Less bark, more bite – competition to the fore as tougher enforcement arrives

New legislation and a tougher outlook from regulators has competition partners salivating, but the old guard maintain their dominance in the City. Can the rise of US players extend to antitrust practices?

Having long been viewed as stable, the UK’s competition law agenda has been shaken up significantly over the last 12 months, with the Competition and Markets Authority (CMA)’s public attack on the proposed merger of mobile networks O2 and Three last month the clearest example yet. In an unprecedented move CMA chief executive Alex Chisholm published a letter to the European Commission, which is assessing the deal, stating that the £10.25bn purchase of O2 by Three owner Hutchison would cause ‘long-term damage to the UK telecoms market’.

‘I’ve never seen a national body be so combative,’ says one City partner. ‘Usually these things are done behind closed doors but this is on the CMA’s website. Actually – let me correct myself – usually the national authorities fall in line with the European Commission.’

‘The backdrop to everything is politics,’ says Freshfields Bruckhaus Deringer competition partner Rod Carlton, who advised BT on its unconditional clearance from the CMA for its £12.5bn takeover of mobile phone network EE in January as the telecoms market gets redrawn.

‘The public are less well off since the crisis and there is a concern that the recovery has disproportionately benefited Wall Street and the City. Corporate profits are at a record high. Joe Bloggs is, understandably, suspicious. The public wants to see more antitrust enforcement, which is paid for through their taxes and Bernie Sanders and Hillary Clinton have vowed to step up enforcement if they become president. Obama has been tougher on global deals and everyone else is following. If you don’t tag along, you look weak.’

With this in mind the UK government has made it harder to appeal decisions at the Competition Appeal Tribunal (CAT), handed out competition powers to sector-based regulators including the Financial Conduct Authority (FCA) and implemented legislation to allow US-style class actions for damages caused by anti-competitive behaviour. The result is that corporates have become increasingly wary of competition and tax authorities blocking their global advances. With US firms in Europe rushing to make lateral hires to support big-name M&A teams, competition partners have gone from being regarded as supporting actors to key protagonists in the success of Big Law.

Arms race

In front of a packed audience at Norton Rose Fulbright’s London offices on 23 March, Slaughter and May-trained Deborah Jones, director of competition at the FCA, sent a warning shot across the City when she declared the regulator had launched its first competition investigation, less than a year after being handed the new powers.

While details of the investigation are not yet public, the FCA has already caused a stir in the competition space with eight market studies in the last two years.

‘The FCA has launched studies into almost every type of financial retail product you could think of,’ says Nigel Parr, head of competition at Ashurst. ‘This enables the regulator to investigate a market as a whole and might lead to identification of abusive dominant behaviour.’

These investigations bring significant banks, traders, hedge funds and private equity houses into the firing line – engaging large numbers of lawyers across the City – and their conclusion will inevitably lead to investigations or industry-wide reforms. The FCA wrapped up a year-long study into investment banking last month and concluded that extensive work needs to be done to prevent anti-competitive practices. A shake-up will ensue, with the FCA seeking measures to reduce cross-selling of other services by banks that advise companies raising money in the equity markets. It is also considering changes to the rules on research covering companies floating on the stock exchange in a bid to hand investors information earlier on in the process and a ban on a widespread clause used by banks to limit the ability of clients to use other providers on future deals. An asset management probe is expected to conclude before the summer.

Samantha Mobley, global competition head at Baker & McKenzie, comments: ‘So far there have been market studies but the investigations into companies are coming. We’re already advising a lot of banks on possible enquiries. In other sectors, such as energy and pharma, market studies at EU level have led to enforcement action. I suspect that’s what will happen with the FCA.’

Since the City watchdog assumed the competition powers handed to it on 1 April 2015, when provisions of the Financial Services (Banking Reform) Act 2013 came into force, the FCA has added over 25 lawyers and economists to its competition department and looks set to break the 100-strong boundary in 2016. Jones is arguably the most high-profile arrival, coming from the Office of Fair Trading (OFT), where she was director of competition enforcement in 2013, but there are others, with Amelia Fletcher’s appointment to the FCA board that same year after having spent over a decade as chief economist at the OFT cited as a crucial step towards establishing a credible team. The move to put former Competition Commission panel member Jonathan Haskel and ex-Slaughter and May competition head and CMA panel member, Malcolm Nicholson, on the FCA’s competition committees last year was another sign of intent.

While the CMA largely stuck to retail banking when policing competition in financial services, the FCA has already made waves in the wholesale sector. Duncan Liddell, a competition partner at Ashurst, says: ‘The FCA has geared up and has lots of competition lawyers and economists in its ranks, including some big hires from the CMA as the FCA pays more. Deb Jones is very highly regarded. The FCA has a really good understanding of how the finance markets work, so will be better placed to spot nefarious behaviour than the CMA.’

However, the transfer of competition powers to sector bodies has been done on a ‘use it or lose it’ basis. While some City lawyers have raised concerns that this will lead to frivolous actions in a bid to retain control, others see the policy as a necessity if the UK is to become a more powerful force in global enforcement.

Berwin Leighton Paisner (BLP) head of competition Andrew Hockley comments: ‘There is an arms race to bring competition cases because of “use it or lose it”. This has ramped up the amount of research and scrutiny that goes into mergers and will likely lead to great numbers of anti-competitive behaviour investigations. Law firms with strong financial services practices are picking up a lot of this work.’

The consensus is that the FCA, in particular, has advantages over other UK competition authorities due to its ongoing relationship with law firms. Elaine Whiteford, competition partner at King & Wood Mallesons (KWM) in London, says: ‘It is clear the FCA is banging the drum and it is saying it is ready to launch an investigation. It will be interesting to see exactly how this plays out in the financial sector, as you typically find investigations before the European Commission are incredibly hard fought, even within the settlement regime the Commission now has. But the FCA is also the regulator of these institutions, so they have an ongoing relationship that there is not with the Commission. You see with financial regulatory investigations that the banks settle early on as people are thinking about their broader relationship, whereas competition law is fought tooth-and-nail. Financial institutions may well deal with competition differently if the FCA is the one bringing investigations.’ 

Another, if controversial, advantage for the FCA is the mandatory self-reporting rules that will see financial institutions forced into admitting competition infringements. Failure to do so could, in extreme circumstances, lead to a financial services firm having its licence rescinded. Many are anxious as to how this will play out in conjunction with the CMA’s leniency rules, which grant immunity from fines and criminal prosecution to the first cartel member to blow the whistle.

André Pretorius, a competition, regulation and trade partner at Herbert Smith Freehills (HSF), says: ‘Self-reporting has been controversial because of the tension between self-reporting and the leniency regime. If you are a bank, one of the things you will be considering is whether to apply for leniency and how to manage the inter-relationship between the FCA and CMA. You have to notify the FCA as soon as you become aware but in order to seek leniency, you need to get in a position where you have sufficient confidence you have infringed the law and made a strategic assessment of whether leniency is the right thing. Once you’ve self-reported, have you lost ability to go for leniency? There’s questions around that.’

CAT tricks

Despite an increase in activity by sector regulators, the CMA is still widely criticised for inertia. The UK National Audit Office (NAO) showed its dissatisfaction of the CMA in February for not handing out as many fines as its European counterparts and for being too lenient with banks. The UK handed out £65m in fines between 2012 and 2014, compared with almost £1.4bn issued by the German authorities, and the NAO declared the CMA faces ‘big challenges’ to increase the number of successful cases it brings. This criticism came in spite of the UK government increasing the CMA’s budget by £12m in 2014/15 so it could accelerate its work investigating cartels and regulated markets. That increase pushed the total cost of all UK competition bodies to £66m last year.

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While Simon Priddis, London managing partner of Freshfields’ antitrust, competition and trade practice, argues ‘the NAO’s report under-rated the CMA’ as there is ‘an important role for a competition authority in taking hard cases and clarifying the law’, the consensus is that the regulator isn’t scoring enough easy wins.

The CMA faced more criticism in March when its second market investigation since replacing the OFT in April 2014 proved to be more a reprieve for the UK’s largest energy suppliers than a crackdown, as City firms such as Linklaters, Freshfields, Allen & Overy (A&O), Baker & McKenzie and Eversheds secured lead roles. The ‘big six’ escaped recommendations that their dominance be tempered through an industry-wide break-up or price capping, with the CMA opting to create a new safeguarded tariff for low-income customers on pre-pay meters. Dale Vince, founder of challenger energy supplier Ecotricity, labelled the outcome ‘a great escape for the big six and a big missed opportunity for the CMA’.

However, legislative changes have made it easier for the CMA and, perhaps more importantly, private enforcers of competition law, to bring cases. Tying in with what Hockley calls ‘the Americanisation of competition law in Europe’, the necessity to prove ‘dishonesty’ of individuals facing UK criminal charges has been removed in a bid to secure convictions. While no one expects the CMA to start bringing as many competition charges as the US Department of Justice (DoJ) – which brought charges against 66 individuals in the 12 months to 30 September 2015, up 50% – the UK regulator has signalled its intent to add criminalisation to its armoury.

Whiteford comments: ‘The CMA is very keen to exercise the criminal powers it has. The government has changed the law and removed the necessity to prove dishonesty, which is a very high standard and essentially kyboshed prosecutions under the Competition Act. If you’re not punishing people, then competition law doesn’t have any teeth.’

After indicating that it would not pursue criminal convictions under the old law, the CMA secured its first successful conviction in seven years in late 2015 when Peter Snee, a managing director of a Herefordshire-based seller of steel water tanks, pleaded guilty to price-fixing charges. But typical of a regime known for its poor handling of cases – encouraging individuals and companies to take a risk and avoid offering guilty pleas or co-operation – the conviction is under review after two other cartel members were acquitted in court.

Another change in the CMA’s favour is the move to curb the amount of new evidence that can be introduced to challenge the regulator’s decisions before the CAT, caused by fears that companies were withholding their best evidence and saving it for an appeal. Permission is now needed to bring in new evidence. But an arguably bigger shake-up has come from the introduction of a new fast-track procedure at the CAT for companies to bring private enforcement actions. The change, under the Consumer Rights Act 2015, was introduced on 1 October 2015 to encourage small and medium-sized enterprises to bring private enforcement using capped legal fees and a guarantee that the hearing will start within six months. Eight months in and the move already appears to be a success, with three claims lodged and the first two settling, one against the training arm of the Institution of Occupational Safety and Health and the other against Tesco.

Edward Coulson, a competition litigator at Hausfeld set to move to BLP in June, says: ‘Fast track has made the CAT the realistic and available forum it was always supposed to be. Also, the old CAT rules meant claimants could only bring follow-on actions from regulator’s decisions. This meant you couldn’t plead outside the four corners of the decision you were relying on, when inevitably these claims can fall outside these decisions. The CAT is now an attractive forum. That’s a big change.’

Open market

The strengthening of the UK’s competition enforcement regime has coincided with a record year for mergers. With the European Commission largely tasked with overseeing the biggest mergers, the competition arm of the EU opened 11 Phase II merger control investigations in 2015, the highest number since 2007. With seven conditional Phase II clearances given last year, 2015 also had the highest level of deal interference since 2001.

David Wittmann, practice partner at Slaughter and May, comments: ‘The low interest rate environment in both the US and Europe has produced a strong deal environment – particularly for strategic buyers who are keen to do deals. The return of pre-conditional offers, however, reflects the growing complexity of obtaining worldwide antitrust approvals.’

The level of aggression from the competition authorities on behavioural and transactional antitrust issues has intensified, and has led to high levels of investment from City firms.

Carlton says: ‘I expect merger review to become still more intense. It’s a powerful tool for intervention in markets, and competition authorities are increasingly wary of the scope for concentrative mergers to harm consumers and the economy as a whole.’

US firms have also moved the dial in London by shifting towards broader service offerings. While Cleary Gottlieb Steen & Hamilton, for example, has long had an outstanding European competition practice, US firms have largely focused their investment on one or two partners in Brussels. But the evolution of the UK’s competition regime, combined with US law firms’ rising stock in the European M&A and disputes arenas, has fired investment.

David Walker, global co-head of private equity at Latham & Watkins, comments: ‘You need to be more proactive in your assessment of UK deals now. The CMA has changed the way it operates and has adopted a more intrusive posture than before.’

Latham, Kirkland & Ellis, Davis Polk & Wardwell and Morgan, Lewis & Bockius have all made high-profile lateral hires in competition as they expand in the City, and those without a UK competition practice are scrambling to make hires, with London-based Milbank, Tweed, Hadley & McCloy corporate partner Mark Stamp labelling the arrival of a London antitrust partner ‘a high priority’. Arguably the most high-profile acquisition of the last 12 months came when Linklaters UK competition chief Paula Riedel switched to Kirkland, but Latham’s hire of the CMA director of mergers Jonathan Parker, the departure of Omar Shah to Morgan Lewis, and the arrival of BLP’s head of EU and competition, David Harrison, at Mayer Brown, have all attracted attention. Davis Polk’s decision to launch a UK and EU antitrust practice in Europe with the hire of former Freshfields heavyweight Nicholas Spearing from Milbank, rather than refer work to rivals, is cited by City partners as a turning point in the market as US advisers strengthen their offerings. Another motivation for US firms to build out their London competition arms has been the rising tide of competition litigation, fuelled by the availability of new opt-out class actions (see box, ‘Competition damages: a new bar for plaintiffs’).

But despite inroads made by some US firms, the pecking order for competition work in the UK has remained much the same and is still dominated by the Magic Circle. While the infiltration of US firms across the board in European M&A will undoubtedly lead to more merger control work (corporates rarely want separate corporate and competition counsel), a long-term commitment to having complete competition practices handling transactional and behavioural work has kept the UK firms a step ahead in London at least. But cartel-related claims and dominant position abuses are fair game.

Freshfields is undoubtedly the leader in this space, with 126 antitrust lawyers across London and Brussels, more than any other law firm, and strength across Europe, Asia and Washington DC. Already boasting a City roster that includes Carlton, Priddis, Deirdre Trapp and John Davies – the firm hired Clifford Chance (CC) partner Alastair Mordaunt in April and relocated him to Hong Kong to spearhead expansion in Asia as the continent steps up enforcement. (China antitrust fines stood at ¥7bn in 2015, almost four times higher than in 2014.)

‘You need to be more proactive in your assessment of UK deals now.’

David Walker, Latham & Watkins

Despite the internationalisation of legal practice, Slaughters maintains its commanding reputation in this area and in October wiped £600m off a £1bn claim against British Airways over its role in an air cargo cartel involving 23 airlines. HSF and Linklaters have maintained their strong positions, despite some partner exits, while A&O has strengthened after hiring Alasdair Balfour from Fried, Frank, Harris, Shriver & Jacobson in the City in 2013.

Mordaunt’s departure, along with Brussels-based Johan Ysewyn’s move to Covington & Burling and global antitrust head Oliver Bretz’s exit to launch his own competition boutique in 2014, are undoubtedly a blow to CC’s practice and the firm is seen as one of the only UK practices to drift over the past few years. Nonetheless, the firm retains bench strength in partners such as Elizabeth Morony, Alex Nourry and Jenine Hulsmann. CC has also won two of the four state aid cases run by the European Commission as it clamps down on tax avoidance, and is advising FairSearch, along with consortium members Allegro, Nokia and Oracle, on the huge antitrust investigation into Google’s abusive search practices.

Even the threat of Brexit, it seems, is unlikely to slow growth in antitrust work, with Brussels-based Freshfields partner Alan Ryan arguing that a British exit from the EU ‘would only double the amount of work as mergers would have to pass the CMA and the European Commission – not just one or the other’. This too, is likely to play into the hands of the Magic Circle, as a Brexit would most likely lead to greater diversity in approach, leaving US firms that have tended to focus on only one of the two European hubs exposed.

‘We have been growing non-stop for a decade,’ says Ryan. ‘We’re the largest antitrust team in Europe but even we need to keep investing to keep up with the pace of change. The noise coming from Clinton and Sanders has already ramped up the pressure, and God only knows what would happen if Trump wins.’ LB

tom.moore@legalease.co.uk