Asset managers must tighten monitoring of communications with rival firms, lawyers warned, after the UK Financial Conduct Authority accused four firms of collusion as it flexes its antitrust muscles for the first time.
The regulator said it believes Artemis Investment Management LLP, Hargreave Hale Ltd, Newton Investment Management Limited and River & Mercantile Asset Management LLP shared sensitive price information ahead of an IPO placing.
All four deny breaking competition law and said they are working with the regulator, following a statement of objection published by the FCA in November.
It is the first case the FCA has brought using its competition enforcement powers since they were handed down in 2016, but legal experts told Behavox Regulatory Intelligence it will certainly not be the last.
“The key lesson from this is that it is not unusual in financial services for competitors to talk to one another, but those conversations and contacts may infringe competition law,” said Adrian Magnus, partner and head of the competition practice at Dentons LLP. “Those types of conversations and contacts may have gone on for a long time and may be seen as standard practice, but this does not necessarily mean that they are OK.”
Compliance officers “need to think very carefully” about how and why their colleagues interact with their competitors, Magnus said, and consider whether those contacts are lawful under competition law.
The asset managers cited could be hit with fines or even tougher action like bans or potential criminal lawsuits.
“It is inevitable that we will see more action over the next few years in this area," said Claire Cross, of counsel at Corker Binning law firm. “The FCA has ploughed a great deal of money and time into ensuring it has suitable resources to be able to investigate breaches of competition law.”
The FCA said the sharing of market sensitive information generally occurred on a bilateral basis, and allowed firms to know the other’s plans during the IPO or placing process when they should have been competing for shares.
When investigating it will gain access to a firm's communications and use modern technologies to scan for any irregularity.
The UK Serious Fraud Office, a much smaller outfit than the FCA, used Artificial Intelligence robots to crawl through 30 million documents in its landmark case against manufacturer Rolls-Royce, saving thousands of human hours.
If enforcers are using AI to uncover flaws, experts question why more asset managers are not using it as a defense.
The FCA alleges, separately, that in 2015, Newton and Hargreave Hale and River & Mercantile disclosed and/or accepted information about the price they intended to pay for shares in relation to one IPO and a placing.
It is also alleged that in 2014 Artemis and Newton shared information about the price they intended or were willing to pay for shares in relation to another IPO.
“From a competition law perspective, the FCA's position is that these firms were competing bidders, and they should have made their pricing decisions independently, without any contacts between them,” said Magnus.
The findings are provisional and may not necessarily lead to an infringement decision, but the direction of travel and message to the wider community is clear.
Cross said a successful outcome would "only further strengthen the resolve of the FCA" to further crack down on anti-competitive behaviour.
"Those who do work in the regulated sector should of course remember that the FCA expects their regulated firms to bring any real or perceived contraventions to the FCA’s attention, in line with their positive obligation to do so," she said.
The FCA has taken a hardline approach to regulation of Britain’s £7 trillion asset management market under chief executive Andrew Bailey, and it conducted a wide-ranging market study last year concluding the sector needed major reforms.
It said there was a lack of transparency and competition, and referred the investment consultancy and fiduciary management services markets to the Competition and Markets Authority for a full-blown antitrust probe.
It also laid groundwork to look at private equity and hedge funds.
The timing of the decision to go after the four asset managers in November, two months after publication of the market study findings in September, may also indicate the two are linked, said Louise Freeman, partner and co-chair of the commercial litigation practice at Covington & Burling LLP.
She said firms should expect further scrutiny, and to prepare accordingly.
“They started with a very wide asset management investigation, and that has been whittled down to the point they put out a report and pass something on to the CMA,” Freeman said. “I can see the FCA doing more of this in future.”
She said that tighter and more focussed systems and controls are a must; the FCA has warned firms to install more advanced surveillance systems immediately, in line with its own bolstered monitoring capabilities.
“The best defence is compliance, to revisit compliance programs, make sure they are being implemented,” said Freeman. “Making sure compliance programs are up to date and extended far enough in terms of who is covered inside a firm too.”
There is also a need to focus on wider issues, such as algorithmic pricing, lawyers said, which have attracted the eye of competition authorities in other sectors and could bleed into finance.
“These are a million miles away from banks on the surface, but actually, firms should think about how these cases could arise in a financial services context, where there might be risks around third-party providers,” said Freeman.
A key message to compliance officers is that businesses must make their own independent decisions without having any prior insight into what their competitors are intending to do, said Magnus, which is a fundamental principle of competition law.
“If there are nods, winks, conversations or other contacts between competitors about what they intend to do, that risks being seen by competition authorities as unlawful,” he said. “That is true whether the future pricing intentions relate to sale prices for bread or to bids to be made by prospective buyers in an IPO.”
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