|April 1, 2014|
Previously published on April 1, 2014
After four years of preparation, the new UK competition regime comes fully into effect today (1 April). The most visible change is the creation of a new unitary competition authority, the Competition and Markets Authority (CMA). While the CMA was formally established six months ago, today marks its formal adoption of powers from the legacy competition authorities (the Office of Fair Trading (OFT) and Competition Commission (CC)), which have now been abolished.
The CMA combines the competition functions of the OFT and CC, as well as some (but by no means all) of the consumer functions of the OFT. The two legacy authorities have been in existence (albeit under different names) since 1973 and 1948, respectively. The final abandonment of the long-standing “British model of competition policy”, in which responsibility for enforcement is shared between an administrative first phase consumer and competition authority and a second phase investigative commission, marks in itself a significant change in the UK competition landscape. Ironically, the transfer of most of the OFT’s consumer protection powers to other bodies, to create a more tightly focused competition enforcement authority, runs counter to the trend seen in some other jurisdictions, such as the Netherlands, to combine consumer and competition roles into new single regulators.
Although the substantive legal regime has not been subjected to any such radical changes, today’s institutional change is accompanied by a number of procedural changes that are worthy of note. In summary, the key changes coming into effect today are:
- a widening of the criminal cartel offence by removing the requirement that individuals must have acted dishonestly before the offence can be committed, to make it easier for the CMA to bring cartel prosecutions;
- revision of the antitrust regime, including a new power to interview individuals, new civil penalties for non-compliance with information requests and a lowering of the threshold for the granting of interim measures;
- revision of the merger review regime, including enhanced information gathering powers, a more prescriptive merger filing process, expanded powers to prevent the consummation of a merger, the introduction of statutory timetables for first phase merger reviews and changes to the procedure for negotiating remedies;
- changes to the market investigations regime, to widen the circumstances in which the Government can initiate an investigation and to enable the CMA to investigate common issues across two or more markets; and
- changes to the way in which sectoral regulators enforce competition law, to ensure better coordination and potentially lead to enforcement activity by the CMA in regulated sectors.
Taken together, these measures are designed to enable more effective competition law enforcement, as part of the Government’s wider economic growth agenda.
The process of creating the CMA started even before the Enterprise and Regulatory Reform Act 2013 (ERRA) received Royal Assent, with its Chairman (Lord David Currie) and Chief Executive (Alex Chisholm), being appointed in 2012 and early 2013 respectively. The formation of the CMA Board was completed in September 2013, with notable non-executive appointments including Bill Kovacic (a past Chair and General Counsel of the US Federal Trade Commission) and Philip Lowe (a past Director General for Competition at the European Commission). The appointments of a number of Senior Directors and Directors have also been confirmed in recent months.
The Government’s intention is that the creation of the CMA, as a single integrated competition authority, will bring about significant benefits to business and consumers, due to its ability to bring greater coherence, flexibility, speed and transparency in the operation of the competition regime. In the view of the CMA’s new Chairman, the new authority will also be able to better manage its resources and be a stronger advocate for competition and consumer protection in the UK and abroad by having a single voice. Faced with calls to preserve the strengths of the UK’s dual agency system, including the guarantee of an unbiased second phase review by a fresh panel of independent experts, the Government has created the CMA as a hybrid body that preserves aspects of the previous dual agency structure, with decisions on second phase merger and market reviews continuing to be taken by CC-style panels.
The depth of expertise and experience of the CMA Board should give the CMA a good start from day one. The CMA has also made some notable hires into senior executive positions, including from law firms and economic consultancies. Most of its staff, however, have transferred over from the legacy agencies, with officials generally being ‘job matched’ to new roles that reflect their prior experience. While this should ensure a welcome transfer of institutional memory to the CMA, some senior staff have left in the run-up to the merger and it remains to be seen how long it will take for the disparate groups of staff to form a coherent whole.
The CMA’s strategic goals
Since the CMA’s creation in October, a number of documents have been published setting out on overall strategy for the CMA. In particular, the CMA has published a document entitled Vision, values and strategy for the CMA and has recently completed a consultation on its Annual Plan for 2014/2015.
The CMA lists five goals in Vision, values and strategy for the CMA: (i) deliver effective enforcement, (ii) extend competition frontiers, (iii) refocus consumer protection, (iv) achieve professional excellence, and (v) develop integrated performance. The document also outlines a number of strategic choices for the CMA, including the areas of the economy that the CMA is likely to focus on in the first couple of years. Notably, the CMA states that it is likely to focus on regulated sectors, emerging sectors and business models (including online industries), and markets in what have historically been public services where the opportunities for competition to develop may be greatest.
The Government’s Steer
As part of its overall reform package, the Government introduced a Ministerial statement of strategic priorities for the CMA, referred to as the ‘Steer’. According to the Government, the Steer is intended to make Government engagement with the CMA more transparent, as part of the CMA’s overall ‘accountability framework’, by providing a statement of the Government’s strategic priorities that the CMA can reflect upon but is not bound by. The final version of the Steer for 2014 - 2017 was published in October 2013.
The Steer states that it is the CMA’s role to “ensure that the forces of competition are fully harnessed to support the return to strong and sustained growth”. In particular, the Steer suggests that the CMA should: (i) identify markets where competition is not working well and tackle the constraints on competition in these cases; (ii) enforce antitrust rules robustly and fairly, including an appropriate mix of complex and simpler enforcement cases, conclude cases quickly but fairly; (iii) play a key role in challenging Government where government is creating barriers to competition; and (iv) work with and through partner agencies to deliver positive competition outcomes - including working with sectoral regulators. Given the rather general and high-level language of the Steer, it remains to be seen how far it will affect the work of the CMA in practice.
Since the entry into force of the Competition Act 1998 (CA98), it has been a distinct feature of the UK regime that sectoral regulators (including Ofcom for the communications sector, Ofwat for water, Ofgem for energy, the CAA for civil aviation and the ORR for rail) have had the power to apply general competition law concurrently with the OFT. In practice, this has meant that sectoral regulators have been left to enforce competition law in their respective sectors, with the OFT concentrating on the rest of the economy.
During the current reform process, concerns were raised by Government over what was seen as a relative lack of competition enforcement in regulated sectors and a general preference on the part of sectoral regulators to use their sector-specific regulatory powers. Although early threats to remove general competition powers from sectoral regulators were not carried out, the new regime includes a number of measures that are intended to increase competition law enforcement in regulated sectors. First, new regulations have been introduced to enhance coordination between the CMA and the sectoral regulators. As well as providing for more formalised discussion between regulators and the CMA over enforcement in regulated sectors through a new ‘UK Competition Network’, the new regulations crucially provide that it will ultimately be for the CMA to decide which authority will investigate a particular case. This means that the CMA may in certain circumstances take a case away from a sectoral regulator. In extreme cases, it will also now be possible for a Government minister to remove a sectoral regulator’s general competition powers altogether.
Second, sectoral regulators are now expressly required to consider whether the use of their competition law powers is more appropriate before taking enforcement action under their sector-specific, regulatory powers. The Government clearly hopes that the refocussing of sector regulators’ powers to give primacy to their competition powers will lead to more competition investigations in regulated sectors. Because of the political pressure on the CMA to become more active, we are also likely to see the CMA playing a more prominent role in such investigations, whether the CMA carries out the investigations itself or feeds into an investigation led by a sectoral regulator. Indeed this has already been seen in practice, with the OFT, Ofgem and CMA cooperating on a recent review of retail energy markets. This work is likely to lead to the CMA’s first major market investigation being in this sector, following the announcement on 27 March that Ofgem is minded to refer the energy market to the CMA for an in-depth review.
Over the years, the OFT and CC have produced a large number of guidance documents or ‘guidelines’ to help outside parties to understand and apply the competition regime. The wide-ranging nature of the current reforms necessitated the creation of new guidance documents outlining the CMA’s approach to the exercise of its functions, as well as the revision of a number of existing CC and OFT guidance documents to reflect the new legal framework. The final versions of the new CMA guidance documents were published in two tranches, in January and March 2014.
While it is beyond the scope of this client advisory to summarise all of the changes reflected in the new guidance documents, it is worth noting the following developments.
Cartel offence prosecution guidance
As we have previously reported, the ERRA has made a significant change to the criminal cartel offence by removing the requirement of personal dishonesty as an essential element of the offence, and instead introducing a number of exceptions and defences (our previous client advisory is available here).
The ERRA also places a duty on the CMA to issue guidance on how it intends to prosecute the offence, to address concerns over its new wider scope. Disappointingly, the prosecution guidance that the CMA has produced provides limited information on this point, other than confirming its desire to focus its activities on prosecuting individuals participating in hard-core cartels. In particular, it fails to give examples of specific conduct that, while technically caught by the offence, is unlikely to result in prosecution.
The new regime preserves the basic structure of UK merger control, namely a voluntary notification regime in which mergers may be reviewed if they involve the acquisition of a company with UK revenues of more than £70 million or lead to the creation of a combined ‘share of supply’ of 25% or more in the UK or a substantial part of it. There have been extensive procedural changes to the regime, however, including the introduction of a statutory 40 working day time limit for first phase reviews to replace the previous practice of applying an informal administrative timetable in most cases. In addition, all merger notifications must now be made by way of a prescribed Merger Notice, rather than by a more flexible informal submission. The CMA will also have new powers to fine parties and third parties for not providing information requested in the course of a merger investigation and will make greater use of powers to prevent merging parties integrating their businesses while an investigation is underway. Although the UK merger control regime will remain familiar to those who have encountered OFT and CC merger reviews, the combination of these changes is likely to make the new regime less flexible and more burdensome for merging parties, especially at the outset of the notification process.
As noted above, the ERRA introduced a number of measures to harmonise and strengthen the powers of the CMA to gather information, including a new power to impose administrative penalties for failures to comply with formal requests for information. The administrative penalties guidance seeks to explain the factors that the CMA will take into account when deciding whether to impose an administrative penalty for non-compliance, and the level at which it will set the fine. It remains to be seen how far the CMA will make use of these powers in practice, however. It is to be hoped that it will not be too heavy-handed in levying fines for non-compliance, especially on third parties receiving information requests in the course of an investigation of a merger by a supplier or competitor.
CA98 procedures guidance
The OFT had already revised its procedures for investigations under the Competition Act 1998 in 2012. The new CMA guidance builds on the progress made by the OFT in improving the robustness of decision-making and transparency of investigatory procedures. The new guidance also now provides additional details of the procedure for settlements, which allows undertakings under investigation to settle a case under a streamlined administrative procedure in exchange for a discount on the fine to be imposed. The new guidance also provides some information on how the CMA will exercise its new powers to interview individuals.
Given earlier critical statements of dissatisfaction by Government concerning the OFT’s record in antitrust enforcement, it is notable that the changes in this area are relatively limited and incremental. The Government has reserved the right to make more fundamental changes to the regime, however, in the event that the promised improvement in enforcement is not forthcoming.
Today marks a new phase in the development of the UK competition regime. While many aspects will remain familiar, the single agency structure is new and it remains to be seen how this will impact enforcement activity. For example, will the fact that the CMA will now be making reference decisions and undertaking in-depth market investigations itself, using its own staff, have an impact on its willingness to open such investigations, given that it may involve taking staff away from other activities such as antitrust enforcement? Will the decision-making panels remain as independent as they were in the CC, now that they are operating within the CMA? Will the fact that the same body will be selecting markets to review, undertaking market investigations and imposing remedies raise human rights concerns? Will it in fact be easier to enforce the revised cartel offence or do the new defences and exclusions introduce additional uncertainty?
Whatever the answers to these questions may be, it is clear that the remainder of 2014 is set to be a period of transition, not only for those working in the competition authorities, but also for business and their advisers, as they familiarise themselves with the myriad changes taking place.
In the longer term, it seems likely that the Government’s clear desire to see more enforcement will lead to an increased regulatory burden on at least some businesses, particularly those in regulated industries. The financial services industry is already under considerable scrutiny by the Financial Conduct Authority, and (as noted above) Ofgem is poised to refer retail energy markets to the CMA for an in-depth investigation. It is perhaps an indication of the toxicity of the current political debate around energy markets that the affected companies actually welcomed Ofgem’s announcement of an investigation, on the basis that an extended competition review should at least help to neutralise public criticism of the industry while it is underway.
It remains to be seen whether the current level of political pressure will have a wider impact on the future work of the CMA. While it is worth bearing in mind that no competition authority can, or even should, act completely independently of its political masters since it exercises government power, independent decision-making in specific cases, on the basis of the facts before the authority, must remain at the core of any modern competition regime. It is therefore to be hoped that the CMA will now act quickly to assert its independence from Government, notwithstanding the essentially political context of its creation.