Out-Law Guide 7 min. read
16 Sep 2015, 4:44 pm
This guide was last updated in July 2018
Changes to the FCA's Handbook, which contains all the FCA rules which regulated firms are expected to follow, took effect from August 2015 and made the duty to disclose clear, but the FCA said that the obligation was not new.
The 2015 changes to the Handbook raised significant issues which require very careful consideration, particularly in light of the FCA having obtained full powers to enforce competition law alongside the UK's general competition authority, the Competition and Markets Authority (CMA) as of 1 April 2015.
The advent of the concurrency powers alone was a major change in the enforcement of competition law for financial services providers. However, the FCA's changes to its Handbook concerning regulated firms' obligation to deal with the FCA in an open and cooperative way, which is contained in Principle 11, might be even more important.
The new rule, which came in effect from 1 August 2015, states that any regulated firm must make a disclosure 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".
The FCA said that this was not a new obligation and that it always applied not just to regulated activities but also to non-regulated activities conducted by the regulated firm and, potentially, the activities of its wider group. However, the FCA considered that it was appropriate to clarify the scope of Principle 11 in light of its new competition law powers. The FCA published its Competition Concurrency Guidance, setting out how it would use these new powers, on 15 July 2015.
The leniency context
In competition law, making disclosures of infringements to competition authorities can result in immunity from fines or significant fine reductions when certain conditions are met. These so-called leniency programmes are operated by the CMA, the European Commission and by other national competition authorities within the EU.
Although the FCA is able to accept leniency applications, it will not operate a leniency programme of its own. It will generally rely on other competition authorities such as the CMA or the Commission sharing leniency information with it within the so-called UK Competition Network (UKCN) or the European Competition Network (ECN). The UKCN consists of the CMA and the vast majority of the UK sector regulators, and the ECN brings together the European Commission and the EU's national competition authorities.
Such sharing of leniency information is generally subject to significant use restrictions, according to which the receiving authority cannot initiate its own investigation based on the leniency information it has received from the other authority. However, those use restrictions would not be applicable if the FCA obtained the same information from other sources, such as the firm itself - which would be the case if the firm disclosed the infringement to the FCA in accordance with its Principle 11 obligations.
Whilst the new rule covers any type of competition law infringement, it is likely to be particularly relevant for the notification of cartel activities to the FCA. Because of this, actual and potential leniency applicants will need to consider this duty very carefully and should consider external legal advice, particularly in relation to when and how to make the Principle 11 disclosure and/or any leniency applications.
The impact on individuals
The FCA's guidance also contains a reminder that certain individuals have to deal with regulators in an open and cooperative way. This applies to people who perform a 'controlled function' under the Financial Services and Markets Act (FSMA) and relates to their dealings with the FCA, PRA and other regulators, according to Principle 4 of the Statements of Principle for Approved Persons (APER)/Rule 4 of the FCA’s Senior Manager Conduct Rules. This places approved persons under a duty to disclose appropriately any information of which the FCA or PRA would reasonably expect notice – making it, in effect, a 'Principle 11 for individuals'.
The reminder from the FCA that the disclosure requirements also arise for those individuals adds another element of complexity for regulated financial services firms in the UK, as any decisions on disclosure under Principle 11 and/or possible parallel leniency applications under competition law would need to also consider the possibility that approved persons within their organisation may take their own individual decisions on such issues, independently of those that the firm takes.
As regards individuals, it is also worth noting that no changes appear to have been considered necessary to the fit and proper person test for approved persons and the threshold conditions for firms to be given and retain authorisation in the FCA Handbook. It has, however, been made clear that certain competition law infringements would call into question the fitness and propriety of the approved persons concerned.
It is also important to bear in mind that the FCA now has the power to apply for director disqualification orders to be imposed on directors with respect to competition law infringements. This may be the case even if the director was not involved in the relevant conduct but ought to have known it was taking place and, for example, took no action to avoid the breach occurring.
Types of infringements covered by the new rule
All types of infringements are covered by the new rule, for example:
After its consultation, the FCA added a materiality threshold to the new rule by clarifying that the disclosure duty only covered "significant" infringements. The added handbook guidance, at 15.3.34G, explains that in determining whether an infringement is significant, one should "have regard to the actual or potential effect on competition, any customer detriment, and the duration of any infringement and implications for the firm's systems and controls".
The FCA never intended the disclosure duty under the new rule to cover any infringement however immaterial. This materiality requirement is already inherent in the concept of "infringement" of the 1998 Competition Act (CA98) and the Treaty on the Functioning of the EU (TFEU) to the extent that there must be an appreciable effect on competition and trade within the UK, or between member states, respectively for there to be an "infringement".
The FCA has also explained that its intention was only to require disclosure of matters likely to be relevant to the purpose of Principle 11, including issues relevant to its consideration of firms’ fitness to conduct authorised business, individuals’ fitness to perform functions in relation to regulated activity and the advancing of the FCA's operational objectives. In light of this, the FCA decided to clarify that the disclosure duty only captures "significant" infringements.
Given that the application of the new rule will, in practice, depend to a large extent on firms' interpretations of what is a 'significant' infringement in their self-assessments, it is too early to say what meaning the added materiality threshold will actually carry.
It is also worth noting that, while most disclosures under the new rule are likely to relate to infringements of CA98 or TFEU, the scope of the new rule potentially covers infringements of competition laws of other jurisdictions worldwide.
Triggering the duty to disclose
The disclosure should be made "as soon as [the regulated firm] becomes aware, or has information which reasonably suggests, that a significant infringement has, or may have, occurred".
This wording closely mirrors the existing reporting rules in the FCA Handbook. In circumstances where an antitrust investigation is already launched – for example, if the firm is in receipt of an information request from a competition authority – the point at which disclosure is required may be relatively straightforward. In other circumstances, the judgement will be more difficult, particularly given that the analysis of potential competition law infringements is often complex.
Who is subject to the duty of disclosure?
Any regulated firms – that is, authorised legal entities – are subject to Principle 11. In addition, individuals that perform a controlled function under FSMA have a duty of disclosure to the FCA/PRA under Principle 4 of APER/Rule 4 of the FCA’s Senior Manager Conduct Rules.
In terms of the extent of what needs to be reported, it should be noted that the disclosure duty also extends to infringements made whilst carrying out non-regulated activities by the regulated firm. The FCA has clarified that the obligation applies to infringements by the regulated firm itself – that is, the authorised legal entity – and not to infringements by other members of the firm’s corporate group that may be part of the same undertaking for competition law purposes. However, breaches by other group companies may require notification if they could affect the authorised firm, directly or indirectly.
How to make a notification
Notification should normally be in writing, but can be made orally if a leniency or immunity application is being made, or has been made, orally.
There is no need to admit liability in the disclosure. Indeed, the FCA does not seek admissions of liability under Principle 11 but merely the disclosure of facts and circumstances that indicate that an infringement has or may have occurred. This is because admissions of liability could potentially limit the extent to which the FCA could use such admissions as evidence, due to the principle against self-incrimination. In other words, the language of the new rule - which some may perceive as vague - can very well be relied upon to justify a type of disclosure which merely encloses the relevant evidence identified and acknowledges that an infringement may have occurred.
Although not an obligation, the FCA's guidance explains that the notification should include:
The last of these can in fact be limited to a statement that the firm has so far done nothing but intends to take such steps - or, for instance, is in discussions with the CMA.
Principle 11 and competition law to date
After the 2015 changes there was an increase in the number of notifications under Principle 11 from firms relating to competition issues than previously. The FCA attributed this to those Handbook clarifications. However, the FCA does not publish any information in relation to notifications under Principle 11 or under Principle 4 of APER/Rule 4 of the FCA’s Senior Manager Conduct Rules. It is therefore difficult to determine how effective these changes have been for the FCA's enforcement and what role, if any, they have played in FCA competition law enforcement.