The Competition Policy Review Panel has today released its 307-page Draft Report on the effectiveness of Australia’s current competition policy and laws, and its recommendations for the promotion of competition across the economy. A full copy of the Draft Report can be found here.
Overall, the Draft Report is a well-balanced and thoughtful response to the complex issues presented by Australia’s concentrated industry structures, aging population and gradual transition to an increasingly services based economy. It provides a ‘call to arms’ for both Government and industries to more actively foster, stimulate and protect innovation, particularly in the health and education sectors.
Welcomely, the Review Panel has reaffirmed that the objectives of competition policy are to enhance the welfare of consumers and to protect the competitive process and competitiveness of markets as a whole, not individual businesses or competitors. However, the Draft Report is focused on reducing the burden of compliance for small and large businesses and reducing costs in exemption, approval and collective bargaining processes.
It has also made sensible recommendations to simplify Australia’s overly complex cartel laws, and to repeal the unnecessary price signaling provisions, whilst more controversially backing the introduction of an effects test for section 46 and the introduction of new laws to deal with concerted practices that have an anti-competitive purpose or effect.
Heralded as ‘Hilmer Mark II’, the Draft Report is the first comprehensive competition review for over 20 years, and evaluates whether our laws continue to be ‘fit or purpose’ for Australia’s current and emerging economy. The background to the Competition Policy Review can be found here, the Terms of Reference here and the Issues Paper here.
The Review Panel received almost 350 submissions on the Issues Paper, with around 50% coming from peak and advocacy bodies, 30% from business, 17% from individuals and the remainder from Government bodies. The top five issues raised were competition laws, competitive neutrality (with Chair, Professor Ian Harper, stating that the Panel was “somewhat surprised by the number of competitive neutrality concerns raised with us…it was not something that was on our radar and hearing the stories has made the issues real for us”, misuse of market power, small business concerns and the ACCC’s operations.
The Review Panel has identified three major forces affecting the Australian economy in its overarching narrative:
- the rise of Asia and other emerging economies, requiring a heightened capacity for agility and innovation to meet changing tastes and preferences in emerging economies;
- Australia’s aging population and increasing demand for health and aged care services, leading to a need to extend competition in government provision of human services; and
- new technologies, which requires policymakers and regulators to capture the benefits to competition that ‘digital disruption’ can bring, whilst still protecting consumers.
Aims of competition policy
The Review Panel has articulated its view of the objectives of competition policy (and the test of the ‘fitness for purpose’ of our competition laws) as being to:
- make markets work in the long-term interests of consumers;
- foster diversity, choice and responsiveness in government services;
- encourage innovation, entrepreneurship and the entry of new players;
- promote efficient investment in and use of infrastructure and natural resources;
- establish competition laws and regulations that are clear, predictable and reliable; and
- secure necessary standards of access and equity.
We support these principles, and in particular, the need to recognise that the ultimate aim of competition laws and policy is to enhance the welfare and interests of Australian consumers in the long term. We also support the Review Panel’s proposition that market regulation should be as ‘light touch’ as possible, allowing market-driven factors to determine success, rather than enacting laws that support competitors of a particular size or nature, or are driven by special interests.
The Review Panel has focused particularly on the need to ensure that competition laws embrace the opportunities created by innovation to stimulate the entry of new and novel players into established markets. The Panel cites Uber as an example of a new player that challenges existing regulatory structures and states that “new entry is a positive discipline on existing market players, encouraging them to be more innovative and responsive to consumer needs…our competition policy, laws and institutions need to be sufficiently adaptable to allow new entry to make innovative and potentially lower-cost products and services available to Australian consumers.”
Simplification of existing competition laws
The Review Panel has recognised the undue complexity of Australia’s existing competition laws, and has called for the simplification of the Competition and Consumer Act (CCA), by removing overly prescriptive provisions and certain redundant laws. It recommends that this occur via a public consultation process, in conjunction with implementation of the other areas for reform.
The Panel also recommends that:
- competition laws apply to the Crown (including local government) insofar as they undertake activity in trade or commerce;
- the current definition of ‘market’ be amended to ensure that it includes competition from imports and services supplied outside of Australia into Australia; and
- the CCA applies to conduct engaged in outside Australia, if it has a competition impact or harms consumers in Australia.
Section 46 and unilateral conduct– it’s all about the effect
The Draft Report accepts that the threshold test of market power is appropriate for section 46, but recommends that the current test be replaced with an effects test. The amended provision would prohibit a corporation with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market. This recommendation adopts the submission of the ACCC to the Review Panel.
As the amended test would remove the current ‘take advantage’ limb, and to “minimise unintended consequences…including the possibility of inadvertently capturing pro-competitive conduct”, the Panel proposes a new defence that would apply if the conduct would be a rationale business decision or strategy by a corporation without market power, and the likely effect of the conduct is to benefit the long term interests of consumers. The onus of establishing the defence would fall on the corporation proposing to rely on it.
Removing the ‘take advantage’ limb is a major departure from the existing approach, although it arguably takes Australia closer to the international approach adopted in the US and the EU. In the absence of this limb, a defence along the lines proposed by the Panel is essential. We query, however, whether it is appropriate for the defendant to bear the burden of proof for what is, in essence, a key part of the existing prohibition. The ‘take advantage’ limb has been particularly problematic for the ACCC, and was the reason for its section 46 loss in the recent Cement Australia decision. It will view the proposed changes as a positive step that will enable it to prosecute more misuse of market power cases.
The Panel is also recommending that the “Birdsville amendment’ be repealed, together with the interpretive provisions of ‘take advantage’. The first is sensible and long overdue, and the second is necessary if the test is reformulated in the manner proposed.
Interestingly, notwithstanding claims to the contrary, the Panel concludes that:
- there is not a strong case supporting that the unconscionable conduct provisions are not working as intended. It supports the ACCC’s continuing focus on this area, and notes that pending cases are likely to enhance our understanding of the boundaries of these laws. We think this is a sensible approach, and that these provisions remain largely untested and should be allowed to develop over time through case law;
- there is no need for a specific prohibition on price discrimination, and discriminatory conduct with an anti-competitive effect can be dealt with under existing provisions and the recommended new section 46; and
- bucking the trend towards effects based tests, resale price maintenance should be retained as a per se prohibition, but the streamlined notification process in place for third line forcing should apply to RPM conduct as well, together with an exemption for related bodies corporate.
Mergers and ACCC processes
The Draft Report supports that the current mergers test in section 50 is appropriate, and that it is sufficiently flexible to allow for issues such as creeping acquisitions, national champions and import competition to be properly considered.
The Report also concludes that the current ACCC informal merger clearance processes generally works well, but has recognised the pitfalls of the formal merger clearance. It encourages the ACCC to consult with business to deliver more timely and transparency in decisions in informal reviews, noting that it is not sensible to seek to regulate an informal non-statutory process.
The Draft Report recommends that the formal merger process and the merger authorisation process be combined and reformed to remove unnecessary restrictions. The Report does not set out any specific proposals, but instead recommends that the features of the combined process be settled between the ACCC, business and competition law experts, and reflect the following principles:
- the ACCC should be the first instance decision-maker, on the basis that the Tribunal is better suited to an appellate or review role given its constitution and powers;
- the ACCC should approve mergers if satisfied that it does not substantially lessen competition or results in public benefits that outweigh the anti-competitive detriments;
- there should be no prescriptive information requirements, but the ACCC should be able to compulsorily require business and market information to be produced;
- strict timelines should apply that can only be extended with the consent of the merger parties; and
- decisions of the ACCC should be subject to review by the Tribunal under a process that also has strict timelines.
Cartel conduct and concerted practices - just keep it simple
The Review Panel supports the approach of using a specific set of per se prohibitions in the CCA to deal with serious cartel conduct. However, it agreed with a number of submissions that the cartel provisions are overly complex and need to be simplified in order to provide sufficient clarity and certainty. New Zealand’s proposed criminal cartel provisions were identified as an example of simplified drafting.
The Review Panel makes a number of recommendations, aimed at narrowing the application of the cartel laws:
- the provisions should only apply to cartel conduct affecting goods or services supplied or acquired in Australian markets;
- the threshold for when corporations are “likely” to be competitors should be lifted to apply a balance of probabilities assessment (ie. more likely than not);
- the prohibition on exclusionary provisions should be removed;
- broader exemptions should apply to joint ventures and other business collaborations, recognising that these arrangements will otherwise be prohibited if they have the purpose, effect or likely effect of substantially lessening competition under section 45; and
- certain trading restrictions imposed by one firm on another in connection with the supply or acquisition of goods or services should also be exempt, acknowledging the role that section 45 and 47 play in prohibiting anti-competitive vertical restrictions.
Interestingly, the Review Panel has proposed broadening the application of the CCA to capture conduct by unregistered foreign companies which damages competition in a market in Australia. This would remove the current requirement that the foreign company carry on business in Australia, making it easier for the ACCC to pursue companies engaging in global cartel conduct.
Another significant recommendation is that section 45 be expanded to apply to “concerted practices” being regular and deliberate activity undertaken by two or more firms. This new law would replace the current price disclosure prohibitions in Division 1A of Part IV. Unlike Division 1A, which applies only to the banking sector, the proposed ‘concerted practices’ prohibition would apply generally throughout the economy. The Review Panel saw no need to change the ACCC’s immunity policy, as it views the current policy as providing an adequate level of certainty.
Green light for private enforcement
The Federal Court has seen an increase in private competition enforcement litigation, particularly class actions (representative proceedings), following the grant of immunity for and prosecutions of cartel conduct by the ACCC. However, the Panel has provided further encouragement for those seeking to enforce laws directly, with a number of suggested reductions in impediments:
- amending section 83 to apply to admissions of fact made by a party in resolving proceedings with the ACCC, in addition to the court’s findings of fact in contested proceedings;
- removing the requirement for ministerial consent prior to commencing proceedings in reliance on conduct engaged in overseas; and
- as noted above, removing the requirement that an unincorporated foreign corporation carry on business in Australia in order for the CCA to apply. In the Review Panel’s view, if the conduct damages competition in an Australian market, it should be caught by the CCA irrespective of where the corporation is resident, incorporated or conducts business.
Introduction of market studies powers - but not for the ACCC
The Panel has recommended the dissolution of the National Competition Council, and the establishment of an Australian Council for Competition Policy (ACCP) to be funded jointly by the Commonwealth, State and Territories as the leader and driver of implementation of the competition policy agenda. Membership of the ACCP would be in the hands of the Treasurer of each jurisdiction.
The recommendation stems from a recognition that advocacy for competition policy has drifted in recent times, and has (to the extent it exists) fallen to the ACCC. As regulator, the ACCC is not an appropriate body to drive competition reform or policy objectives, and assuming that role also prevents it from holding government to account.
A newly established ACCP would have accountability for advocating and educating in competition policy, monitoring and reporting on agreed reforms and progress, identifying new areas for reform, making recommendations to government on market design and regulatory issues (including privatisations) and undertaking research into developments domestically and internationally.
The ACCP would also have power to elect to undertake market studies, at the direction of government or the request of market participants and regulators, and to make recommendations to government on regulatory changes or potential braches of competition law identified in the studies. However, whether it would have compulsory information gathering powers remains undecided, with the Panel seeking comments on this question and, specifically, whether the model under which the Productivity Commission operates should apply (whereby it does have these powers, but generally chooses not to use them).
Competition payments also remain on the agenda, with the Panel suggesting that the Productivity Commission be required to undertake a study of reforms agreed to by governments to estimate their effect on revenues and, if disproportionate effects are estimated, competition policy payments be made to ensure that revenue gains flow to the reforming jurisdictions.
No material increase in ACCC powers but options for greater external input
Rather than recommend increases to the ACCC’s toolkit of powers, the Review Panel has adopted a measured approach, and assesses the ACCC as a well-regarded and effective body, whilst also recognising the lack of an ‘outsiders view’ on decision making and the burden that powers such as section 155 notices can impose on businesses.
The Panel recommends that the ACCC retain its current dual focus on competition and consumer matters, given that each area of enforcement complements the other. We think this is the right approach, and avoids the duplication and cost that would be inevitable if these functions were to be split.
The Panel is supportive of input into the governance of the ACCC by individuals who do not play a role in its day to day operations. It proposes two options to introduce greater diversity into ACCC decision making: the first is to replace the current Commission with a Board that includes members like the existing Commissioners, but also independent non-executive members with business, consumer and academic expertise in an effort to strengthen accountability.
The second option is to retain the current structure but to add an Advisory Board to advise on strategy, but without decision making powers, comprising the ACCC Chair and independent non-executive members. The Panel is seeking input on both options.
The Panel has further recommended that the ACCC review its guidelines on section 155 notices, and address the concerns raised in submissions regarding the cost and burden of compliance in a digital age, where more electronic material is being retained by businesses. The Panel also states that notices should be framed as narrowly as possible by the ACCC.
Importantly, the Panel also recommends that the current obligation to comply with section 155 notices be qualified to require a ‘reasonable search’ to be undertaken, taking into account the number of documents involved and the ease and cost of retrieving materials. This is an unexpected and welcomed recommendation.
Further submissions have been sought in relation to whether the penalties for non-compliance with a section 155 notice ought to be increased, with the Panel expressing an initial view that the current penalties – well less than 50% of those available under the Corporations Law – are inadequate.
Finally, the Panel urges the ACCC to take a more active approach in linking small businesses to alternative dispute resolution schemes, where complaints have merit but do not fall within the ACCC’s enforcement priorities.
Access to infrastructure
Sensibly, the Panel has taken the benefit of the comprehensive review of the national access regime by the Productivity Commission and has recommended the adoption of its recommendations on criterion (a) and (f) and the alternative recommendation on criterion (b).
It expressly states that the declaration criteria in Part IIIA should be targeted to ensure that third-party access only be mandated where it is in the public interest, with the result that:
- criterion (a) should require that access on reasonable terms and conditions through declaration promote a material increase in competition in a dependent market;
- criterion (b) should require that it be uneconomical for anyone (other than the service provider) to develop another facility to provide the service; and
- criterion (f) should require that access on reasonable terms and conditions through declaration promote the public interest.
The Tribunal would be able to undertake merits review of access decisions within suitable time limits.
Looking forward, the Panel seeks comment on:
- which categories of infrastructure Part IIIA might applied to in future, particularly mining, and the costs/ benefits that would arise from regulation; and
- whether Part IIIA should be confined to the categories of ‘bottleneck infrastructure ‘cited identified the Hilmer Review.
Structural change is also recommended with the introduction of a single national access and pricing regulator to take over the functions and powers given to the NCC and the ACCC under the National Access Regime, the NCC under the National Gas Law, the Australian Energy Regulator under the National Electricity Law and the National Gas Law, the ACCC under the telecommunications access and pricing regime and price regulation and advisory roles under the Water Act 2007.
Key industry reforms
The key industry recommendations for reform are:
- the establishment of greater choice and competition for human services, in particular, for health and aged care services. The Panel recommends placing user choice at the heart of service delivery, the separation of funding, regulation and service delivery, encouragement of a diversity of providers and stimulation of innovation in service provision;
- for infrastructure, the introduction of cross-jurisdicational and cost-reflective road pricing linked to road construction, maintenance and safety so as to make investment more responsive to road user needs and preferences, and the finalisation of existing reform projects for electricity, gas and water. The Panel recommends:
- quicker adoption of the National Energy Retail Law by Victoria and Qld, deregulation of gas and electricity retail prices and the inclusion of the NT and WA into the National Electricity Market;
- detailed review of competition in the gas market through the Energy White Paper;
- a national approach to water reform, including through a possible inter-governmental agreement;
- across all sectors:
- review and updating of competitive neutrality policies against best practice, and the improvement of complaints-handling processes and monitoring. The Panel recommends this review be overseen by its proposed new ACCP; and
- review of regulations restricting competition in each jurisdiction, with regulations only to remain if they are in the public interest and the objectives of the restrictions can only be achieved by restricting competition. Review priority should be given to planning and zoning (with all levels of government being required to include competition principles in decision making, beyond purely local concerns), retail trading hours (with a recommendation that remaining restrictions on trading hours be removed), taxis (described as a sector “long overdue” for regulatory reform, with recommendations to remove unnecessary regulation restricting competition with taxis)), pharmacy (with recommendations that existing ownership and location rules be removed)and parallel import regulations (with recommendations that the remaining restrictions be removed).
The Panel also noted the large number of submission relating to supermarkets in Australia, particularly with respect to misuse of market power allegations, greater vertical integration and use of ‘home brands’. With the exception of its proposed reforms to section 46, the Panel concluded that these matters do not of themselves raise issues for competition policy or law reform.
Other areas of reform recommended by the Review Panel are:
- simplification of the authorisation and notification procedures, and the power given to the ACCC to grant exemptions (including block exemptions) for any conduct that is unlikely to substantially lessen competition or is likely to result in a new public benefit;
- removing the per se prohibition on third line forcing, making it subject to a substantial lessening of competition test (yet, again...);
- the extension of section 47 to all forms of vertical conduct, and repeal of the current specific forms of exclusive dealing. Instead, section 47 would apply to:
- supplying goods or services, or doing so at a particular price, discount, allowance, rebate or credit, on any condition that has the purpose, effect or likely effect of substantially lessening competition; and
- refusing to supply good or services, or refusing to supply at a particular price, discount, allowance, rebate or credit, for the reason that the person has not agreed to a condition that has the purpose, effect or likely effect of substantially lessening competition;
- the inclusion by the ACCC in its annual report of the number of complaints made, and matters investigated, in relation to secondary boycott conduct, and the extension of jurisdiction for secondary boycotts to the state and territory Supreme Courts;
- simplification of the collective bargaining notification processes to allow for changes to existing notifications and to enhance awareness of this process;
- the repeal of the current exception for intellectual property licences in the CCA, and an independent review of intellectual property laws by a body such as the Productivity Commission; and
- the repeal of shipping liner exemptions in Part X of the CCA, and the introduction of ‘safe harbours’ via block exemption granted by the ACCC for agreements that meet minimum pro-competitive features, with a two year transition period
Our earlier Alert on the objectives of the Review noted the words of Roosevelt (“To reach a port we must set sail, Sail, not tie at anchor, Sail, not drift.”). In keeping with this theme, Roosevelt also said: “There are many ways of going forward, but only one way of standing still”.
The Draft Report lays out a sensible path for going forward, and forks in the road where the way is less clear. We hope that the momentum continues with submissions on the Draft Report, and that the Government’s eventual response does not leave us standing still.
Submissions on the Draft Report (in particular, on Part 2 – Draft Recommendations) are invited and due on Monday 17 November 2014.