The United Kingdom is holding a referendum on leaving the European Union (popularly called a ‘British Exit’ or ‘Brexit’) on June 23. Recent opinion polls suggest that it will be a very close vote. If the vote is to 'leave' the EU, the notice period required means that the actual Brexit date is unlikely to be before 2018.

This note examines the impact of a possible Brexit on competition law, one of the most visible areas of EU enforcement. We address in turn each of the main pillars of competition enforcement – antitrust (rules prohibiting anti-competitive agreements and abuses of dominance), mergers and State aid. We will address the subject of private enforcement (competition damages claims) in a later note.

The nature of the impact will very much depend on the model adopted by the UK for its future relations with the EU – whether it rejoins the European Free Trade Area (EFTA), together with Norway, Iceland, Switzerland and Liechtenstein (which would entail retention of much of the existing body of EU law), or whether it seeks to negotiate a looser free trade agreement with the EU, or simply relies on the rules of the World Trade Organisation. For the purposes of this note, we are assuming a looser arrangement.

Antitrust

It is important to note that the EU competition rules (Articles 101 and 102 TFEU) would continue to apply post-Brexit to agreements or conduct of UK businesses that have an effect within the EU, in the same way as agreements or conduct of US and Asian businesses are currently subject to EU competition law where their agreements and conduct affect EU markets, and EU and US businesses are subject to the competition rules of Asian countries where there is an effect in those countries. A UK participant in a global cartel would therefore still face investigation and fines by the European Commission. One key difference, however, is that the Commission would have no power to carry out on-site investigations (dawn raids) in the UK, nor to ask the UK competition authority, the Competition and Markets Authority (CMA) to do so on its behalf. The Commission's powers of investigation would be limited to making written requests for information, as it currently does on a regular basis to businesses based outside the EU.

The impact would mainly be felt in relation to the enforcement of competition law by the UK authorities. The substance of UK competition law is very similar to that of EU competition law, and there is a statutory requirement (section 60 of the Competition Act 1998) to interpret the UK competition rules in a manner consistent with competition case-law of the European Court of Justice. There is a strong prospect that this link would be cut in the event of a Brexit. The effects would not be felt immediately, because the CMA would now look to the significant body of UK case law, which has developed consistently with EU law by virtue of section 60, as its main source of authority. EU competition case-law would in any event remain influential, even without the express statutory link, simply because of the similarity of the substantive provisions. It might therefore take some years for gaps to appear. UK courts would no longer have the facility of referring questions of interpretation of EU law to the European Court of Justice, currently an important driver of consistency in interpretation, and that might gradually lead to divergence.

EU "block exemptions" for categories of agreements such as distribution and technology licences currently also give rise to a "parallel exemption" from the UK prohibition. The operation of this parallel exemption would need to be redefined and the government might take the opportunity to enact UK exemptions without the current strong single market focus of the EU rules, for example by permitting a greater degree of territorial restriction in these agreements than is currently the case under EU competition law.

However, other effects of Brexit would be felt more quickly. Currently the CMA must also apply EU competition law where it applies national competition law and may not take action where the Commission has opened a formal investigation. These requirements would fall away in the event of a Brexit, and there would be a greater chance of parallel investigations by UK and EU authorities, including the possibility of UK criminal investigations in parallel with European Commission cartel investigations. If the UK authorities were no longer required to apply EU law, Brexit would also pave the way for the UK government to decide to diverge more significantly, for example by adopting a prosecutorial approach to competition enforcement. This is a longer term prospect, however.

Some procedural interactions would also no longer apply, so for example cartel members would not be able to safeguard their position in national queues for leniency by submitting "short form" national applications in conjunction with a full EU application.

There is currently close coordination between the European Commission and national competition authorities, and this would inevitably be weakened, as far as the UK is concerned, by a Brexit. There is a strong prospect that the Commission and the UK would eventually negotiate a competition cooperation agreement of the type currently in place with a number of major competition jurisdictions such as the US and Japan, but any such cooperation would be much looser than the current arrangements.

Merger control

Under current EU rules, mergers that satisfy the EU filing thresholds must be notified to the European Commission. In principle they require no clearance by national competition authorities of the EU Member States, although national authorities can seek to have specifically national aspects of mergers referred back to them, and retain a tightly circumscribed right to protect certain national interests. This "one-stop shop" would disappear, so mergers – whether of UK or foreign businesses – that met both UK and EU thresholds would be likely to face scrutiny under both systems. The UK would not be able to seek a reference back of the national dimension of an EU merger, so although it could apply its own merger control rules in such a case, it would do so in parallel with the Commission rather than in its stead. This would effectively mean the CMA having jurisdiction over much larger mergers than at present – most large mergers are currently dealt with by the Commission alone. Parallel reviews would also raise the possibility - probably in practice relatively rare – of one authority permitting and the other blocking a merger, or of diverging remedies. In this area, a Brexit appears certain to result in multiple filings, and therefore a greater burden for businesses.

State aid

The third key pillar of EU competition law is state aid. The rules prohibit Member States from distorting competition by granting aid to specific businesses. There is no equivalent provision in UK competition law. The obligations apply only to Member States, so the UK outside the EU would be able (subject to WTO rules) to provide aid to businesses in the UK without fear of EU action. Conversely, the UK would have no scope to oppose the grant of unlawful aid by other Member States.

Conclusion

The full effects of a Brexit in the field of competition enforcement will take some time to emerge. There would be an immediate risk of parallel investigations in both antitrust and merger fields, with an increased burden to businesses as well as some risk of inconsistent outcomes, although EU case-law is likely to remain highly influential in practice if not as a matter of law for some time yet. In the medium or longer term, there is an appreciable prospect of a degree of divergence between UK and EU rules. A key point to watch out for will be any decision on a post-Brexit approach to the current section 60, which determines how UK competition rules are to be interpreted.

This article is part of our Brexit series