SYDNEY: 28 November 2014 – The European Commission’s former Vice President and Competition Commissioner Joaquín Almunia had a busy last week at the office. On 21 October 2014, the European Commission announced that it had agreed fines with a number of banks relating to the manipulation of two benchmarks. The first was Swiss Franc LIBOR and the second on the “bid/ask spread” of Swiss franc interest rate derivatives. The Commissioner also delivered a message in a speech on anti-trust litigation. This reflected the formal adoption by the EU Council of Ministers of a European Commission proposal for a Directive on antitrust damages actions on 10 November 2014.

These were not “business as usual” messages. Although the cartel media release is a continuation of the work of the Commission described by Justin O’Brien and announced in December 2013, former Commissioner Almunia’s parting shot has illuminated a path in the regulatory morass.

Taken alone, an announcement on Swiss Franc Libor is not critical. The US Commodity Futures Trading Commission (CFTC) includes the Swiss Franc in its “other currencies” when it reports on currency swaps. An examination of the Depository Trust and Clearing Corporation’s Swap Data Repository (“SDR”) indicates that Swiss Franc swaps have comparable volumes to those of the New Zealand dollar. However, the announcement by the European Commission on Swiss Franc benchmarks demonstrated two things. First, that the European Commission is committed to treating benchmark manipulation as cartel conduct. Second, that there can be a separate cartel in bid/ask spread setting as well as in the underlying benchmark rate.

In turn, the settlement of the fines associated with the cartel conduct allowed the outgoing Commissioner to make a statement, both written and in video form, which ended with the ringing warning:

“Acting against financial cartels is one of our top priorities … all market players in this sector must be aware that no violation of antitrust rules will be tolerated”.

Having warned the sector that benchmark and spread manipulation are to be considered cartel conduct, Almunia turned to his parting shot. His final speech was to mLex, a commercial organisation that provides regulatory risk analysis services. His speech had the title “Antitrust litigation – The way ahead”. In it, he reviewed the European Commission’s Directive on Antitrust Damages Actions (the Directive). In this speech, the Commissioner made it clear that he regards this directive is one of the most important achievements of his term. He noted that:

“Certain breaches of competition law harm large numbers of citizens. In these cases, collective action is the logical response, and that will make private enforcement even more effective as a complement to public enforcement”.

This concept that the rights of private action, which are set out in the Directive, are additional to the public action was reinforced in the speech:

“The underlying principle is that the fines imposed by public enforcers – both the Commission and national agencies – and the damages awarded in court are complementary; there is no trade-off”.

The Directive changes the approach in the European Union for damages caused by cartel conduct. It requires each member state to adopt a range of measures that are friendly to claimants and have at least five characteristics:

• a rebuttable presumption that cartels cause harm
• a right to discovery, including discovery from competition regulators
• where a price increase due to an infringement is "passed on", the indirect purchaser also has a right of action
• a full immunity recipient has primarily liability only to its own customers (or providers)
• the minimum limitation period should be at least five years

In his last week on the job, the Commissioner joined the dots between cartel conduct of financial institutions and potential actions by consumers of financial services.

The effect of the announcement on the Directive is that downstream consumers, whether they are bank customers or members of pension funds, have been invited to climb aboard the cartel punishment bandwagon. Whereas private actions to enforce competition law are not unusual in common law countries, the Directive provides further certainty in EU common law jurisdictions as well as new litigation opportunities in civil law states. The presumption of harm flowing from a cartel reduces the burden of proof on the victim. The effect of the price “passed on” provisions mean that end consumers who have been affected will have a course of action.

The stark message from the Commissioner is that the settlements made by banks in respect of benchmark manipulation will not be sufficient. The provisioning for “litigation costs”, the bankers’ code for settled fines for wrong-doing, as announced by banks such as Deutsche, Barclays, RBS and UBS may have to be supplemented by significant contingent liability provisions for the downstream effects.

In turn, the courts across all of the European states will need to be able to determine the actual losses and this is a non-trivial challenge.

The implementation of the Directive in terms of the laws introduced in each of the European Union member states will be an interesting exercise from both a drafting and a policy perspective. If the law implementing the directive does not give plaintiffs the certainty that is intended, then they may end up forum shopping the action. As Almunia said in his final speech:

“Another achievement of the Directive is that it will harmonise national laws. Its rules will apply throughout the EU and will make sure that all victims can claim damages irrespective of where they live in Europe”.

The absence of a public antitrust action against benchmark manipulation in the United States means that the distinction between competition law and policy in the US and the European Union is even more sharply focussed. However, there are likely to be actions taken by US entities with legal presence in the European Union as soon as the Directive is implemented.

Almunia’s parting shot is likely to ricochet.

The messages from the Commissioner are stark and indicate that the potential for competition law to eclipse financial services regulation discussed by Nicholls and O’Brien is being realized, at least in the European Union.