The OFT has published for consultation two documents relating to compliance with competition rules. The first document is a guide for businesses on how best to ensure compliance, updating and expanding its existing short guide on How Your Business Can Achieve Compliance (OFT424) in order to reflect current best practices. The second document is specifically aimed at directors and provides further guidance on their duties under competition law, in particular in light of the OFT's revised guidance on Director Disqualification Orders. (click here to access the consultation papers). The OFT recognises that many businesses are keen to comply with competition rules and it wants to support them in achieving an effective competition law compliance culture.
Although the OFT has always made it clear that it is not in a position to endorse individual compliance programmes, the updated draft guidance on how your business can achieve compliance and the draft guidance for directors in particular will be welcomed by businesses. Under its revised policy on directors' disqualification orders, obligations on directors to ensure compliance have greatly increased and any guidance from the OFT as to what would constitute 'good compliance' will be very helpful in this context. The new draft guidance for company directors for the first time sets out specifically what level of knowledge will be expected of the different types of directors and the steps they can be expected to take to prevent and detect competition law breaches and is set to become a key compliance document for all company directors.
How your business can achieve compliance
The OFT's updated draft compliance guidance places commitment to compliance at the core of an effective compliance culture. There is a clear emphasis that any such commitment needs to be unambiguous and needs to exist at all levels of the management chain. Without this unambiguous commitment the key steps to a compliance programme are unlikely to be effective. The guidance provides a series of examples as to the means by which this commitment can be communicated and demonstrated (e.g. disciplinary sanctions, board member with dedicated role for driving compliance, regular communications by senior management underlining the importance of compliance, establishing a confidential system for reporting compliance concerns). The rest of the draft guidance consists of a four step approach, referred to by the OFT as the four 'Rs'.
Step one: risk identification
The first step is for companies to identify the key competition law compliance risks that are specific to its business. For some companies the key risks will relate to the risk of cartel activities, while others are more likely to need to address vertical issues or issues relating to dominance. It is important for a compliance programme to be tailored to the specific needs of a company, to avoid it being a simple box ticking exercise.
Step two: risk assessment
The second step is to assess each of the risks identified as high, medium or low risk, based on the likelihood of the risks occurring. The OFT suggests businesses may also find it helpful to identify a staff-based risk assessment, identifying employees' degree of exposure to the identified risks.
Step three: risk mitigation
The third step is to identify appropriate risk mitigation activities. These will depend on the risks identified and on the assessment of those risks, but would generally include suitable training and appropriate policies and procedures, such as internal disciplinary procedures. The draft guidance provides a list of examples of appropriate procedural measures.
Step four: review
Finally, companies should undertake a regular review of their compliance systems in order to ensure that there is indeed unambiguous commitment from the top down, that the risks identified have not changed and that the risk mitigation activities are appropriate and effective.
Compliance activities and the amount of a penalty
The OFT has decided not to change its penalties policy in relation to compliance activities and to continue to adopt a neutral starting position with regard to competition law compliance programmes when setting financial penalties. Where the OFT considers that the existence of a compliance programme should be a mitigating factor, it will be prepared to reduce a fine by up to 10%. The OFT will not treat the existence of a compliance programme as an aggravating factor, as such an approach would be a disincentive for businesses to engage in competition law compliance activities.
Company directors and competition law
Following its revised guidance on competition disqualification orders (CDOs) in which the OFT sets out its intention to apply for CDOs also in cases where a director 'ought to have known' about a competition law breach, the OFT is consulting on draft guidelines that are aimed at providing further guidance for directors on their duties under competition law. The draft guidance provides information on the principles, types of behaviour and extent of knowledge that will be relevant to directors when considering their responsibility under competition law.
The director's role
For the purposes of the application of CDOs, the OFT will first of all take into account the director's role in the company, as this will determine the level of understanding of competition law it is reasonable to expect of them and the steps they can be expected to take to prevent or detect infringements.
- Executive and non-executive directors
The OFT expects executive directors to have a more detailed understanding of and familiarity with the way in which the company operates on a day to day basis. Non-executive directors on the other hand are not expected to have an intimate knowledge of the company's day to day transactions, but are expected to challenge the decisions and actions of the executive directors. The OFT expects non-executive directors to ask appropriate questions of the company's executives in order to ensure that appropriate compliance methods are in place to prevent and detect competition law breaches.
- Executive director's responsibilities within the company
It is also necessary to consider the director's specific role within the company. Certain areas of business, such as sales departments, are more likely to be exposed to the risk of competition law than others, and the OFT expects directors in charge of those areas to take greater steps to prevent and detect breaches of competition law.
- Size of the company
The roles of company directors will also differ depending on the size of the company. Directors in smaller organisations are expected to have a more intimate knowledge of day to day activities and transactions and therefore to be more aware of actual or potential breaches. Directors in larger organisations are not expected to have an intimate knowledge of all day to day activities, but will be expected to take steps to ensure that appropriate systems are in place to prevent and detect breaches of competition law.
Knowledge of competition law
Although the OFT does not expect all directors to have specific competition law expertise, it does expect all directors to understand the most serious forms of infringement (price fixing, bid rigging, market sharing, limiting production, sharing commercially sensitive information between competitors, resale price maintenance). In addition, the OFT believes that directors should have sufficient understanding of the principles of competition law to be able to recognise risks and to realise when to make further enquiries or seek legal advice. Any extra knowledge assumed will depend on the director's responsibility.
For example, a director with responsibility for commercial contracts is expected to understand which types of commercial contract are most likely to contain anti-competitive provisions. A director with responsibility for competition law compliance will be expected to have a sufficient grasp of the principles of competition law in order to indentify and assess the types of risk to which the company is exposed, and to take reasonable steps to address those risks. Provided he has done so, a compliance director is not expected to have a greater awareness of specific infringements by the company than any other director.
Detecting and preventing infringements
The steps a director will be expected to take in order to detect and prevent infringements will again depend on the director's role in the company and its size. Where a director has immediate management responsibility, the OFT considers that he ought to have greater awareness of any anti-competitive behaviour within the business area for which he is responsible. This means that in smaller businesses, where the directors are involved in all day to day business activities, the OFT will take the view that the directors ought to be aware of any anti-competitive behaviour that occurs.
Non-executive directors are expected to make reasonable enquiries of the company's executive directors to satisfy themselves that executive directors have demonstrated a commitment to competition law compliance, taken appropriate steps to identify and assess the company's exposure to competition law risks and to mitigate those risks, and are keeping the company's exposure to risk and its compliance measures under regular review.
The final section of the draft guidance sets out some practical case scenarios demonstrating under which circumstances the OFT is likely to apply for a CDO.
The OFT consultation on both documents ends on 21 January 2011.