On 21 February 2019, the Financial Conduct Authority (FCA) issued its first formal decision using its competition enforcement powers since the FCA became a concurrent competition regulator in 2015, a decision which finds that three asset management firms breached competition law in the context of an IPO and placing
This decision follows the FCA’s decision earlier this month to fine one of the fund managers involved using its regulatory powers under the Financial Services and Markets Act 2000 (FSMA).
The non-confidential version of the competition decision has not yet been published, and only limited details are in the public domain. However, from the FCA’s announcement of the decision and its Final Notice against the fund manager, we can glean the following details:
- The firms disclosed to each other information regarding the price they intended to pay (sometimes the volume they wished to acquire) for shares in an IPO and placing, shortly before the price was set (during the bookbuilding process).This amounted to strategic confidential information which allowed the firms to know each other’s plans in a process in which they should have been competing for shares, according to the FCA.
- In the case of the relevant fund manager, the information disclosed included:
- specific details about the bid he had put in, an indication of volume purchased and the fact that he had submitted it; and
- an invitation for others to follow his lead and cap their orders at the same price limit as his.
From a competition perspective, the FCA considered that the disclosure of bidding intentions undermined the competitive pressure between asset managers to reflect what they really think a company is worth. It therefore resulted in higher costs of equity capital for companies looking to raise capital on the market. The FCA fined two of the firms £108,600 and £306,300 respectively (the third firm was given full immunity from fines under the leniency programme).
From a FSMA perspective, the FCA considered that the fund manager’s conduct - and in particular his attempt to influence other fund managers – amounted to a failure to observe proper standards of market conduct and act with due skill, care and diligence. He was fined £32,200.
The FCA is an unusually powerful regulator, with a toolkit including extensive regulatory powers in addition to competition enforcement powers and strict self-reporting requirements for firms and individuals in the sector. Both these decisions serve as a useful reminder that firms and individuals could face a range of penalties for breaching competition law.
The line between legitimate and illegal information sharing is hard to draw. Many of the arguments raised in the fund manager’s defence went to this point but were rejected by the FCA, mainly on the basis that his attempt to influence other fund managers tipped his conduct into misconduct. From a competition perspective however, the distinction between sharing information and attempting to influence is not necessary, nor indeed relevant. The disclosure of strategic confidential information could be sufficient
Firms should therefore take care when sharing views on a company's valuation with other investors who may be competitors in the same process. Even an opinion could be enough, if it were sufficient for a competing investor to understand another firm's bidding intention, in the context of a competitive process.
Finally, this decision demonstrates the FCA’s commitment to take competition enforcement action in the financial services sector, an ambition it has been particularly vocal about since obtaining its concurrent competition powers. It must be noted that the fines are low compared to fines typically imposed by competition regulators, and the FCA closed the case against the fourth firm initially involved. That said, the FCA opted for a twin regulatory and competition process and took action against an individual in relation to the same facts. It is a regulator to be reckoned with, and consequences for individuals can be particularly serious.