SYDNEY, 14 OCTOBER: As Justin O’Brien, George Gilligan and Olivia Dixon have demonstrated, financial regulators are increasingly using nuanced tools such as deferred prosecution to craft bespoke enforcement responses to perceived wrongdoing.  In contrast, competition regulators faced with potential cartel behaviour have used immunity or leniency as weapons of enforcement. The Australian Competition and Consumer Commission (ACCC) is currently reviewing elements of its cartel immunity policy with a view to fine tuning the arrangements.  Is there anything that financial regulators can learn from this?

One of the critical issues for cartel participants is that cartels are inherently unstable. The most efficient firm in any cartel is likely to be able to achieve a better outcome for shareholders by removing the restraint to competition imposed by the cartel behaviour. As a consequence, cartels have to rely on the expectation of punishment by other cartel members of a cartel defaulter. This punishment might include other anti-competitive behaviour such as price predation by all other cartel members. Immunity or leniency for the first firm which reports an undetected cartel adds to the instability of cartel behaviour. In the words of ACCC Chair Rod Sims, “The threat of detection destabilises existing cartels and deters the formation of new cartels”.

Providing an immunity or leniency is widely practised by competition authorities. The International Competition Network of competition regulators provides advice on drafting and implementing efficient programs. The Department of Justice and the European Union have similar policies. The United Nations Conference on Trade and Development’s model law on competition also refers to leniency programs for adoption by developing states.

The ACCC review of its immunity scheme is looking at fine tuning, rather than an overhaul. The issues facing the Commission, as well as practitioners in competition law, is how to provide certainty to those firms which are currently engaging in cartel conduct but which might be willing to identify the cartel, in exchange from immunity. The biggest risk for the cartel member is that it might not be the first member of a particular cartel to go to the ACCC. The ACCC discussion paper focuses on four major issues as well as simplification of the format of the policy (so that it can all be read in a single document).

The first is to introduce a ‘letter of comfort’ from the Commonwealth Director of Public Prosecutions (CDPP). Currently the ACCC issues such a letter, but the CDPP deals with the matter by way of an undertaking. The second deals with two exceptions to the immunity policy. Currently, the ACCC will not grant immunity to a ‘clear leader’ of a cartel or to a cartel member which has used coercion to force others to join the cartel. The Commission has found that the term ‘clear leader’ lacks clarity and is considering removing that exception while taking submission on coercion. The third area provides opportunities for a second reporter. This firm could potentially take advantage of the ACCC’s cooperation policy if it ‘adds value’. The ‘added value’ concept is used in the EU leniency program to reduce fines by up to 30%. The final issue is ‘amnesty plus’ where a firm can receive leniency in a matter in the case that it has qualified for immunity in another (for example, by identifying a further cartel).

The effect of immunity can be very significant. In Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617, Visy was fined $36 million for engaging in cartel behaviour with Amcor. Amcor was granted leniency as it reported the cartel. In Australian Competition and Consumer Commission v Admiral Mechanical Services Pty Ltd [2007] FCA 1085 a large number of air conditioning firms and their directors were also fined after immunity was granted to a cartel member. The ACCC provides examples of prosecution of cartels and an immunity program is not required in many cases.

The consistency of approach by competition regulators on a global basis to the issues of immunity or leniency might provide some insights for financial regulators as an adjunct to deferred prosecutions. From a regulatory perspective, matters such as Libor manipulation have characteristics that look very similar to one or more of the four basic forms of cartel behaviour: price fixing; bid rigging; market sharing; and controlling output. Freddie Mac’s litigation against a large collection of banks in respect of Libor manipulation alleges collusion similar to price fixing or bid rigging.

As a competition regulator, the ACCC will accept Federal Court enforceable undertakings under section 87B of the Competition and Consumer Act 2010 Cth (CCA). These form part of the ACCC’s approach to deferred prosecutions. These undertakings are given either to correct a harm or to prevent a harm occurring in the future (for example, as the consequence of a merger). The ACCC recognises cooperation in the event of admission of contravention of the CCA and this may include: complete or partial immunity from ACCC action; making submissions to the Court for a reduction in penalty; and/or agreeing to an administrative settlement instead of litigation. The ACCC keeps an online register of section 87B undertakings. The effect of the flexible enforcement regime that still provides certainty helps the ACCC to target cartels and to discourage other anti-competitive conduct.

Would a more flexible regulatory approach with an immunity/leniency regime work to reduce the risk of manipulation of the financial sector in the same way that it works to reduce cartel risk in other markets? The degree to which the ACCC and other regulators are able to fine tune immunity regimes suggest that there is a great deal of competition regulatory experience which might usefully be applied in the finance sector as part of a deferred prosecutions regime.