Financial Conduct Authority - Treasury Contents

Further written evidence submitted by the Office of Fair Trading

Further to my letter of 7 November, I am writing again to set out in greater detail the Office of Fair Trading's (OFT's) view on the remit of the Financial Conduct Authority (FCA), with regard to competition.

We believe that the FCA should have a top-line objective to promote competition in its rule-setting and regulation of the sector. We do not believe, however, that fulfilment of this objective requires the FCA to have concurrent powers to make Market Investigation References (MIRs) to the Competition Commission (CC), and that it may have unintended consequences. I explain this further below.

MIR powers cannot be effectively exercised in isolation from wider competition enforcement powers. The MIR tool addresses features of a market which cannot be adequately tackled through the enforcement of consumer and competition law. Where problems in markets can be tackled through enforcement this is preferable, not least because it enables the establishment of cross-economy precedents with stronger deterrent effect. It also carries possibilities of consumer redress.

The proposal to grant MIR powers to the FCA risks undermining this principle of the primacy of enforcement action, which could inadvertently weaken competition within the sector. The FSA has suggested that the need to consider the interactions between any possible MIR and potential enforcement action under the Competition Act 1998 (CA98) for collusion or abuse of dominance could be overcome via liaison between the FCA and the competition authorities before any financial services' MIR is made. We do not believe such an approach is desirable or possible because the consideration of competition enforcement issues is an integral part of the MIR decision-making process. In our experience, market studies often reveal a complex competitive landscape which demands a range of responses including, potentially, both CA98 and consumer enforcement as well as possible MIR action. Such situations arise regularly and the issues are frequently hard to disentangle.

In addition, there may be complex interactions with the European Commission's jurisdiction to enforce Articles 101 and 102 of the Treaty on the Functioning of the European Union. We are bound by strict legal constraints on information sharing about these often highly sensitive cases. Circumstances could therefore arise where, despite a requirement to consult or liaise, we were unable to share with the FCA information which might be highly relevant to its investigation.

The proposal could also have the consequence that the ability of the OFT (or the future Competition and Markets Authority) to use its competition tools in financial markets is diminished or compromised. In particular, it risks the fragmentation of roles, weakening the ability of the competition regime to support the Government in tackling strong vested interests, and gives rise to the risk of overlaps or, more likely, gaps in action. As I mentioned in my previous letter, the ability to review financial markets is vital for the OFT as a national competition authority.

This brings me to the FSA's recent supplementary evidence that calls for MIR powers in the financial services arena to be the sole preserve of the FCA. Our concerns would be significantly increased by this proposal, as it would contravene the existing principle whereby national competition authorities are able to act across the whole economy even in areas where other sectoral regulators have competition powers. It would also aggravate the concerns outlined above about ensuring that CA98 enforcement and MIRs are complementary.

Moreover, it is likely that the FCA will have strong incentives to use its regulatory powers in preference to making MIRs. In some cases this may lead to more rapid outcomes. For example, remedies to promote consumer switching which could result from an MIR to (eg, as in PPI) could hopefully be applied directly by the FCA. The danger, however, is that such remedies are not imposed in the light of the fresh analysis envisaged by the two-phase approach to market review at the heart of the UK competition regime. The area of greatest need of and most powerful use of an MIR - where it could shine a light on FCA rules that do not promote competition - might not be the first priority of the FCA and, as a result of this proposal, might not be available to the independent competition regime. The overall effect may be that MIRs are less, not more frequently, made in the financial services sector.

Finally, these questions need to be considered in the light of the Government's proposed reforms to the UK competition framework, which seek both to provide for more flexible use of resource between the two phases of the market investigation regime, and to provide a single, more powerful advocate for competition in the UK and internationally. Granting MIR powers to the FCA would, in the OFT's view, run counter to both these objectives.

John Fingleton
Chief Executive

15 December 2011

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