This article was written by Urszula McCormack, Neil Carabine, Edmund Wan, Leonie Tear and Alison Leung.
The Securities and Futures Commission (SFC) and the Competition Commission entered into a Memorandum of Understanding (MoU) on 16 April 2020. The purpose is to promote collaboration and the lawful exchange of information between the two regulators. This is the Competition Commission's first MoU signed with a financial regulator.
The MoU sends a clear message; that both regulators intend to ramp up enforcement action and are willing to work together to clean up bad practices in the market.
Will this be useful? Yes, from a regulator's perspective. However, it also raises important questions for institutions managing suspected breaches in terms of balancing the opportunity for formal leniency for self-reporting swiftly through an "open book" under the competition regime, whilst managing their reporting obligations under the securities and futures regime.
The MoU will undoubtedly change the way institutions report – for some, it is likely lead to simultaneous reporting, whilst for others, it could undermine the incentive to self-report (at all, or as swiftly). Various issues underpin this, including the different nature of the consequences (criminal vs civil) and the conflict that can arise between the interests of the relevant institution versus the individuals concerned.
This article summarises the scope of the MoU and how these thornier issues may arise.
1. Key details – to whom does this initiative apply?
The MoU sets out two key categories of market players in the securities and futures industry which are subject to the Competition Ordinance (Cap. 619) (Competition Ordinance"), subject to statutory exceptions, namely:
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NB. Certain parts of the Competition Ordinance are disapplied for Specified Persons. |
2. How will the regulators co-operate?
Under the MoU, the SFC and the Competition Commission have agreed to the following:
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Each regulator will notify and consult the other in relation to issues, such as changes to policies and procedures, that may have a significant implication for the other. |
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To share information pertaining to the other's functions or objectives regarding enforcement action to be taken by them against relevant market players in the securities and futures industry. This may include information relating to infringement notices, warnings, public reprimands, decisions or block exemption orders against market players (and their officers and employees). To facilitate direct sharing of information, the Commission will give consent to the Relevant Entity (or its officers) such that it may inform the SFC of the exercise of the Competition Commission's powers, and the details of the investigation. Each regulator may also make a formal request for information from the other. |
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To share and exchange views with each other on policy issues. The SFC may seek the Competition Commission's views on any competition-related issues. |
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To engage in other forms of technical cooperation, including ongoing communications between the two agencies, staff training and secondments, etc. |
3. Provisos and safeguards
The MoU does not have any legal effect, and the co-operation and sharing of information between the SFC and the Competition Commission is subject to a number of provisos and safeguards. Key provisos and safeguards include the rights for the SFC or the Competition Commission to decline to share information where:
- it is not permitted by law;
- the sharing of information could prejudice an enforcement action being taken by one of the regulators against a market player;
- an essential third party permission has not been obtained.
The SFC or the Competition Commission may also attach conditions to the provision of information, including how the information may be used and who it can be disclosed to.
4. Impact on market players
This MoU shows the regulators are eager to combat anti-competitive practices in the securities and futures sector.
The MoU also creates a new dynamic in relation to, and may undermine, the Competition Commission's Leniency Policy.
The Leniency Policy seeks to encourage self-reporting of activity such as bid-rigging and price fixing. It does so by offering the first member of the cartel to report the conduct (who meets all other requirements for leniency) an agreement not to take proceedings against it.
The SFC does not operate the same kind of self-reporting incentive scheme. Rather, a self-report will be taken into account as a mitigating factor in determining any penalty. Further, the SFC Code of Conduct sets out that SFC regulated entities must report to it immediately any material breach of SFC rules and regulations. Involvement in a cartel would certainly be considered a material breach. Further, failing to make such a report may be considered being uncooperative which would be taken into account by the SFC in determining any penalty.
On its face, this suggests that the interest of reporting under the Leniency Policy and the SFC Code of Conduct are aligned. However that is not necessarily the case. The Leniency Policy favours speed, and offers incentives for reporting. Reporting under the SFC Code of Conduct can reduce penalties, but does not carry the opportunity for immunity.
Furthermore, prosecutions under the SFO and the Competition Ordinance may also lead to different consequences. Market misconduct offences under the SFO carrying potential criminal ramifications, including up to 10 years' imprisonment. Whereas, breach of the competition rules creates civil liability only.
Conflicting interests can also come into play as between the senior management and the corporate. Whilst a corporate entity cannot be imprisoned, individuals can. This will be a key concern for any officers involved in deciding whether to seek leniency from the Competition Commission if they believe they could face criminal prosecution by the SFC.
There are also different thresholds for individual liability. Criminal liability for an officer of a corporation may arise where a breach can be shown to have occurred with their consent or connivance or due to their recklessness – that is, they do not need to have actively taken part in it.
On the other hand, individual liability only arises under the Competition Ordinance where the person engages in the economic activities, and attempts to contravene, aids, abets, conspires with etc any other person to contravene the competition rules, or is knowingly concerned in or a party to the contravention of the competition rules.
In practice, we find that SFC-regulated entities do seek to actively engage with the SFC and other financial regulators where a competition law issue arises. However, there are careful risk assessments that are undertaken, as well as an appropriate strategic approach to notifications, that takes into account the different regimes involved.
Bringing this together…
Any entity considering a self-report, will need to bear in mind the MoU going forward. This is likely to entail a disclosure plan that includes notifications to the SFC and the Competition Commission at the same time (or very nearly). This will help ensure the SFC hears about the conduct from the market player and not from the Competition Commission under the MoU. The Competition Commission may grant leniency and not take proceedings, but an SFC investigation and action is still possible. Whilst the obligation to report to the SFC was always there, this MoU hammers home this need and the limitations on the extent to which the Competition Commission's Leniency Policy acts as an incentive to report when the risk of regulatory action still remains, albeit by a different authority. The incentive is further weakened if individuals involved in deciding whether to seek leniency are at risk of prosecution.
Market players, including the licensed corporations and registered institutions, should make sure relevant officers and staff are well versed in competition law principles. This may also be an opportune time to review the policy manuals and procedures (including those relating to industry participation, whistleblowing, crisis management) to ensure compliance with the Competition Ordinance.
Of course – the facts and circumstances matter. We strongly recommend obtaining legal advice if any suspected competition law breach has occurred.
