERRA) delivered, which included the enhancement of the CMA's powers to scrutinise mergers and investigate markets. Within its review, the CMA has said it will also assess the operation of competition laws provided for in part 1 of the UK's Competition Act.

It is possible that further reforms could be implemented by the government on the basis of the review's findings.

Disclosing infringements and the leniency regime

In an effort to incentivise businesses to 'blow the whistle' on anti-competitive behaviour, the CMA operates a leniency programme that rewards companies that own up to their involvement in cartels and subsequently cooperate with its investigations. There is however no obligation on companies to self-report to the CMA.

The first company to report cartel activity can obtain corporate immunity from financial penalties, blanket immunity from criminal prosecution for current and past employees and officers as well as protection from competition disqualification proceedings . Where an investigation is already live, leniency can still be available, and up to a 50% reduction in financial penalties can be granted.

CMA guidance confirms that businesses across all sectors must notify it of the cartel conduct, and admit liability for the infringement of competition law, in order to secure leniency. This is true even for financial services firms, despite the fact that the FCA has concurrent competition powers;  this is to ensure that the CMA can maintain a "single queue system" for leniency applications.

However, in accordance with principle 11 of the FCA's Handbook, financial services firms are required to "deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice".

In addition, since 1 August 2015, all regulated firms have been obliged to disclose to the FCA "if it has, or may have, committed a significant infringement of any applicable competition law … as soon as it becomes aware, or has information which reasonably suggests, that a significant infringement has, or may have, occurred".

There is therefore a tension between the inherently voluntary nature of the CMA's leniency regime, and the FCA's mandatory disclosure requirements for competition law infringements, which businesses have raised potential concerns about.

The FCA has encouraged firms to make principle 11 disclosures on a 'no-names' basis if the firms have concerns about making a disclosure that may impact on their eligibility for leniency, and the broad wording of 'may have' infringed, contained in the rules, allows firms to avoid admitting liability when making a principle 11 notification.

Alan Davis is an expert in competition law at Pinsent Masons, the law firm behind Out-Law.com.