Enhanced competition law powers in the financial services sector

The Government has announced a number of amendments to the Financial Services (Banking Reform) Bill which will provide financial services regulators with enhanced competition law powers and will impose a secondary competition objective on the Prudential Regulation Authority of facilitating effective competition. The Government has also confirmed its intention to establish a Payment Systems Regulator which will have a competition objective and will similarly have concurrent competition powers.

The grant of concurrent competition powers to the FCA

The government has proposed that the Financial Conduct Authority (“FCA”) will be granted the same powers under UK competition law as are held by the current Office of Fair Trading. The FCA will operate such powers concurrently with the future UK competition authority, the Competition and Markets Authority (“CMA”), enabling the FCA to investigate competition law breaches under the Competition Act 1998 and to fine infringing parties up to 10% of their worldwide turnover.

The Financial Services (Banking Reform) Bill will amend FSMA in order to equip the FCA with the following competition powers:

• Competition Act 1998 enforcement powers used to address cartels, anti-competitive agreements and abuses of a dominant position.
• Power under the Enterprise Act 2002 to carry out market studies and make references to the Competition and Markets Authority.

The proposed competition law powers will be used in addition to the FCA’s “competition objective” which requires it to act to ensure that markets for regulated financial services are operating competitively. The powers will be held concurrently with the CMA which will be the new competition regulator taking on the combined roles of the Office of Fair Trading and Competition Commission as from 1 April 2014. By being appointed a concurrent regulator, the FCA will be obliged to consider whether it would be more appropriate to take action under its competition law powers before exercising any of its regulatory powers under FSMA.

According to HM Treasury’s briefing document on the amendments to the Bill, the government believes that equipping the FCA with these powers will strengthen the FCA’s ability to ensure competitive banking markets in the interests of consumers. It also believes that the ability to carry out market studies and make references to the CMA will enhance the credibility of the FCA and make it easier for the FCA to persuade firms to alter their behaviour voluntarily. Finally providing the FCA with these competition powers will enable the FCA to become a member of the European Competition Network so they are better placed to engage with regulatory issues at a European level.

It is proposed that these changes will be implemented in April 2015 to allow the FCA time to prepare for this change.

PRA competition objective

The proposed amendment to give the PRA a secondary competition objective implements the recommendation of the Parliamentary Commission on Banking Standards.

The competition objective will be subordinate to the PRA’s general objective to ensure the safety and soundness of the firms that it regulates (and to its insurance objective). The intention is to ensure competition considerations are embedded in the operation of the PRA and to require that the PRA takes a more proactive approach to competition than under its existing duties.

Payment Systems Regulator

The government has confirmed its proposals to create a Payment Systems Regulator (“Regulator”) which is proposed to come into force by spring 2015. The government’s amendments to the Financial Services (Banking Reform) Bill set out that the FCA will be required to establish the Payment Systems Regulator as a separate body under the FCA with its own managing director, board and budget. The costs of the Payment Systems Regulator will be funded by a levy on the participants in designated payment systems.

The introduction of the Payment Systems Regulator follows a consultation launched by the Treasury in March 2013 in which it set out its proposals to establish a competition-focused, utility style regulator for the payment systems sector.

Contrary to its initial proposals, the government does not intend to introduce any form of licensing system but instead will introduce a designation system in order to minimise the burden of regulation. HM Treasury will designate a payment system when it is satisfied that any deficiencies in the design of the system, or any disruption in its operation would be likely to have serious consequences for those who use or are likely to use the service provided by the system. Once a system is designated, the payment scheme company and system participants (e.g. members, card issuers and merchant acquirers and the system infrastructure providers) will be brought within the scope of the Payment System Regulator’s powers.

The Payment Systems Regulator will have a broad range of regulatory and enforcement powers, including a power to impose fines for compliance failures and a power to require owners of payment systems to dispose of their interests in them where there is likely to be a restriction or distortion of competition.

In exercising its functions, the Payment Systems Regulator will be required to act in a way which advances one of its payment systems objectives:

• The competition objective – to promote effective competition in the market for payment systems in the interests of users;
• The innovation objective – to promote innovation in the market with a view to improving the quality, efficiency and economy of payment systems;
• The service-user objective – to ensure that payment systems are operated and developed in order to take account of users.

In line with the proposal to grant concurrent competition law powers to the FCA, the government has confirmed its intention to grant concurrent competition law powers to the Payment Systems Regulator. This will allow it to take enforcement action, including the ability to fine, for breaches of the Competition Act 1998, in relation to participation in payment systems.