On 25 April, the Enterprise and Regulatory Reform Act 2013
(the Act) received Royal Assent, marking the
culmination of a two year process to reform important aspects of UK
competition law. When the Act was published on 2 May, lawyers
finally had the opportunity to assess the full extent of the
changes that will be made to the competition law regime, after
almost a year of parliamentary debate. (While the 284 page Act
contains a range of other measures loosely related to the
Government's over-arching growth agenda, such as targeted
reforms to employment law and changes to copyright laws, this
update will focus on its competition law aspects.)
The key change arising from the Act will be the merger of the two
UK competition authorities, the Office of Fair Trading
(OFT) and Competition Commission
(CC), to form a new Competition and Markets
Authority (CMA). In addition, the Act introduces
important changes to investigative procedures in antitrust cases
(concerning suspected anticompetitive agreements and abuse of
dominance), merger control procedure, the scope of the criminal
cartel offence and the conduct of market investigations. The
CMA's explicit focus on competition will lead to the transfer
of most of the OFT's existing consumer protection
responsibilities to other bodies. The changes to institutional
structures and procedures introduced by the Act reflect the
Government's stated objective of achieving more active
competition law enforcement in the UK and there will be
considerable political pressure on the CMA to
deliver.
Creation of the CMA
The decision to merge the OFT and CC marks a departure from the
UK's long-established institutional system, which is based on
having one competition authority for first phase investigations of
mergers and markets (as well as antitrust investigations) and
another, entirely separate, authority for in-depth investigations,
as well as certain regulatory appeals. The two authorities have
evolved differently, to reflect their different roles, with the OFT
developing an administrative structure more similar to that of a
Ministerial government department or the European Commission's
Competition Directorate General, in which key decisions are
ultimately taken by the Chief Executive or senior officials,
whereas the CC operates largely through ad hoc case-specific teams
of officials and panels of part-time independent members, with
decisions being taken by the members themselves.
The main benefit of the current system is that in-depth reviews
are conducted by an entirely new team of investigators and decision
makers, reducing the risk of 'confirmation bias' (the
tendency for case teams to focus on strengthening their own case,
rather than questioning its premise, as an investigation
progresses). The downside is that the move to a new agency can
extend the process, as a new case team has to get up to speed with
the facts, and can make it harder for the authorities to allocate
scarce resources between cases efficiently. There is also some
inevitable duplication of resources, since each authority requires
its own senior management and teams of experts and each has
separate premises.
While achieving cost-savings through the removal of such
duplication appears to have been the main driver of the original
decision by Government to merge the authorities, as part of its now
largely forgotten 'bonfire of the quangos', this objective
has been rather overwhelmed by the complexity of the process of
merging the authorities and the knock-on effect of the merger on
the surrounding legislative framework. In addition, Government took
the opportunity offered by primary legislation to tweak a number of
aspects of the competition law regime, apparently in a bid to
improve procedural efficiency in a number of areas and hence to
facilitate more active enforcement.
The Act's primary provisions dealing with the merger are
limited to providing for the creation of the new authority, which
is required to "seek to promote competition, both within and
outside the United Kingdom, for the benefit of consumers", and
abolishing the OFT and CC. Further details are provided in Schedule
3 of the Act, which provides for the creation of a
board, which will be responsible for running the organisation
and taking key decisions (or delegating them to staff), and a
'panel'. The latter will serve as a pool of suitable
individuals for allocation to groups, which will serve as the
decision-makers in in-depth merger and market investigations.
Interestingly, the Act specifically provides that groups must reach
decisions independently of the CMA Board, even though the same
individuals may sit on both.
It is clear from this structure that the CMA will combine aspects
of the current OFT and CC structures, with the board largely
reflecting the OFT's current function and the panel mirroring
the CC's current structure. In fact, the consequential
amendments contained in the Act carry over the existing two-agency
terminology, whereby the OFT 'refers' mergers and markets
to the CC for in-depth investigation, to the CMA, which will be
under a duty to "make a reference to its chair for the
constitution of a group" if it considers that an in-depth
investigation is justified. How this set-up will work in practice,
including how the CMA will be structured, how it will select cases
and how it will reach decisions, has been largely left to the new
CMA management to decide. It will be particularly interesting to
see whether the CMA decides to use its panel members for
decision-making in areas beyond those currently handled by CC
groups, including in antitrust cases (where the CC currently has no
role).
The CMA is due to come into existence (albeit in skeleton form) on
1 October this year, in advance of it formally taking over from the
OFT and CC on 1 April 2014. At the time of writing, only the Chair
designate and Chief Executive have been named (Lord David Currie
and Alex Chisholm, respectively), while five non-executive director
posts were publicly advertised in March. Although it is expected
that the CMA will be staffed mainly by transferring employees over
from the OFT and CMA, the new authority will need to rebuild its
senior team, following recent departures of the OFT's
long-standing Chief Economist Amelia Fletcher and head of cartel
enforcement Ali Nikpay (to academia and private practice,
respectively). It is likely that the period between October and
next April will see senior officials at the OFT and CC becoming
increasingly involved in their new roles at the CMA, while at the
same time attempting to carry out their remaining functions at the
legacy authorities, with live case work switching over only on 1
April next year. Although both authorities have promised to hand
over an active case load to the CMA, there is bound to be some
impact on current cases, particularly in more discretionary areas
such as antitrust enforcement.
Antitrust investigations
Although, when announcing its decision to reform UK competition
law, the Government expressed dissatisfaction with the relatively
small number of antitrust cases being brought by the OFT, and the
duration of those investigations that are launched, the extent of
the Act's reforms in this area is relatively modest. The key
changes comprise the introduction of a new CMA power to "ask
questions" of individuals who manage or work for an
undertaking under investigation for infringement of competition
law, or did so in the past, as well as a new power to fine
individuals or companies that fail to respond to an information
request.
Taken together, these changes could prove to be powerful tools to
assist the CMA with gathering information expeditiously. In
particular, the ability to require key individuals to attend its
premises to be formally interviewed could, used properly, enable
the CMA to avoid some of the problems that have arisen from the
OFT's current, more document-based evidence collection process,
in which key facts that fundamentally undermine the OFT's case
have come to light only when witnesses have been cross-examined
during the appeal of an infringement decision.
Although the Government's threat of imposing statutory time
limits on antitrust investigations has not been carried out, the
Act does give the Secretary of State the option of introducing such
time limits by order at some time in the future, if investigations
are still taking too long. Ominously for the CMA, the Act
also obliges the Secretary of State to undertake a review of
the operation of the UK antitrust regime, and report to Parliament,
within five years.
Following Government criticism of the relative lack of competition
law enforcement by sectoral regulators, the Act provides for the
CMA to have the ability to take over an antitrust investigation
from a sectoral regulator, without yet specifying the circumstances
in which this may arise. The Act also gives the Secretary of State
the power to remove a sectoral regulator's competition law
powers altogether, and transfer responsibility for the enforcement
of competition law in its sector to the CMA, should he consider
that this is "appropriate".
Merger control
Having rejected the case for radical change to the current UK
merger control regime, beyond the abolition of the dual agency
review process, the Government has limited itself to a small number
of incremental improvements in this area. As a result, the UK will
continue to have a voluntary merger notification regime, under
which mergers need not be notified before completion but may be
investigated if the target generates annual revenues in the UK of
at least £70 million or the parties together supply or
consume at least 25% of a specified product or service in the UK or
a substantial part of it. The CMA will, however, gain wider
information gathering powers, as well as expanded powers to prevent
the completion of a merger, or to undo any integration that has
taken place. In addition, the Act introduces a new statutory time
limit, under which the CMA must decide whether to subject a merger
to an in-depth investigation within 40 working days of the start of
its review, and makes detailed changes to the way in which merger
remedies are negotiated, proposed and implemented.
The criminal cartel offence
As indicated in a previous
note, the most controversial aspect of the Act is the removal
of the dishonesty requirement from the criminal cartel offence.
Since 2003, it has been a criminal offence in the UK for two or
more individuals dishonestly to agree to implement specified
arrangements between undertakings. The "arrangements" so
specified include arrangements to fix the price for the supply of a
product or service in the UK, to "limit or prevent"
supply or production, to divide supplies or customers and to rig
bids. On conviction, an individual found guilty of committing the
cartel offence may be sentenced to up to five years'
imprisonment and/or an unlimited fine.
The requirement that individuals must have acted dishonestly for
the offence to be committed was designed to ensure that only the
most serious forms of anticompetitive conduct were criminalised,
reflecting the perceived need for a high threshold of individual
culpability (reflected in the offence's mens rea or
'guilty mind'), before such a punitive criminal conviction
could be imposed. So far, there has not been a single conviction
under the cartel offence, except for one case in which the
defendants pleaded guilty before the UK court pursuant to a plea
bargain entered into with the United States Department of Justice.
The Government accepted the OFT's argument that this was, at
least in part, due to the difficulty of proving the presence of
dishonesty to the requisite legal standard and the Act therefore
deletes the word "dishonesty" from the definition of the
offence.
The impact of this change is potentially dramatic, since it
effectively makes any agreement between individuals for
undertakings to engage in certain, defined types of arrangement a
strict liability offence, irrespective of the individuals'
intention or the arrangements' impact on competition.
Arrangements that can involve a degree of collective price setting
or production limitation include, for example, syndicated loan
agreements, insurance subscription markets, IP collecting
societies, credit card interchange arrangements and technology
licences. While there has been extensive analysis of the extent to
which such arrangements may restrict competition, and hence
infringe civil competition law, they are usually perfectly benign
and are in any event clearly a long way from the type of 'hard
core' cartel activity that was the intended target of the
criminal offence.
The understandable criticism of such a development has resulted in
the creation of a number of new defences, which were increased
during the passage of the bill through Parliament. As enacted, it
will be a defence if an individual charged with the offence can
show that:
- customers were given "relevant information" about the arrangements in question prior to agreeing to buy the affected products or services or that such information was published before the arrangements were implemented;
- he or she did not intend that the nature of the arrangements concerned would be concealed from customers before entering into the agreement in question;
- he or she did not intend, at the time of the making of the agreement, that the nature of the arrangements would be concealed from the CMA; or
- he or she took reasonable steps to ensure that the nature of the arrangements would be disclosed to professional legal advisers for the purposes of obtaining advice before their making or implementation.
The Act also provides for CMA to publish guidance on the
"principles to be applied in determining, in any case, whether
proceedings for an offence ... should be instituted".
The new defences do little to resolve the underlying flaw with the
offence, as amended, namely the failure to take sufficient account
of the intentions of the individuals concerned in defining the
scope of the prohibited conduct or of the effect of the conduct on
competition. As a result, while the defences should help reduce the
chance that perfectly legitimate conduct will be caught by the
offence, they do not remove it altogether. They also raise a number
of questions regarding practical implementation. For example, in
what circumstances will individuals be viewed as "concealing
arrangements from the CMA", given that in most cases there
would be no reason to tell the CMA about a routine commercial
agreement? Perhaps the best thing that can be said for these
amendments is that they are a good example of how not to define a
criminal offence.
Market investigation references
Unusually, the UK competition law regime empowers the competition
authorities to investigate entire markets, and to impose remedies
to address any concerns identified, in circumstances where no
market participant has engaged in conduct that would amount to an
infringement of a competition law prohibition. The Act makes
relatively few changes to this aspect of the regime, with the main
changes being to extend the powers of the Secretary of State to
initiate or intervene in market investigations on public interest
grounds and to enable the CMA to investigate issues across markets,
rather than being limited to investigating only one market at a
time. Although the list of specific public interest considerations
remains limited to national security, this list can be extended by
the Secretary of State at any time. As a result, this change
introduces a clear risk of greater ministerial intervention in, and
hence politicisation of, the market investigation regime.
The Act also provides a statutory framework for the early stages
of a market investigation for the first time, including the
introduction of compulsory evidence gathering powers, and reduces
the standard timetable for an in-depth market investigation from 24
to 18 months.
Conclusion
Now that the shape of the Act is finally settled, the
focus of Government, the authorities and the wider competition law
community will switch to implementation, in the run-up to the CMA
opening its doors next April (or rather, changing the sign on the
door of the CC's offices, where the CMA will be based). We can
therefore expect to see a wave of consultations in the year ahead,
on a wide range of matters including merger procedures, antitrust
investigations, guidance for cartel offence prosecutions and new
market investigation procedures. Companies and their advisers will
need to respond to these consultations, as they arise.
In the short term, the focus of staff at the OFT and CC is likely
to switch to their roles and responsibilities in the new
organisation, which may have a knock-on impact on current
enforcement. Given the extent of the institutional and procedural
changes introduced by the Act, a period of disruption and
uncertainty seems inevitable. Only time will tell whether the short
term costs of these changes are outweighed by the hoped for
longer-term benefit of a more effective UK competition law
regime.
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