The National Audit Office publishes its report on the UK Competition Regime

On 5 February 2015, the National Audit Office (NAO) published a report entitled “the UK Competition Regime”.[1]  The report assesses the performance of the UK competition regulators, focussing on the Competition and Markets Authority (the CMA).  It also considers the eight sectoral regulators (the Office of Gas and Electricity Markets, the Office of Communications, the Water Services Regulation Authority, the Civil Aviation Authority, the Financial Conduct Authority (FCA), the Payment Systems Regulator, the Office of Rail and Road, and Monitor) but not the European Commission.  The report follows the NAO’s last assessment of the competition landscape in 2010, where it identified various deficiencies. 

The report concludes that the CMA has inherited certain strengths including a positive legacy of merger and market investigation work.  However, it has also inherited problems in competition enforcement, which derive, according to the NAO, from a difficult legal environment, very low business awareness of the organisation and competition law more broadly, and reputational damage caused by a series of high profile losses in court.  The NAO has made various recommendations which we set out below.  The report has been welcomed by the CMA itself, as demonstrating that the CMA “has made significant progress in improving how the competition regime works”.[2] 

Report Headlines

NAO’s Recommendations

The UK Government should:

  1. Regularly report the full cost of the competition regime and keep its cost-effectiveness under review; and
  2. Encourage greater flexibility and a more coherent approach across the regime.
  3. The Department for Business, Innovation and Skills (BIS) should: 

Develop indicators of the competitiveness of UK markets, like their profitability, and the cost of entry and exit.

  1. If the number of enforcement cases remains low, BIS, working with the CMA should:
  2. Consider the reasons for the low number of enforcement cases, and assess whether any legislative or institutional barriers should be removed.

The CMA should:

  1. Work to increase awareness of competition law, drawing on the work of other enforcement agencies;
  2. Do more to increase their enforcement workflow; and
  3. Get an external cost review of the processes and anticipated outcomes of the two major MIRs.

The CMA and the other sectoral regulators should:

  1. Develop a better understanding of consumer behaviour to better inform their proposed remedies.

Comment

Some of the headlines in this report will be familiar to observers of the UK competition regime.  The CMA’s low enforcement case flow was flagged in the last NAO report.[3]  It remains to be seen whether the increased case flow which the NAO has noted in its report is a sign of things to come and whether it will result in an increased number of enforcement decisions.  The report does note that there has been a change in the law regarding the criminal cartel offence and that the CMA has dropped all but one of the cases under the old legislation.

There are some fairly surprising statistics about the lack of awareness among businesses about competition law and the CMA.  The research which the NAO refers to, was conducted shortly after the creation of the CMA, which perhaps explains businesses’ lack of familiarity with the CMA.  Clearly the CMA has a lot to do to increase awareness – particularly about competition law.  Their current agenda clearly indicates that this is an important priority.  However, as the NAO suggests, some high profile successful enforcement cases would go a long way to increasing awareness of and compliance with competition law. 

The NAO notes that the CMA places a lot of emphasis on its market studies and MIRs.  From reading the report it is clear that the NAO is not sure whether these provide real value to markets and consumers.  One of its recommendations is to have the two current MIRs (energy and retail banking) externally assessed to consider what benefits they are likely to bring. As the report notes, the two current MIRs will be very important for the CMA in establishing its reputation.  The NAO is not the only body to show interest in the CMA’s MIRs.  The CMA received fierce criticism in November 2015 from MPs for their MIR on retail banking.[4] 

Detail behind the headlines

Effective competition is a priority for the government in its bid to improve productivity and growth.  The government set out two policy papers in 2015 aimed at creating and maintaining well-functioning markets in the UK.  It regards these as “essential to the UK’s long-term economic success”.[5] 

The coordination of the competition regime has improved but there are structural problems holding it back.  The CMA is more supportive of the smaller competition regulators than previously, particularly through the establishment of the UK Competition Network.  However, the sectoral regulators have different levels of financial support and report to different government departments.  The NAO found that overall, sectoral regulators still find it easier to use their non-competition powers.

Businesses awareness of the CMA and competition law is low, which may harm compliance.    According to the CMA’s 2014 survey of UK industry,[6] less than 2% of businesses knew the CMA well or very well.  Although only recently formed at the time of the survey, it compared very unfavourably to the FCA, which had only been created in 2013.[7]  In terms of competition law, only 23% of businesses felt they knew competition law well, while 20% had never heard of it at all and a further 25% did not feel they knew it well. 

There has been an increased effort to detect and punish anti-competitive behaviour, particularly in financial services.  Between 2001 and 2015, the Office of Fair Trading  (the OFT) and the CMA only identified three breaches of competition law in the financial services sector.  The European Commission has taken a number of high profile actions into financial institutions since 2013.[8]  The NAO observes that the CMA is investing in its information gathering ability and the FCA is currently conducting competition market studies into credit cards, investment and corporate banking, and the asset management industry.

The CMA has improved the robustness of its investigation procedures.  The CMA has been successful in 15 of its last 19 civil court cases.  Moreover, despite past failures in prosecuting the criminal cartel offence, the NAO noted that the law had changed around the cartel offence and the difficulty in proving the dishonesty element had proved critical in the recent acquittal.[9]  This is in contrast to the collapse of the trial of the BA executives in May 2010 for procedural failings and the annulment of the OFT’s infringement decision in the tobacco pricing case due to lack of evidential rigour in 2011. 

The competition regime faces big challenges in increasing the number of enforcement decisions to date.  Back in 2010, the NAO identified low case flow as a problem, and this remains the case.  Since 2012 the CMA has made on average four infringement decisions per year (16 in total).  By contrast in 2013 alone, the German competition authorities made 36 infringement decisions and their French counterparts made 23.  This is replicated in the volume of fines levied.  Between 2012 and 2014 the OFT and the CMA levied £65m of fines compared to almost £1.4bn in Germany.  The NAO notes that recent activity in the UK has improved,[10] but there is a view among some stakeholders that because the UK is the best jurisdiction in which to contest an adverse finding, and because the CMA is more focussed on market studies and MIRs,[11] the CMA is reluctant to take enforcement action.

The NAO was positive about the CMA’s innovative approach towards mergers.  Among other points it noted that: all but one merger which had been considered at phase 1 had been completed within 40 days since the new timeframe was introduced in April 2014; the cost of the phase 2 process had decreased;[12] and stakeholders welcomed the CMA’s openness to having meaningful discussions early on and the ability of the parties to offer remedies at phase 1.

There is a significant emphasis on market investigation references.  The NAO notes that this has implications for the regime as a whole.  Interestingly the CMA estimates that 77% of the consumer benefits it has delivered come from its market studies and MIRs, which may explain why it devotes such a high percentage of resources (around 60 frontline staff) to the current energy and retail banking MIRs.  It has had some success with such studies – the 2009 enquiry into UK airports led to the sale of Gatwick, Stansted and Edinburgh airports.  The NAO observes that there is considerable public and political interest in the CMA’s two current MIRs.  The CMA’s ability to present a credible analysis and appropriate remedies in these two cases will have a significant impact on its reputation.

Using the current statistics, it is difficult to effectively capture the impact of the CMA’s work and its individual tools.  For these reasons it is difficult for the CMA to set its priorities.  The NAO therefore concludes that the CMA needs to do more work in calculating the impact of its work.  The NAO also notes that the CMA is hampered in its choice of tools and processes due to the legal criteria which affect its decision making.