UK: Recent UK Competition Law Developments In Financial Services

Originally published on www.complinet.com on June 9th, 2010.

There has been growing concern on the part of competition authorities about the effects of certain practices in the financial services sector on consumers, businesses and markets in the UK. In the current economic climate, financial services companies have become more heavily scrutinised than ever before, making it imperative to ensure full compliance with competition rules. In addition to competition investigations into banking services for SMEs and overdraft charges for consumers, the recent fine imposed on the Royal Bank of Scotland for breaking competition rules and the announcement of several proposed investigations to be undertaken by the Office of Fair Trading in the near future, demonstrate the OFT's determination to tackle issues of concern in the financial services sector.

Powers of the UK competition authorities

The UK competition authorities have extensive powers available to uncover anti-competitive behaviour and agreements as well as a broad range of enforcement sanctions, both civil and criminal. The OFT can conduct dawn raids and send information requests to companies it suspects of breaching competition law. It can conduct market studies and refer whole industries to the Competition Commission for investigation. It can act either on its own initiative, as a result of complaints or leniency applications and in response to super complaints from consumer bodies. The authorities have a wide range of remedies at their disposal to enforce the rules including fines, directors' disqualification (a remedy which expected to be used more and more frequently), declaring agreements void, requiring behavioral change and even structural divestments. In the case of cartel activities, prison sentences, personal fines and appropriation of assets are also available. In this regard, former and existing BA executives are currently defending criminal cartel charges at Southwark Crown Court.

RBS fined for breaching competition rules

Last month, RBS was fined £28.6m after admitting a breach of competition law between October 2007 and February/March 2008. The fine is the first to be levied on a financial services company for anti-competitive behaviour. It follows a two-year investigation by the OFT after Barclays Bank volunteered information on its own role under the OFT's leniency policy. It was discovered that individuals in RBS' Professional Practices Coverage Team had unilaterally disclosed generic as well as specific confidential future pricing information to their counterparts at Barclays, which was taken into account by Barclays when determining its own pricing. Barclays was granted full immunity from fines.

The disclosures by RBS took place on the fringes of social, client and industry events and during telephone conversations, and according to RBS involved only two members of staff. The case shows how the provision of commercially sensitive material to a competitor, even if it occurs only in a few isolated cases (or indeed even once as in the T-Mobile case), can give rise to serious breaches of competition law resulting in fines. It also indicates that competition authorities are continuing to target the financial services sector and will use high-impact enforcement if necessary. Finally, the outcome for Barclays demonstrates that if a company's internal compliance monitoring detects any behaviour that falls below acceptable standards, there is much to be gained (in terms of seeking immunity from fines) from fast and decisive action to ensure that that company is the first to alert the OFT to the inappropriate conduct in question.

Investigation into investment banking fee structures and profits

The OFT's recent announcement of an investigation into investment banking fee practices and profits is a further indication that competition authorities are increasingly targeting the financial services sector. The fees that investment banks charge for their services are generally charged on a percentage of transaction basis rather than on the basis of time spent. These fees are reported to have risen significantly and consequently have come under a great deal of scrutiny in the current financial climate from both shareholders and investors. Philip Collins, chairman of the OFT, stated that the OFT's interests lie in "whether City markets are delivering what business consumers want on competitive terms which represent good value to consumers and, more broadly, to the wider economy". The inquiry is expected to be the first significant investigation into City practices for more than a decade and should include investment fees for merger and acquisition deals and for underwriting share and bond issues.

One note of caution, however, it is possible that the European Commission may assert its right over that of the OFT to investigate given the global nature of the investment banking market. This will have implications for timing and focus of any investigation.

Investigation into the cash ISA market

The OFT is currently also considering features of the £158bn cash ISA market following a super-complaint by Consumer Focus, a designated consumer body. A super-complaint is a complaint submitted by a designated consumer body to the OFT that feature(s), of a UK market are significantly harming the interests of consumers. The OFT must publish a response to such complaints within 90 days, stating how it proposes to deal with the matter. In the first super-complaint to be made this year, Consumer Focus has accused ISA providers of using headlinegrabbing rates to lure savers and then slashing rates after the first year, leaving consumers with uncompetitive returns over the long term. Consumer Focus also alleges that consumers face unfair obstacles due to poor and bureaucratic processes if they want to transfer their account to another provider. In addition, some ISA providers are also said to impose arbitrary rules prohibiting transfers into some of the most attractive accounts. Consumer Focus also claims that ISA providers are using consumer inertia and confusion to drop ISA rates faster than on other accounts. The OFT is now inviting interested parties to provide any evidence which may be useful to the OFT's assessment in determining whether to launch a full investigation.

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