The UK’s Office of Fair Trading (OFT) has published its final guidance on calculating fines for competition law infringements. The new policy signals increased penalties, particularly for those involved in the most serious competition infringements such as price-fixing, bid-rigging, market sharing arrangements and exclusionary pricing strategies by dominant companies.
Penalty guidance in context
A strong competition regime remains central to the government’s overall growth strategy, and financial penalties which both deter anti-competitive conduct and properly reflect the seriousness of infringements are an important element of on-going reforms to competition enforcement.
The roots of the OFT’s revised approach to penalties can be traced back to high-profile defeats by the OFT in the Construction Bid-Rigging and Construction Recruitment Forum cases, where the Competition Appeal Tribunal (CAT) slashed fines imposed by the OFT by up to 90 per cent. The OFT’s revised penalty guidance now codifies the approach taken by the CAT in those cases.
The government has also reacted to these judgments by proposing, in the Enterprise and Regulatory Reform Bill (ERRB), that the CAT should have regard to the same penalty guidance as published by the OFT. By limiting the number of future cases where the CAT finds that fines imposed by the OFT are unlawful and takes a different approach to the calculation, the government hopes to address unwarranted incentives to appeal.
Key changes to OFT penalty calculations
The final guidance adopts many of the changes consulted on by the OFT at the end of 2011, as highlighted in our January briefing. It does, however, also reflect some changes to the original proposals following concerns we and other companies and their advisers raised during the consultation.
The key elements of the new policy are:
- Starting point: the OFT has raised the ‘starting point’ for determining fines from 10 per cent of a company’s ‘relevant turnover’ to up to 30 per cent. Although the statutory upper limit remains 10 per cent of a group’s worldwide turnover, the OFT starts by taking a company’s turnover in the product and geographic market affected by the infringement in the last business year prior to the end of the infringement (known as ‘relevant turnover’). The increased band of up to 30 per cent is designed to give the OFT greater flexibility to penalise serious breaches whilst deterring other companies from engaging in similar behaviour. It also brings the UK in line with current EU fining policy.
- Serious infringements: as part of the uplift to 30 per cent, the OFT originally proposed a minimum starting point of 25 per cent for the most serious infringements of competition law (hardcore cartel activity and serious abuses of a dominant position). In the final policy, the OFT has retained greater flexibility by removing the 25 per cent minimum but confirming that it will use a starting point towards the upper end of the range for these cases.
- Aggravating factors – delays: once the OFT has calculated relevant turnover and adjusted for the duration of the infringement, that amount may be increased if there are aggravating factors or decreased where there are mitigating factors. The new policy adopts a new aggravating factor of persistent and repeated unreasonable behaviour that delays the OFT’s enforcement action. This includes repeatedly disrespecting OFT time limits. In the final guidance, the OFT helpfully notes that it will not treat the full exercise of the party’s rights of defence as unreasonable behaviour. This may raise difficult questions in practice as the OFT and the parties try to draw the line between unreasonable behaviour in responding to onerous information requests and protecting parties’ rights of defence.
- Aggravating factors – recidivism: companies should welcome a change to the original proposal that any same or similar infringement finding by the OFT, European Commission or any national competition authority in the EU in the last 15 years could result in an uplift of up to 100 per cent. The final policy limits these ‘repeat infringements’ to previous decisions by the OFT, UK sector regulator or European Commission within the last 15 years. The OFT also helpfully confirms that it would expect to apply such an increase only where the prior decision found that the infringement had a UK impact.
- Mitigating factors – compliance: the question whether compliance activities should count as a mitigating factor – or even an aggravating factor in exceptional cases – is subject to much debate. The OFT’s position is to treat the mere existence of compliance activities as having a neutral effect on the fine. However, the final policy does note that the OFT will consider carefully whether evidence of compliance activities presented in a particular case merits a discount of up to 10 per cent (including in cases where compliance programmes have been implemented following an OFT investigation). This approach should be welcomed as more favourable than the position currently taken by the European Commission (and many other authorities). The new policy emphasises the need for businesses to ensure that their compliance activities are effective at identifying, assessing and mitigating risk throughout the organisation and are both led from the top and regularly reviewed.
The OFT is expected to publish further updated guidance over the coming weeks on how it investigates competition infringements and deals with leniency applicants. These changes in OFT policy and procedure are an important part of wider reforms to the UK regime contained in the ERRB, which will shortly complete its passage through the House of Commons before moving to the Lords for debate.
The government’s goal is to create a stronger antitrust regime which effectively deters anti-competitive conduct and penalises companies found to have infringed the law. Delivery of these goals by the new Competition and Markets Authority will remain subject to parliamentary scrutiny long after the regime becomes fully operational in 2014.