European Commission Sector Investigations

Hedge funds should sit up and take notice

Lorcan Tiernan and Sinead O'Loghlin, Dillon Eustace
Originally published in the May 2005 issue

New EU competition commissioner Neelie Kroes announced on March 10th 2005 that the European Commission ("the Commission") is intending to launch vast investigations into several key industries, such as energy and financial services. It is expected that the so – called "sector investigations" will start in May 2005, although no timing details have been released so far. Commissioner Kroes views the financial services sector as key to Europe's overall competitiveness, and has decided to undertake a sector investigation as "competition does not appear to be functioning as well as it might".

As part of the renewed Lisbon Strategy, Commissioner Kroes intends to use the powers under Regulation 12003, allowing the Commission to conduct investigations into sectors where competition does not appear to be functioning as well as might be expected. The financial services sector has been specifically earmarked for immediate investigation. The Commission's sector investigation will include an inquiry into hedge funds. Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Thus, a hedge fund is a consumer of financial services, bringing them within the scope of the Commission's investigation. While there is no timetable for the Commission's investigation, it is usual for such sectoral inquiries to last six months.

It is contended that the Commissioner's announcement has significant implications for all Irish financial service providers. The EU Commission by instigating a sector investigation, is evidently concerned about the regulatory regime that is currently in place, and its effects on the levels of competition across Member States. The announcement signals another important chapter for future regulation of one of the four infrastructures which underpin the EU's economy.

Procedural Background to Sector Inquiries

Regulation 12003 is the directly applicable EU legislative instrument which sets out the procedural powers of the Commission in competition matters. The Commission considers that, in the framework of Regulation 12003, sector inquiries will provide a particularly appropriate instrument for investigating cross -border market concerns and examining sector -wide practices that do not normally fall within the scope of an individual case. The Regulation enables the Commission to investigate suspicious pricing structures and other practices that indicate a possible anti-competitive situation which may exist across an entire industry. Furthermore, indications that specific companies have infringed the competition rules are not required to trigger a sector inquiry.

Although there is little experience of sector investigations (there have been ten in over forty years of EU competition law enforcement), the Commission is entitled to launch a sector inquiry where the trend of trade between Member States, the rigidity of prices or other circumstances suggest a restriction or distortion of competition1. Regulation 12003 confers wide powers of investigation, prosecution and punishment on the Commission in competition matters. The Commission's investigative instruments are essentially threefold under Regulation 12003 which include: requests for information2, the taking of statements3, and the conduct of inspections4.

The Commission has extensive powers to request information. Article 18 of Regulation 12003 empowers the Commission to request information from the governments and competent authorities of Member States and from undertakings and associations of undertakings. The Commission may require undertakings and associations of undertakings to provide all necessary information. The term "necessary information" means information that might enable the Commission to verify the existence of the presumed infringement referred to in the request which justified the initiation of the inquiry5. When sending a simple request for information to an undertaking or association of undertakings, the Commission is required to state;

  1. the legal basis;
  2. the purpose of the request; and
  3. specify what information is required and fix the time – limit within which the information is to be provided6.

Severe fines may be imposed if the undertakings concerned supply incorrect or misleading information to the Commission7. Thus, it is wise to ensure that questions raised by the Commission when interviewing any natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject-matter of an investigation are answered in good faith. The failure to fully disclose information relevant to the Commission's investigation, when requested, may result in punitive sanctions under Article 23 of the Regulation.

Under Article 20 the Commission possess powers to conduct all necessary inspections of undertakings and associations of undertakings. To this end, the officials authorized by the Commission are empowered:

  1. to enter any premises, land and means of transport of undertakings and associations;
  2. to examine the books and other records related to the business;
  3. to take or obtain copies of or extracts from such books or records;
  4. to seal any business premises and books or records for the period and to the extent necessary for the inspection; and
  5. to ask any representative or member of staff of the undertaking or association of undertakings for oral explanations relating to the subject-matter and purpose of the inspection and to record the answers.

The Commission has far-reaching powers of investigation and inspection. It is reasonable to expect that all financial service providers who fall within the scope of a sector investigation would be well advised to treat them with the same respect and caution as any other investigation of a suspected infringement of EU competition law and ensure full co – operation with the Commission to avoid the punitive provisions of Article 23.

Central to understanding the driving force behind the Commission's decision to investigate the financial services sector is the recognition that there are still obstacles to competition – "be [they] regulation, State aid, [or] private barriers"9. Hence, Commissioner Kroes has invited interested parties to inform the Commission of national/EU regulatory barriers to effective competition in the financial services sector, so that appropriate action can be taken to address the inefficiencies of the current prudential regulatory framework. In sector investigations the Commissiontypically sends questionnaires to industry participants, regulatory authorities, government departments, trade associations etc, seeking information. It also invites other third parties to provide information through publishing questionnaires on its website. While this approach usually operates voluntarily, the Commission can compel companies to provide information.


Hedge fund managers have an invaluable opportunity to contribute meaningfully to this process and have a significant input into shaping the future regulatory infrastructure that will inevitably be put in place after the sector investigation has been concluded.

A sector investigation of the financial services market in Europe should be welcomed, since it may provide opportunities for hedge fund managers to put forward arguments relating to better application of the competition rules in the sector. In many jurisdictions, it is difficult to obtain the requisite regulatory authorisation to establish a hedge fund. At present, also it is very difficult to market hedge funds effectively throughout the EU, which has serious implications for the competitiveness of European hedge funds in the world market. Currently, where hedge fund managers wish to widely market a hedge fund in another EU Member State, he/she must jump through an inordinate number of hoops to get to that point. These requirements are costly and restrictive of competition.

The Commission must look at these regulatory barriers as fetters to effective competition. Thus it is important for interested parties in the hedge fund industry to establish a line that reflects their best interests and to ensure that their collective views are put forward consistently and effectively, so the Commission can analyze any alleged anticompetitive practices in a systematic and transparent manner.

  1. Regulation 12003, Article 17
  2. Article 18
  3. Article 19
  4. Article 20
  5. Case T- 3990 SEP v Commission [1991] ECR II – 1497 at 1509 – 15104 Article 20
  6. Article 18(2)
  7. Article 23(1)(a) The Commission is entitled to impose on undertakings fines not exceeding 1% of the total turnover in the preceding business year for supplying incorrect or misleading information
  8. Article 19(1)
  9. Neelie Kroes, "Anti – trust reform in Europe: a year in practice", Brussels, 10th March 2005