New UK Financial Regulator's Competition Powers Confirmed but Uncertainties Remain

On 26 January 2012, the Financial Services Bill (the Bill) was introduced into Parliament. The text of the Bill was published by HM Treasury on the following day. Amongst other things, the Bill sets out the objectives and powers of the new financial regulator, the Financial Conduct Authority (FCA), including those relating to competition.

The UK Government has been working on reforms to UK financial regulation since the economic crisis of 2008, with formal consultations following in July 2010 and February 2011. Introduction of the Bill represents the definitive statement of Government's intentions.

The most obvious change arising from these reforms, which are due to be implemented by early in 2013, will be the replacement of the current single financial regulator, the Financial Services Authority (FSA), with three bodies. These are: a Financial Policy Committee within the Bank of England, responsible for maintaining the overall stability of the financial system, a Prudential Regulation Authority, which (as its name suggests) will be responsible for prudential regulation of systemically important financial services companies, and the FCA. The FCA will be empowered to deal with issues of market conduct, ranging from consumer protection to market integrity and, according to the Government, will have "a clear mandate to tackle competition issues in the financial services sector". The FCA's substantive functions include making rules for regulated financial services markets, preparing and issuing codes and giving general guidance to stakeholders. It will also take over responsibility for the registration and regulation of providers of consumer credit from the UK's competition and consumer protection authority, the Office of Fair Trading (OFT).

Since regulators are creatures of statute, the objectives contained in the statute creating a regulator form the framework for all of its future activities. The drafting of the objectives of the FCA reflect the delicate balancing act that it will be forced to undertake. Specifically, the Bill indicates that it will be required to discharge its regulatory functions in a way that is compatible with ensuring that relevant financial services markets "function well" (its "strategic objective"), while also advancing one or more of its three "operational objectives". These are: (1) to protect consumers; (2) protect the integrity of the financial system; and (3) promote effective competition in the interests of consumers (which in this context refers to all users of financial services, not just individuals).

Unlike most UK sectoral regulators¹, the FCA will not have the power to apply general UK competition law in those sectors that it regulates. In part, this simply reflects the current position of the FSA, which also lacks such powers. During the consultation process preceding introduction of the Bill, the CEO-designate of the FCA made a late attempt to change this separation of powers. In particular, he argued before the Joint Committee scrutinising the draft Bill that the FCA should have the ability to take action against anticompetitive practices under general competition law, without having to show first that such action was justified under one of the FCA's regulatory functions. Unsurprisingly, the OFT resisted such a move, arguing that giving the FCA concurrent competition powers would compromise the OFT's ability to use its competition tools in financial markets, and would risk fragmenting the competition regime. It is relevant to note in this context that a large proportion of the OFT's competition and consumer caseload over recent years has related to retail financial services. Publication of the Bill itself has confirmed that the OFT's position has prevailed and the FCA will not gain concurrent powers to apply general competition law.

The FCA will, however, be given a statutory power to ask the OFT to consider whether a feature, or combination of features, of a financial services market in the UK may prevent, restrict, or distort competition. The FCA might make such a request where, for example, it does not itself have the powers to address the potential problem in the market or where it considers that the matter would benefit from the OFT's competition expertise. Following such a request, the OFT will have 90 days to decide whether to take any action and, if so, what this should be.

The FCA's mandate is intended to allow it to take the initiative to use its powers to tackle competition problems more swiftly and effectively than the FSA did previously, e.g. by promoting switching, removing barriers to entry or addressing asymmetries of information. Although the Government has trumpeted the FCA's duty to promote competition as "a key element of the Government's reform programme" that gives the FCA a "clear mandate" to tackle competition issues, it is unclear how effective the FCA will be in practice, given the limitations on its powers and potential tensions between the FCA's three operational objectives. The appropriate role and level of competition in financial services markets can also be particularly difficult to assess, due to the complexity of financial products, switching difficulties, information asymmetries between providers and consumers and the unpredictable and potentially disproportionate systemic impact of market failure.

It is hoped that, in practice, the OFT and FCA will work together and consult each other on competition issues arising in the regulated financial services sector. In case this proves to be ineffective, the Government proposes to review the issue of whether the FCA should have access to more specific competition powers in five years' time, when the authority has had time to bed down and develop its competition-specific expertise. Given that the OFT itself is set to be abolished by Government, with its activities being transferred to a new, unified Competition and Markets Authority, many uncertainties remain to be addressed during this period.

¹For example, the communications regulator Ofcom has competition law powers under the Enterprise Act 2002 and Competition Act 1998, as well as a defined role in media merger reviews.