Almost one year after the Bill’s first reading, and two years after the Government’s initial consultation, the Enterprise and Regulatory Reform Act received Royal Assent on 25 April 2013. This important step confirms that major reforms to the UK’s competition regime will be implemented by April 2014. These include:
- the creation of a new single competition authority – the Competition and Markets Authority (CMA) – to carry out the competition functions of the Competition Commission (CC) and the Office of Fair Trading (OFT); and
- reforms to the merger and markets regimes, the laws prohibiting anti-competitive behaviour and abusive conduct, the criminal cartel offence and competition enforcement by sector regulators.
These changes are designed to improve the effectiveness of the UK competition regime overall. They will increase regulatory risk for business in a number of areas, through enhanced powers of investigation, earlier intervention in potentially anti-competitive deals, markets and behaviour and more exposure to corporate and personal liability.
Whilst the new legislation introduces important statutory changes to the regime, much of the detail on how these laws will be applied in practice is left to the CMA’s discretion. How the CMA, under the leadership of Chair-designate (Lord David Currie) and CEOdesignate (Alex Chisholm), will use its extensive powers will become clearer over the coming months, as the OFT and CC publish draft guidance for public consultation. This will be an important opportunity for business and advisers to influence developing policies, as well as understand the full implications of the reforms and the steps business should take to prepare.
We have summarised below the reforms that we expect will have the greatest immediate impact, and the key issues to consider now in preparing for the new regime.
More cases and faster decisions
The Government has set out its expectation that the number of antitrust cases being opened, and the speed of investigations and decisions in those cases, should increase. To achieve this, the new regime requires the CMA to report on its antitrust activities against a Performance Management Framework. The OFT has already stated its intention to deliver a strong 'pipeline' of ongoing antitrust investigations to the CMA.
Business should expect greater antitrust investigatory and enforcement activity under the CMA, and more pressure on legal and management resource during the course of investigations. Now is the time to ensure compliance programs are up to date, and that compliance functions are trained to respond to fast-moving investigations.
New powers of investigation
The CMA will have new powers to compel a wide class of individuals to answer questions about suspected infringements by companies they are or were employed by. The power extends to any individual employed by the business at the time of the suspected infringement, as well as current employees. The CMA is required to give notice to the company when questioning current employees, but there is no requirement to give reasonable notice. Companies will not receive any notice of the CMA questioning former employees. Individuals are subject to heavy financial penalties for failure to comply.
Dawn raids and HR
Dawn raid procedures should be updated to take account of the possibility that individuals may be served notice and interviewed on dawn raids. Issues such as separate representation, conflicts of interest and individual liability will need to be addressed. HR procedures should be reviewed to ensure consistent treatment of individuals across the business should they be questioned about suspected infringements.
Companies should expect more publicity about antitrust investigations very early on in the process. The CMA will have new powers to publish details of cases when they are opened – an approach already adopted by the OFT. To protect the CMA, these notices will usually benefit from privilege from defamation. Companies can also expect the CMA to continue the OFT’s experimentation with alternative forms of publicity, such as social media.
Corporate press and media procedures should be reviewed to anticipate adverse publicity arising from any new antitrust investigations and the negative PR this often generates, even when investigations are subsequently closed or complaints prove unfounded.
Lower threshold for interim measures
The CMA will be able to intervene earlier and more often to stop certain behaviour pending the outcome of its investigation. Companies should expect more frequent regulatory intervention in day-to-day commercial practices following allegations or evidence of anti-competitive conduct.
Have you identified those practices and commercial arrangements with suppliers, customers or competitors that are most likely to be subject to complaint and regulatory intervention? Are you ready to respond quickly and decisively to any such allegation?
Criminal cartel offence
No requirement to prove dishonesty
Criminal prosecution of individuals for their part in a cartel will no longer need proof that they acted dishonestly in relation to infringing behaviour. However, an individual will not commit an offence if:
- customers are given 'relevant information' (including details sufficient to show that the offence might apply) before they enter into agreements for the supply of goods or services; or
- in the case of bid-rigging, the person requesting bids is given 'relevant information' at or before the time when a bid is made; or
- 'relevant information' is published, before the arrangements are implemented, in the manner to be specified by the Secretary of State.
This widening of the offence, combined with concerns about how the so-called 'publication defences' would work in practice, provoked significant lobbying from business organisations and debate in parliament. In response, the Government stood firm on widening the offence but added a number of defences. These are, in summary:
- no intention to conceal the nature of the arrangements from customers (at all times before they enter into agreements for the supply of goods or services) or the CMA; and
- disclosure of the nature of the arrangements to legal advisers for advice before they are made or implemented.
The Government also imposed an obligation on the CMA to publish guidance on the principles to be applied in determining whether proceedings should be brought. Given its importance in guiding companies and individuals on the types of conduct likely to be prosecuted, this guidance – when published for consultation – is expected to receive significant debate.
Individuals at risk
In anticipation of these major changes, now is the time to review your internal training and compliance procedures to identify the types of behaviour that could fall within the widened offence and the individuals potentially at risk.
In the lead-up to April 2014, companies and their advisers will need to understand the scope of the offence and how the defences will work in practice. A key opportunity to engage in the discussion will be the consultation on the CMA’s prosecution guidance. As personal sanctions are severe, businesses and individuals should consider carefully whether this guidance gives them sufficient certainty on the types of conduct that will be prosecuted.
Powers to intervene in anticipated deals and to unwind integration in completed deals pending a final decision
The UK retains its 'voluntary' system of notification, so companies are not penalised for closing without obtaining clearance. However, the new regime will be closer to the EUstyle mandatory, suspensory regime, as the CMA will be able to intervene and stop certain steps taking place at very early stages in deal discussions, as well as order the unwinding of integration that has already taken place. These changes extend the OFT’s current powers to stop business integration pending investigation. They are designed to maintain the authority’s flexibility in unwinding, or imposing remedies on, anticompetitive deals.
New powers of investigation and new time limits
The current two-phase investigation process is also retained (albeit within a single body), but the CMA will be bound by new statutory deadlines to complete its 'phase 1' review within 40 working days. This new time constraint is backed-up by new powers to demand information from a wide class of individuals or companies from the outset. The procedure and timing for agreeing remedies at phases 1 and 2 is also changing, including the introduction of statutory time limits for the remedies phase, and the ability for parties to offer undertakings in lieu of reference to phase 2 after receiving the phase 1 decision on competition issues, rather than before as under the current regime.
How the CMA uses these powers to intervene in anticipated and completed deals, and conduct shorter phase 1 reviews with enhanced information gathering powers, will be critical to deal-planning and regulatory risk allocation.
The new remedies procedure will help parties to design phase 1 remedy offers that meet any identified competition concerns. However the statutory deadlines for agreeing remedies will increase the time pressure to find and agree purchasers in cases where the CMA requires an 'upfront buyer' for divestments.
Much of the detail on the new mergers regime is left to the CMA’s discretion, including detailed phase 1 decision making structures, the parties’ access to the decision maker(s) at phase 1, and the transition of case teams from phase 1 to phase 2 in a unitary authority. If you have views on these issues, you should consider engaging in the forthcoming consultation on the CMA’s merger procedures.
The current regime allowing the OFT to conduct phase 1 market studies to investigate anti-competitive features across markets is being extended to allow the CMA to conduct a full phase 2 market investigation into practices which exist in more than one market.
The CMA will also now be able to investigate public interest issues (e.g. national security) alongside competition issues, on the direction of the Secretary of State.
New time limits and powers of investigation
The CMA will be subject to new statutory time limits for both phase 1 market studies and phase 2 market investigations. The CMA’s powers to demand evidence may be used much earlier than the OFT’s formal powers under the current regime. Once the CMA has published a 'market study notice', the powers may be exercised and the new time periods apply. Heavy financial penalties can be imposed for failure to comply.
Prepare for intervention
Since the regime was introduced in 2003, companies in markets as diverse as financial services, audit, supermarkets and private health have experienced the costly and intrusive nature of wide-ranging reviews, and the risk of serious structural and/or behavioural remedies being imposed.
As the regime is extended, and investigation powers enhanced, now is the time for companies in the regulatory spot-light to take steps to mitigate the chances of intervention. Is your market subject to high levels of consumer complaint? Does the current economic environment make your market particularly subject to political or media interest? Are you adequately resourced to deal with the challenge of an extended investigation?
New pressures on regulators to use competition law powers
Alongside the CMA are sector regulators whose functions include the promotion of competition. Several of these regulators also have competition powers concurrently with the OFT/CMA. These powers are being retained, but in response to a perceived lack of competition enforcement over recent years, the CMA’s role is being strengthened (including the power to take cases over) and regulators will have an explicit requirement to consider competition enforcement before using their own sector powers.
'Use it or lose it'
In the final stages of the Bill’s progression through Parliament, the pressure on regulators was increased further by an additional power for the Secretary of State to remove their concurrent competition powers if he/she considers it appropriate to do so for the purpose of promoting competition.
Anticipate more enforcement
If you are a regulated entity, have you addressed this increased risk of competition enforcement by your regulator or the CMA? Have you considered which types of conduct or behaviour are most likely to be subject to complaint, and competition enforcement, and how these risks and procedures differ from regulatory controls?
Other significant reforms in the pipeline
The Government has announced a range of reforms to the UK’s competition litigation regime to encourage private actions for damages. These include an extended role for the Competition Appeal Tribunal, a limited 'opt-out' collective actions regime for mass damages claims and mechanisms to facilitate alternative dispute resolution and collective settlement. Legislation is expected to be introduced to Parliament for scrutiny in the May 2013 – May 2014 session, and subject to that debate, may come into force in late 2014.
The changes to private actions for competition law infringements are expected to form part of a wider package of reforms to consumer law during the next parliamentary session. Reforms will be implemented through the proposed Consumer Bill of Rights which, along with some subsidiary legislation, will consolidate the UK’s consumer laws. The new Consumer Bill of Rights is expected to introduce statutory guarantees which set out the quality standards that goods, services, and digital content must meet, and remedies available to consumers if these standards are not met. It will also implement provisions of the EU Consumer Rights Directive.
The CMA retains some consumer functions, with others transferring to Citizens Advice, Trading Standards or the Financial Conduct Authority. Going forward, the CMA is likely to use its powers to target market-wide issues that harm consumers, although the allocation of responsibilities between the various bodies (and risk of inconsistent approaches) is still subject to some debate. In this context, the CMA, or failing that the Courts, may be given new enforcement powers to order businesses to put in place schemes of collective compensation in cases where they have breached consumer law and consumers suffer significant losses.