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First Firms Fined under Competition Law
27th February 2019
FCA issues First Decision under Competition Law
The regulator’s first decision under competition law has been issued this last week, that found competition law breaches by three asset management firms.
The Competition Act 1998 (the Competition Law) prohibits agreements, practices and conduct that may damage competition in the UK.
Prohibitions in Chapter I covers the following behaviours which have as their object or effect the prevention, restriction or distortion of competition within the UK:
anti-competitive agreements; and
concerted practices between businesses
In addition, whilst we are still in the EU, Article 101 of the Treaty on the Functioning of the European Union (TFEU) covers equivalent agreements or practices which may affect trade between EU member states.
It should be noted that any business found to have infringed the Chapter I prohibition and/or Article 101 of the TFEU can be fined up to 10% of its annual worldwide group turnover.
The three firms, Hargreave Hale Ltd, Newton Investment Management Limited and River and Mercantile Asset Management LLP (RAMAM) were each found to have breached competition law and two of the three firms were given fines, the third having been given immunity from a fine under the competition leniency programme. Hargreave Hale was fined £306,300 and RAMAM was fined £108,600.
The infringements to competition law involved the sharing of strategic information on both sides between competing asset management firms during one initial public offering and one placing, just before the share prices were set.
The firms disclosed and/or accepted otherwise confidential bidding intentions, not only of the price they that they were willing to pay but also the volume they wished to obtain. This exchange of information then allowed one firm to know another’s intentions during the IPO or placing process, when they should have been competing for shares. IN doing so, they then undermined the process by which prices are set. The effect is that this can then reduce pressure to make bids that reflect what they really think the company is worth and could therefore reduce the share price achieved by the initial public offering and so raise the cost of equity capital for the issuing company.
The Executive Director of Strategy and Competition at the FCA, Christopher Woolard, said “
“Asset management firms must take care to avoid undermining how prices are properly set for shares in both IPOs and placings. Failure to do so risks them acting illegally. The FCA will act when markets that play a vital role in helping companies raise capital in the UK’s financial markets are put at risk. We can also take regulatory action against an individual and did so here with respect to some of the same facts.”
As the FCA pointed out in informing of their decision, over £31 billion was raised in new investments from new listings on the London Stock Exchange markets alone between 2015 and 2018, which shows how important it is to protect competition in the primary capital markets during a book-building process.
An individual, Mr Paul Stephany, a former fund manager at Newton Investment Management Limited was also fined for conduct relating to the FCA’s investigation under the Competition Act.
The FCA fined Mr Stephany £32,200 for his conduct in relation to two separate occasions relating to an Initial Public Offering (IPO) and a placing.
On the two instances, Mr Stephany submitted orders as part of a book build for shares that were to be quoted upon public exchange. However, prior to the order books for the new shares closing, he had contacted other fund managers at competitor firms and attempted to influence them to cap their orders at the same price limit a his own orders.
On one of the occasions, Mr Stephany sent an email to himself about an IPO for On the Beach Group plc (OTB), blind copying in 14 External Fund Managers at 11 competitor firms in which he said “I wanted to urge those considering or in for the OTB IPO to think about moving to a 260m pre money valuation limit. I have done that first thing this morning with my 17m order”.
The FCA therefore found that Mr Stephany’s actions were “an attempt to get investors to use their collective power and thereby undermine the proper price formation process of the IPO, which risked causing harm to other market participants.”
As a result of failing to give proper consideration to the risks of engaging in his communications, the FCA found that he had breached the Statements of Principle 3 and Principle 2 in that he:
failed to observe proper standards of market conduct; and
acted without due skill, care and diligence
The FCA’s final decision notice on Mr Stephany was reinforced with comment from Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, who said:
“This matter underscores the importance of fund managers taking care to avoid undermining the proper price formation process in both IPOs and placings. These markets play a vital role in helping companies raise capital in the UK’s financial markets and when they are put at risk the FCA will take action.”
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