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.
15 December 2011