Te FCA’s objectives -July 2013
comments at s1k.objectives@fca.org.uk or send a letter to: Early Intervention Team, Cross Cutting, Prudential and Early Intervention Department, PRR Division, Financial Conduct Authority, 25 The North Colonnade, London, E14 5HS.
we do not approve acquisitions where we have significant concerns about the controller’s integrity or reputation: eg: If a controller does not seek our approval of the acquisition or increase of control before it occurs, we are not told about a change in control until after the event has happened, we will take appropriate action, which could include prosecution.
We will impose tough penalties on firms that have failed to treat consumers fairly. This is supported by our penalty policy, which links the size of the fine to the benefit a firm received from its misconduct
We will continue to investigate senior managers and take action against those who fail to:
• recognise and manage the risk that their firm is running
• control the way their products are sold
• ensure that the interests of consumers are at the heart of those designing new products.
We will take action against firms and individuals who conduct illegal activities, and will make the public aware of the dangers of such activities and help return funds to victims where the courts have been able to recover money.
The FSCS considers claims from consumers against firms which are unable, or likely to be unable, to pay claims against them, for example, because they are insolvent.
We are an active member of the Financial Stability Board (FSB), the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the European Securities and Markets Authority (ESMA) and the Joint Forum. We also engage with other European and global organisations who set standards where their work is relevant to our objectives, including the:
• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)
• Financial Action Task Force (FATF)
• Basel Committee for Banking Supervision (BCBS).
We are the prudential regulator for around 23,000 authorised firms.
Prudential risks can increase the probability of consumer harm or market dislocation or both.
The FCA’s core markets regulatory activities focus on:
• supervising the infrastructures that support the trading of financial instruments
• supervising the issuing of securities, including acting as the UK Listing Authority (UKLA)
• maintaining a broad oversight of both on-exchange and over the counter (OTC) markets and detailed monitoring to prevent, detect and pursue market abuse.
Recognised Investment Exchanges (RIEs)
The way we supervise an RIE depends on how much risk the strategy and operation of the trading venue pose to our objectives. For example we will look at the increasing role of technology in trading and the effectiveness of competition in the markets where RIEs are active
Promoting effective competition
We have a competition duty to:
a. promote effective competition in the interests of consumers in the markets we regulate.
b. to promote effective competition when addressing our consumer protection or market integrity objectives.
Our powers to pursue our competition mandate:
a. make rules in support of our objective to promote competition to benefit consumers
b. take action against firms that we regulate. we can:
• change the permissions that the business currently operates under, and/or
• add a specific requirement to how the business should operate.
These may extend to matters unrelated to the regulated activity an authorised person has permission to carry out.
On competition, we consider:
• the needs of different consumers who may use those services, including their need for information that helps them make informed choices.
• how easy it is for consumers to access those services, including consumers in areas affected by social or economic deprivation
• how easy it is for consumers to switch suppliers
• how easily new businesses can enter the market
• how far competition is encouraging innovation.
We liasise with cma and have the power to ask cma whether competition is effective in a market.
Our competition remit also covers authorisation and supervision, by examining the business models of firms we regulate…For example, we look at whether our authorisation requirements create undue barriers to entry for new firms.
it is competition outcomes (to consumers and the economy) that needs to be protected and promoted, and not the survival of competitors
Case study
To enter the banking market originally required setting up expensive infrastructures before the authorisation process. The problem with this was that there was no guarantee that authorisation would be given, so considerable expense could be wasted. The FCA saw this as a potential barrier to entry …. So the FCA made this simpler.
possible causes of competition distortion (market failures):
• Market power held by suppliers – where rivalry is restricted because it is difficult for new organisations to enter the market or to grow rapidly, for example, as a result of low rates of consumer switching, network effects where the value of a service grows the more people use that particular service, strategic behaviour by established firms, or their reputation.
• Problems in the flow of information between market participants – where suppliers cannot obtain the information they need on consumers, or consumers cannot obtain the information they require on the services available.
• Low switching rates – understanding the reasons why more consumers do not switch suppliers, including whether suppliers artificially raise the perceived costs and risks of switching, in turn preventing markets from working well.
• Costs or benefits to third parties – costs or benefits not captured in a product’s price that mean that too much or too little of that product is produced or consumed.
• Problems in the way consumers or firms make decisions – resulting in situations where what consumers receive is not what they need, they pay too high a price for a service, or where consumers’ behaviour does not adequately constrain suppliers.
• Too little consumption – could reflect problems in accessing financial services, including a lack of consumer awareness or understanding. It may also be because products are unsuitable or because there are unnecessary, anti-competitive restrictions on the availability of products
• Existing regulation could be having adverse effects on competition, for example, through making it more difficult for firms to enter or grow.
• demand-side substitutability = how easily consumers can switch from one product to another or one supplier to another
• supply-side substitutability= how easily firms can produce suitable alternatives.
We will also examine whether these constraints are brought to bear locally or regionally, nationally or internationally. Identifying markets for review In financial services, as in other areas of the economy, the benefits of effective competition are enhanced efficiency, more innovation and lower prices, which in turn help to provide a broader range of better products and services that meet consumers’ needs. So we can identify markets that appear not to be working well we gather information from a range of sources, such as: • super-complaints • market intelligence • complaints from third parties • FCA Panels. 30 These costs and benefits are known in economic literature as externalities. 31 These are behavioural biases.
Understanding the true nature and extent of competition in any market is complex. We determine our priorities by working out the level of risk that is posed to effective competition in the different markets, in particular those that harm consumers’ interests. Where we consider the level of risk is a concern, we review the competition issues in greater detail, and decide whether we need to intervene. While significant consumer harm can result from weak competition for existing services, competition concerns can also exist, or could in future exist, in markets for new services. In identifying markets for review, we will therefore examine how competition is evolving in markets for new services as well as markets for existing services.
This will help ensure that the regulatory measures we adopt under our competition mandate support innovation and reduce the risk of significant harm arising in the future for consumers. Using detailed studies to review markets We will carry out detailed market studies of the markets concerned to analyse the effectiveness of competition in those areas and the reasons why competition is ineffective.
We will look at different features in different markets, and will explore the issues in their specific context. Any proposals for intervention that arise from the market study would be subject to the procedures required under statute, including consultation for any new rules and an assessment of proportionality. The actions that we could take after a market study are discussed below. Sometimes we will come across issues that we consider could be handled better by other consumer or regulatory bodies, in particular the OFT (and its successor, the Competition Markets Authority (CMA)). In these cases we will liaise with the relevant agency, to ensure that the issue is dealt with by the most appropriate body.
Market study procedures
We will announce the launch of any market studies we carry out. How long it takes to complete each study depends on many factors, such as the scale and complexity of the market. However, we expect that most will take between six months and a year.
Early on in each market study we will let stakeholders know about the issues that concern us and the theories of harm we will be looking at. A theory of harm is a high-level description of the potential adverse effects on competition and the reasons behind them. We will also provide a clear point of contact for stakeholders. Each market study will mean gathering specific information from a broad set of stakeholders (for example firms, intermediaries and distributors, trade bodies, consumers, consumer bodies).
To understand how competition works in the markets we regulate, we may ask for information from organisations and individuals that we do not regulate. We will receive our information from: • data we already hold or have access to • information and evidence provided to us by the FCA’s Panels • the firms we regulate, using our information-gathering powers where necessary • firms and organisations that we do not directly regulate but are likely to have information relevant to the markets we are examining
trade and consumer associations • Government departments and other regulators (UK and international) • various consumers. We gather information using questionnaires to firms, desk research, surveys, mystery shopping exercises and working with other regulators. We will also welcome informal consultation with relevant stakeholders. We will publish our draft conclusions on the effectiveness of competition in the markets we review.
We will present our draft analysis and preliminary conclusions, and where necessary, will include proposed solutions for addressing any concerns identified. We will also assess the proportionality of proposed interventions before going ahead. We will publish a market study once it is complete, including:
• a description of the market under consideration
• the reasons for carrying out the study
• a description of the methodologies used to collect and analyse the data
• our analysis
• our conclusions on the issues considered.
Promoting competition in markets that are not working well
Actions following market studies If we conclude that competition is not working well and we need to take action, we can intervene to promote effective competition using a number of measures, including:
• policy or regulatory changes
• rule-making, including changes to or potential withdrawal of existing rules • using firm-specific enforcement powers
• publishing guidance
• proposals for enhanced industry self-regulation.
eg. determining the information to be provided to consumers, limiting the sale of two or more products in a bundle or intervening more directly to affect prices, or the divestment of assets or businesses
It will be necessary to show that any intervention is proportionate to the concerns identified. For example, divestment of assets or businesses needs stronger proof of this proportion: is necessary to show that such a degree of intrusion is warranted and that behavioural remedies would not adequately address our concerns. … so we will carry out a detailed assessment of proportionality and will consult on the draft measures.
in exceptional circumstances, we may need to act more quickly to avoid serious and irreparable harm to effective competition, so we may use temporary product intervention rules to intervene early and prevent the harm to competition.
We might approach the wma where, for example, we do not have the statutory powers to address the potential problem or where we consider the wma has particular expertise. To avoid any duplication of investigation by the wma and FCA, we will try to refer relevant cases to the OFT at an early stage of the process.
Third party complaints, cartels and enforcement:
Anyone who has concerns about activities that cause or potentially cause harm to consumers can let us know by contacting the FCA.
Recognised Investment Exchanges (RIEs) Stock exchanges, futures exchanges and commodity exchanges:
we ensure ongoing compliance with these requirements. we can object to an RIE’s proposed regulatory provision if we judge it to be unjustified or disproportionate.
The framework for sharing information with the OFT is set out in the MoU: www.fca.org.uk/mou-fca-oft
The FCA and the OFT have complementary, and, to a limited degree, overlapping roles relating to competition. We cooperate closely with the OFT. Merger control falls outside our competition mandate, we share information and insights
If we decide not to take a competition issue further, this does not stop the OFT or another competition authority investigating or acting