In the context of continued regulatory scrutiny of the financial services and insurance sectors by competition authorities, the European Commission announced on 24 April 2017 that it has issued a tender to analyse the competition implications of loan syndication in six EU Member States. This follows indications by the Commission in its Directorate-General for Competition's (DG Competition) 2017 Management Plan that the loan syndication area "exhibits close cooperation between market participants in opaque or in transparent settings … which are particularly vulnerable to anticompetitive conduct". In December 2016 Competition Commissioner Vestager stated that “our work in the financial sector is not done.” Banks active in loan syndication should be on alert that their practices will be reviewed for competition law compliance.
The Commission is seeking a contractor to analyse the loan syndication markets in France, Germany, the Netherlands, Poland, Spain and the UK, with a maximum duration for the study of nine months. The "systematic analysis" must cover syndication formation and composition, recurring contract terms, loan origination and operation and restructuring. The Commission is also seeking details on the "[m]ain economic benefits and drawbacks of syndication for lenders and borrowers", and an assessment of the most important competition law cases and determinations in this field.
The Commission has specifically asked that the study cover risk at the pre-formation stage, and to assess the:
"nature of information exchange and risk of anticompetitive coordination before closure: effects of existing client relationships between (potential) lead arrangers and borrowers, contacts between lenders during "market sounding", during preparation of bank book by arrangers (investigating prices at which investors are willing to invest, rates, fees), during kick-off bank meetings; scope and effects of non-disclosure requirements determining confidentiality duties of lead arrangers and other lenders".
The pre-formation stage involves particular competition risks, given the potential for coordinated behaviour between competitors.
This tender launch is significant as such studies are often a prelude to a sector inquiry or formal enforcement action. Sector inquiries have previously been used by DG Competition to analyse the competition dynamics in a range of industries, including the business insurance sector. They can involve burdensome document demands and even the use of dawn raids to seize evidence. Further, the likelihood of such a development in the loan syndication area is increased by recent regulatory interest in related markets. Last year, DG Competition concluded that the insurance equivalent of syndicated loans (co-insurance practices) should no longer be automatically exempt from breaching EU competition rules.
Loan syndication has long been a hot compliance area, as that it involves competitors cooperating to put together finance for a project. Given that syndication will likely receive increased regulatory attention in the near future, it will be important for all market participants to:
- consider their engagement strategies with regulators;
- ensure that they are fully compliant with competition law; and
- verify that all relevant competition compliance policies and training are up to date.
A key takeaway from prior sector inquiries is that early focused thinking on how best to respond in defence of legitimate industry practices is essential. Potential strategies could involve leveraging industry bodies or commissioning academic research.
Our Competition and Regulatory team regularly looks at syndication issues for financial services clients, and has extensive experience of helping clients navigate sector inquiries in a range of industries, including the business insurance sector. Please let us know if you would like to discuss these issues with us. In particular, we would be very happy to provide you with the benefit of our broad experience engaging with regulatory inquiries and enforcement actions, and to share best practices.