UK: What Is Really Wrong With The New Criminal Cartel Offence?

Last Updated: 29 September 2015
Article by Stephen Hornsby
Too broad, too limited: and too far and too fast.

Over the summer, a jury took less than three hours to acquit two businessmen in the galvanised tank industry who had been charged with price fixing. One other member of 'ring' who had pleaded guilty is awaiting sentence and is doubtless regretting his plea (see footnote 1).

Prison is expensive for the taxpayer and its aims (usually deterrence) are frequently debated. So Parliament needs to show beyond reasonable doubt that a new criminal offence is really necessary before introducing a new one – and then only as a last resort.

The burden of proving a need for a criminal offence is probably discharged when it comes to financial market abuse: rigging benchmarks to favour a bank's own book should probably have been illegal from the start. But should small time metal bashers who try (and usually fail) to maintain or raise prices really be imprisoned? What would be the purpose of their imprisonment given that as they would be most unlikely to serve more than half their sentence.

Parliament has at least answered the first question by saying that price fixers should be subject to the risk of imprisonment. The case for imprisonment was simply stated in the debates leading to the adoption of the cartel offence in its original form. The Minister introducing the offence said that cartels are theft (though of course not all thieves go to prison).

Recently (April 2014), the initial requirement of 'dishonesty' was removed to make convictions easier to obtain. It was the absence of 'dishonesty' that influenced the jury in the galvanised tank case and led to their acquittal. Doubtless, convictions will be easier from now on because the Competition & Markets Authority does not have to show 'dishonesty' but problems are likely to remain.

Cartels have been either legal or gone unpunished for years. They were actually legally enforceable until 1956; and even up until 2000, cartels that did not affect international trade (which the EU penalised, sometimes heavily) only needed to be registered with the old Office of Fair Trading to be enforceable, unless struck down subsequently by a special court. Although few cartels survived court scrutiny (even those that were designed to save jobs) financial penalties could not be imposed whether registered or not. In fact, financial penalties could only be imposed on repeat offenders who broke court orders and no one was actually imprisoned for breach of these orders.

So what is really wrong with the new offence? Critics – mostly lawyers – don't like the fact that the offence is broadly drafted and catches a lot of legal activity. This criticism intensified once the 'dishonesty' requirement was dropped as it acted as some sort of filter.

The difficulty with this criticism is that other civilised countries have had a cartel criminal offence without a dishonesty requirement (US and Ireland). Procedural rules such as publication (which gives immunity) can deal with this criticism in part. Doubtless the Competition and Markets Authority could and should do more. For example, guidelines could be produced indicating by reference to decided cases what type of cartels would merit criminal prosecutions in the future.

The reference to type of cartel helps flag the real problem with the whole criminalisation project which the new and broader offence exacerbates. Despite the assertions of the Minister in Parliament, some cartels, far from being theft are actually a "good thing" and they have been supported by regulators and government. This uncertainty about the formal classification of certain activity as criminal, feeds into the mind-set of the businesses, judges and juries who are not natural competition law zealots but whose views count.

To take one example, building societies ran a cartel in the residential mortgage market for years with Bank of England approval. The restriction on improvident lending helped keep house prices in check until it was abandoned.

Policy makers can also sometimes promote price competition which has worked out badly for the public or actually opposed price competition where it might help. Deregulating buses outside London has led to price wars with unsatisfactory consequences for consumers (congestion and pollution). On the other hand, in the English water industry, the regulator fought tooth and nail for many years to stop a new entrant offering water to industrial users in Wales. Such competition was permitted in Scotland and has been beneficial. So price competition isn't invariably the answer across the board and those supposed to promote it don't always do so.

An additional and very serious problem is that tacit coordinated price rises that are feature of highly concentrated industries where a handful of competitors have an identical need to avoid ruinous competition, don't come within the law at all, let alone the criminal law. Bearing in mind that this phenomenon can occur in key industries such as oil and electricity which are a vital interest to consumers, it is scarcely surprising that the public might take a rather relaxed view of cartels where participants are not blessed by such a limited number of competitors to begin with. If the big boys can't get it in the neck, why should the small fry?

All these points are reflected in surveys on public attitudes to the cartel offence. In 2007, most felt that imprisonment was not justified. In March 2015, an even more important survey came out commissioned by the Competition and Market Authority. This showed that 55% of businesses surveyed did not believe price fixing was even unlawful, let alone criminal. This is a pretty staggering statistic when one bears in mind that the criminal cartel offence seeks to enshrine price competition as a cardinal virtue.

It is one thing to change public perception by liberalising a previously prohibited practice; it is quite another to go in the opposite direction; this is a major challenge for the cartel criminalisation project. This is particularly the case where the offence as currently designed means that top management is not vulnerable to custodial sentences but only the actual fixer who is usually at a much lower level in the organisation. The offence – especially shorn of 'dishonesty' does not really 'take' in the current climate and should really be looked at again or guidelines produced to confine it to really exceptional cases.


Footnote 1: The Defendant who pleaded guilty was recently given a suspended sentence of six months imprisonment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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